Economic Models and PPF Analysis

Questions and Answers

What does the production possibility frontier illustrate?

If all resources of an economy are being used efficiently, more of one good can be produced only if less of another good is produced.

What is a simplified representation used to study a real situation?

a model

What does it mean if an economy is producing on its production possibility frontier?

The economy has no idle resources and is using resources efficiently.

If the economy produces 2 units of consumer goods per period, it can produce at most ________ units of capital goods per period.

24 Signup and view all the answers

If the economy produces 10 units of capital goods per period, it can produce at most ________ units of consumer goods per period.

4 Signup and view all the answers

The opportunity cost of producing the fourth unit of consumer goods is ________ units of capital goods.

8 Signup and view all the answers

What are all points outside the production possibility frontier?

infeasible production points Signup and view all the answers

Why is the production possibility frontier bowed out from the origin?

Resources are not equally suited for the production of both goods. Signup and view all the answers

How can a tremendous natural disaster be depicted in terms of production possibilities?

an outward shift of the production possibility frontier Signup and view all the answers

In Tom's Production Possibilities, which point represents an efficient combination of coconuts and fish?

D only Signup and view all the answers

In Tom's Production Possibilities, which point represents an inefficient combination of coconuts and fish?

C only Signup and view all the answers

In Tom's Production Possibilities, which point represents a combination not feasible for Tom to produce at this time?

D only Signup and view all the answers

In Tom's Production Possibilities, which points represent combinations feasible for production?

A, B, and C Signup and view all the answers

The opportunity cost for Tom to move from point A to point B is ________.

5 coconuts Signup and view all the answers

Because of trade, a country may:

consume outside its production possibility frontier. Signup and view all the answers

If the opportunity cost of manufacturing automobiles is lower in the United States than in Britain, what will the U.S. do?

Import airplanes from Britain and export automobiles to Britain. Signup and view all the answers

What does Eastland have an absolute advantage in producing?

oranges only. Signup and view all the answers

What does Westland have an absolute advantage in producing?

peaches only. Signup and view all the answers

The opportunity cost of producing 1 box of oranges for Eastland is ________.

1 box of peaches. Signup and view all the answers

The opportunity cost of producing 1 box of oranges for Westland is ________.

4 boxes of peaches. Signup and view all the answers

The opportunity cost of producing 1 box of peaches for Eastland is ________.

1 box of oranges. Signup and view all the answers

The opportunity cost of producing 1 box of peaches for Westland is ________.

1/4 box of oranges. Signup and view all the answers

What does Eastland have a comparative advantage in producing?

oranges only. Signup and view all the answers

What does Westland have a comparative advantage in producing?

peaches only. Signup and view all the answers

In the scenario with Tom and Hank, what is the incorrect statement regarding their trade?

For both to become better off, each should specialize in the production of some good. However, since Hank is equally productive in both goods, it doesn't matter which good each specializes in. Signup and view all the answers

Which of the following is a positive economic statement?

There has been an increase in the rate of inflation. Signup and view all the answers

What is an example of a positive statement?

The federal government spends half of its budget on national defense. Signup and view all the answers

Which of the following is an example of a normative statement?

Everyone in America deserves to be covered by national health insurance. Signup and view all the answers

Study Notes

Production Possibility Frontier (PPF)

The PPF illustrates the trade-off between the production of two goods; more of one good results in less of another if resources are used efficiently.
Points outside the PPF represent infeasible production scenarios.
The curve is bowed outward due to the unequal suitability of resources for producing various goods.

Economic Models

A model simplifies real-world situations for study, helping understand economic behaviors and choices.

Resource Efficiency

An economy on its PPF is fully utilizing its resources, with no idle resources present.

Opportunity Cost

Opportunity costs arise when producing additional units of a good; they indicate the amount of another good that must be forgone.
Specific examples include:
- Producing 2 consumer goods incurs an opportunity cost of 24 capital goods.
- The cost of the fourth consumer good is 8 capital goods.

Production Possibilities Schedules and Figures

Analyzing schedules and figures provides concrete examples of production scenarios:
- Tom's production possibility figure identifies point D as efficient and point C as inefficient.

Trade and Specialization

Trade allows countries to consume beyond their PPF.
Comparative advantage determines the specialization of countries:
- The United States exports automobiles and imports airplanes based on opportunity costs.

Absolute and Comparative Advantage

Eastland has absolute advantages in oranges, while Westland dominates in peaches.
The opportunity cost varies between the two:
- For Eastland: 1 box of oranges = 1 box of peaches.
- For Westland: 1 box of oranges = 4 boxes of peaches.
Specialization based on comparative advantages leads to enhanced production efficiency.

Economic Statements

Positive statements describe factual scenarios (e.g., inflation rates).
Normative statements convey opinions or beliefs about what ought to be (e.g., national health insurance for all).

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Description

This quiz explores the concepts surrounding the Production Possibility Frontier (PPF) and economic models. Understand trade-offs, resource efficiency, and opportunity costs in the context of economic decision-making. Dive into the implications of these concepts with practical examples and applications.