IBE – Homework – Lecture 2

Indicate whether the statement is true or false.

1. Production possibilities frontiers cannot be used to illustrate trade-offs.

a. True
b. False

Indicate the answer choice that best completes the statement or answers the question.

2. Microeconomics is the study of

a. how money affects the economy.
b. how individual households and firms make decisions.
c. how government affects the economy.
d. how the economy as a whole works.

Indicate whether the statement is true or false.

3. The production possibilities frontier is a graph that shows the various combinations of outputs that the economy can
possibly produce given the available factors of production and the available production technology.
a. True
b. False

Indicate the answer choice that best completes the statement or answers the question.

4. When two variables have a negative correlation,

a. if the x-variable decreases, the y-variable decreases.
b. if the x-variable increases, the y-variable decreases.
c. one variable will move while the other remains constant.
d. the variables' values are never positive.

Table 2-3

Production Possibilities
Corn Barley
(Bushels) (Bushels)
2,000 0
1,600 700
1,200 1,100
800 1,400
400 1,600
0 1,700

5. Refer to Table 2-3. What is the opportunity cost of increasing the production of
barley from 700 bushels to 1100 bushels?
a. 200 bushels of corn
b. 400 bushels of corn
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IBE – Homework – Lecture 2
c. 600 bushels of corn
d. 800 bushels of corn

6. The most obvious benefit of specialization and trade is that they allow us to
a. work more hours per week than we otherwise would be able to work.
b. consume more goods than we otherwise would be able to consume.
c. spend more money on goods that are beneficial to society, and less money on goods that are harmful to
society.
d. consume more goods by forcing people in other countries to consume fewer goods.

Indicate whether the statement is true or false.

7. The slope of a line is the ratio of the vertical distance covered to the horizontal distance covered along the line.
a. True
b. False

8. If one producer is able to produce a good at a lower opportunity cost than some other producer, then the producer with
the lower opportunity cost is said to have an absolute advantage in the production of that good.
a. True
b. False

9. Adam Smith developed the theory of comparative advantage as we know it today.

a. True
b. False

Figure 2-11

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IBE – Homework – Lecture 2

10. Refer to Figure 2-11. It is possible for this economy to produce 1000 shoes.
a. True
b. False

11. Normative statements describe how the world is, while positive statements prescribe how the world should be.
a. True
b. False

12. Draw a production possibilities frontier showing increasing opportunity cost of hammers in terms of horseshoes.
a. On the graph, identify the area of feasible outcomes and the area of infeasible outcomes.
b. On the graph, label a point that is efficient and a point that is inefficient.
On the graph, illustrate the effect of the discovery of a new vein of iron ore, a resource
c.
needed to make both horseshoes and hammers, on this economy.
On a second graph, illustrate the effect of a new computerized assembly line in the
d.
production of hammers on this economy.

Indicate the answer choice that best completes the statement or answers the question.

Table 3-3
Assume that Aruba and Iceland can switch between producing coolers and producing radios at a constant rate.

Labor Hours Needed to Make 1

Cooler Radio
Aruba 2 5
Iceland 1 4

13. Refer to Table 3-3. Assume that Aruba and Iceland each has 120 labor hours available. If each country divides its
time equally between the production of coolers and radios, then total production is
a. 90 coolers and 120 radios.
b. 27 coolers and 60 radios.
c. 90 coolers and 27 radios.
d. 27 coolers and 90 radios.

Indicate whether the statement is true or false.

14. Historical episodes are not valuable to economists.

a. True
b. False

Indicate the answer choice that best completes the statement or answers the question.

15. In the simple-circular flow diagram, the flow of money from the firms to the markets for factors of production is
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IBE – Homework – Lecture 2
called
a. spending.
b. revenue.
c. income.
d. wages, rent, and profit.

16. As a student, Jordyn spends 40 hours per week writing term papers and completing homework assignments. On one
axis of her production possibilities frontier is measured the number of term papers written per week. On the other axis is
measured the number of homework assignments completed per week. Jordyn's production possibilities frontier is a
straight line if
a. she faces no trade-off between writing term papers and completing homework assignments.
b. she can switch between writing term papers and completing homework assignments at a constant rate.
c. the rate at which she can switch between homework assignments and term papers depends on the number of
homework assignments she is completing and on the number of term papers she is writing.
d. she is required by her professors to spend half of her time on term papers and the other half of her time on
homework assignments.

Indicate whether the statement is true or false.

17. For a country producing two goods, the opportunity cost of one good will be the inverse of the opportunity cost of the
other good.
a. True
b. False

Indicate the answer choice that best completes the statement or answers the question.

18. When a country has a comparative advantage in producing a certain good,

a. the country should import that good.
b. the country should produce just enough of that good for its own consumption.
c. the country’s opportunity cost of that good is high relative to other countries’ opportunity costs of that same
good.
d. then specializing in the production of that good and trading for other goods could allow that country to
consume at a point beyond its production possibilities frontier.

Indicate whether the statement is true or false.

19. In the circular-flow diagram, one loop represents the flow of goods and services, and the other loop represents the
flow of factors of production.
a. True
b. False

20. In the circular-flow diagram, households and firms are the decision makers.
a. True
b. False

21. A country can have a comparative advantage in the production of a good, even if it does not have an absolute
advantage in the production of that good.
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IBE – Homework – Lecture 2
a. True
b. False

22. A production point is said to be efficient if there is no way for the economy to produce more of one good without
producing less of another.
a. True
b. False

Figure 2-12

23. Refer to Figure 2-12. What does the arrow going from oval B to rectangle 2 represent in the figure?

Indicate whether the statement is true or false.

24. Economists work both inside and outside the administrative branch of the U.S. government.
a. True
b. False

25. In one month, Moira can knit 2 sweaters or 4 scarves. In one month, Tori can knit 1 sweater or 3 scarves. Moira’s
opportunity cost of knitting scarves is lower than Tori’s opportunity cost of knitting scarves.
a. True
b. False

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IBE – Homework – Lecture 2
Figure 3-7
Mary’s Production Possibilities Frontier Kate’s Production Possibilities Frontier

26. Refer to Figure 3-7. What is Mary’s opportunity cost of one cookie?

Indicate whether the statement is true or false.

Figure 2-10

27. Refer to Figure 2-10. Points A, B, and D represent efficient outcomes for this economy.
a. True
b. False

Table 3-13
Minutes Needed to Make 1 Quantity Produced in 4 Hours
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IBE – Homework – Lecture 2
Compass Radio Compass Radio
Russia 30 15 8 16
England 20 5 12 48

28. Refer to Table 3-13. What is England’s opportunity cost of one compass?

Indicate the answer choice that best completes the statement or answers the question.

29. Which of the following statements about comparative advantage is not true?
a. Comparative advantage is determined by which person or group of persons can produce a given quantity of a
good using the fewest resources.
b. The principle of comparative advantage applies to countries as well as to individuals.
c. Economists use the principle of comparative advantage to emphasize the potential benefits of free trade.
d. A country may have a comparative advantage in producing a good, even though it lacks an absolute advantage
in producing that good.

30. When constructing a production possibilities frontier, which of the following assumptions is not made?
a. The economy produces only two goods or two types of goods.
b. The amount of available resources does not change.
c. The technology available to firms is given.
d. The quantities of the factors of production that are available are increasing over the relevant time period
.

31. Which of the following is an example of a normative, as opposed to a positive, statement?

a. Universal healthcare would be good for U.S. citizens.
b. A decrease in the minimum wage would decrease unemployment.
c. If the national saving rate were to increase, so would the rate of economic growth.
d. In response to the most recent recession, the federal government extended the duration of unemployment benefits
.

Table 3-5

Assume that England and Italy can switch between producing cheese and producing bread at a constant rate.

Labor Hours Needed to Make 1 Unit of

Cheese Bread
England 8 3
Italy 3 12

32. Refer to Table 3-5. Which of the following combinations of cheese and bread could Italy produce in 24 hours?
a. 8 units of cheese or 2 units of bread
b. 2 units of cheese or 8 units of bread
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IBE – Homework – Lecture 2
c. 7 units of cheese or 8 units of bread
d. 2 units of cheese and 3 units of
bread

Table 3-11
Assume that Jamaica and Sweden can switch between producing coolers and producing radios at a constant rate.

Output Produced in One Day

Coolers Radios
Jamaica 12 6
Sweden 24 3

33. Refer to Table 3-11. At which of the following prices would both Jamaica and Sweden gain from trade with each
other?
a. 1 radio for 1 cooler
b. 1 radio for 4 coolers
c. 1 radio for 10
coolers
d. 1 radio for 15
coolers

Scenario 3-1

In country A a worker who works 40 hours can produce 200 pounds of rice or 100 pounds of broccoli. In country B a
worker who works 40 hours can produce 160 pounds of rice or 120 pounds of broccoli.
34. Refer to Scenario 3-1. Give a range of prices in terms of pounds of rice per pound of broccoli at which the two
countries would be both be willing to trade.

Indicate the answer choice that best completes the statement or answers the question.

Figure 2-6

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IBE – Homework – Lecture 2

35. Refer to Figure 2-6. Consider the production possibilities frontier for an economy that produces only cars and sofas.
The opportunity cost of each car is
a.
the slope of the production possibilities frontier, or sofas.
b.
the reciprocal of the slope of the production possibilities frontier, or
of a sofa.
c.
the reciprocal of the slope of the production possibilities frontier, or sofas.
d.
the slope of the production possibilities frontier, or of a sofa.

Figure 3-4

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IBE – Homework – Lecture 2

36. Refer to Figure 3-4. If point A represents Alex’s current production and point B represents Barb’s current production,
under what circumstances can both Alex and Barb benefit from specialization and trade?
a. Alex produces more pizzas and Barb produces more lemonade.
b. Alex produces more lemonade and Barb produces more pizzas.
c. Both Alex and Betty produce only pizzas.
d. There are no circumstances under which both Alex and Barb can benefit from specialization and
trade.

Figure 2-4
Graph (a) Graph (b)

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IBE – Homework – Lecture 2

37. Refer to Figure 2-4, Graph (a) and Graph (b). Which of the following is not a result of the shift of the economy's
production possibilities frontier from Graph (a) to Graph (b)?
a. The trade-off between the production of donuts and cups of coffee changes.
b. The opportunity cost of a cup of coffee is higher at all levels of coffee
production.
c. Production of 3 donuts and 3 cups of coffee becomes possible.
d. Production of 2 donuts and 2 cups of coffee becomes efficient.

Figure 3-6
The production possibilities frontiers below show how much Greg and Catherine can each produce in 8 hours of time.
Greg’s Production Possibilities Catherine’s Production Possibilities

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IBE – Homework – Lecture 2

38. Refer to Figure 3-6. Is it possible for Greg and Catherine to gain from trade? Defend your answer.

Indicate the answer choice that best completes the statement or answers the question.

39. Suppose that a worker in Cornland can grow either 40 bushels of corn or 10 bushels of oats per year, and a worker in
Oatland can grow either 5 bushels of corn or 50 bushels of oats per year. There are 30 workers in Cornland and 30
workers in Oatland. If the two countries do not trade, Cornland will produce and consume 600 bushels of corn and 150
bushels of oats, while Oatland will produce and consume 20 bushels of corn and 1300 bushels of oats. If each country
made the decision to specialize in producing the good in which it has a comparative advantage, then the combined yearly
output of the two countries would increase by
a. 1200 bushels of corn and 50 bushels of oats.
b. 580 bushels of corn and 50 bushels of oats.
c. 50 bushels of corn and 580 bushels of oats.
d. 580 bushels of corn and 1500 bushels of oats.

40. The prairie dog has always been considered a problem for American cattle ranchers. They dig holes that cattle and
horses can step in, and they eat grass necessary for cattle. Recently, ranchers have discovered that there is a demand for
prairie dogs as pets. In some areas, prairie dogs can sell for as high as $150 each. Cattlemen are now fencing off prairie
dog towns on their land so these towns will not be disturbed by their cattle.

Draw a rancher’s production possibilities frontier showing increasing opportunity cost of cattle production in terms of
prairie dog production. Using a separate graph for each situation, show what would happen to the initial production
possibilities frontier in each of the following situations:
The outcome is efficient, with ranchers choosing to produce equal numbers of cattle and
a.
prairie dogs.
As a protest against the government introducing the gray wolf back into the wild in their
b.
state, ranchers decide to withhold 25 percent of the available grassland for grazing.
The price of prairie dogs increases to $200 each, so ranchers decide to allot additional
c.
land for prairie dogs.
The government grants new leases to ranchers, giving them 10,000 new acres of
d.
grassland each for grazing.
e. A drought destroys most of the available grass for grazing of cattle, but not for prairie
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IBE – Homework – Lecture 2
dogs since they also eat plant roots.

Indicate the answer choice that best completes the statement or answers the question.

41. Suppose that a worker in Caninia can produce either 2 blankets or 8 meals per day, and a worker in Felinia can
produce either 5 blankets or 1 meal per day. Each nation has 10 workers. For many years, the two countries traded, each
completely specializing according to their respective comparative advantages. Now war has broken out between them and
all trade has stopped. Without trade, Caninia produces and consumes 10 blankets and 40 meals per day and Felinia
produces and consumes 25 blankets and 5 meals per day. The war has caused the combined daily output of the two
countries to decline by
a. 15 blankets and 35 meals.
b. 25 blankets and 40 meals.
c. 35 blankets and 45 meals.
d. 50 blankets and 80 meals.

Table 3-7
Kalene and Jim run a business that sets up and tests computers. Assume that Kalene and Jim can switch between setting
up and testing computers at a constant rate. The following table applies.

Minutes Needed to Number of Computers Set Up or Test in a

Set Up 1 Test 1 40-Hour Week
Computer Computer Computers Set Up Computers Tested
Kalen
48 ? 50 40
e
Jim 30 40 80 60

42. Refer to Table 3-7. Which of the following points would not be on Kalene's production possibilities frontier, based on
a 40-hour week?
a. (0 computers set up, 40 computers tested)
b. (8 computers set up, 32 computers tested)
c. (25 computers set up, 20 computers tested)
d. (50 computers set up, 0 computers tested)

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IBE – Homework – Lecture 2
Answer Key
1. False

2. b

3. True

4. b

5. b

6. b

7. True

8. False

9. False

10. True

11. False

12.
(a-c) (d)

13. c

14. False

15. d

16. b

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IBE – Homework – Lecture 2
17. True

18. d

19. False

20. True

21. True

22. True

23. income

24. True

25. False

26. 0.5 muffin

27. False

28. 4 radios.

29. a

30. d

31. a

32. a

33. b. Any price which is less than 8 coolers per one radio but greater than 2 coolers per one radio, being 8 the op. cost of
one radio in Sweden and 2 the op. cost of one radio in Jamaica.

34. Any price which is less than 2 pounds of rice per pound of broccoli but greater than 4/3 pound of rice per pound of
broccoli.

35. d

36. b

37. d

38. Yes. Greg has a comparative advantage producing cake because he has a lower opportunity cost. Catherine has a
comparative advantage producing ice cream because she has a lower opportunity cost.

39. b

40.
(a) (b)

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IBE – Homework – Lecture 2

(c) (d)

(e)

41. a

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IBE – Homework – Lecture 2
42. b

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