Chapter 2: Thinking Like An Economist Terms: Production possibilities frontier (PPF) graph that shows the combinations of output that the economy can produce given the available factors of production (land, labor, capital) Positive statement statement that describes the world, fact, can be proved or disproved Normative statement statement that includes a value judgment, prescriptive Opportunity cost whatever must be given up to obtain some item Ed spends an hour studying instead of watching tv with his friends. The opportunity cost to him of studying is

a. the improvement in his grades from studying for the hour. b. the improvement in his grades from studying minus the enjoyment of watching tv. c. the enjoyment he would have received if he had watched tv with his friends. d. zero. Since Ed chose to study rather than to watch tv, the value of studying must have

been greater than the value of watching tv. Mark is refinishing an antique china cabinet and has already spent $180 on the restoration. He expects to be able to sell the cabinet for $360. But then Mark discovers that he needs to do an additional $200 of work to make the cabinet worth $360 to potential buyers. He could also sell the cabinet now, without completing the additional work, for $100. What should he do?

a. He should sell the cabinet now for $100. b. He should keep the cabinet since it wouldnt be rational to spend $380 restoring a

cabinet and then sell it for only $360. c. He should complete the additional work and sell the cabinet for $360. d. It does not matter which action he takes since the outcome will be the same either way.

Panel (a) Panel (b)

The rate of tradeoff between producing chairs and producing couches depends on how many chairs and couches are being produced in

a. Panel (a). b. Panel (b). c. both Panel (a) and Panel (b). d. neither Panel (a) nor Panel (b).

chairs

couches

chairs

couches

A country that only produces left and right shoes would be represented by the PPF in a. Panel (a). b. Panel (b). c. both Panel (a) and Panel (b). d. neither Panel (a) nor Panel (b).

A country with highly specialized workers is most likely to have a PPF like the one in

a. Panel (a). b. Panel (b). c. both Panel (a) and Panel (b). d. neither Panel (a) nor Panel (b).

The first principle of economics discussed in Chapter 1 is that people face trade-ffs.

a) Use a PPF to illustrate societys trade-off between two goods a clean environment and the quantity of industrial output. What do you suppose determines the shape and position of the frontier?

b) Show what happens to the frontier if engineers develop a new way of producing electricity that emits fewer pollutants.

An economy consists of four workers: Sleepy, Sneezy, Doc, and Dopey. They only produce two goods: washing cars and mowing lawns. In an hour, Doc can wash four cars or mow four lawns. Dopey can do half of that two cars or two lawns. Sleepy can wash four cars or mow two lawns in an hour and Sneezy can wash two cars or mow four lawns.

a) Before drawing a PPF for the four dwarves, do you anticipate it being like panel a or panel b above? Why?

b) Calculate production at the following six points and graph them. Label these points A F. To be consistent, put cars on the X axis.

a. All spend their time mowing lawns. b. All spend their time washing cars. c. All split their time equally between the two tasks. d. Doc and Dopey split their time, Sleepy only washes cars and Sneezy only mows lawns. e. Only Sleepy washes cars. f. Only Sneezy mows lawns.

c) Which points above are efficient and which are inefficient? d) Assume we start at point A. What is the opportunity cost of four washed cars? To be most

efficient, who should be washing those cars? e) Assume we start at point E. What is the opportunity cost to move to point D? Who should be

switching to washing cars in this case? To Think About: One of the principles is that trade can make everybody better off. Can you think of an instance when trade makes everybody worse off?