Q: Suppose an economy can produce either pizzas or cola. If moving from point C (2 million pizzas, 12 million colas) to point D (3 million pizzas, 9 million colas) on the PPF, what is the opportunity cost of producing the additional pizza?

$$\text{Opportunity Cost} = 12 - 9 = 3$$ million cans of cola$

Q: At which point is resource allocation considered efficient on the PPF?

Where $$\text{Marginal Benefit} = \text{Marginal Cost}$$

Q: Suppose the willingness to pay for the 3rd million pizza is 3 cans of cola, and the marginal cost is also 3 cans of cola. What should the economy do?

Produce the 3rd million pizza, as $$\text{Marginal Benefit} = \text{Marginal Cost}$$

Question 1

Which of the following best describes the Production Possibilities Frontier (PPF)?

Accepted Answer

The PPF shows the maximum combinations of two goods that can be produced given available resources and technology.

Question 2

Suppose an economy can produce either pizzas or cola. If moving from point C (2 million pizzas, 12 million colas) to point D (3 million pizzas, 9 million colas) on the PPF, what is the opportunity cost of producing the additional pizza?

Accepted Answer

$$	ext{Opportunity Cost} = 12 - 9 = 3$$ million cans of cola$

Question 3

If a point lies inside the PPF, what does this indicate about resource use?

Accepted Answer

Resources are not being used efficiently.

Question 4

Why does the PPF typically bow outward (concave to the origin)?

Accepted Answer

Because opportunity costs increase as more of one good is produced.

Question 5

According to the principle of decreasing marginal utility, what happens to the marginal benefit of pizza as more pizzas are consumed?

Accepted Answer

Marginal benefit decreases.

Question 6

At which point is resource allocation considered efficient on the PPF?

Accepted Answer

Where $$	ext{Marginal Benefit} = 	ext{Marginal Cost}$$

Question 7

Suppose Joe can make 5 salads or 1 smoothie per hour, and Liz can make 15 salads or 15 smoothies per hour. Who has the comparative advantage in making salads?

Accepted Answer

Joe, because his opportunity cost of making a salad is lower.

Question 8

If country A has an opportunity cost of 2 cans of cola per pizza and country B has an opportunity cost of 4 cans of cola per pizza, what is a mutually beneficial trading price for pizza?

Accepted Answer

Any price between 2 and 4 cans of cola per pizza

Question 9

Which of the following statements about absolute and comparative advantage is correct?

Accepted Answer

A country can have an absolute advantage in both goods but a comparative advantage in only one.

Question 10

If the marginal cost of producing pizza increases as more pizzas are produced, what does this imply about the PPF?

Accepted Answer

The PPF is bowed outward.

Question 11

Suppose the willingness to pay for the 3rd million pizza is 3 cans of cola, and the marginal cost is also 3 cans of cola. What should the economy do?

Accepted Answer

Produce the 3rd million pizza, as $$	ext{Marginal Benefit} = 	ext{Marginal Cost}$$

Question 12

Which of the following is NOT an assumption of the Ricardian model of trade?

Accepted Answer

All countries have the same opportunity costs.

Question 13

If Joe and Liz specialize according to their comparative advantage and trade at a price of 2 salads per smoothie, what is the result?

Accepted Answer

Both can consume beyond their individual PPFs.

Question 14

Which of the following best explains why not all points outside the PPF are attainable?

Accepted Answer

Limited resources and technology restrict production possibilities.

Question 15

If the economy is producing at a point where marginal benefit is less than marginal cost, what should it do?

Accepted Answer

Produce less of the good.

Question 16

Which of the following is a real-world limitation of the Ricardian model of trade?

Accepted Answer

It ignores issues like unemployment and environmental impact.

Question 17

If the opportunity cost of producing one more pizza increases as more pizzas are produced, what economic principle does this illustrate?

Accepted Answer

The law of increasing opportunity cost.

Question 18

Suppose a country is producing at a point below its PPF. Which of the following could move it onto the PPF?

Accepted Answer

Improving efficiency in resource use.

The Economic Problem: Production Possibilities, Opportunity Cost, and Gains from Trade

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