Q: According to the principle of efficient resource allocation, what condition must be met for the best production plan?

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

Q: If the opportunity cost of producing 1 pizza is 3 cans of cola for Country A and 4 cans of cola for Country B, what is a possible range of terms of trade for 1 pizza?

$$3 \u003c \text{Price of 1 pizza} \u003c 4$$ cans of cola

Question 1

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

Accepted Answer

The PPF is the boundary between combinations of goods that can be produced and those that cannot, given current resources and technology.

Question 2

If an economy is operating at a point inside its PPF, what does this indicate?

Accepted Answer

Some resources are unemployed or underutilized.

Question 3

Suppose the opportunity cost of producing one pizza is 2 cans of cola. If the economy moves from producing 2 pizzas to 3 pizzas, how many cans of cola must be given up?

Accepted Answer

$$2$$

Question 4

According to the principle of efficient resource allocation, what condition must be met for the best production plan?

Accepted Answer

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

Question 5

If the PPF is bowed outward, what does this imply about opportunity costs?

Accepted Answer

Opportunity costs increase as more of one good is produced.

Question 6

Country A can produce either 10 units of good X or 20 units of good Y. Country B can produce either 5 units of good X or 5 units of good Y. Who has the comparative advantage in producing good X?

Accepted Answer

Country B, because it has a lower opportunity cost for good X.

Question 7

Joe can make 1 smoothie or 5 salads in 10 minutes. Liz can make 1 smoothie or 1 salad in 10 minutes. Who has the comparative advantage in making salads?

Accepted Answer

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

Question 8

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

Accepted Answer

Comparative advantage is determined by lower opportunity cost, not by absolute productivity.

Question 9

If the opportunity cost of producing 1 pizza is 3 cans of cola for Country A and 4 cans of cola for Country B, what is a possible range of terms of trade for 1 pizza?

Accepted Answer

$$3 \u003c 	ext{Price of 1 pizza} \u003c 4$$ cans of cola

Question 10

Which of the following is NOT an assumption of the basic PPF model discussed in class?

Accepted Answer

There are no opportunity costs.

Question 11

If a country specializes in the good for which it has a comparative advantage and then trades, what is the likely outcome?

Accepted Answer

Both countries can consume beyond their individual PPFs.

Question 12

Which of the following best explains why the opportunity cost of producing pizza increases as more pizzas are produced, according to the PPF diagram?

Accepted Answer

Resources are specialized, so reallocating them increases opportunity cost.

Question 13

Suppose the marginal benefit of producing an additional pizza is $$MB = 10$$ and the marginal cost is $$MC = 8. $$What should the economy do to achieve efficient resource allocation?

Accepted Answer

Produce more pizzas until $$MB = MC.$$

Question 14

Which of the following is a real-world limitation of the free trade model discussed in class?

Accepted Answer

The model assumes no unemployment and balanced trade.

Question 15

If the opportunity cost of producing 1 smoothie for Joe is $$1/5$$ salads, and for Liz is $$1$$ salad, who should specialize in smoothies?

Accepted Answer

Liz, because she has the lower opportunity cost.

Question 16

Which of the following points on a PPF diagram is unattainable given current resources and technology?

Accepted Answer

A point beyond the PPF.

Question 17

If a country is producing at a point where $$MB \u003c MC$$, what should it do to achieve efficiency?

Accepted Answer

Decrease production of the good.

Question 18

Which economist is most closely associated with the theory of comparative advantage and gains from trade?

Accepted Answer

David Ricardo

Question 19

If the marginal utility of an extra good decreases as the amount consumed increases, which principle does this illustrate?

Accepted Answer

Principle of diminishing marginal utility

Question 20

Suppose an economy can produce a maximum of 36 smoothies if it devotes all resources to smoothies, and 30 salads if it devotes all resources to salads. If both Joe and Liz specialize according to comparative advantage and trade, what is the effect on total output?

Accepted Answer

Total output can be greater than what either could produce alone, allowing both to consume beyond their individual PPFs.

Chapter 2: The Economic Problem – Production Possibilities, Opportunity Cost, and Gains from Trade

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