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14) Using the igure above, suppose with no trade Liz and Joe each produce at point A on
their respective PPFs. Then, Liz suggests that they specialize and trade. She would produce
only smoothies and Joe would produce only salads. Then she would sell 10 smoothies to Joe
at a price of 2.5 salads per smoothie. In this scenario,
A) Liz gains 10 smoothies and 5 salads, and Joe gains 5 smoothies.
B) Liz gains 5 smoothies, and Joe gains 10 smoothies.
C) Liz gains 10 smoothies, and Joe loses 5 smoothies.
D) Liz gains 5 smoothies and 5 salads, and Joe loses 5 salads.
E) Neither of the individuals gains from trade.
Skill: Level 3: Using models
Section: Checkpoint 3.4
Status: Old
AACSB: Analytical thinking
15) Using the igure above, suppose with no trade Liz and Joe each produce at point A on
their respective PPFs. Then, Joe suggests that they specialize and trade. He would produce
only salads and Liz would produce only smoothies. Then, Joe says, he would buy 16
smoothies from Liz at a price of 1.5 salads per smoothie. Liz should
A) accept Joe's ofer since she will gain 4 smoothies and 4 salads.
B) accept Joe's ofer, as she will be as well of as with no trade.
C) not accept Joe's ofer, as the price he ofers is too low for her to gain from trade.
D) not accept Joe's ofer since she would lose 2 smoothies and 2 salads.
E) accept Joe's ofer since she will gain 4 salads.
Skill: Level 3: Using models
Section: Checkpoint 3.4
Status: Old
AACSB: Analytical thinking
3.6 Integrative Questions
1) As technology advances,
A) all opportunity costs decrease.
B) the PPF shifts outward.
C) a country moves toward the midpoint along its PPF and can produce more of both goods.
D) all opportunity costs increase.
E) the PPF shifts inward because unemployment occurs.
Skill: Level 3: Using models
Section: Integrative
Status: Old
AACSB: Analytical thinking
91
2) If a country is operating at a point of production eiciency,
A) it enjoys a free lunch when increasing production.
B) it produces on its production possibilities frontier.
C) it must specialize in the production of a good.
D) it operates on its trade line.
E) it cannot be producing at its point of comparative advantage.
Skill: Level 2: Using deinitions
Section: Integrative
Status: Old
AACSB: Relective thinking
3) Relative to Al, Joe has ________ if Joe can produce a good at a lower opportunity cost than
Al.
A) a comparative advantage
B) more production eiciency
C) a comparative beneit
D) a marginal beneit
E) a free lunch
Skill: Level 3: Using models
Section: Integrative
Status: Old
AACSB: Relective thinking
4) Suppose that after specializing according to comparative advantage, a country is trading
with another nation that also specializes according to its comparative advantage. Which of
the following statements are true for the irst country?
i. It enjoys gains from trade.
ii. It must have an absolute advantage in the production of the good it produces.
iii. It is producing at a point beyond its PPF.
A) i only
B) i and ii
C) i and iii
D) ii and iii
E) i, ii, and iii
Skill: Level 3: Using models
Section: Integrative
Status: Old
AACSB: Relective thinking
92
5) The table above gives the production possibilities frontier for two countries, Anaconda
and Bear. This table shows that
A) when Anaconda and Bear specialize and trade, Anaconda should specialize in the
production of shoes.
B) when Anaconda and Bear specialize and trade, Anaconda should produce at its
production point E.
C) Anaconda has an absolute advantage in the production of corn and shoes.
D) Bear can consume no more than 2 bushels of corn and 700 pairs of shoes.
E) Bear is unable to gain from trade with Anaconda.
Skill: Level 3: Using models
Section: Integrative
Status: Old
AACSB: Analytical thinking
6) The table above gives the production possibilities frontier for two countries, Anaconda
and Bear. The table shows that
A) Bear achieves production eiciency only at its production point A.
B) Anaconda achieves production eiciency only at its production point A.
C) Anaconda has a comparative advantage in the production of corn.
D) Bear has an absolute advantage in the production of both goods.
E) Both answers A and B are correct.
Skill: Level 3: Using models
Section: Integrative
Status: Old
AACSB: Analytical thinking
93
7) The table above gives the production possibilities frontier for two countries, Anaconda
and Bear. The opportunity cost of moving from production point B to production point C for
Anaconda equals ________ and for Bear equals ________.
A) 1 ton of corn; 1 ton of corn
B) 650 pairs of shoes; 900 pairs of shoes
C) 550 pairs of shoes; 700 pairs of shoes
D) 100 pairs of shoes; 200 pairs of shoes
E) 50 pairs of shoes; 100 pairs of shoes
Skill: Level 3: Using models
Section: Integrative
Status: Old
AACSB: Analytical thinking
8) The table above gives the production possibilities frontier for two countries, Anaconda
and Bear. The opportunity cost of moving from ________ is greater for ________.
A) point A to point B; Anaconda
B) point B to point A; Bear
C) point D to point E; Bear
D) point E to point D; Bear
E) any point to any other point; Bear
Skill: Level 3: Using models
Section: Integrative
Status: Old
AACSB: Analytical thinking
3.7 Essay: Production Possibilities
1) What does the vertical intercept of a production possibilities frontier represent?
Skill: Level 2: Using deinitions
Section: Checkpoint 3.1
Status: Old
AACSB: Relective thinking
94
2) What economic concepts are represented in the production possibilities model?
Skill: Level 5: Critical thinking
Section: Checkpoint 3.1
Status: Old
AACSB: Written and oral communication
3) How can a combination of goods be unattainable?
Skill: Level 1: Deinition
Section: Checkpoint 3.1
Status: Old
AACSB: Relective thinking
4) What does a production point beyond the production possibilities frontier represent?
Skill: Level 1: Deinition
Section: Checkpoint 3.1
Status: Old
AACSB: Relective thinking
5) "If Mexico is currently operating at a point beyond its production possibilities frontier,
then there are unemployed or misallocated resources in Mexico." Is this statement true or
false? Briely explain your answer.
Skill: Level 1: Deinition
Section: Checkpoint 3.1
Status: Old
AACSB: Written and oral communication
6) "If Mexico is currently operating at a point inside its production possibilities frontier,
then there are unemployed or misallocated resources in Mexico." Is this statement true or
false? Briely explain your answer.
Skill: Level 1: Deinition
Section: Checkpoint 3.1
Status: Old
AACSB: Relective thinking
7) Are all points inside the production possibilities frontier unattainable?
Skill: Level 1: Deinition
Section: Checkpoint 3.1
Status: Old
AACSB: Relective thinking
8) In the movie Cast Away, Tom Hanks plays a FedEx eiciency expert stranded on a
deserted island. While on the island, he divides his time between catching ish, gathering
coconuts, painting, and building a raft. Suppose that these were Mr. Hanks' only activities.
Did he face an opportunity cost from pursuing any of these activities? Why or why not?
Skill: Level 3: Using models
Section: Checkpoint 3.1
Status: Old
AACSB: Written and oral communication
96
9) What does it mean when a "free lunch" is available? Relate your answer to the
production possibilities frontier.
Skill: Level 1: Deinition
Section: Checkpoint 3.1
Status: Old
AACSB: Written and oral communication
10) Describe the diferences between tradeofs and free lunches in terms of a PPF.
Skill: Level 1: Deinition
Section: Checkpoint 3.1
Status: Old
AACSB: Written and oral communication
11) On a production possibilities frontier diagram, where are production points that have
tradeofs? Where are production points with a free lunch?
Skill: Level 1: Deinition
Section: Checkpoint 3.1
Status: Old
AACSB: Written and oral communication
97
12) Explain why a movement from a point inside a production possibilities frontier to the
production possibilities frontier is described as a free lunch and a movement along a
production possibilities frontier is described as a tradeof.
Skill: Level 4: Applying models
Section: Checkpoint 3.1
Status: Old
AACSB: Written and oral communication
13) Draw a production possibilities frontier between beans and peas. Label the
unattainable points, the attainable points with fully employed resources, and the attainable
points with unemployed resources.
Skill: Level 1: Deinition
Section: Checkpoint 3.1
Status: Old
AACSB: Analytical thinking
98
14) The igure above shows a nation's production possibilities frontier for apples and
oranges.
a. What combination of goods is represented by point A?
b. What combination of goods is represented by point B?
c. Which point represents an unattainable combination of goods?
d. The movement from point C to point D results in a free lunch. What is the free lunch?
Skill: Level 1: Deinition
Section: Checkpoint 3.1
Status: Old
AACSB: Analytical thinking
99
15) Before the irst Gulf War, Kuwait had the capacity to produce a certain amount of oil
from its oil wells. After the war, it found that capacity greatly diminished because the oil
wells were on ire. Draw Kuwait's PPF before and after the war, assuming that the only two
goods produced are oil and food. Further assume that setting the oil wells on ire did not
afect Kuwait's ability to produce food. Explain why the PPF before the war is diferent
from the PPF after the war.
Skill: Level 4: Applying models
Section: Checkpoint 3.1
Status: Old
AACSB: Analytical thinking
3.8 Essay: Opportunity Cost
1) Moving on a bowed out PPF, what happens to the opportunity cost of its production as a
nation specializes more in one product?
Skill: Level 2: Using deinitions
Section: Checkpoint 3.2
Status: Old
AACSB: Relective thinking
100
