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14) The figure 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?
15) Before the first 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 fire. 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 fire did not affect Kuwait's ability to
produce food. Explain why the PPF before the war is different from the PPF after the war.
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?
2) Why is the production possibilities frontier bowed out?
3) Why does the production possibilities frontier have a bowed out shape rather than being a
straight line?
4) When economists state that the opportunity cost of a product increases as more of it is
produced, what do they mean? For instance, what is the opportunity cost? And, where in a PPF
diagram does this statement apply and where does it not apply?
5) What is the relationship between the bowed out shape of the production possibilities frontier
and the increasing opportunity cost of a good as more of it is produced?
6) A (very, very small) country produces milk and shirts and its production possibilities frontier
is in the table above.
a. The nation is currently producing at point B. What is the opportunity cost of two additional
gallons of milk? At point C? At point D? What do your results show?
b. Suppose the nation is initially producing 4 gallons of milk and 40 shirts. What is the
opportunity cost of 2 additional gallons of milk? Explain your answer.
7) Jean can either type her term paper or create Web pages during the limited time she has
available. The table above shows her PPF.
a. Can Jean type 90 pages and create 2 Web pages?
b. Use the above numbers to calculate the opportunity cost of a typed page as she increases her
time typing and decreases time creating a Web page.
8) The table above gives the production possibilities frontier for a nation that produces wheat and
soybeans. Use the information in that table to complete the table below, which has in it the
opportunity costs of moving from one production point to another. Do not forget to note the units
of the opportunity costs.
9) The figure above represents the production possibilities frontier for a country.
a. The nation is currently producing at point B and wants to move to point C. What is the
opportunity cost of the move?
b. The nation is currently producing at point B and wants to move to point A. What is the
opportunity cost of the move?
c. The nation is currently producing at point D and wants to move to point B. What is the
opportunity cost of the move?
10) The table above presents the production possibilities of Farmer Brown. Use these data to
calculate Farmer Brown's opportunity cost of additional beef as Farmer Brown moves from point
A to B to C to D. Also use the data to calculate Farmer Brown's opportunity cost of additional
wheat as Farmer Brown moves from point D to C to B to A. Based on these costs, does Farmer
Brown use resources that are more productive in one activity than the other or are they equally
productive in both uses? Explain your answer.
3.9 Essay: Economic Growth
1) How is economic growth shown in a production possibilities frontier graph?
2) Discuss three factors that can expand a country's production possibilities.
3.10 Essay: Specialization and Trade
1) What is comparative advantage? Give an example.
2) "When a person has an absolute advantage in producing a good, the person necessarily has a
lower opportunity cost of producing it." Is this assertion true or false?
3) "When a person can produce more of a good or service than another person, the first person
has the comparative advantage in producing the good." Is this assertion correct or incorrect?
Explain your answer.
4) Why is it likely that the United States has an absolute advantage in goods and yet it still ends
up importing them from other countries?
5) The United States has an absolute advantage in producing sugar over all of the other sugar
producing countries. Does this fact mean that we should not import any sugar from the other
countries?
6) "When countries specialize in producing the good in which they have a comparative
advantage and then trade with each other, only the country with the absolute advantage gains." Is
the previous statement correct or incorrect? Briefly explain your answer.
7) "Because the United States is the largest economy in the world and can produce anything it
needs domestically, there are no gains from trade for the United States." Is the previous
statement correct or incorrect?
8) How can a nation that is at an absolute disadvantage gain from trade?
9) Why do nations engage in international trade?
10) Explain why specialization and trade increases a country's overall level of consumption.
11) Japan can use all of its resources to produce 100 videos or 400 shoes. China can use all of its
resources to produce 25 videos or 200 shoes. Which nation has the comparative advantage in
shoes and which nation has the comparative advantage in videos?
12) The United States can use all of its resources to produce 50 computers or 4,000 shoes.
Suppose that at world market prices, one computer exchanges for 100 shoes. Explain how the
United States can gain from trade.
13) The table above shows the amounts of cloth and cheese that China and Pakistan can produce
in an hour. Which country has the comparative advantage in cloth and which country has the
comparative advantage in cheese?
14) Omar and John can fix computers or write computer programs. The table above shows the
number of computers they can fix and the lines of code they can write in a day.
a. Who, if anyone, has the absolute advantage?
b. Who has the comparative advantage in fixing computers? Why?
c. Who has the comparative advantage in writing programs? Why?
15) Two nations can produce computers and software in the amounts given in the table above.
Does either nation have an absolute advantage in producing the products? Which nation has a
comparative advantage in computers? Which nation has a comparative advantage in software?
Explain your answers.
16) The figure above shows Prakash's and Gail's production possibilities frontiers for writing
books and magazine articles.
a. What is Prakash's opportunity cost of a book? What is Gail's opportunity cost? Who has the
comparative advantage in writing books?
b. Who has the comparative advantage in writing magazine articles?
c. According to their comparative advantages, who should write books and who should write
magazine articles?
