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CHAPTER 2: THE PRODUCTION POSSIBILITY MODEL,
TRADE, AND GLOBALIZATION
Questions and Exercises
1. In the figure to the right, wadget production is measured
on the vertical axis and widget production is measured on
the horizontal axis. If the society becomes more
2. If a society became equally more productive in the production of both widgets
3. Any production possibility curve that shows the principle of rising trade-off must
be bowed out. The accompanying grade production possibility curve embodies the
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© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
History Economics
40 100
4. a. In order to produce one more Peep, JustBorn must give up 3 Mike and Ikes.
b. See the accompanying graph.
c. Point A is efficient. Point B is inefficient. Point C is impossible.
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© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
5. The theory of comparative advantage underlies the shape of the production
possibility curve. By taking advantage of each person's comparative advantage,
6. a. See the accompanying graph.
b. As the output of food increases, the trade-off
between food and clothing is increasing. To
c. If the country gets better at producing food, the place where the production
d. If the country gets equally better at producing food and clothing, the production
7. There are no gains from trade when neither of two countries has a comparative
8. The fact that the production possibility model tells us that trade is good does not
mean that in the real world, free trade is the best policy. The production
possibility model does not take into account the importance of institutions and
9. a. See the accompanying graph.
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© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
b. The United States has a comparative advantage in the production of wheat
c. The United States should trade wheat to Japan in return for bolts of cloth. One
possibility is that the United States produces 1000 tons of wheat and Japan
d. See the accompanying graph. Point A is the bundle of goods each country will be
10. Globalization increases competition by allowing greater specialization and
division of labor. Because companies can move operations to countries with a
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© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
11. The law of one price rules, meaning that U.S. wages can only exceed foreign
wages to the degree that U.S. workers are more productive than foreign workers.
12. The law of one price states that wages of workers in one country will not differ
significantly from wages of (equal) workers in another institutionally similar
country. As the world is globalizing, the law of one price causes firms to hire
Questions from Alternative Perspectives
1. Austrian
In a market economy competition the market process translates individual actions into
actions that are good for society. There is no such mechanism for government;
government has a monopoly on power, which allows individuals in government to use
2. Religious
a. Most people would say that while it might be a component of the goals of society,
b. If a country is Christian, maximizing output probably should not be "the" goal of
c. In a Christian society the paramount goal would be to discern and fulfill the
3. Feminist
a. Companies definitely think that sex sells products. Just look at the cover of any
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© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
b. Sex is used in the advertising of numerous products.
c. All people are subject to abuse by advertising, but women are more likely to be
d. While men and women may both be used in advertising, many times men are
4. Institutionalist
a. Back in the 1950s President Eisenhower warned of the military/industrial
complex, which maintains all types of military spending on projects so that they
continue to generate jobs for those areas. Senators with power on the
b. The short-term consequence is a loss in consumer goods. The long-term
consequences are potentially much more serious, because in order for the military
5. Radical
a. Yes, not only does technology still have such effects, those effects on our lives
seem to be increasing in some areas. While technology has freed us from some
arduous jobs, it has also eliminated jobs that gave meaning to people's lives.
In modern society technology is replacing many human activities that were called
work with activities associated with computers. Today computers can design
buildings, diagnose medical problems, drive cars, and many more tasks. This is
reducing the types of labor that are needed. The type of labor that is needed now
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© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
b. When making policy decisions, society must take into account not only what
Issues to Ponder
1. This statement can be true or false depending on the implicit assumptions made in
the analysis. It is true given that individuals will eliminate all inefficiencies they
2. If achieving a particular distribution of income is one of society’s goals, a
particular production technique that leads to greater output might be considered
3. a. From the numbers alone, one would choose not to work because the
opportunity cost of working is giving up an $80,000 increase in lifetime
income while the benefit is $32,000 of income now. Although there is a
b. It depends on the particular student. Working takes time from study and thus
4. The fact that lawns occupy more land in the United States than any single crop
does not mean that the United States is operating inefficiently. Although the cost
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© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
5. Following the hint that society’s production possibility curve reflects more than
just technical relationships, we realize that trust is an input to production to the
6. a. Firms may produce in Germany, because (1) transportation costs to/from the other
countries may be very high, so that if these costs are included, it would not be
(4) historical circumstances may have led to production in Germany and the cost
of moving production may exceed potential gains.
b. There would probably not be a significant movement of workers right away. One
c. I would want to know about the rule of law in Thailand that will govern business
practices, the stability of the government, and the infrastructure. All of these will
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© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
