Chapter 01 – Limits, Alternatives, Choices
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Chapter 01 – Limits, Alternatives, and Choices
McConnell Brue Flynn 21e
DISCUSSION QUESTIONS
1. What is an opportunity cost? How does the idea relate to the definition of economics? Which
of the following decisions would entail the greater opportunity cost: Allocating a square block in
the heart of New York City for a surface parking lot or allocating a square block at the edge of a
typical suburb for such a lot? Explain. LO1
Answer: An opportunity cost is what was sacrificed to do or acquire something else. The
2. Cite three examples of recent decisions that you made in which you, at least implicitly,
weighed marginal cost and marginal benefit. LO1
Answer: Student answers will vary, but may include the decision to come to class, to
3. What is meant by the term “utility” and how does the idea relate to purposeful behavior? LO1
Answer: “Utility” refers to the pleasure, happiness, or satisfaction gained from engaging
4. What are the key elements of the scientific method and how does this method relate to
economic principles and laws? LO2
Answer: The key elements include the gathering of data (observation), the formulation of
Chapter 01 – Limits, Alternatives, Choices
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5. State (a) a positive economic statement of your choice, and then (b) a normative economic
statement relating to your first statement. LO3
6. How does the slope of a budget line illustrate opportunity cost and trade-offs? How does a
budget line illustrate scarcity and the effect of limited incomes? LO4
Answer: Budget lines are always sloped downward. This downward slope shows an
inverse relationship between the two goods, meaning that as you increase one, the other
7. What are economic resources? What categories do economists use to classify them? Why are
resources also called factors of production? Why are they called inputs? LO5
Chapter 01 – Limits, Alternatives, Choices
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8. Why is money not considered to be a capital resource in economics? Why is entrepreneurial
ability considered a category of economic resource, distinct from labor? What are the major
functions of the entrepreneur? LO5
Answer: Money is not considered a capital resource because money is not productive – it
provides access to resources but itself does not directly contribute to the production of
goods and services. Additionally, the quantity of money in circulation does not determine
an economy’s productive capacity, while the amount of capital and other resources does.
9. Specify and explain the typical shapes of marginal-benefit and marginal-cost curves. How are
these curves used to determine the optimal allocation of resources to a particular product? If
current output is such that marginal cost exceeds marginal benefit, should more or fewer
resources be allocated to this product? Explain. LO6
Answer: The marginal benefit curve is downward sloping, MB falls as more of a product
Chapter 01 – Limits, Alternatives, Choices
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10. Suppose that, on the basis of a nation’s production possibilities curve, an economy must
sacrifice 10,000 pizzas domestically to get the 1 additional industrial robot it desires but that it
can get the robot from another country in exchange for 9,000 pizzas. Relate this information to
the following statement:
“Through international specialization and trade, a nation can reduce its opportunity cost of
obtaining goods and thus ‘move outside its production possibilities curve.’” LO7
Answer: The message of the production possibilities curve is that an individual nation is
limited to the combinations of output indicated by its production possibilities curve.
11. LAST WORD Studies indicate that married men on average earn more income than
unmarried men of the same age and education level. Why must we be cautious in concluding that
marriage is the cause and higher income is the effect?
REVIEW QUESTIONS
1. Match each term with the correct definition. LO1
economics
opportunity cost
marginal analysis
utility
a. The next-best thing that must be foregone in order to product one more unit of a given product.
b. The pleasure, happiness, or satisfaction obtained from consuming a good or service.
c. The social science concerned with how individuals, institutions, and society make optimal
(best) choices under conditions of scarcity.
d. Making choices based on comparing marginal benefits with marginal costs.
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2. Indicate whether each of the following statements applies to microeconomics or
macroeconomics: LO3
a. The unemployment rate in the United States was 5.1 percent in September 2015.
b. A U.S. software firm discharged 15 workers last month and transferred the work to India.
c. An unexpected freeze in central Florida reduced the citrus crop and caused the price of oranges
to rise.
d. U.S. output, adjusted for inflation, increased by 2.4 percent in 2014.
e. Last week Wells Fargo Bank lowered its interest rate on business loans by one-half of 1
percentage point.
f. The consumer price index rose by 0.2 percent from August 2014 to August 2015.
3. Suppose that you initially have $100 to spend on books or movie tickets. The books start off
costing $25 each and the movie tickets start off costing $10 each. For each of the following
situations, would the attainable set of combinations that you can afford increase or decrease?
LO4
a. Your budget increases from $100 to $150 while the prices stay the same.
b. Your budget remains $100, the price of books remains $25, but the price of movie tickets rises
to $20.
c. Your budget remains $100, the price of movie tickets remains $10, but the price of a book falls
to $15.
Answer:
4. Suppose that you are given a $100 budget at work that can be spent only on two items: staplers
and pens. If staplers cost $10 each and pens cost $2.50 each, then the opportunity cost of
purchasing one stapler is: LO4
a. 10 pens.
b. 5 pens.
c. zero pens.
d. 4 pens.
Answer: 4 pens. You must forego purchasing 4 pens if you are to free up enough money
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5. For each of the following situations involving marginal cost (MC) and marginal benefit (MB),
indicate whether it would be best to produce more, fewer, or the current number of units. LO4
a. 3,000 units at which MC = $10 and MB = $13.
b. 11 units at which MC = $4 and MB = $3.
c. 43,277 units at which MC = $99 and MB = $99.
d. 82 units at which MC < MB.
e. 5 units at which MB < MC.
6. Explain how (if at all) each of the following events affects the location of a country’s
production possibilities curve: LO6
a. The quality of education increases.
b. The number of unemployed workers increases.
c. A new technique improves the efficiency of extracting copper from ore.
d. A devastating earthquake destroys numerous production facilities.
7. What are the two major ways in which an economy can grow and push out its production
possibilities curve? LO7
a. Better weather and nicer cars.
b. Higher taxes and lower spending.
c. Increases in resource supplies and advances in technology.
d. Decreases in scarcity and advances in auditing.
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PROBLEMS
1. Potatoes cost Janice $1 per pound, and she has $5.00 that she could possibly spend on potatoes
or other items. If she feels that the first pound of potatoes is worth $1.50, the second pound is
worth $1.14, the third pound is worth $1.05, and all subsequent pounds are worth $0.30, how
many pounds of potatoes will she purchase? What if she only had $2 to spend? LO1
Answer: 3; 2
Feedback: Janice will purchase potatoes until the value of potatoes is less than the cost
of potatoes or until her income has been exhausted. For example, assume Janice has
$5.00 to spend on potatoes or other items and the cost of a pound of potatoes is $1. Now
assume the first pound of potatoes is worth $1.50 to Janice. She will purchase this pound
of potatoes since the value of the pound of potatoes ($1.50) is greater than the cost ($1).
2. Pham can work as many or as few hours as she wants at the college bookstore for $9 per hour.
But due to her hectic schedule, she has just 15 hours per week that she can spend working at
either the bookstore or at other potential jobs. One potential job, at a café, will pay her $12 per
hour for up to 6 hours per week. She has another job offer at a garage that will pay her $10 an
hour for up to 5 hours per week. And she has a potential job at a daycare center that will pay her
$8.50 per hour for as many hours as she can work. If her goal is to maximize the amount of
money she can make each week, how many hours will she work at the bookstore? LO1
Answer: 4.
Feedback: Pham will choose to work at the bookstore as long as the wage rate at the
bookstore exceeds her other opportunities. However, if another job offers a higher wage
rate she will choose employment there. She will work until her total time allotment (for
work) is exhausted.
Chapter 01 – Limits, Alternatives, Choices
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Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
choose to work these last 4 hours at the bookstore because the bookstore wage rate of $9
exceeds the daycare center wage rate of $8.50.
3. Suppose you won $15 on a lotto ticket at the local 7-Eleven and decided to spend all the
winnings on candy bars and bags of peanuts. Candy bars cost $0.75 each while bags of peanuts
cost $1.50 each. LO5
a. Construct a table showing the alternative combinations of the two products that are available.
b. Plot the data in your table as a budget line in a graph. What is the slope of the budget line?
What is the opportunity cost of one more candy bar? Of one more bag of peanuts? Do these
opportunity costs rise, fall, or remain constant as additional units are purchased?
c. Does the budget line tell you which of the available combinations of candy bars and bags of
peanuts to buy?
d. Suppose that you had won $30 on your ticket, not $15. Show the $30 budget line in your
diagram. Has the number of available combinations increased or decreased?
Answers:
Part a:
Part b:
Candy Bars
20
10
Bags of
Peanuts
5.
5.175.−=
−
=Slope
Chapter 01 – Limits, Alternatives, Choices
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Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
The opportunity cost of one more candy bar is ½ of a bag of peanuts. The opportunity
cost of one more bag of peanuts is 2 candy bars. These opportunity costs are constant.
They can be found by comparing any two of the consumption alternatives for the two
goods.
Part c: No; it only tells you what is possible.
Candy Bars
Bags of
Peanuts
10
20
20 40
Income = $30
Income = $15
4. Suppose that you are on a desert island and possess exactly 20 coconuts. Your neighbor,
Friday, is a fisherman, and he is willing to trade 2 fish for every 1 coconut that you are willing to
give him. Another neighbor, Kwame, is also a fisherman, and he is willing to trade 3 fish for
every 1 coconut. LO5
a. On a single figure, draw budget lines for trading with Friday and for trading with Kwame. (Put
coconuts on the vertical axis.)
b. What is the slope of the budget line from trading with Friday?
c. What is the slope of the budget line from trading with Kwame?
d. Which budget line features a larger set of attainable combinations of coconuts and fish?
e. If you are going to trade coconuts for fish, would you rather trade with Friday or Kwame?
Chapter 01 – Limits, Alternatives, Choices
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Answers:
Part a:
Part b: -1/2
Part c: -1/3
Part d: The budget line from trading with Kwame
Part e: Kwame
Coconuts
Fish
20
40
60
Trade with
Friday
Slope = -1/2
Trade with
Kwame
Slope = -1/3
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5. Below is a production possibilities table for consumer goods (automobiles) and capital goods
(forklifts):
LO6
a. Show these data graphically. Upon what specific assumptions is this production possibilities
curve based?
b. If the economy is at point C, what is the cost of one more automobile? Of one more forklift?
Which characteristic of the production possibilities curve reflects the law of increasing
opportunity costs: its shape or its length?
c. If the economy characterized by this production possibilities table and curve were producing 3
automobiles and 20 fork lifts, what could you conclude about its use of its available resources?
d. Is production at a point outside the production possibilities curve currently possible? Could a
future advance in technology allow production beyond the current production possibilities curve?
Could international trade allow a country to consume beyond its current production possibilities
curve?
Answers:
Part a: (See figure below.) The assumptions are full employment, fixed supplies
of resources, fixed technology and two goods.
Part b: 4 automobiles and 21 forklifts; its shape.
automobiles
forklifts
8
30
D (12,6)
C (21,4)
B (27,2)
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Feedback: Consider the following example:
Assume the economy is producing at point C. Thus, the economy is producing 4
automobiles and 21 forklifts.
The cost of producing one more automobile can be found by moving to point D and
Part c: Underutilizing.
Feedback: The economy is underutilizing resources (inside the PPC).
Chapter 01 – Limits, Alternatives, Choices
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6. Look at Figure 1.3. Suppose that the cost of cheese falls, so that the marginal cost of producing
pizza decreases. Will the MC curve shift up or down? Will the optimal amount of pizza increase
or decrease? LO6
Answers: MC will shift down; the optimal amount of pizza will increase.
7. Referring to the table in problem 5, suppose improvement occurs in the technology of
producing forklifts but not in the technology of producing automobiles. Draw the new production
possibilities curve. Now assume that a technological advance occurs in producing automobiles
but not in producing forklifts. Draw the new production possibilities curve. Now draw a
production possibilities curve that reflects technological improvement in the production of both
goods. LO7
Chapter 01 – Limits, Alternatives, Choices
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Feedback: This implies we can produce more automobiles with the given resources, so
the schedule will shift up along the vertical axis.
automobiles
forklifts
8
30
automobiles
forklifts
8
30
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8. Because investment and capital goods are paid for with savings, higher savings rates reflect a
decision to consume fewer goods for the present in order to be able to invest in more goods for
the future. On average, households in China save 40 percent of their annual income each year,
whereas households in the United States save less than 5 percent. Production possibilities are
growing at roughly 9 percent annually in China and 3.5 percent in the United States. Use
graphical analysis of “present goods” versus “future goods” to explain the differences in growth
rates. LO7