Production Possibility Curve in Drought
2 Trade-offs, Comparative Advantage, and the Market System
Chapter
SOLUTIONS TO END-OF-CHAPTER EXERCISES
Chapter 2 Answers to Thinking Critically Questions:
1. When BMW closes down a plant for alterations it incurs the direct cost of those alterations, but there is also an indirect opportunity cost. If BMW closes down the plant then that means the plant is not producing automobiles which could be sold. Therefore, BMW’s opportunity cost is the profits that it could have earned by operating the plant. BMW incurs direct and indirect costs from shutting down the plant. However, BMW also receives benefits from shutting down the plant: the profits from selling the new sports-activity coupe. If the value of these profits to BMW exceeds the costs of shutting down the plant, then BMW will shut down the plant. 2. No. This chapter discusses the benefits to a country of specializing in the production of those products for which it has a comparative advantage and trading for the other goods. Those benefits are the reduction in the relative price that consumers pay. This reduction in relative price creates gains from trade. This does not mean that trade is costless, but it does mean that the benefits to society are larger than the costs. We will discuss this issue further in the chapter on comparative advantage and gains from international trade (Chapter 8 in the Micro volume; Chapter 6 in the Macro volume). LEARNING OBJECTIVE
LEARNING OBJECTIVE 2-1: Use a production possibilities frontier to analyze opportunity costs and trade-offs.
Review Questions
1.1 Scarcity is the situation in which wants exceed the limited resources available to fulfill those wants. There are some things that are available in such abundance that they exceed our wants. For example, for most people there is enough oxygen in the atmosphere that the amount they want to inhale equals or exceeds the amount available – so oxygen isn’t scarce for them. Another example might be weeds in your garden –
Chapter
SOLUTIONS TO END-OF-CHAPTER EXERCISES
Chapter 2 Answers to Thinking Critically Questions:
1. When BMW closes down a plant for alterations it incurs the direct cost of those alterations, but there is also an indirect opportunity cost. If BMW closes down the plant then that means the plant is not producing automobiles which could be sold. Therefore, BMW’s opportunity cost is the profits that it could have earned by operating the plant. BMW incurs direct and indirect costs from shutting down the plant. However, BMW also receives benefits from shutting down the plant: the profits from selling the new sports-activity coupe. If the value of these profits to BMW exceeds the costs of shutting down the plant, then BMW will shut down the plant. 2. No. This chapter discusses the benefits to a country of specializing in the production of those products for which it has a comparative advantage and trading for the other goods. Those benefits are the reduction in the relative price that consumers pay. This reduction in relative price creates gains from trade. This does not mean that trade is costless, but it does mean that the benefits to society are larger than the costs. We will discuss this issue further in the chapter on comparative advantage and gains from international trade (Chapter 8 in the Micro volume; Chapter 6 in the Macro volume). LEARNING OBJECTIVE
LEARNING OBJECTIVE 2-1: Use a production possibilities frontier to analyze opportunity costs and trade-offs.
Review Questions
1.1 Scarcity is the situation in which wants exceed the limited resources available to fulfill those wants. There are some things that are available in such abundance that they exceed our wants. For example, for most people there is enough oxygen in the atmosphere that the amount they want to inhale equals or exceeds the amount available – so oxygen isn’t scarce for them. Another example might be weeds in your garden –