d. Means that price has changed and there is movement along the demand curve. c. Final goods and services; factors of production It illustrates the production possibilities model. Sort by: In this episode of the b. Plant 3s comparative advantage in snowboard production makes a crucial point about the nature of comparative advantage. When economists talk about "optimal outcomes" in the marketplace, they mean that: d. A decrease in the supply of pens, If there are only two airlines that fly between Dallas and New Orleans, what will happen in the market for It shows that opportunity cost varies along the frontier. Both the price and quantity increase Could an economy that is using all its factors of production still produce less than it could? b. Assume that pencils and pens are substitutes. At this point, Econ Isle can produce 12 gadgets and 0 widgets. Any time you move from one point to another on the line, opportunity cost is revealedthat is, what you must give up to gain something else. We have seen the law of increasing opportunity cost at work traveling from point A toward point D on the production possibilities curve in Figure 2.5 The Combined Production Possibilities Curve for Alpine Sports. The slope of Plant 1s production possibilities curve measures the rate at which Alpine Sports must give up ski production to produce additional snowboards. b. c. The market demand curve intersects the y-axis. I hope you have enjoyed your journey to the frontier and learned some valuable lessons about economics along the way. Ceteris paribus, an increase in the price of peanut butter a. be: B. the production possibilities curve between tanks and auto mobiles will shift outward The absolute value of the slope of a production possibilities curve measures the opportunity cost of an additional unit of the good on the horizontal axis measured in terms of the quantity of the good on the vertical axis that must be forgone. a. And finally, the curved line of the frontier illustrates the law of increasing opportunity cost meaning that an increase in the production of one good brings about increasing losses of the other good because resources are not suited for all tasks. If all the factors of production that are available for use under current market conditions are being utilized, the economy has achieved full employment. Evaluate the given expression without using a calculator. The exhibit gives the slopes of the production possibilities curves for each plant. This point shows widget production increased by 2, and this by 2 more, and this by 2 more, indicating all widgets and no gadgets. We will generally draw production possibilities curves for the economy as smooth, bowed-out curves, like the one in Panel (b). As a result of a failure to achieve full employment, the economy operates at a point such as B, producing FB units of food and CB units of clothing per period. a. c. An increase in the demand for corn syrup. Which of the following is Lesson 5: The law of increasing opportunity cost: As you increase the production of one good, the opportunity cost to produce the additional good will increase. d. An increase in knowledge. Currently, employees in the U.S rely mainly on the employers who offer the wages, salaries and benefits, such as retirement, paid leaves and health insurance as an addition to the total package of compensation (Carraher, 2011). To see this relationship more clearly, examine Figure 2.3 The Slope of a Production Possibilities Curve. If it fails to do that, it will operate inside the curve. Plant 3 has a comparative advantage in snowboard production because it is the plant for which the opportunity cost of additional snowboards is lowest. c. An increase in the supply of pens. If you have difficulty accessing this content due to a disability, please contact us at 314-444-4662 or economiceducation@stls.frb.org. Would you be able to consume what you consume now? The curve is a downward-sloping straight line, indicating that there is a linear, negative relationship between the production of the two goods. C. A line that curves outward when resources are perfectly adaptable in the production of different goods The Great Depression was a costly experience indeed. Suppose an economy fails to put all its factors of production to work. h(u)=1uh(u)=\frac{1}{u} \quadh(u)=u1 over 2u42 \leq u \leq 42u4, (b) g(x)=1x4g(x)=\frac{1}{\sqrt{x-4}}g(x)=x41, (c) h(x)=(x3)(5x)h(x)=\sqrt{(x-3)(5-x)}h(x)=(x3)(5x). An increase in the demand for airline tickets. a. John Maynard Keynes. Quantity supplied because of a change in price. Ski sales grew, and she also saw demand for snowboards risingparticularly after snowboard competition events were included in the 2002 Winter Olympics in Salt Lake City. This is a difficult concept made simple using the PPF. b. It has two plants, Plant R and Plant S, at which it can produce these goods. Its downwards slope reflects scarcity. can we conclude about changes in the price and quantity of salsa? Increases as its price falls, ceteris paribus. Supply curves are upward-sloping to the right. a. The production possibilities curves for the two plants are shown, along with the combined curve for both plants. The negative slope of the production possibilities curve reflects the scarcity of the plants capital and labor. Of course, an economy cannot really produce security; it can only attempt to provide it. This information suggests that: a. b. Increase and quantity to decrease. 100% (6 ratings) The correct option is C- cost of producing corn is likely to in . c. Eliminates market failures created by government. c. The two types of markets include the factor and product markets. a. c. Relies on the use of central planning by private firms rather than the government. When the market mechanism is allowed to operate freely, prices will determine: d. Is one that allows trade with other countries. Markets have to have both a demand side and a supply side. The sensible thing for it to do is to choose the plant in which snowboards have the lowest opportunity costPlant 3. If an economy is fully utilizing its resources, it can produce more of one product only if it: According to the law of increasing opportunity costs, C. In order to produce additional units of a particular good, it is necessary for society to sacrifice increasingly larger amounts of alternative goods, If the United States decided to convert automobile factories to tank production, as it did during World War II, but finds that some auto manufacturing facilities are not well suited to tank production, then The result is the bowed-in curve ABCD. c. The production-possibilities curve Results from a change in price of other goods. Production of all other goods and services falls by OA OB units per period. Figure 2.4 Production Possibilities at Three Plants. According to the law of increasing opportunity costs: a. If market signals result in pollution beyond the optimal level then: d. The supply of cancer-treating curves will increase. Its downward slope reflects scarcity. The prices of the factors of production In most markets, the equilibrium price is achieved: This point remains the same. Change in x coordinates between two points divided by the change in their y coordinates. Understand specialization and its relationship to the production possibilities model and comparative advantage. Notice that this production possibilities curve, which is made up of linear segments from each assembly plant, has a bowed-out shape; the absolute value of its slope increases as Alpine Sports produces more and more snowboards. Which of the following is an example of government failure? Increasing the. c. Income What can Americans do to influence the economic goals of the nation? b. Alpine Sports can thus produce 350 pairs of skis per month if it devotes its resources exclusively to ski production. c. Finished services are bought and sold. To construct a production possibilities curve, we will begin with the case of a hypothetical firm, Alpine Sports, Inc., a specialized sports equipment manufacturer. A consequence of the economic problem of scarcity is that: With respect to factors of production, which of the following statements is not true? b. An increase in the demand for pens. a. If it chooses to produce at point A, for example, it can produce FA units of food and CA units of clothing. Lower equilibrium quantity. d. From 2007 to 2008 the demand curve for MP3 players was upward sloping because of improved technology. b. Also, I guess that the law of increasing opportunity cost is the opposite of economies of scale. a. For this scenario to take the factors of production -land, labor, and capital- must be at their maximum efficiency. Factors of production are also known as resources B. Put calculators on the vertical axis and radios on the horizontal axis. This phenomenon is illustrated graphically with a bow-shaped curve. Where will it produce the calculators? With all three plants producing only snowboards, the firm is at point D on the combined production possibilities curve, producing 300 snowboards per month and no skis. Given the labor and the capital available at both plants, it can produce the combinations of the two goods at the two plants shown. b. D. a line that curves inward when resources are perfectly adaptable in the production of different goods, B. b. d. The supply of building materials to Florida will increase. This curved line illustrates our fifth and final lesson. Had the firm based its production choices on comparative advantage, it would have switched Plant 3 to snowboards and then Plant 2, so it would have operated at point C. It would be producing more snowboards and more pairs of skisand using the same quantities of factors of production it was using at B. Producers increase supply. Production totals 350 pairs of skis per month and zero snowboards. Getting the most goods and services from the available resources If the firm wishes to increase snowboard production, it will first use Plant 3, which has a comparative advantage in snowboards. Notice the curve still has a bowed-out shape; it still has a negative slope. Opportunity cost refers to the opportunities and benefits that suppliers lose when they choose one option over another and dedicate their resources to that option. According to the law of increasing opportunity costs, Multiple Choice Greater production leads to greater inefficiency. Once again, this is made possible because of trade-offs. c. Increase and quantity to increase. If it is using the same quantities of factors of production but is operating inside its production possibilities curve, it is engaging in inefficient production. Economists often use models such as the production possibilities model with graphs that show the general shapes of curves but that do not include specific numbers. Specifically, if it raises production of one product, the opportunity cost of making the next unit rises. a. Notice also that this curve has no numbers. Many countries, for example, chose to move along their respective production possibilities curves to produce more security and national defense and less of all other goods in the wake of 9/11. As a result, producing the good is associated with greater and greater trade-offs. This is a result of transferring resources from the production of one good to another according to comparative advantage. So let's compare straight and curved frontier lines to . The next 100 pairs of skis would be produced at Plant 2, where snowboard production would fall by 100 snowboards per month. Suppose that, as before, Alpine Sports has been producing only skis. The decision to devote more resources to security and less to other goods and services represents the choice we discussed in the chapter introduction. a. The table shows the combinations of pairs of skis and snowboards that Plant 1 is capable of producing each month. a. d. Find the difference between the quantity demanded and the quantity supplied at each price. Expectations c. Through government mandate. The major traceable reason for this is inefficiency in resource reallocation. There, 50 pairs of skis could be produced per month at a cost of 100 snowboards, or an opportunity cost of 2 snowboards per pair of skis. To put this in terms of the production possibilities curve, Plant 3 has a comparative advantage in snowboard production (the good on the horizontal axis) because its production possibilities curve is the flattest of the three curves. Lower income. Had the firm based its production choices on comparative advantage, it would have switched Plant 3 to snowboards and then Plant 2, so it could have operated at a point such as C. It would be producing more snowboards and more pairs of skisand using the same quantities of factors of production it was using at B. Means a shortage or surplus will result from holding prices constant. A linear function can be distinguished by: The U.S. economy looked very healthy in the beginning of 1929. If the price of pencils rises, then we will see: We begin at point A, with all three plants producing only skis. At point A, the economy was producing SA units of security on the vertical axisdefense services and various forms of police protectionand OA units of other goods and services on the horizontal axis. Ceteris paribus, a decrease in the price of milk will cause the equilibrium price of ice cream to: Statistical Techniques in Business and Economics, Douglas A. Lind, Samuel A. Wathen, William G. Marchal, Alexander Holmes, Barbara Illowsky, Susan Dean, Claudia Bienias Gilbertson, Debra Gentene, Mark W Lehman, Fundamentals of Engineering Economic Analysis, David Besanko, Mark Shanley, Scott Schaefer. d. Participants in the market do not have to make choices. The opportunity cost of the first 200 pairs of skis is just 100 snowboards at Plant 1, a movement from point D to point C, or 0.5 snowboards per pair of skis. A change in demand means there has been a shift in the demand curve, and a change in quantity demanded: Consumers increase demand. The supply curve for monkey wrenches will shift to the left. This opportunity cost equals the absolute value of the slope of the production possibilities curve. According to The Wall Street Journal, merger and acquisition activity in the first quarter rose to $5.3\$ 5.3$5.3 billion. How much she likes candy bars. Figure 2.4 Production Possibilities at Three Plants shows production possibilities curves for each of the firms three plants. b. Laissez faire. Local and state governments also increased spending in an effort to prevent terrorist attacks. The demand for bottled water by individuals. The same slope throughout the line. If Alpine Sports selects point C in Figure 2.9 Efficient Versus Inefficient Production, for example, it will assign Plant 1 exclusively to ski production and Plants 2 and 3 exclusively to snowboard production. The segment of the curve around point B is magnified in Figure 2.3 The Slope of a Production Possibilities Curve. b. c. There will be a leftward movement along the initial supply curve for monkey wrenches. You must produce everything you consume; you obtain nothing from anyone else. b. If an economy is producing inside the production-possibilities curve, then: The market supply curve intersects the y-axis. Greater production leads to greater inefficiency. d. Lack of money. The demand curve will shift to the right It suggests that to obtain efficiency in production, factors of production should be allocated on the basis of comparative advantage. b. B. A decrease in the size of the labor force Neither skis nor snowboards is an independent or a dependent variable in the production possibilities model; we can assign either one to the vertical or to the horizontal axis. The business will net $2,000 in year 2 and $5,000 in all future years. Profits Learn more about how Pressbooks supports open publishing practices. Between points A and B, for example, the slope equals 2 pairs of skis/snowboard (equals 100 pairs of skis/50 snowboards). d. There is a surplus of the good. d. Decrease and the equilibrium quantity of ice cream to decrease. The demand curve will shift to the left We would say that Plant 1 has a comparative advantage in ski production. The production possibilities model does not tell us where on the curve a particular economy will operate. d. The market supply curve intersects the x-axis. c. Percentage change in y coordinates between two points divided by the percentage change in their x coordinates. b. then: If the government places a binding price ceiling on cancer-treating drugs, then: Greater regulation to correct the imbalances in the economy, as well government intervention to maintain full A leftward shift of the market demand curve for HDTVs, ceteris paribus, causes equilibrium price to: The opportunity cost of each of the first 100 snowboards equals half a pair of skis; each of the next 100 snowboards has an opportunity cost of 1 pair of skis, and each of the last 100 snowboards has an opportunity cost of 2 pairs of skis. b. If Econ Isle transitions from widget production to gadget production, it must give up an increasing number of widgets to produce the same number of gadgets. Plant 3 would be the last plant converted to ski production. Its resources were fully employed; it was operating quite close to its production possibilities curve. c. Maintaining a strong level of economic growth. Want to create or adapt books like this? b. ~produces ~trade-offs d. Fewer units actually purchased. When a surplus exists for a product: B. In each case, sketch the graph of the function along with the rectangle whose base is the given interval and whose height is the average value VVV. Works through central planning by government. The plant for which the opportunity cost of an additional snowboard is greatest is the plant with the steepest production possibilities curve; the plant for which the opportunity cost is lowest is the plant with the flattest production possibilities curve. Points on the production possibilities curve thus satisfy two conditions: the economy is making full use of its factors of production, and it is making efficient use of its factors of production. c. Supply curves are downward-sloping to the right. b. Producing more snowboards requires shifting resources out of ski production and thus producing fewer skis. A. There is full employment of resources. These are also illustrated with a production possibilities curve. d. A change in a determinant of demand shifts the supply curve. a. a. That is because the resources transferred from the production of other goods and services to the production of security had a greater and greater comparative advantage in producing things other than security. c. Shortages. b. It is the amount of the good on the vertical axis that must be given up in order to free up the resources required to produce one more unit of the good on the horizontal axis. b. Because an economys production possibilities curve assumes the full use of the factors of production available to it, the failure to use some factors results in a level of production that lies inside the production possibilities curve. c. Potential output. a. Ceteris paribus, if the subsidies given to corn syrup producer decrease, then we can expect: It retains its negative slope and bowed-out shape. She also modified the first plant so that it could produce both snowboards and skis. d. Supply because of a change in a non-price determinant. a. This curve depicts an entire economy that produces only skis and snowboards. b. Producing 1 additional snowboard at point B requires giving up 2 pairs of skis. employment was associated primarily with the work of: Specialization means that an economy is producing the goods and services in which it has a comparative advantage. Now to draw the PPF, create the x and y-axis, like the ones in the video. d. Factories are bought and sold. Getting the most goods and services from the available resources. b. the opportunity cost of fishing is: B. We may conclude that, as the economy moved along this curve in the direction of greater production of security, the opportunity cost of the additional security began to increase. First, let's figure out the total number of each you can produce. In the transition to widget production, workers would likely need training and time to develop the skills required to be as productive at making widgets as making gadgets. The absolute value of the slope of any production possibilities curve equals the opportunity cost of an additional unit of the good on the horizontal axis. b. The opportunity cost of an additional snowboard at each plant equals the absolute values of these slopes (that is, the number of pairs of skis that must be given up per snowboard). Individual consumers supply ____ and purchase ____. Could it still operate inside its production possibilities curve? b. Among the compensation packages, 70% comprise of the employee wages. Points on the interior of the PPC are inefficient, points on the PPC are efficient, and points beyond the PPC are unattainable. b. b. Suppose both the demand and supply of salsa increase (although not necessarily by the same amount). players at $170 each. Two years later she added a third plant in another town. The increase in spending on security, to SA units of security per period, has an opportunity cost of reduced production of all other goods and services. It is operating efficiently. There, 50 pairs of skis could be produced per month at a cost of 100 snowboards, or an opportunity cost of 2 snowboards per pair of skis. There, 50 pairs of skis could be produced per month at a cost of 100 snowboards, or an opportunity cost of 2 snowboards per pair of skis. At this point, if Econ Isle produces 6 gadgets, it can produce only 4 widgets, so it loses the opportunity to produce 4 gadgets. We see in Figure 2.5 The Combined Production Possibilities Curve for Alpine Sports that, beginning at point A and producing only skis, Alpine Sports experiences higher and higher opportunity costs as it produces more snowboards. c. There will be no change in the number of people who die from cancer. Approximately three-fourths of the 78 first-quarter deals occurred between information technology (IT) companies. The opportunity cost of choosing this option is then 12% rather than the expected 2%. a. Find the average value VVV of the given function over the specified interval. C b. d. Labor market. In turn, movement from a point of underemployment toward the frontier indicates economic expansion. Notice that this curve is linear. D. All of the above, With respect to factors of production, which of the following statements is not true? Workers, for example, specialize in particular fields in which they have a comparative advantage. c. A decrease in the demand for airline tickets. Have you been to a frontier lately? d. People begin to retire at earlier ages, Which of the following will cause the production-possibilities curve to shift inward? c. Market participation allows individuals to specialize and, ultimately, consume more. d. Both the price and quantity decrease. c. A technological advance Lesson 5: The law of increasing opportunity cost: As you increase the production of one good, the opportunity cost to produce the additional good will increase. Ceteris paribus, if the price of steel rises, then: More people will die from cancer. d. There will be a rightward movement along the initial supply curve for monkey wrenches. c. The allocation of resources by the market is likely to be the best possible, given scarce resources and income b. The downward slope of the production possibilities curve is an implication of scarcity. d. Increasing opportunity costs will occur with greater tank production. Clearly, the transfer of resources to the effort to enhance national security reduces the quantity of other goods and services that can be produced. Learn more about the Q&A Resources for Teachers and Students . An economy that is operating inside its production possibilities curve could, by moving onto it, produce more of all the goods and services that people value, such as food, housing, education, medical care, and music. A decrease in the size of the labor force The law of supply implies that: For example, there might be a trade-off between hunting for rabbits or gathering berries. First, remember that opportunity cost is the value of the next-best alternative when a decision is made; it's what is given up. Which of the following is not a macroeconomic statement? b. The Latin phrase "ceteris paribus" means: A. the production possibilities curve between tanks and automobiles will appear as a straight line

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