Chapter%20One

1
Chapter One

• The Central Idea

2
Economics

• Economics is the study of how people deal with
  scarcity
• Scarcity Situation in which the quantity of
  resources is insufficient to meet all wants (not
  enough stuff for our wants)
• Leads to CHOICES Must give up one thing in favor
  for another
• Economic interaction is the exchanges of goods
  and services between people
• These interactions can occur in a MARKET an
  arrangement where economic exchanges between
  people take place

3
Consumer Decisions

• Opportunity Cost Value of the next-best
  alternative that was not chosen
• Gains from Trade Improvements in income,
  production, or satisfaction owing to the exchange
  of goods or services
• Important Voluntary trade only happens if BOTH
  parties gain.
• Does not change total amount of goods, just
  redistributes or reallocates

4
Figure 1.1 Gains from Trade Through a Better
Allocation of Goods
5
Consumer Decisions

• When acting alone, Emily and Johann can only
  produce 1 card each (2 total)
• If they sell their services to each other, they
  can produce 10 total cards
• They BOTH gain from trade

Emily Poet Emily Poet Johann Printer Johann Printer
Write Full Time Write and Print Print Full Time Write and Print
Cards 0 1 10 1
Poems 10 1 0 1
6
Consumer Decisions

• Specialization People concentrating on what they
  are good at
• Creates a DIVISION OF LABOR workers concentrate
  on different tasks
• Comparative Advantage A situation where a person
  can produce a good for a lower opportunity cost
  than another person.
• When people specialize where they have a
  comparative advantage, overall production is
  increased
• International Trade Exchange of goods or
  services between people in different countries

7
Scarcity and Choice for the Economy as a Whole

• Consumption vs. Investment
• Opportunity cost of producing 200 movies instead
  of 100 movies is 2,000 computers
• OC of making 300 movies instead of 200 movies is
  4,000 computers
• OC of making 400 movies instead of 300 is 5,000
  computers
• OC of making 500 movies instead of 400 is 13,000
  computers

Movies Computers
0 25,000
100 24,000
200 22,000
300 18,000
400 13,000
500 0
8
Production Possibilities

• Because OC continues to go up as we make more
  movies, it is called INCREASING opportunity cost

Movies Computers
0 25,000
100 24,000
200 22,000
300 18,000
400 13,000
500 0
9
Figure 1.2 The Production Possibilities Curve
10
Production Possibilities Curve

• Bows out because of increasing opportunity cost
  of producing movies each move causes a more
  dramatic fall in graph
• Points of line EFFICIENT
• Points under or to the left of line INEFFICIENT
• Points over or to the right of line IMPOSSIBLE

11
Figure 1.3 Shifts in the Production
Possibilities Curve
12
Shifts in the PP Curve

• Shift out, up, right means increase in
  production, due to things like more workers or
  developing technology
• Doesnt need to be a uniform shift
• Impossible points are not forever impossible

13
Figure 1.4 Shifts in the Production
Possibilities Curve Depend on Choices
14
Market Economies and Price Systems

• Market Economy An economy where prices are
  freely determined and goods and services can be
  traded freely in markets
• Examples United States, Mexico, Australia
• Command Economy (Centrally Planned Economy) An
  economy where the government determines prices
  and production
• Examples Soviet Union, China
• Market Economies are more productive, so most of
  the world is trying to convert

15
Key Elements of a Market Economy

• Freely Determined Prices
• Leads to inefficiencies. Example feeding bread
  to cows in the Soviet Union
• Property Rights and Incentives
• Property rights give people control over their
  assets
• Incentives are devices used to motivate people to
  take action, usually increasing productivity
• Freedom to Trade both home and abroad

16
Key Elements of a Market Economy, continued

• A Role For Government
• How much involvement should government have?
  Police? Education? Welfare?
• Market Failure Market is inefficient, potential
  for government involvement
• Government Failure Government made things worse
• Role of Private Organizations
• Organizations exist to reduce transaction costs
  (costs of buying and selling)

17
The Price System

• Signals
• As demand increases, prices increase therefore
  signaling that there needs to be more workers,
  more production, etc.
• Incentives
• If more money is entering an industry, more firms
  will enter. In contrast, it will hurt competing
  industries.
• Distribution
• Workers in hot industries earn more, while
  competing industries employees will earn less.

18
Answers to Text Problems

• 1. The limited budget for guest speakers means
  that you can either bring in Spike Lee for one
  lecture or have ten lectures by former economic
  advisers. As a resource, Spike Lee is scarcer
  than former economic advisers are, and therefore
  his price for a lecture is much higher. The
  scarcity represented by the limited budget means
  that either Spike Lee or former economic advisers
  can be invited to speak, and therefore a choice
  must be made. It is necessary to consider how
  many people will attend the lecture and what
  those people will prefer. To determine whether
  the money is better spent on Spike Lee or former
  economic advisers, you have to compare the
  additional satisfaction per dollar spent on Spike
  Lee versus the former economic advisers.

19
Answers to Text Problems

• 2. The opportunity cost of attending one more
  year of school is the income given up by not
  working over that year. So, in a sense, the cost
  of any additional year of school for each
  graduate is the same lost income. However, the
  income one can earn increases with the attainment
  of higher levels of education. Therefore, the
  opportunity cost (income given up) of one year of
  school for the medical school graduate will be
  larger than the opportunity cost of the college
  graduate. Of the three graduates, the high school
  graduate has the smallest opportunity cost of an
  additional year of education.

20
Answers to Text Problems

• 3. The opportunity cost of any choice is the
  next-best or second-best alternative given up.
  Allison's opportunity cost of ranking the
  consulting job first is not being able to attend
  a local community college. The third alternative
  involving world travel has nothing to do with the
  opportunity cost of consulting. An opportunity
  cost is the next-best alternative given up.

21
Answers to Text Problems

• 4. Assuming that people like salt and pepper to
  season food, both of us are better off if we
  trade one salt shaker for one pepper shaker. We
  both gain from a better allocation. There is no
  production going on in the question. We both lose
  if trade is prevented, not just the one person in
  the country that does not allow trade.

22
Answers to Text Problems

• 5. A. Tina is producing 30 units of salsa and
  Julia is producing 15 units of salsa. Total
  production is 45 units of salsa and 4
  advertisements.
• B. Gains from trade are possible because they
  have different comparative advantages. This is to
  say, they have different relative efficiencies in
  the production of salsa and advertisements.
• C. Total production will be 5 ads and 50 units of
  salsa per week.

23
Answers to Text Problems

• A.
• B. The opportunity cost of increasing the time
  spent on math from 80 to 100 percent is 50 points
  on the English paper, a decrease in the English
  grade from 50 points to 0 points. The opportunity
  cost of increasing the time spent on math from 60
  to 80 percent is 20 points on the English paper,
  a decrease in the paper's grade from 70 points to
  50 points.
• C. There are increasing opportunity costs from
  spending more time studying math. This is because
  additional time spent on one subject takes away
  from the time available for the other subject,
  and time taken away from that subject becomes
  increasingly valuable when less time is available
  for that subject.
• D. Given the figures in the chart, there is no
  distribution of time between English and math
  that will create a grade of 92 on both.
  Therefore, the tradeoff curve needs to shift to
  the right. This might occur due to learning new
  study techniques.

24
Answers to Text Problems

• A.
• B. PPF shifts out mainly in the production of
  cars. This is seen in the dashed line in the
  figure.

25
Answers to Text Problems

• 8. Japan had a high rate of saving relative to
  the United States, emphasizing investment more
  than Americans. As you can see in Figure 1.3 in
  Chapter 1, higher investment results in a more
  rapid growth of the country's production
  possibilities curve. The consumption and
  investment decisions of past Japanese generations
  allow the current generation to enjoy a higher
  quantity and diversity of goods.

26
Answers to Text Problems

• 9. First, if Huey is not very efficient (inside
  his PPF) at either studying or having fun, Tracy
  may help with both by helping Huey be more
  efficient at having fun and studying. Huey would
  move toward his PPF. Second, if Huey is efficient
  (on his PPF), Tracy may know something new about
  how to study and how to have fun. Here, Huey's
  PPF shifts outward. In either case, Huey is not
  being efficient.Figure 1-3 shows how Huey's
  economics grade could be increased without
  affecting his grade in mathematics starting from
  an inefficient situation.

27
Answers to Text Problems

• 10. Neither the country that sets prices nor the
  country that tries to adjust prices daily is a
  market economy. A market economy has prices
  determined in a free market through the
  interaction of self-interested buyers and
  sellers.

28
Answers to Text Problems

• 11. Oil is bought and sold on a world market. A
  higher price tells U.S. producers that their oil
  is more valuable and encourages them to increase
  production. The higher price redistributes income
  away from consumers of oil toward producers of
  oil.

29
Answers to Text Problems

• 12. Nearly any good and service can be put into
  the sentence to produce a true statement. The
  statement will not work, however, in the case of
  some public goods (for example, national
  defense) goods that involve externalities (such
  as clean air) services in which the transport
  costs are prohibitive (haircuts) goods and
  services that are explicitly illegal (illicit
  drugs) or human beings themselves (that is,
  slavery is illegal).

30
Chapter Review

• The _____________ of a choice is the value of the
  foregone alternative that was not chosen.
• Comparative advantage
• Production possibility
• Opportunity cost
• Gain from trade

31
Chapter Review

• 2. Specialization in production results in
  ______________.
• gains from trade
• division of labor
• increasing opportunity costs
• comparative advantage

32
Chapter Review

• 3. The ________________ is the price of money in
  terms of another.
• trade rate
• exchange rate
• medium of exchange
• comparative rate

33
Chapter Review

• 4. The two major types of economies are
  _____________ and ____________ economies.
• A. multilateral, command
• B. central, planned
• C. market, government
• D. market, command

34
Chapter Review

• 5. In a market economy, prices serve as
  _______________, provide _____________, and
  affect the _______________.
• signals, incentive, distribution of income
• distribution of income, signals, incentive
• signals, distribution of income, incentive
• incentive, signals, distribution of income

35
Chapter Review

• 6. Scarcity is a characteristic of a command
  economy, but not of a market economy.
• A. True
• B. False

36
Chapter Review

• 7. If Canada produces two goods with less
  resources than the United States, there can be no
  comparative advantage in those two goods.
• True
• False

37
Chapter Review

• 8. The production possibilities curve slopes
  downward.
• True
• False

38
Chapter Review

• 9. A market economy is also called a centrally
  planned economy.
• True
• False

39
Chapter Review

• 10. Freely determined prices and property rights
  are characteristics of centrally planned
  economies.
• True
• False

40
Chapter Review

• 11. When one person or group of people can
  produce one good relative to another good with
  comparatively less time, effort, or resources
  than another person can produce that good, this
  is called
• comparative advantage.
• specialization.
• opportunity cost.
• division of labor.

41
Chapter Review

• 12. When more than two people engage in trade, it
  is called
• international trade.
• multilateral trade.
• gains from trade.
• comparative advantage.

42
Chapter Review

• 13. The production possibilities curve
• slopes downward and is bowed out from the origin.
• slopes upward and is bowed out from the origin.
• slopes downward and is bowed in toward the
  origin.
• slopes upward and is bowed in toward the origin

43
Chapter Review

• 14. Points outside the production possibilities
  curve are
• efficient.
• inefficient.
• impossible.
• possible.

44
Chapter Review

• 15. Economic growth causes
• an inward shift in the production possibilities
  curve.
• an outward shift in the production possibilities
  curve.
• an upward movement on the production
  possibilities curve.
• a downward movement on the production
  possibilities curve.

45
Chapter Review

• 16. The price that one department of an
  organization must pay to receive goods and
  services from another department in the same
  organization is called a(n)
• transfer price.
• transaction cost.
• opportunity cost.
• transaction price.

46
Chapter Review

• 17. Which of the following is NOT one of the
  important roles of prices in a market economy?
• They serve as signals.
• They provide incentives.
• They form preferences.
• They affect the distribution of income.

47
Chapter Review

• 18. If the economy devotes all of its resources
  to steel production, it will be producing at
  point
• A
• B
• H
• G

48
Chapter Review

• 19. Point F in the diagram represents
• an efficient production level.
• an inefficient production level.
• an impossible production level.
• a possible production level.

49
Chapter Review

• 20. If the economy is currently producing at
  point E, then
• it is utilizing its resources efficiently.
• it is utilizing its resources inefficiently.
• it is on its production possibilities curve.
• it is beyond its production possibilities curve.

50
Problems

• 1. Sharon has only thirty dollars to spend for
  her weekend entertainment. She can go to a
  college football game for thirty dollars, or she
  can go to the movies for ten dollars. Explain the
  problem of scarcity and choice in this context.
  What will Sharon consider as she decides whether
  to go to the football game or the movie?

51
Answer

• The scarcity represented by the limited budget
  means that Sharon can either go to the football
  game, or the movies three times, and therefore a
  choice between them must be made. Sharon will
  consider how intense her preferences are to see
  the football game and compare this to the ticket
  price. She will compare the additional
  satisfaction per dollar spent on the football
  game versus going to the movies.

52
Problems

• 2. Compare the opportunity cost of one more year
  of college versus for one year for (1) a factory
  worker earning 15,000 a year, (2) an engineer
  earning 60,000 a year, and (3) a computer
  programmer earning 100,000 a year.

53
Answer

• One of the opportunity costs of one more year
  of college is the yearly earning one has to give
  up in order to attend college. Therefore, the
  opportunity cost is higher for the computer
  programmer than that for the engineer, which in
  turn is higher than that for the factory worker.

54
Problems

• 3. John is a high school student. He has ranked
  his 3 options of what he can do during the
  Christmas school break in the following order
  (1) work in a fast-food restaurant full time and
  earn 2,000, (2) work in a department store for
  the first two weeks of the break and earn 1,000
  and spend the rest of the break traveling, (3)
  work in his fathers shoe factory full time and
  earn 1,500. What is the opportunity cost of his
  choice?

55
Answer

• Johns first choice is to work full time in a
  fast-food restaurant. His next best opportunity
  is working for part of the Christmas break and
  traveling for the remainder of the break.
  Therefore, the opportunity cost of his first
  choice is the 1,000 he would have received from
  working in a department store as well as the time
  he could have used for traveling.

56
Problems

• 4. Suppose you have two hotdog sausages and a
  friend of yours has two hotdog buns. Explain how
  you can both gain from trade. Is this gain from
  trade through better allocation or greater
  production? Suppose now that your friend lives in
  another country, whose government does not allow
  trade between countries. Who would lose as a
  result of this trade barrier?

57
Answer

• You can trade one of your hotdog sausages for one
  of your friends hotdog buns. As a result, both
  you and your friend can gain from the exchange.
  This gain is through better allocation rather
  than greater production. If trade between you and
  your friends is prohibited, then both you and
  your friend would lose.

58
Problems

• 5. Suppose Ashley and Allison can produce the
  following combinations of pizza and cakes in a
  day
• A. If Ashley and Allison are both currently
  producing 2 pizza pies per day, how many cakes
  are they producing? What is the total production
  of pizza and cakes between them?
• B. Is there a possibility for increasing
  production? Why or why not?
• C. Suppose that Ashley completely specializes in
  producing pizza and Allison completely
  specializes in producing cakes. What will be the
  total production of pizza and cakes?

59
Answer

• A. Ashley is producing 3 cakes and Allison is
  producing 6 cakes. Total production4 pizza pies
  and 9 cakes.
• B. Gains from trade are possible because they
  have different comparative advantagedifferent
  relative efficiencies in the production of pizzas
  and cakes.
• C. Total production will be 5 pizza pies and
  10 cakes per day.

60
Problems

• 6. Suppose one country is relatively efficient at
  producing software and another country is
  relatively efficient at producing TV sets. Will
  specialization and trade between these two
  countries increase the total production of the
  two countries?

61
Answers

• Specialization and trade between two countries
  will increase the total production of the two
  countries because shifting production toward the
  good in which they are relatively efficient will
  increase the total world production of both
  goods.

62
Problems

• 7. Suppose you must divide your time between
  studying for your biology final and writing a
  final paper for your economics class. The time
  and the grades in the two classes are as follows
  
• A. Draw a tradeoff curve for the biology
  grade versus the economics grade.
• B. What is the opportunity cost of increasing
  the time spent on biology from 60 to 80 percent?
  What is the opportunity cost of increasing the
  time spent on economics from 80 to 100 percent?
• C. Are there increasing opportunity costs
  from spending more time on biology? Explain.

63
Answer

• A tradeoff curve for the biology grade versus the
  economic grade is as follows
• 20 points on the biology grade 45 points on the
  economics grade.
• There are increasing opportunity costs from
  spending more time on biology because as more
  time is spent on biology, an increasing number of
  economics points must be given up.

64
Problems

• 8. A small country produces only two goods, CDs
  and T-shirts. Given its limited resources, this
  country has the following production
  possibilities
• A. Draw the production possibilities curve.
• B. Suppose this country improves its technology
  for producing CDs, but technology remains the
  same for the production of T-shirts. What happens
  to the production possibility curve? How does
  this change affect the opportunity cost of
  increasing T-short production?

65
Answer

• A.
• B. The production possibilities curve shifts out
  in the direction of CDs, but the total quantity
  of T-shirts that can be produced remains the
  same. This change causes the production
  possibilities curve to be flatter when CD
  production is on the horizontal axis, and
  therefore decreases the opportunity cost of
  increasing CD production.

66
Problems

• 9. Look at the diagram below. What is the
  opportunity cost of moving from point B to point
  A? What are some ways in which the economy can
  move out of the inefficient area inside the
  production possibilities curve?

67
Answer

• There is no opportunity cost of moving from B to
  A because it is a move from inside the production
  possibility curve to a point on the production
  possibility curve. The economy can do this by
  increasing its use of resources and employing
  more of its capital and labor.

68
Problems

• 10. Suppose two countries initially have the same
  endowment of resources and are both able to
  produce computers and clothing. Computers
  represent investment and clothing represent
  consumption. Suppose one country chooses a
  combination that has more computers than the
  other. How do you think the production
  possibilities curves will differ in the future?

69
Answer

• The country that chooses more of the investment
  good will have its production possibilities curve
  shift out further than the other countrys
  production possibilities curve.

70
Problems

• 11. Susan the professor can spend her time doing
  research or preparing lectures. What is the
  opportunity cost of her spending time doing
  research? As Susan spends more and more time
  doing research, there are increasing opportunity
  costs. Why?

71
Answer

• 11. The opportunity cost is the value of the next
  best forgone alternative that was not chosen
  because Susan decided to do research. If this
  next best alternative is preparing lectures, the
  opportunity cost of research is the amount of
  lecture preparation she could have done with time
  allocated to research. The more time devoted to
  research, the less time that is allocated to
  teaching, the higher the value of the time
  allocated to teaching.

72
Problems

• 12. Suppose the government in a hypothetical
  economy is responsible for setting prices.
  Explain why, regardless of how the government
  sets prices, this cannot be a market economy.

73
Answer

• In a market economy prices are freely determined
  by many buyers and sellers. For this to work,
  prices cannot be set by a single entity such as
  the government.

74
Problems

• 13. Suppose increased production of VCRs in Asia
  causes the price of VCRs to decline all over the
  world. Explain how this change in the price
  signals information to U.S. producers, provides
  incentives to U.S. producers, and affects the
  distribution of income.

75
Answer

• A decrease in the price of VCRs signals U.S.
  producers that VCRs are now less scarce. A lower
  price decreases profits, thereby providing
  incentives for U.S. producers to produce fewer
  VCRs. It also redistributes income away from U.S.
  producers and toward consumers.

76
Problems

• 14. Explain how a market economy works to enable
  the production and allocation of surfboards.

77
Answer

• Prices in the surfboard market are free to vary
  people have property rights to the surfboards
  they buy many people sell surfboards the
  government does not regulate the use of
  surfboards and surfboard production takes place
  within firms with many workers. A higher price,
  for instance, will allocate surfboards to the
  serious surfers and away from the casual surfers.

78
Activities

• 1
• 2
• 3
• 4
• 5
• 6
• 7
• 8
• Multiple Choice Questions, Short Free-Response
  Questions, Long Free-Response Questions

79
Activity 1

1. False Sunshine isnt scarce because it isnt
   limited it is a free good.
2. False Polio isnt scarce because it is
   desirable.
3. False Scarcity is a relative, not an absolute,
   concept. Because resources are scarce and wants
   are unlimited, almost everything is scarce. If
   you pay an opportunity cost to use a good or
   service, it is scarce. If you pay a positive
   price for a good or service, it is scarce. Water
   may cover three-fourths of the earth, but we pay
   an opportunity cost and a positive price for
   clean water everywhere. Of course, water may be
   scarcer in the deserts than in the wetlands.
   Only a government can actually make water cheaper
   in a desert.

80
Activity 1

1. False An important opportunity cost of going to
   college is lost earning. If you could earn
   20,000 a year by working, you will sacrifice
   80,000 during four years of college.
2. False If all other things are equal, less mass
   transportation will be purchased if the price is
   higher. The price could be increased in terms of
   dollars, inconvenient schedules, crime and filthy
   cars. The demand curve for transportation would
   have to be perfectly inelastic, or vertical, for
   the answer to this question to be True.

81
Activity 1

• 6. False The price of something depends on
  supply and demand, not on usefulness or on some
  criterion of quality. Water is more useful than
  diamonds, but it has a lower price. What you pay
  for a good or service depends on the market price
  determined by supply and demand.

82
Activity 1

• 7 8 False When people trade voluntarily,
  both parties expect to gain, or they wouldnt
  trade. One reason for this gain is the law of
  comparative advantage. If one person does legal
  work better than another and if a second person
  word-processes documents better than the first,
  they would gain by trade. But would a lawyer who
  is the fastest word processor in town hire a
  secretary? Yes, because of comparative
  advantage Each person would specialize in what
  he or she does comparatively better. An hour
  spent word processing is an hour not spent in
  legal work, and the opportunity cost for the
  lawyer would be very high. The lawyer will
  specialize in legal work and the secretary in
  word processing. The total output of goods and
  services will increase. This concept can also be
  applied to countries.

83
Activity 1

• 9. False A monopoly charges a higher price than
  a competitive market price, but the monopolist
  cannot repeal the law of demand. If the price is
  too high, the monopolist might sell nothing. A
  monopolist will try to establish a price at a
  point that will make the greatest profit. This
  price is higher than a competitive price and will
  result in less production.

84
Activity 1

• 10. False Profits are an incentive for business
  to succeed. A business that doesnt care about
  its customers will not make high profits. As
  Adam Smith said, It is not from the benevolence
  of the butcher, the brewer or the baker that we
  expect our dinner, but from their regard for
  their own interest. We address ourselves not to
  their humanity but to their self-love, and never
  talk to them of our own necessities but of their
  advantages.

85
Activity 2

• 1.a. Two
• b. Two
• c. Two
• d. Constant
• 2.a. Two
• b. Four
• c. Six
• d. Increasing

86
Activity 2

• Figure 2.3 Bowed out Production Possibilities
  Curve
• Figure 2.4 Vertical Production Possibilities
  Curve
• Figure 2.5 Downward sloping, straight
  Production Possibilities Curve

87
Activity 2

1. BD
2. AA
3. CC
4. It is impossible for a country by itself to
   attain with existing resources and technology.
5. The economy is not fully using existing resources
   and technology. An example of point Y is the
   Great Depression of the 1930s.

88
Activity 2

1. New resources are discovered. New technologies
   are developed.
2. Resources are not being fully employed.
3. The government might want to emphasize the
   production of capital goods so the economy would
   grow more in the future. This would shift the
   PPC outward in the future.

89
Activity 3

• You decide to go to college
• Explicit Costs Tuition, Books, Travel
• Implicit Costs Income not earned, Less job
  experience
• You take a job after school
• Explicit Costs Work clothes, Meals,
  Transportation
• Implicit Costs Less Studying, Less Social Time

90
Activity 3

• You study for and take an AP Economics
  Examination
• Explicit Costs Cost of AP Economics Books, Cost
  of AP Economics Exam
• Implicit Costs Money earned from part-time job,
  Less social time, Less study time for other
  courses

91
Activity 3

• A stay-at-home dad returns to work
• Explicit Costs Work clothes, Taxes, Child-Care
  Expenses
• Implicit Costs Less time with family, Less time
  for recreation

92
Activity 3

• Family members work in their parents restaurant
• Childs (employee) viewpoint
• Explicit Costs Taxes, Work Clothes
• Implicit Costs Lower pay than elsewhere, Less
  time for study, Less time for recreation
• Parents (employer) viewpoint
• Explicit Costs Payroll Taxes, Wages for Child
• Implicit Costs Less flexibility in hiring and
  firing, More complex relationship with child

93
Activity 3

• A. You decide to go to college Consider the
  benefits of a college education to be your
  expected extra future income, growth in knowledge
  and social development. A decision to attend
  college occurs when the expected explicit and
  implicit costs are less than expected benefits.
  If income were the only criterion, individuals
  who drop out of college to become star
  professional athletes may have concluded that the
  costs of missing a professional sports career
  exceeded the anticipated future income from
  becoming a better educated, but nonstarring,
  individual in a career outside of sports.

94
Activity 3

• B. You take a job after school Working after
  school may supplement family income, but it
  normally increases the disposable income of the
  high school student. More disposable income
  benefits the income earner. Choice of hours,
  however, can make the benefits exceed the costs.
  Total benefits may exceed total costs, even when
  the cost of an additional hour of work per week
  exceeds the benefit of the additional hour of
  work. But the economic way of thinking causes
  the person to adjust work so the extra benefit
  from the extra hour just matches the extra cost.
  If this extra hour of work causes the worker to
  earn a lower grade in a class, total benefits of
  work may exceed total costs of work but the
  marginal costs of that extra hour of work greatly
  exceed the marginal benefits of the extra income.

95
Activity 3

• C. You study for an take an AP Economics
  Examination While the benefits of studying for
  an AP Economics exam are self-evident, there are
  costs that most students can list in a minute.
  AP Economics students may take other AP tests, so
  the management of study time becomes a crucial
  factor in mastery of all the tests. Marginal
  decisions determine time allocation among the
  subject areas When an extra hour spent on
  economic adds more expected score points than an
  hour spent on chemistry, the student spends the
  hour studying economics.

96
Activity 3

• D. A stay-at-home dad returns to work
  Stay-at-home parents sacrifice money income.
  This stay-at-home dad concluded that the benefits
  of working for a living exceeded the lost
  benefits of staying at home. Lost benefits could
  be explicit in the form of lower or no
  public-assistance payments. Implicit lost
  benefits involve control over use of time,
  ability to bond with and teach children, and the
  ability to have household chores done without
  paying someone else. Explicit new costs will
  include payroll taxes, possibly income taxes,
  commuting costs, child-care expenses and costs of
  work clothes.

97
Activity 3

• E. Family members work in their parents
  restaurant This is the toughest scenario of
  all. Family decision making frequently follows
  tradition rather than market criteria. A student
  may work in a family business that is not the
  best fit for either the family or the student
  just because other generations worked there.
  At the other extreme, knowing the business and
  feeling a sense of ownership in it may bring out
  the finest service possible from a young worker.
  Either scenario carries costs and benefits. The
  student works to earn family approval, and this
  approval is worth more than the perceived costs.
  Adult members of the family business may want
  their high school children to sharpen their work
  ethic. The business may absolutely need the
  family members to assist as part of family
  tradition or because a family member has higher
  productivity than a stranger. Some family
  restaurants hold secret recipes that are not
  entrusted to anyone beyond the family. Both
  parties the employee and the employer must
  conclude that the benefits of working exceed the
  costs, or family labor services will not be
  purchased.

98
Activity 4

• Because the supply of parking spaces is limited,
  the scare goods must be allocated among people
  who want parking spaces.
• Tradition, Command, and the Market

99
Activity 4

• Leave things as they have been Tradition
• First-come, first-served Tradition and Command
• Markets and a Price System The Market
• Democracy A political solution, which is Command
• Random Choice Command with some market because
  of reselling

100
Activity 4

• Leave things as they have been Faculty are
  rewarded Student parking is discouraged
• First-come, First-served People with low
  opportunity costs for time are rewarded Those
  who have high opportunity costs for time and many
  productive activities are penalized.
• Markets and a price system People with higher
  incomes and more important time alternatives are
  rewarded those with low opportunity costs for
  time or with lower incomes are penalized.
• Democracy People with political clout are
  rewarded
• Random Choice People with luck, regardless of
  cost, are rewarded The unlucky are penalized.

101
Activity 4

1. It is impossible to say because equality or
   fairness depends on each individuals
   perspective. Many students will choose
   first-come, first-served or random choice because
   everyone has an equal chance.
2. The market system leads to the greatest
   efficiency because every choice has an
   opportunity cost. There is an incentive to make
   choices that minimize opportunity cost. Each
   person makes choices based on his or her costs
   and benefits.
3. Must base answers on equity or efficiency.

102
Activity 5

1. Resource owners are anyone who has land, labor,
   capital or entrepreneurship to sell in the factor
   market.
2. A business firm buys resources and in turn, sells
   goods and service to resource owners.
3. A market where finished goods and services are
   bought and sold.
4. Answers vary

103
Activity 5

1. A market where the factors of production (land,
   labor, capital, entrepreneurship) are bought and
   sold
2. Wages for labor, for example
3. They buy in the factor markets and sell in the
   product markets.
4. Supply and demand
5. From selling their resources in the factor
   markets.

104
Activity 5

1. From selling the goods and services they produce
   with the factors of production
2. Interdependence is important because people
   specialize and trade their production in markets
   for other products they need. The circular flow
   of income shows the interdependence of the
   economy.

105
Activity 6

• 1. Absolute advantage states that a particular
  individual or country can produce more of a
  specific commodity than another individual or
  country using the same amount of resources.
  Comparative advantage states that a particular
  country or individual can produce a specific
  commodity at a lower opportunity cost (in terms
  of forgone production in an alternative
  commodity) than another country or individual.

106
Activity 6

1. Washing two loads of dishes
2. Vacuuming ½ of a room
3. Washing one load of dishes
4. Vacuuming one room
5. Debbie
6. Mike
7. Debbie
8. Mike
9. Mike should wash dishes and Debbie should vacuum.
   They will finish their chores sooner by
   specializing according to their comparative
   advantage. The person with the lower opportunity
   cost should perform the chore.

107
Activity 6

1. Cleaning two jail cells
2. Cleaning 4/3 of a jail cell
3. Cleaning ½ of an office
4. Cleaning ¾ of an office
5. Hannah
6. Hannah
7. Hannah
8. Andy
9. Hannah should clean offices and Andy should clean
   jail cells, and they will finish sooner. The
   person with the lower opportunity cost should
   perform the chore.

108
Activity 6

1. For every car, it must give up 1/3 of a computer
2. For every car, it must give up 3/5 of a computer
3. For every computer, it must give up three cars
4. For every computer it must give up 5/3 of a car
5. United States
6. Japan
7. United States
8. Japan
9. The U.S. should produce cars, and Japan should
   produce computers because cars and computers
   would then be produced by the lower-cost country.
   The total output of cars and computers will be
   higher.
10. If people and national do not trade on the basis
    of comparative advantage, there will be fewer
    goods and services for people to enjoy. People
    will be poorer. Less trade or self-sufficiency
    means a lower standard of living.

109
Activity 7

• Yes, Yes
• Masters Degree
• Marginal Benefits 100,000
• Marginal Costs 100,000
• D. The persons earning power is greater as he
  or she gets older. The higher degree also
  increases earning power. Going to school longer
  means these potential earnings are sacrificed,
  which increases the opportunity cost.

110
Activity 7

• Answers vary Ironing blue jeans and cleaning up
  every speck of dust are examples.
• Depends on the example
• People frequently dont purchase the
  highest-priced goods because the marginal benefit
  of the highest quality is not worth the
  additional cost.
• You could make college acceptance conditional on
  work during the entire senior year. This would
  raise the cost of senioritis and provide an
  incentive for seniors to study harder.

111
Activity 8

1. False. The best things in life are not free.
   Even things such as love and friendship (not
   economic goods though) have opportunity costs.
2. No. If life were priceless, we would not use
   life as an opportunity cost for any other
   benefit. Yet we fight wars. The benefits of
   smoking, drinking, hang gliding, using illegal
   drugs, driving without a seat belt and driving at
   excessive speeds confront people with the risk of
   an increased probability of death, yet people
   engage in these activities. If life were
   priceless, we would use whatever resources were
   necessary to cure cancer, heart disease and other
   terminal illnesses.

112
Activity 8

• 3. Only C involves opportunity costs for the
  student who is cheating. For some people, the
  opportunity cost of cheating is their conscience.
  Students compare benefits and costs when
  contemplating cheating. For those with weak
  consciences, other costs must be substituted to
  discourage them. If the costs of cheating are
  greater than the benefits, cheating will not
  occur.

113
Activity 8

1. False. Scarcity is a relative concept, not an
   absolute one. Resources are scarce compared with
   wants. Unsold stocks of goods do not proved that
   scarcity does not exist because these goods still
   have a price. If there were no scarcity, we
   could produce everything we wanted at a price of
   zero.
2. False. Money is not a resource. If the
   government prints more money, it does not affect
   the number of goods and services used to satisfy
   our wants.

114
Activity 8

• 6. Her behavior does make sense economically.
  The benefits of finding a cheaper gas station
  were not as high as the opportunity cost. It was
  not until the tenth apartment that the additional
  benefits and additional opportunity costs of
  searching for apartments were equal. This makes
  sense. After all, a good place to live at a
  reasonable cost is more important than saving a
  few cents on a gallon of gas.

115
Activity 8

• 7. Tina should hire Tom. The key is the law of
  comparative advantage. Tina sacrifices an hour
  of legal fees if she does her own word
  processing. She can probably pay several Toms to
  word process for less than she can earn in an
  hour as a lawyer. Therefore, she specializes in
  law, and Tom specializes in word processing.

116
Multiple Choice Questions

• C
• B
• C
• D
• E
• C
• C
• A
• C
• C
• B
• B
• C
• C
• E

1. D
2. B
3. E
4. B
5. D
6. C
7. E
8. B
9. B
10. B
11. A
12. C
13. C
14. C
15. D

117
Short Free-Response Questions

• Graph I assumes increasing opportunity cost. The
  shape of the curve is concave to the origin or
  bowed out. If you move from Point A to Point E,
  you must give up increasing amounts of planes to
  get more butter. This is what a production
  possibilities curve should look like.
• Graph II assumes constant opportunity cost. As
  you go from Point A to Point E, the trade-offs do
  not change.
• Graph III, a curve convex to the origin, assumes
  decreasing opportunity cost.

118
Short Free-Response Questions

• 2. False. People with 1 million cannot spend
  more than 1 million. Even if people had all the
  money they could use, time to use it would be
  scarce.

119
Long Free-Response Questions

1. Scarcity exists because there are limited
   resources to fulfill unlimited wants.
2. What to produce and how much of each good or
   service to produce, how to produce, and for whom
   to produce.
3. Tradition, Command, and Market
4. Varying Answers

120
Long Free-Response Questions

1. Movie production indicates increasing per-unit
   opportunity costs. As more movies are produced,
   increasingly more computers must be sacrificed.
2. Graph
3. With a move from Point C to Point D, the per-unit
   opportunity cost of producing one additional
   computer is 5/3 movies.

121
Long Free-Response Questions

1. The per-unit opportunity cost of producing one
   more movie as we alter the production from Point
   C to Point B is one computer.
2. The point on the axis will shift inward for the
   movie production, but the point on the axis
   corresponding to computer production will not
   change.
3. Shift the PPF inward.
4. Shift the PPF outward.

122
Long Free-Response Questions

1. More education increases human capital, a
   resource, and moves the curve outward
2. Better medicine improves human capital, a
   resource, and moves the curve outward
3. International trade increases output because of
   the law of comparative advantage and moves the
   curve outward.
4. The increase in the unemployment rate results in
   underemployed resources, which is illustrated by
   a point inside the curve. The resources
   (workers) are still available but are not being
   employed.
5. The computer viruses take computers out of
   commission, which shifts the curve inward.