Review Questions

PPF are wasteful. Over time, a growing economy will tend to shift the PPF outwards. The law of diminishing returns holds that as increments of additional resources are devoted to producing something, the marginal increase in output will become increasingly smaller. All choices along a production possibilities frontier display productive efficiency; that is, it is impossible to use society’s resources to produce more of one good without decreasing production of the other good. The specific choice along a production possibilities frontier that reflects the mix of goods society prefers is the choice with allocative efficiency. The curvature of the PPF is likely to differ by country, which results in different countries having comparative advantage in different goods. Total production can increase if countries specialize in the goods in which they have comparative advantage and trade some of their production for the remaining goods.

2.3 Confronting Objections to the Economic Approach

The economic way of thinking provides a useful approach to understanding human behavior. Economists make the careful distinction between positive statements, which describe the world as it is, and normative statements, which describe how the world should be. Even when economics analyzes the gains and losses from various events or policies, and thus draws normative conclusions about how the world should be, the analysis of economics is rooted in a positive analysis of how people, firms, and governments actually behave, not how they should behave.

Self-Check Questions

1 . Suppose Alphonso’s town raised the price of bus tickets from $0.50 per trip to $1 per trip (while the price of burgers stayed at $2 and his budget remained $10 per week.) Draw Alphonso’s new budget constraint. What happens to the opportunity cost of bus tickets? 2 . Return to the example in Figure 2.4. Suppose there is an improvement in medical technology that enables more healthcare with the same amount of resources. How would this affect the production possibilities curve and, in particular, how would it affect the opportunity cost of education? 3 . Could a nation be producing in a way that is allocatively efficient, but productively inefficient? 4 . What are the similarities between a consumer’s budget constraint and society’s production possibilities frontier, not just graphically but analytically? 5 . Individuals may not act in the rational, calculating way described by the economic model of decision making, measuring utility and costs at the margin, but can you make a case that they behave approximately that way? 6 . Would an op-ed piece in a newspaper urging the adoption of a particular economic policy be a positive or normative statement? 7 . Would a research study on the effects of soft drink consumption on children’s cognitive development be a positive or normative statement?

Review Questions

8 . Explain why scarcity leads to tradeoffs. 9 . Explain why individuals make choices that are directly on the budget constraint, rather than inside the budget constraint or outside it. 10 . What is comparative advantage? 11 . What does a production possibilities frontier illustrate? 12 . Why is a production possibilities frontier typically drawn as a curve, rather than a straight line? 13 . Explain why societies cannot make a choice above their production possibilities frontier and should not make a choice below it. 14 . What are diminishing marginal returns? 15 . What is productive efficiency? Allocative efficiency? 16 . What is the difference between a positive and a normative statement? 17 . Is the economic model of decision-making intended as a literal description of how individuals, firms, and the governments actually make decisions? 18 . What are four responses to the claim that people should not behave in the way described in this chapter?

Critical Thinking Questions

19 . Suppose Alphonso’s town raises the price of bus tickets from $0.50 to $1 and the price of burgers rises from $2 to $4. Why is the opportunity cost of bus tickets unchanged? Suppose Alphonso’s weekly spending money increases from $10 to $20. How is his budget constraint affected from all three changes? Explain. 20 . During the Second World War, Germany’s factories were decimated. It also suffered many human casualties, both soldiers and civilians. How did the war affect Germany’s production possibilities curve? 21 . It is clear that productive inefficiency is a waste since resources are used in a way that produces less goods and services than a nation is capable of. Why is allocative inefficiency also wasteful? 22 . What assumptions about the economy must be true for the invisible hand to work? To what extent are those assumptions valid in the real world? 23 . Do economists have any particular expertise at making normative arguments? In other words, they have expertise at making positive statements (i.e., what will happen) about some economic policy, for example, but do they have special expertise to judge whether or not the policy should be undertaken?

Problems

Use this information to answer the following 4 questions: Jade has a weekly budget of $24, which she likes to spend on magazines and pies. 24 . If the price of a magazine is $4 each, what is the maximum number of magazines she could buy in a week? 25 . If the price of a pie is $12, what is the maximum number of pies she could buy in a week? 26 . Draw Jade's budget constraint with pies on the horizontal axis and magazines on the vertical axis. What is the slope of the budget constraint? 27 . What is Jade's opportunity cost of purchasing a pie?