Question 1

A circular flow diagram shows the flows from the goods and resources markets.

Accepted Answer

A circular flow diagram is a visual representation of the flow of goods and resources between households and firms in the economy. It shows how households and firms interact in both the goods market (where households buy goods and services from firms) and the resource market (where firms buy resources, such as labor and capital, from households). The circular flow diagram is circular because the flows of goods and resources move in a continuous loop between households and firms.

Question 2

Property rights facilitate the development of trade.

Accepted Answer

Property rights allow individuals to own and control their own resources, including land, buildings, and goods. This encourages investment and entrepreneurship, which can create goods and services that can be traded with others. Without property rights, it is difficult to establish secure ownership, which can reduce incentives for investment and economic growth. Therefore, property rights are a key factor in facilitating trade and commerce.

Question 3

If marginal benefit is greater than marginal cost for the production of cars, to reach the allocative efficient quantity of cars, the production of cars must be increased.

Accepted Answer

Allocative efficiency occurs when marginal benefit equals marginal cost, meaning that no additional benefit can be gained from producing more of a good. If marginal benefit is greater than marginal cost, then producing more cars will increase societal benefit and move towards allocative efficiency.

Question 4

Over the past several decades, the United States has devoted a greater fraction of its resources to consumption than Hong Kong, which is why the U.S. economy grew faster than Hong Kong's economy.

Accepted Answer

The statement is false. In fact, Hong Kong has consistently had higher rates of economic growth than the United States, despite devoting a smaller fraction of its resources to consumption.

Question 5

As long as the marginal benefit from a good is greater than its marginal cost, an economy is operating efficiently.

Accepted Answer

Efficiency in an economy is typically achieved when the marginal benefit equals the marginal cost, not when the marginal benefit is greater than the marginal cost.

Question 6

-The Hobbits of the Shire are trying to decide how much bread and how much wine to produce. They ask you to be their economic consultant and give you the information in the first table above about different combinations of wine and bread that they can produce if they are fully employed and doing their best. The Hobbits also give you the information in the second table above about their willingness to pay for wine depending on how much wine they already have. To help the Hobbits solve their problem:
a) Draw the Shire's production possibilities frontier. Put wine on the horizontal axis.
b) What is the opportunity cost of the first two thousand bottles of wine? What is the marginal cost of the 3,000th bottle of wine? What is the marginal cost of the 3,000th loaf of bread?
c) Draw the marginal cost of wine curve. What happens to the marginal cost if production of wine increases? Why?
d) Draw the marginal benefit from wine curve on the same figure on which you put the marginal cost curve. Describe the relationship between the quantity of wine produced and the marginal benefit from wine.
e) What combination of bread and wine will you recommend the Hobbits to produce? Why? Explain to the Hobbits why they would be worse off by producing a different combination of bread and wine.

Accepted Answer

The answer of  
-The Hobbits of the Shire are...

Question 7

In the United States, the government coordinates most of the economic activity.

Accepted Answer

In the United States, the government does not coordinate most of the economic activity. Instead, the economy is primarily driven by market forces and private businesses. However, the government does regulate the economy and provides some essential services such as infrastructure and education.

Question 8

If Hong Kong continues to devote more resources to accumulating capital than the United States, Hong Kong will continue to grow more rapidly than the United States.

Accepted Answer

Devoting more resources to accumulating capital (investment) generally leads to higher economic growth rates in the long run. Therefore, if Hong Kong continues to invest more than the United States, it is likely to continue growing more rapidly than the United States.

Question 9

The more we have of a good or service, the smaller is its marginal benefit and the less we are willing to pay for an additional unit of it.

Accepted Answer

This is known as the law of diminishing marginal utility. As we consume more of a good, the satisfaction or benefit we receive from consuming each additional unit decreases, leading to a decrease in our willingness to pay.

Question 10

We are using resources efficiently if we can produce more of one good without producing less of some other good that we value more highly.

Accepted Answer

Efficient resource use implies that we cannot produce more of one good without producing less of another, due to the concept of opportunity cost.

Question 11

If two countries specialize in the production of goods in which they have a comparative advantage, they can experience gains from trade.

Accepted Answer

When countries specialize in goods they have a comparative advantage in and trade with each other, they can both benefit by having access to a wider variety of goods at a lower cost. This allows them to consume more than they would have been able to produce on their own, leading to gains from trade.

Question 12

Specialization and trade allow countries to consume beyond their PPFs.

Accepted Answer

Specialization and trade allow countries to produce and export goods and services in which they have a comparative advantage, while importing those in which they are less efficient. This leads to a more efficient allocation of resources and higher levels of consumption beyond their production possibility frontiers (PPFs).

Question 13

A country has a comparative advantage in the production of a good if its opportunity cost is lower compared to another country.

Accepted Answer

This is the definition of comparative advantage. A country with a lower opportunity cost of producing a good has a comparative advantage in that good.

Question 14

Households are buyers in factor markets and sellers in goods markets.

Accepted Answer

Households are sellers in factor markets because they provide factors of production (labor, capital, etc.) and buyers in goods markets where they purchase products and services.

Question 15

When a nation is producing the allocatively efficient quantity of a product, the marginal benefit of producing the good equals the marginal cost of producing that good.

Accepted Answer

This is the definition of allocative efficiency. At the allocatively efficient quantity of a product, the marginal benefit to society of producing one more unit is equal to the marginal cost of producing that unit. This ensures that resources are being used efficiently to maximize total societal welfare.

Question 16

-Sarah and her boyfriend Mike want to save some money to pay for their wedding. So they decided to help people in the neighborhood by cleaning their garages and mowing lawns. Sarah takes 60 minutes to clean a garage and 80 minutes to mow a lawn. Mike takes 80 minutes to clean a garage and 80 minutes to mow a lawn. Sarah and Mike devote 10 hours per week each to these activities and get paid $25 for each garage they clean and $25 for each lawn they mow. Sarah says to Mike: "I have an absolute advantage in cleaning and we are equally productive in mowing. Therefore I should do both cleaning and mowing but you should only mow lawns." Mike disagrees. He thinks Sarah should specialize in cleaning garages and he should specialize in mowing lawns. Help Sarah and Mike to resolve their dispute.
a) Who has an absolute advantage in cleaning garages? In mowing lawns? Explain.
b) Draw Sarah's and Mike's production possibilities frontiers. What are each individual's opportunity costs?
c) Who has a comparative advantage in cleaning garages? In mowing lawns? Explain.
d) Is Sarah right when she says that she should do both cleaning and mowing while Mike should only mow lawns? Or may be Mike is right when he suggests that Sarah specializes in cleaning and he specializes in mowing? Illustrate and substantiate your answer with a numerical example.

Accepted Answer

The answer of  
-Sarah and her boyfriend Mike want...

Question 17

-Harry usually spends 10 hours a week playing Quidditch. However, his Defense Against the Dark Arts exam is coming and he needs more time to study for the exam. If he does not study at all, the lowest grade he will receive is 55. But Harry realizes that this grade is unacceptable and so he has to give up some of his Quidditch time. But how much? He asks his friend Hermione, who is very good at Magical Economics, to help him figure this out. Together, they come up with the schedules of Harry's possibilities and values in the tables above. Then Hermione quickly finds the solution. But Harry still looks puzzled. Help Hermione to explain her solution to Harry.
a) Draw Harry's production possibilities frontier with the Quidditch hours on the horizontal axis and Harry's grade, starting at 55, on the vertical axis.
b) What is the opportunity cost of the first two hours of Quidditch? What is the marginal cost of the 5th hour?
c) What is Harry's opportunity cost of raising his grade from 82 points to 87 points?
d) Draw Harry's marginal cost of playing Quidditch curve. What happens to the marginal cost if Harry spends more time playing Quidditch?
e) Draw Harry's marginal benefit from playing Quidditch curve. Describe the relationship between Harry's time spent playing Quidditch and the marginal benefit from playing Quidditch.
f) For how many extra hours did Hermione recommend Harry to study? Why? If Harry follows her advice, what grade will he expect? What do you think Hermione said when Harry asked why he should not spend more time playing Quidditch?

Accepted Answer

The answer of  
-Harry usually spends 10 hours a...

Question 18

As long as technology increases, economic growth is free.

Accepted Answer

While technology can lead to increases in economic growth, it is not always free. There may be costs associated with research and development, implementation of new technologies, and changes to the workforce. Additionally, inequality in access to technology and its benefits can lead to economic disparities.

Question 19

Each point on the production possibilities frontier achieves allocative efficiency.

Accepted Answer

The production possibilities frontier (PPF) represents the maximum combination of goods or services that can be produced with a fixed amount of resources. While points on the PPF are productively efficient, meaning resources are fully utilized, allocative efficiency is achieved only when the production is in accordance with consumer preferences. Not every point on the PPF necessarily reflects allocative efficiency.

Quiz 2: The Economic Problem