chapter 2 the economic problem.docx

chapter 2 the economic problem 2THE ECONOMIC C h a p t e r PROBLEM A n s w e r s t o t h e R e v i e w Q u i z z e s Page 36 1. How does the production possibilities frontier illustrate scarcity? The unattainable combinations of production that lie beyond the PPF curve illustrate the concept of scarcity. There simply are not enough resources to produce any of these combinations of outputs. Additionally, while moving along the PPF to increase the production of one good requires that the production of another good be reduced, which also illustrates scarcity. 2. How does the production possibilities frontier illustrate production efficiency? The combinations of outputs that lie on the PPF curve illustrate the concept of production efficiency. These points are the maximum production points possible and are attained only by producing the goods and services at the lowest possible cost. Any point inside the frontier reflects production where one or both outputs may be increased without decreasing the other output level. Clearly, such points cannot be production efficient. 3. How does the production possibilities frontier show that every choice involves a tradeoff? Movements along the PPF frontier illustrates that producing more of one good requires producing less of other good. This observation is the tradeoff that must be made when producing output efficiently. 4. How does the production possibilities frontier illustrate opportunity cost? The negative slope of the production possibility curve illustrates the concept of opportunity cost. Moving along the production possibility frontier, producing additional units of a good requires that the output of another good must fall. This sacrifice is the opportunity cost of producing more of the first good. 5. Why is opportunity cost a ratio? The slope of the PPF is a ratio that expresses the quantity of lost production of the good on the y-axis when increasing the production of the good on the x-axis. The steeper the slope, the greater the ratio, and the greater is the opportunity cost of increasing the output of the good measured along the horizontal axis. 6. Why does the PPF for most goods bow outward so that opportunity cost increases as the quantity produced of a good increases? Some people (say those of Italian background) are better suited to produce one type of good or service, like pizza. Other people (say those of American background) are better suited to produce other goods or services, like cola. If society allocates resources wisely, it will use each resource to produce the kind of output for which it is best suited. For the PPF, measure pizza production on the x-axis and cola production on the y-axis. A small increase in pizza output, when pizza production is relatively low, can be accommodated by taking some Italians out of cola production, and the drop in cola production will be small, because their productivity in cola production is low. On the other hand, the increase in pizza production will be relatively high because Italian productivity in pizzas is high. At this point, the slope of the PPF will be gentle, reflecting a low opportunity cost of making additional pizza. However, the same small increases in pizza output when pizza production is relatively large, and there are no Italians still making cola, will require the transfer of Americans into pizza, where their productivity is relatively low, 2THE ECONOMIC C h a p t e r PROBLEM A n s w e r s t o t h e R e v i e w Q u i z z e s Page 36 1. How does the production possibilities frontier illustrate scarcity? The unattainable combinations of production that lie beyond the PPF curve illustrate the concept of scarcity. There simply are not enough resources to produce any of these combinations of outputs. Additionally, while moving along the PPF to increase the production of one good requires that the production of another good be reduced, which also illustrates scarcity. 2. How does the production possibilities frontier illustrate production efficiency? The combinations of outputs that lie on the PPF curve illustrate the concept of production efficiency. These points are the maximum production points possible and are attained only by producing the goods and services at the lowest possible cost. Any point inside the frontier reflects production where one or both outputs may be increased without decreasing the other output level. Clearly, such points cannot be production efficient. 3. How does the production possibilities frontier show that every choice involves a tradeoff? Movements along the PPF fr。