Global Econ chap 2

Question 1

definition

Question 2

allocative efficiency

Answer 2

when the mix of goods produced represents the mix that society most desires

Question 3

budget constraint

Answer 3

all possible consumption combinations of goods that someone can afford, given the prices
of goods, when all income is spent; the boundary of the opportunity set

Question 4

comparative advantage

Answer 4

when a country can produce a good at a lower cost in terms of other goods; or, when a
country has a lower opportunity cost of production

Question 5

invisible hand

Answer 5

Adam Smith’s concept that individuals’ self-interested behavior can lead to positive social
outcomes

Question 6

law of diminishing marginal utility

Answer 6

as we consume more of a good or service, the utility we get from
additional units of the good or service tends to become smaller than what we received from earlier units

Question 7

law of diminishing returns

Answer 7

as we add additional increments of resources to producing a good or service, the
marginal benefit from those additional increments will decline

Question 8

marginal analysis

Answer 8

examination of decisions on the margin, meaning a little more or a little less from the
status quo

Question 9

normative statement

Answer 9

statement which describes how the world should be

Question 10

opportunity cost

Answer 10

measures cost by what we give up/forfeit in exchange; opportunity cost measures the value
of the forgone alternative

Question 11

positive statement

Answer 11

statement which describes the world as it is

Question 12

production possibilities frontier (PPF)

Answer 12

a diagram that shows the productively efficient combinations of two
products that an economy can produce given the resources it has available.

Question 13

productive efficiency

Answer 13

when it is impossible to produce more of one good (or service) without decreasing the
quantity produced of another good (or service)

Question 14

sunk costs

Answer 14

costs that we make in the past that we cannot recover

Question 15

key concepts

Question 16

opportunity cost example

Answer 16

A fundamental principle of economics is that every choice has an opportunity cost. If you sleep through your
economics class, the opportunity cost is the learning you miss from not attending class. If you spend your
income on video games, you cannot spend it on movies. In short, opportunity cost is all around us and part of human existence.

Question 17

Budget constraint example

Imagine Anna, who has a weekly income of $100. She can spend this income on either food or clothing. The price of food is $1 per unit, and the price of clothing is 2$ per unit.

Answer 17

B = Pi x Qi + Pii x Qii
100 = $2 x Qf + $1 x Qc
100 - 1 x Qf = 2 x Qf + 1 x Qc - 1 x Qc
100 - 1 x Qc = 2 x Qf
(100 - 1 x Qc) / 2 = 2 x Qf /2
50 - (0.5 x Qc) = Qf

f(Qc) = 0 ->Y axis = 50
f(Qf) = 0 -> x axis = 100

Question 18

identify opportunity cost

Answer 18

Attending college is another case where the opportunity cost exceeds the monetary cost. The out-of-pocket
costs of attending college include tuition, books, room and board, and other expenses. However, in addition,
during the hours that you are attending class and studying, it is impossible to work at a paying job. Thus,
college imposes both an out-of-pocket cost and an opportunity cost of lost earnings.

Question 19

detailed explation of LoDMU

Answer 19

When Alphonso chooses between burgers and bus tickets, for example, the first few bus rides that he chooses might provide him with a great deal of utility—perhaps they help him get to a job interview or a
doctor’s appointment. However, later bus rides might provide much less utility—they may only serve to kill time on a rainy day. Similarly, the first burger that Alphonso chooses to buy may be on a day when he missed
breakfast and is ravenously hungry. However, if Alphonso has multiple burgers every day, the last few burgers may taste pretty boring.

Question 20

example of sunk cost

Answer 20

Consider the case of Selena, who pays $8 to see a movie, but after watching the film for 30 minutes, she knows that it is truly terrible. Should she stay and watch the rest of the movie because she paid for the ticket, or should she leave? The money she spent is a sunk cost, and unless the theater manager is sympathetic, Selena will not get a refund. However, staying in the movie still means paying an opportunity cost in time. Her choice is whether to spend the next 90 minutes suffering through a cinematic disaster or to do something—anything—else.

Question 21

PPF vs Budget constraint

Answer 21

budget constraint is a straight line
PPF is a curved line
PPF doesn’t have specific numbers on the axis

Question 22

the law of increasing opportunity cost

Answer 22

which holds that as production of a good or service increases, the marginal opportunity cost of producing it
increases as well. This happens because some resources are better suited for producing certain goods and services instead of others. When government spends a certain amount more on reducing crime, for example,the original increase in opportunity cost of reducing crime could be relatively small. However, additional increases typically cause relatively larger increases in the opportunity cost of reducing crime, and paying for enough police and security to reduce crime to nothing at all would be a tremendously high opportunity cost.

Question 23

what is effciency

Answer 23

In everyday usage, efficiency refers to lack of waste.

Question 24

positive vs normative statements

Answer 24

Positive statements are factual. They may be
true or false, but we can test them, at least in principle. Normative statements are subjective questions of
opinion. We cannot test them since we cannot prove opinions to be true or false.