Chapter 01 - Limits, Alternatives, and Choices QUESTIONS 1. What is an opportunity cost? How does the idea relate to the definition of economics? Which of the following decisions would entail the greater opportunity cost: Allocating a square block in the heart of New York City for a surface parking lot or allocating a square block at the edge of a typical suburb for such a lot? Explain. 3. What is meant by the term “utility” and how does the idea relate to purposeful behavior? LO1 4. What are the key elements of the scientific method and how does this method relate to economic principles and laws? 5. Indicate whether each of the following statements applies to microeconomics or macroeconomics: a. The unemployment rate in the United States was 9.7 percent in March 2010. b. A U.S. software firm discharged 15 workers last month and transferred the work to India. c. An unexpected freeze in central Florida reduced the citrus crop and caused the price of oranges to rise. d. U.S. output, adjusted for inflation, decreased by 2.4 percent in 2009. e. Last week Wells Fargo Bank lowered its interest rate on business loans by one-half of 1 percentage point. f. The consumer price index rose by 2.7 percent from December 2008 to December 2009. 7. What are economic resources? What categories do economists use to classify them? Why are resources also called factors of production? Why are they called inputs? 8. Why is money not considered to be a capital resource in economics? Why is entrepreneurial ability considered a category of economic resource, distinct from labor? What are the major functions of the entrepreneur? 10. Explain how (if at all) each of the following events affects the location of a country’s production possibilities curve: a. The quality of education increases. b. The number of unemployed workers increases. c. A new technique improves the efficiency of extracting copper from ore. d. A devastating earthquake destroys numerous production facilities. 5. Below is a production possibilities table for consumer goods (automobiles) and capital goods (forklifts): a. Show these data graphically. Upon what specific assumptions is this production possibilities curve based? b. If the economy is at point C, what is the cost of one more automobile? Of one more forklift? Which characteristic of the production possibilities curve reflects the law of increasing opportunity costs: its shape or its length? 1-1 Chapter 01 - Limits, Alternatives, and Choices c. If the economy characterized by this production possibilities table and curve were producing 3 automobiles and 20 fork lifts, what could you conclude about its use of its available resources? d. Is production at a point outside the production possibilities curve currently possible? Could a future advance in technology allow production beyond the current production possibilities curve? Could international trade allow a country to consume beyond its current production possibilities curve? 1-2
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