Answers to Exercises

1. The concept ignored is opportunity costs. If the society is operating along a PPC, then it is impossible to have increases in all goods and services. It is impossible to have more and better health, education, infrastructure, and other things without giving up something else.

2. If we assume that Janine's and Robert's opportunity costs can be measured by their salaries, then Robert's opportunity cost of standing in line is less than Janine's. We could, however, specify that in neither case will Janine or Robert lose any income by standing in line. In this case, their opportunity costs depend on what else they could be doing. We do not have sufficient information to evaluate whose opportunity costs are higher in this case.

3. If the U.S. economy was at full employment, it was already on its PPC. Johnson was ignoring the fact that once an economy is on the PPC, more of one good cannot be produced without producing less of another. His policies would cause the economy to produce at an unsustainable level.

4 a. 10 hours working; $50 income
b. No
c. 10 hours studying; 1.0 GPA

5. a. A person's comparative advantage is the activity in which that person has the lowest opportunity cost.
b. No one can have a comparative advantage in all activities because comparative advantage is the relative or "comparative" opportunity costs.
c. If the issue is who should study full-time and who should work full-time, then the second individual, described in (5) should work while the individual described in (4) should study full-time. Otherwise it depends where on the PPC both individuals are located since the slopes of the PPC's are constant.

6. No. In both cases the next best opportunity to playing tennis on Saturday morning is relaxing around the house.

7.

a. The marginal opportunity cost of 25 additional units of health care are: A to B 10 units of all other goods, B to C 20 units of all other goods, C to D 30 units of all other goods, D to E 40 units of all other goods
b. The opportunity cost of combination C is all other combinations.
c. Producing at combination A for nation 1 means producing 100 units of other goods; combination E means producing 100 units of health care. For nation 2, combination A is 50 units of all other goods and combination E is 65 units of health care. It is more costly for nation 2 to produce only other goods than it is for nation 1. For nation 2, 65/50 is the cost, while for nation 1, 100/100 is the cost. Thus, nation 2 should specialize in health care and nation 1 in all other goods.

8. Assuming that each can choose to work more hours or to spend time negotiating the price of a car, then the professor would be expected to spend more time negotiating.

9. There is an opportunity cost to everything. The time spent at lunch has a cost; you could be doing something else.

10. You look at the opportunity cost of spending another 45 minutes. You can remain in line or do something else. Your decision to spend more time in line has nothing to do with the time you have already spent in line. You may say, "I've already spent 30 minutes, I will lose that time if I do not remain here." However, you have lost that 30 minutes no matter what you do.

11. Having paid the $600 fee at the beginning of the semester means that the opportunity cost of eating any quantity of food does not include the price of the food. However, a fee per quantity means that the opportunity cost of consuming more food includes the price of that food. Because there are lower opportunity costs under the fixed fee scheme, the average quantity of food consumed will be higher under this scheme.

12. You may do everything better than others, but to do one thing you have to forgo doing other things and this opportunity lost is what specialization is all about. Each person specializes in the activity in which his or her opportunity cost is lowest. If you take one hour to cook a gourmet meal but could also solve three math problems in that hour, while a friend takes two hours to cook the meal or solve five math problems, you are "better at everything." But your gourmet meal costs you three math problems whereas your friend's one meal costs five math problems. Your friend is relatively better off specializing in cooking.

13. The policy is an attempt to work against the idea of specialization according to comparative advantage. The educated people were not able to use their training. As a result, China made a move from a point on its PPC to a point inside its PPC, which reduced its total output. China's output fell so much that the policy was finally abandoned even in the face of strong political pressures to maintain it.

14. The focus at the elementary level is on the development of skills to be used the rest of the individual's life. The knowledge of a specific subject is less important than the continuity of the individual's development. As the student ages, the subject matter becomes increasingly important. The more important the knowledge of subject matter becomes relative to general skills, the more specialized the instructor must be. In the elementary schools, specialization in general development and general skills occurs; in college and graduate school, specialization according to specific subject matter occurs.

15. Even though most of these officials and corporate executives know how to drive, the government and the corporations believe that their time is better spent concentrating on their positions rather than on driving. The executives and government officials specialize in their managerial expertise, while the chauffeurs specialize in driving. The result should be greater output.

Answers to Study Guide Homework

Any answer could be correct. The key mistake to watch for is listing more than one possible use for the same hours on Friday night.

Production possibilities curve

3. a. Bob's opportunity cost of one bird is two bookends.
b. Bill's opportunity cost of one bird is three bookends.
c. Bob has the lower opportunity cost, so Bob has a comparative advantage.

Through specialization, Bob and Bill together can produce more output in a week.

5a. Shopping at the no-frills store yields better prices but is more time-consuming. The Shorts have a higher income but less time to spend with their children. They are likely to perceive the opportunity cost of shopping at the no-frills store to be high because it is so time-consuming. Also, because their income is higher, they are likely to opt for the more expensive superstore. Mrs. Long has more time with her children, so she is likely to perceive the opportunity cost of shopping at the no-frills store as lower. Also, the time spend is worth the lower prices to her because her income is lower.

b. The Longs are more likely to clip coupons and buy sale items because they have more time and less money to spend.

c. The Shorts are more likely to pay the higher prices at convenience stores because they have more income to spend, but less time.

Answers to Internet Exercise

The purpose of this exercise is to introduce students to information available regarding U.S. international trade. By accessing the Economic Report of the President, students will be able to examine summary data regarding U.S. imports and exports. This exercise will also reinforce graphing skills learned in the Appendix to Chapter 1.

Based on 1996 information, Western Europe sells the most to the U.S.

Based on 1996 information, Western Europe purchases the most from the U.S.

Industrial countries will have different opportunity costs. Specialization and trade enable nations to acquire combinations of goods that lie beyond their own resource capabilities. The concept of comparative advantage applies to industrial nations as well as developing nations. Specialization according to comparative advantage followed by trade allows nations to acquire more of the goods they want.