Chapter 1:

1
.Give three examples of important trade-offs that you face in your life.
Three important trade-offs I have faced in my life are getting a job or babysitting for my
sisters, continue you both soccer and volleyball or focus on school, and lastly save my money
or spend it.
2. What items would you include to figure out the op-opportunity cost of a vacation to
Disneyworld? The items I would include to figure out the opportunity cost of a vacation to
Disneyworld is the cost of the hotel, the cost of tickets and parking, the cost of food, the cost
to get a fast pass, and extra accessories I would want to buy.
3.
Water is necessary for life. Is the marginal benefit of a glass of water large or small? The
marginal benefit of a glass of water is small because water is plentiful and we all need it in
order to survive.
4.
Why should policymakers think about incentives?
Policymakers should think about incentives because many polices change the costs or
benefits that people face which then becomes an alter their behavior. When policy makers
fail to consider how their policies affect incentives and then they often end up with
unintended consequences.
5. Why isn’t trade among countries like a game with some winners and some losers? Trade isn’t
among countries like a game with some winners and some losers because trade between two
countries can make each country better off.
6.
What does the “invisible hand” of the marketplace do?
The households and firms interacting in markets act as if they are guided by an “invisible
hand” which leads them to desirable market act outcomes. The invisible hand usually leads
markets to allocate resources to maximize the size of economic pie.
7.
Explain the two main causes of market failure and give an example of each
Two main causes of market failure is externality and market power. Externality is the impact
of one person’s actions on well-being of a bystander. An example is of externality is pollution.
When the production of a good pollutes the air and create health problems for those who live
near factories. Market power refers to the ability of a single person or firm to unduly
influence market prices. An example of this is if everyone in town needs water but there is
only one well. The owner of the well is not subject to the rigorous competition.
8.
Why is productivity important?
Productivity is important because the growth rate of a nation’s productivity determines the
growth rate of its average income. With growth in productivity, an economy will be able to
produce and consume
9.
What is inflation and what causes it?
Inflation is an increase in the overall level of prices in the economy. Inflation is caused in
almost all cases is when large or president inflation, the culprit is the growth in the quantity
of money. When the government creates large quantities of nation’s money, the value of the
money falls.
10.
How are inflation and unemployment related in the short run? Inflation and unemployment
related in the short run is that many economics policies push inflation and unemployment in
opposite directions. They both start at high level, low levels, or someplace in between.

Multiple choice:
1. Economics is best defined as the study of
A. How society manages its scarce resources
2. Your opportunity cost of going to a movie is
B. the price of the ticket plus the cost of any soda and popcorn you buy at the theater.
3. A marginal change is one that
b. incrementally alters an existing plan
4. Adam Smith’s “invisible hand” refers to
b. the ability of free markets to reach desirable outcomes, despite the self-interest of
market participants.
5.Governments may intervene in a market economy in order to
d.All of the above.
6.If a nation has high and persistent inflation, the most likely explanation is
c.the government imposing excessive levels of taxation

Problems and Applications

1. Describe some of the trade-offs faced by each of the following
2. a family deciding whether to buy a new car. The family doesn’t know whether or not to
buy a new car maybe because they don’t have much money and the new expenses they
would have to deal with.
3. a member of Congress deciding how much to spend on national parks. I think most
tourist visit national parks because they are visiting a new place, but I think spending a
lot of money on them wouldn’t be necessary
4. c. a company president deciding whether to open a new factory. You have to know
whether or not your new company will have a good business or a low business income.
You also got to make sure the people in town will like it.
5. d.a professor deciding how much to prepare for class. You want to be ahead of time
and know what you are going to teach the class before it starts. So, having a plan will
help
6. e .a recent college graduate deciding whether to go to graduate school. If you want to
major in your career more it would be better to go to graduate school so it gives you
more opportunities for jobs.
2. You are trying to decide whether to take a vacation. Most of the costs of the vacation
(airfare, hotel, and for gone wages) are measured in dollars, but the ben-efits of the
vacation are psychological. How can you compare the benefits to the costs? You can
compare the benefits to the cost by seeing if the cation would really be worth it. Like
seeing how much will it cost to do how many activities for the amount of time you are
staying. You don’t want to spend than you are on vacation.
3. You were planning to spend Saturday working at your part-time job, but a friend asks you
to go skiing. What is the true cost of going skiing? Now suppose you had been planning to
spend the day studying at the library. What is the cost of going skiing in this case? Explain
If I worked part time on Saturday then I would go skiing after I was off work. The true cost
of skiing would be around 60-80 dollars. But if I was planning to spend the day at the library
studying then I would go study if I had a big exam coming up. To go skiing it would be the
same cost.
4. You win $100 in a basketball pool. You have a choice between spending the money now
and putting itaway for a year in a bank account that pays 5 percent interest. What is the
opportunity cost of spending the$100 now? You could waste the $100 dollars now and
buy yourself food or clothes or anything you need at the moment.
5. The company that you manage has invested $5 million in developing a new product, but
the development isnot quite finished. At a recent meeting, your sales-people report that
the introduction of competing products has reduced the expected sales of your new
product to $3 million. If it would cost $1 million to fin-ish development and make the
product, should you go ahead and do so? What is the most that you should pay to
complete development. If my new product is almost finished then I would go ahead
and put the money in the finish it up. I’m not going to leave an unfinished product
sitting there because it would just be a waste of time.
6. The Social Security system provides income for peopleover age 65. If a recipient of
Social Security decides to work and earn some income, the amount received inSocial
Security benefits is typically reduced.a.How does the provision of Social Security affect
people’s incentive to save while working?b.How does the reduction in benefits
associated with higher earnings affect people’s incentive to work past age 65?
A. The provision of the social security number affects people incentive to save while
working is it benefits an individual’s incentive to save for retirement.
B. The reduction in benefits associated with higher earnings affect people incentive to
work past age 65 is that it lowers the incentive not to work. So the more you work
the lower your after tax social security benefits will be.
7. A 1996 bill reforming the federal government’s anti-poverty programs limited many
welfare recipients toonly two years of benefits. How does this change affect the
incentives forworking?b.How might this change represent a trade-offbetween equality
and efficiency?
a. This changes the effect of the incentives for working by taxes going and people
earning less money.
b. This might change a represent of a trade-off between equality and efficiency
because it’s either it being equal to all people, and they are limited or earn the
same money. Also, people might just be greedy and want money.
8. Explain whether each of the following governmentactivities is motivated by a concern
about equality ora concern about efficiency. In the case of efficiency,discuss the type of
market failure involved.
a.regulating cable TV prices. I think these are more equality because everyone should
be able to have cable tv. It’s something we all need in our home
b. I think providing people with vouchers for poor people would depend on efficiency
because where is the government going to get the money and how much is the
government going to give them.
c. Prohibiting smoking in public places would be equality because I think the smokers
should have their place to smoke so kids don’t breathe the cigars in public places.
d. I think if they break the oil into smaller companies the brand will gin more money
because several companies have it so it’s easier for people to get.
e. I think imposing higher personal income tax rates on people with higher incomes is
fair because they are gaining more money than other people
f. Instituting laws against driving while intoxicated is equality because it should for
everyone since a lot of people would do that.
9. Discuss each of the following statements from the standpoints of equality and
efficiency.
a.“Everyone in society should be guaranteed the best healthcare possible. This should
be equality because everyone deserves healthcare no matter what because everyone
at some point needs care when they are hurt.
”b.“When workers are laid off, they should be able to collect unemployment benefits
until they find a new job. Yes they should because they still need to purchase stuff they
need to survive and not be able to suffer.
10. In what ways is your standard of living different from that of your parents or
grandparents when they were your age? Why have these changes occurred? My
parents and grandparents struggled with living conditions when they were my age.
They had could only eat meal a day and could shower once a week. The way I live now
is so different from what parents had to live through and I’m very thankful for all the
things I have. These changes have occurred because we have more knowledge with
technology and more opportunities for jobs.
11. Suppose Americans decide to save more of their in-comes. If banks lend this extra saving
to businesses, which use the funds to build new factories, how might his lead to faster
growth in productivity? Who do you suppose benefits from the higher productivity? Is
society getting a free lunch. I think if the bank lends the extra saving to business which
funds ro build new factories might lead to faster growth in productivity because its
more factories so more money for the businesses.
12. During the Revolutionary War, the American colonies could not raise enough tax
revenue to fully fund the war effort; to make up the difference, the colonies decided to
print more money. Printing money to cover expenditures is sometimes referred to as an
“inflation tax.” Who do you think is being “taxed” when more money is printed? Why?
I think who is being taxed when more money is printed is the people who are doing it
because they are the ones who are printing money to pay things but in the end they
will be taxed more.
Chapter 2:
Questions for Review:
1. How is economics a science? Economics is a science because they devise theories,
collect data, and then analyze these data in an attempt to verify or refute their
theories
2. Why do economists make assumptions? Economist make assumptions because
they are to better understand consumer and business behavior when making
economic decisions.
3. Should an economic model describe reality exactly?
No economic can be a perfect description of reality
4. Name a way that your family interacts in the factor mar-ket and a way that it
interacts in the product market
A way that my family interacts in the factor market is my family is the buyer of the
product and the firms are the sellers. My family provides the inputs that firms use
to produce goods and services
5. Name one economic interaction that isn’t covered by the simplified circular-flow
diagram
One economic interaction that isn’t covered by the simplified circular-flow is
taxation.
6. Draw and explain a production possibilities frontier for an economy that produces
milk and cookies. What happens to this frontier if disease kills half of the economy’s
cows?
If the disease kills half of the economy’s cows then the economy will have a big
struggle on producing and selling milk. Milk would be limited and sell quicker
because everyone would want to get milk when they have the chance too.
7. Use a production possibilities frontier to describe the idea of “efficiency.
A production is water because everyone needs water in order to survive and if
water was limited then there would be a big struggle with finding or getting water.
Everyone would go crazy if water was selling so quickly and some many not get
some.
8. What are the two subfields into which economics is divided? Explain what each
subfield studies.
The field of economics is traditionally divided into two broad subfields.
Microeconomics is the study of how households and firms make decisions and
how they interact in specific markets. Macroeconomics is the study of economy-
wide phenomena.
9. What is the difference between a positive and a nor-mative statement? Give an
example of each
The difference between positive and normative statements is how we judge their
validity. An example of a positive statement Is exaiming evidence and a normative
statement is involving judgement.
10. Why do economists sometimes offer conflicting advice to policymakers?
 Economists sometimes offer conflicting advice to policymakers because economist
may disagree about the validity of alternative positive theories about how the world
works.

Multiple choice:
1. An economic mode is
c. a simplified representation of some aspect of the economy
2. The circular-flow diagram illustrates that, in markets for the factors of production
a. households are sellers, and firms are buyers.
3. A point inside the production possibilities frontier is
a. efficient, but not feasible
4. An economy produces hot dogs and hamburgers. If a discovery of the remarkable
health benefits of hot dogs were to change consumers’ preferences, it would
c. move the economy along the production possibilities frontier.
5. All of the following topics fall within the study of microeconomics EXCEPT
d. the influence of the government budget deficit on economic growth
6. Which of the following is a positive, rather than a normative, statement?
a. Law X will reduce national income

Problems and Application:

1. Draw a circular-flow diagram. Identify the parts of the model that correspond to the flow of
goods and services and the flow of dollars for each of the following activities. 
a.Selena pays a storekeeper $1 for a quart of milk. 
Flow of goods and services: Quart of milk from the store to Selena. 
Flow of dollars: $1 from Selena to the storekeeper. 
b.Stuart earns $4.50 per hour working at a fast-food restaurant. 
Flow of goods and services: Stuart's labor (fast-food service). 
Flow of dollars: $4.50 from the fast-food restaurant to Stuart. 
c.Shanna spends $30 to get a haircut. 
Flow of goods and services: Haircut service from the barber to Shanna. 
Flow of dollars: $30 from Shanna to the barber. 
d.Salma earns $10,000 from her 10 percent ownership of Acme Industrial. 
Flow of goods and services: Not applicable (ownership does not involve the exchange of
goods). 
Flow of dollars: $10,000 in dividends from Acme Industrial to Salma. 
2. Imagine a society that produces military goods and consumer goods, which we’ll call “guns”
and “butter.”
a.Draw a production possibilities frontier for guns and butter. Using the concept of opportunity
cost,explain why it most likely has a bowed-out shape. As an economy reallocates resources
from producing one good to the other, the opportunity cost increases because resources are
better suited for the initial production. 
b.Show a point that is impossible for the economy to achieve. Show a point that is feasible but
inefficient. 
Impossible Point: Any point outside the PPF (beyond its limits) is impossible to achieve.
Inefficient Point: A point inside the PPF represents inefficient resource allocation,
indicating that more of both goods can be produced without sacrificing either. 
c.Imagine that the society has two political parties, called the Hawks (who want a strong
military) and the Doves (who want a smaller military). Show a point on your production
possibilities frontier that the Hawks might choose and a point that the Doves might choose. 
Hawks might choose a point favoring more guns (strong military), while Doves might choose a
point favoring more butter (smaller military). 
d.Imagine that an aggressive neighboring country reduces the size of its military. As a result,
both the Hawks and the Doves reduce their desired production of guns by the same amount.
Which party would get the bigger “peace dividend,” measured by the increase in butter
production? Explain. 
If both of the Hawks and Doves reduce desired gun production, the peace dividend
(increase in butter production) would likely be similar for both parties since they jointly
agree to reduce military production. 
3.The first principle of economics discussed in Chapter 1is that people face trade-offs. Use a
production possibilities frontier to illustrate society’s trade-off between two “goods”—a clean
environment and the quantity off industrial output. What do you suppose determines the
shape and position of the frontier? Show what happens to the frontier if engineers develop a
new way of producing electricity that emits fewer pollutants. 
The PPF's position and shape are influenced by things like resource availability,
technological advancements, and the harmony between industrial output and
environmental protection. The PPF will shift outward if engineers create a new, more
environmentally friendly method of generating electricity, enabling increased industrial
productivity without compromising environmental quality.
4. 4.An economy consists of three workers: Larry, Moe, and Curly. Each works 10 hours a day
and can produce two services: mowing lawns and washing cars. In an hour, Larry can either
mow one lawn or wash one car; Moe can either mow one lawn or wash two cars; and Curly can
either mow two lawns or wash one car. a.Calculate how much of each service is produced
under the following circumstances, which we label 
A, B, C, and D:•All three spend all their time mowing lawns. (A) Larry: 10 lawns, Moe: 10
lawns, Curly: 10 lawns. 
•All three spend all their time washing cars. (B) Larry: 20 cars, Moe: 20 cars, Curly: 10
cars. 
•All three spend half their time on each activity. (C) Larry: 5 lawns, 10 cars; Moe: 5 lawns,
10 cars; Curly: 5 lawns, 10 cars. 
•Larry spends half his time on each activity, while Moe only washes cars and Curly only
mows lawns. (D) Larry: 5 lawns, 5 cars; Moe: 0 lawns, 10 cars; Curly: 10 lawns, 0 cars. 
b.Graph the production possibilities frontier for this economy. Using your answers to part
(a), identify points A, B, C, and D on your graph. 
c.Explain why the production possibilities frontier has the shape it does. 
The PPF has a bowed-out shape because resources are not equally efficient in producing
both goods. As an economy shifts resources from one activity to another, the opportunity
cost increases because the resources are less suitable for the second activity. 
d.Are any of the allocations calculated in part(a)inefficient? Explain. 
Yes because the allocations calculated in parts A, B, and D are inefficient because they are
inside the PPF. These points represent underutilization of resources, and more of at least
one good could be produced without sacrificing the other. 
5.Classify the following topics as relating to microeconomics or macroeconomics. 
a.a family’s decision about how much income to save 
Microeconomics. 
b.the effect of government regulations on auto emissions 
Microeconomics. 
c.the impact of higher national saving on economic growth 
Macroeconomics 
d.a firm’s decision about how many workers to hire 
Microeconomics 
e.the relationship between the inflation rate and changes in the quantity of money 
Macroeconomics 
6.Classify each of the following statements as positive or normative. Explain. 
a.Society faces a short-run trade-off between inflation and unemployment.
Positive. Factual statement 
b.A reduction in the rate of money growth will reduce the rate of inflation.
Positive. Factual statement 
c.The Federal Reserve should reduce the rate of money growth.
Normative. Is a recommendation 
d.Society ought to require welfare recipients to look for jobs
Normative. Is a judgement on values. 
.e.Lower tax rates encourage more work and more saving
Positive. Realistic situation. 

Chapter 3:

Questions for review:

1. Under what conditions is the production possibilities frontier linear rather than bowed
out. When an economy can switch resources between two products without the
opportunity costs rising, this is known as a linear PPF. When both items have constant
opportunity costs, which means that the resources needed to manufacture one good
may simply be employed to make the other, this is how it usually works.
2. Explain how absolute advantage and comparative advantage differ. Comparative
advantage is used when describing the opportunity costs faced by two producers.
Absolute advantage is used when comparing the productivity of one person, firm, or
nation to that of another. 
3. Give an example in which one person has an absolute advantage in doing something but
another person has a comparative advantage. Ben and Alex mow lawns and wash cars.
Alex has an absolute advantage in both activities because he can perform both tasks
faster. Ben has a comparative advantage in mowing lawns because his opportunity
cost of mowing is lower. 
 4. .Is absolute advantage or comparative advantage more important for trade? Explain
your reasoning using the example in your answer to Question 3. Comparative
advantage is more important for trade because it focuses on the opportunity cost of
producing one good over another. Trade allows entities to specialize in producing the
goods or services where they have a comparative advantage, resulting in greater
overall production efficiency and mutually beneficial trade relationships. 
5. If two parties trade based on comparative advantage and both gain, in what range must
the price of the trade lie? The trade price must be higher than the opportunity cost for
the exporter and lower than the opportunity cost for the importer to make the trade
mutually beneficial. 
6. Why do economists oppose policies that restrict trade among nations? Economists
generally oppose trade restrictions among nations because such restrictions, like
tariffs or import quotas, can lead to several negative economic consequences. They
include reduced efficiency, higher prices, and less economic growth. 

Multiple Choice:
1. 1.In an hour, David can wash 2 cars or mow 1 lawn, and Ron can wash 3 cars or mow 1
lawn. Who has the absolute advantage in car washing, and who has the absolute
advantage in lawn mowing? 
2. a.David in washing, Ron in mowing. 
3. b.Ron in washing, David in mowing. 
4. c.David in washing, neither in mowing. 
5. d.Ron in washing, neither in mowing. 

2. Once again, in an hour, David can wash 2 cars or mow 1 lawn, and Ron can wash 3
cars or mow 1 lawn. Who has the comparative advantage in car washing, and who has
the comparative advantage in lawn mowing? 
a.David in washing, Ron in mowing. 
b.Ron in washing, David in mowing. 
Ron can wash more cars than David but the amount of lawns is the same. 
c.David in washing, neither in mowing. 
d.Ron in washing, neither in mowing. 

3.When two individuals produce efficiently and then make a mutually beneficial trade based on
comparative advantage, 
a.they both obtain consumption outside their production possibilities frontier. 
b.they both obtain consumption inside their production possibilities frontier. 
c.one individual consumes inside her production possibilities frontier, while the other consumes
outside hers. 
d.each individual consumes a point on her own production possibilities frontier. 
Consume a point when trade occurs 

4.Which goods will a nation typically import? 

a.those goods in which the nation has an absolute advantage 
b.those goods in which the nation has a comparative advantage 
c.those goods in which other nations have an absolute advantage. 
d. those goods in which other nations have a comparative advantage 
More mutually beneficial. 
5.Suppose that in the United States, producing an aircraft takes 10,000 hours of labor and
producing a shirt takes 2 hours of labor. In China, producing an aircraft takes 40,000 hours of
labor and producing a shirt takes 4 hours of labor. What will these nations trade? 
a.China will export aircraft, and the United States will export shirts. 
b.China will export shirts, and the United States will export aircraft. 
Both have the comparative advantage in the goods they export 
c.Both nations will export shirts. 
d.There are no gains from trade in this situation 
.6.Mark can cook dinner in 30 minutes and wash the laundry in 20 minutes. His roommate takes
half as long to do each task. How should the roommates allocate the work? 
a.Mark should do more of the cooking based on his comparative advantage. 
b.Mark should do more of the washing based on his comparative advantage 
His roomate will do the cooking quicker 
.c.Mark should do more of the washing based on his absolute advantage 
.d.There are no gains from trade in this situation 

Problems and Applictions:

1.Maria can read 20 pages of economics in an hour. She can also read 50 pages of sociology in
an hour. She spends 5 hours per day studying. 
a.Draw Maria’s production possibilities frontier for reading economics and sociology. 

b.What is Maria’s opportunity cost of reading 100 pages of sociology? 

The opportunity cost of reading 100 pages of sociology is the number of economics pages
she could have read instead. Her opportunity cost is 4 pages of economics. 
2.American and Japanese workers can each produce 4 cars a year. An American worker can
produce 10 tons of grain a year, whereas a Japanese worker can produce 5 tons of grain a year.
To keep things simple, assume that each country has 100 million workers. 
a.For this situation, construct a table analogous to the table in Figure 1. 
  Cars  Grain (tons) 
U.S.  400M  1000M 
Japan  400M  500M 
 
b.Graph the production possibilities frontiers for the American and Japanese economies. 
  
c.For the United States, what is the opportunity cost of a car? Of grain? For Japan, what is the
opportunity cost of a car? Of grain? Put this information in a table analogous to Table 1. 
Opportunity Costs (per 100 million workers): 
 U.S.: 1 car = 2.5 tons of grain 
 Japan: 1 car = 10 tons of grain 
d.Which country has an absolute advantage in producing cars? In producing grain? 
The countries have the same absolute advantage in producing cars. The US has the
absolute advantage in producing grain. 
e.Which country has a comparative advantage in producing cars? In producing grain? 
 U.S.: Comparative advantage in producing grain (lower opportunity cost). 
 Japan: Comparative advantage in producing cars (lower opportunity cost). 
f.Without trade, half of each country’s workers produce cars and half produce grain. What
quantities of cars and grain does each country produce? 
U.S.: 200 million cars and 5000 million tons of grain 
Japan: 200 million cars and 1000 million tons of grain 
g.Starting from a position without trade, give an example in which trade makes each country
better off. 
The US should trade grain because they have a lower opportunity cost, while Japan should
trade cars as they have a lower opportunity cost in that. Both countries would benefit from
this trade. 
3.Pat and Kris are roommates. They spend most of their time studying (of course), but they leave
sometime for their favorite activities: making pizza and brewing root beer. Pat takes 4 hours to
brew a gallon of root beer and 2 hours to make a pizza. Kris takes 6 hours to brew a gallon of
root beer and 4 hours to make a pizza 
.a.What is each roommate’s opportunity cost of making a pizza? Who has the absolute advantage
in making pizza? Who has the comparative advantage in making pizza? 
Pat has the opportunity cost of 2 hours of root beer production when making a pizza. Kris
has the opportunity cost of 4 hours of root beer brewing when making a pizza. Pat has the
absolute advantage. Pat also has the comparative advantage in making pizza. 
b.If Pat and Kris trade foods with each other, who will trade away pizza in exchange for root
beer? 
Pat would trade pizza while Kris would trade root beer. This is because Pat has the
comparative advantage and Kris has a higher opportunity cost for making pizzas. 
c.The price of pizza can be expressed in terms of gallons of root beer. What is the highest price
at which pizza can be traded that would make both roommates better off? What is the lowest
price? Explain. 
A gallon of root beer should be worth around three pizzas. One pizza is worth 1/3 gallon of
root beer. This is because three pizzas and a gallon of root beer both take around 6 hours
to make. 
4.Suppose that there are 10 million workers in Canada and that each of these workers can
produce either 2 cars or 30 bushels of wheat in a year. 
a.What is the opportunity cost of producing a car in Canada? What is the opportunity cost of
producing a bushel of wheat in Canada? Explain the relationship between the opportunity costs
of the two goods. 
Opportunity cost of producing one car is half a year and about 150 million bushels of
wheat. The opportunity cost of producing a bushel of wheat is around 12 days, and around
670,000 cars. Canada has a much larger opportunity cost when producing cars, meaning
that they have a comparative advantage when producing wheat. 
b.Draw Canada’s production possibilities frontier. If Canada chooses to consume 10 million cars,
how much wheat can it consume without trade? Label this point on the production possibilities
frontier. 

 
c.Now suppose that the United States offers to buy 10 million cars from Canada in exchange for
20 bushels of wheat per car. If Canada continues to consume 10 million cars, how much wheat
does this deal allow Canada to consume? Label this point on your diagram. Should Canada
accept the deal?  
Canada is allowed to consume 200 million bushels of wheat, more than they normally
would. Canada’s acceptance of the offer depends on the demand of the country. If Canada
values cars more than wheat, the deal should not be taken. But if Canada needs the extra
wheat, the deal should be accepted. 
5.England and Scotland both produce scones and sweaters. Suppose that an English worker can
produce 50 scones per hour or 1 sweater per hour. Suppose that a Scottish worker can produce 40
scones per hour or 2 sweaters per hour. 
a.Which country has the absolute advantage in the production of each good? Which country has
the comparative advantage? 
England has the absolute advantage in scones while Scotland has the absolute advantage in
sweaters. England has the comparative advantage in scones and Scotland has the
comparative advantage in sweaters. 
b.If England and Scotland decide to trade, which commodity will Scotland trade to England?
Explain. 
Scotland will trade sweaters to England. They have the comparative and absolute
advantage in that item, making it beneficial for them. 
c.If a Scottish worker could produce only 1 sweater per hour, would Scotland still gain from
trade? Would England still gain from trade? Explain. 
Scotland and England would still gain from this trade because the opportunity cost of
Scotland making a sweater is still lower than England’s. This means the comparative
advantages are the same. 
6.The following table describes the production possibilities of two cities in the country of
Baseballia :Pairs of Red Socks per Worker per Hour: Boston:3 Chicago:2 Pairs of White
Socks per Worker per Hour: Boston:3 Chicago:1 
a.Without trade, what is the price of white socks(in terms of red socks) in Boston? What is the
price in Chicago? 
In Boston, one white sock is worth one red sock. In Chicago, one white sock is worth ½ red
socks. 
b.Which city has an absolute advantage in the production of each color sock? Which city has a
comparative advantage in the production of each color sock? 
Boston has the absolute advantage in white and red socks. Chicago has the comparative
advantage in red socks while Boston has the comparative advantage in white socks. 
c.If the cities trade with each other, which color sock will each export? 
Boston will export white socks and Chicago will export red socks. 
d.What is the range of prices at which trade can occur? 
The price of one pair of white socks should be 1 or 2 red socks. 
7.A German worker takes 400 hours to produce a car and 2 hours to produce a case of wine. A
French worker takes 600 hours to produce a car and X hours to produce a case of wine. 
a.For what values of X will gains from trade be possible? Explain. 
Any number that is not 3. This would give France a comparative advantage and make
trade beneficial. 
b.For what values of X will Germany export cars and import wine? Explain. 
Germany will export cars and import wine for values less than 3. This is because this trade
is beneficial to both France and Germany. 
8.Suppose that in a year an American worker can produce 100 shirts or 20 computers and a
Chinese worker can produce 100 shirts or 10 computers. 
a.For each country, graph the production possibilities frontier. Suppose that without trade the
workers in each country spend half their time producing each good. Identify this point in your
graphs. 

 
b.If these countries were open to trade, which country would export shirts? Give a specific
numerical example and show it on your graphs. Which country would benefit from trade?
Explain. 
China would export shirts because they have the comparative advantage. They make 100
shirts for every 10 computers while America makes 100 shirts for every 20 computers. Both
countries would benefit.  
c.Explain at what price of computers (in terms of shirts) the two countries might trade. 
China would trade 1 computer for 10 shirts. America would trade 1 computer for 5 shirts. 
d.Suppose that China catches up with American productivity so that a Chinese worker can
produce 100 shirts or 20 computers. What pattern of trade would you predict now? How does
this advance in Chinese productivity affect the economic wellbeing of the citizens of the two
countries? 
There would no longer exist the need for trade. Trade will only occur if certain demands
are met. Citizens of China and America will have similar well-beings. 
9.Are the following statements true or false? Explain in eachh case. 
a.“Two countries can achieve gains from trade even if one of the countries has an absolute
advantage in the production of all goods.” 
True: Benefits from trade come from having a comparative advantage for a specific set of
goods. As long as a country has a comparative advantage for a good, both countries will
benefit. 
b.“Certain very talented people have a comparative advantage in everything they do.” 
False: Comparative advantages are based on opportunity costs, not talent or skill. Some
talented people will have higher opportunity costs than others. 
c.“If a certain trade is good for one person, it can't be good for the other one.” 
False: everyone has different demands and needs for different goods. 
d.“If a certain trade is good for one person, it is always good for the other one.” 
False: Not everyone has the same needs, and trade is not beneficial in some cases. 
e.“If trade is good for a country, it must be good for everyone in the country.” 
While trade can bring overall economic benefits to a country by increasing efficiency the
benefits may not be equally distributed among all individuals 

Chapter 4:

Questions for Review:

1.What is a competitive market? Briefly describe a typeof market that isnotperfectly
competitive?
A competitive market is one in which there are many buyers and many sellers so
that each has a negligible impact on the market price. If a seller were to change
their price, their buyers are likely to switch sellers. No single seller can impact the
market price in a competitive market. Monopolies and oligopolies can create
imperfect competitive markets. Along with this, imperfect competitive markets
can be caused by only having one seller where this seller sets the price, such as
a local television station.
2. What are the demand schedule and the demandcurve, and how are they related? Why does
the de-mand curve slope downward? A demand schedule is a table that shows the
relationship between the price of a good and the quantity demanded, while a demand curve
is a graph of that same information. Because a lower price increases the quantity demanded,
the demand curve slopes downward.
3. Does a change in consumers’ tastes lead to a move-ment along the demand curve or a shift
in the demandcurve? Does a change in price lead to a movementalong the demand curve or a
shift in the demandcurve? Explain your answers. A change consumers' taste will only
shift the demand curve, while a change in the price of the good itself will
represent a movement along the demand curve. A curve shifts when there is a
change in a relevant variable that is not measured on either axis. Because price is
on the vertical axis, a change in price represents a movement along the demand
curve.
4. Popeye’s income declines, and as a result, he buysmore spinach. Is spinach an inferior or a
normalgood? What happens to Popeye’s demand curve forspinach?
In this case, spinach is an inferior good. A rise in quantity demanded at any given price will
shift the demand curve to the right
5. What are the supply schedule and the supply curve,and how are they related? Why does the
supply curveslope upward? The supply schedule and supply curve are a table and graph
respectively that show the relationship between the price of a good and the quantity
supplied. The supply curve slopes upward because a higher price means a great quantity
supplied.
6. Does a change in producers’ technology lead to amovement along the supply curve or a shift
in the sup-ply curve? Does a change in price lead to a movementalong the supply curve or a
shift in the supply curve? The supply curve is very similar to the demand curve in that
anything not measured on the axis (technology, input prices, expectations, number of sellers)
will result in a shift in the supply curve. At the same time a change in price (on the vertical
axis) will results in movement along the supply curve.
7. Define the equilibrium of a market. Describe the forcesthat move a market toward its
equilibrium, Equilibrium of a market is where supply and demand have been brought into
balance. Equilibrium of a market is where supply and demand have been brought
into balance. The activity of many buyers and sellers automatically pushes the
market price toward the equilibrium price. Increase in demand and shortage of
supply can also move the equilibrium price, but how quickly equilibrium is
reached thereafter varies from market to market.

Multiple choice
1. A change in which of the following will NOT shift the demand curve for hamburgers?
b.the price of hamburgers
 2. An increase in ________ will cause a movement along a given demand curve, which
is called a change in________.
b.supply, quantity demanded
3. Movie tickets and DVDs are substitutes. If the priceof DVDs increases, what happens
in the market for movie tickets
b.The supply curve shifts to the right.
4. The discovery of a large new reserve of crude oil willshift the ________ curve for
gasoline, leading to a________ equilibrium price.
b.supply, lower
5. f the economy goes into a recession and incomes fall,what happens in the markets for
inferior goods?
a.Prices and quantities both rise
6. Which of the following might lead to an increase in theequilibrium price of jelly and a
decrease in the equilib-rium quantity of jelly sold
c.an increase in the price of grapes, an input into jelly