Lecture 1 Practice Question Answers
From Browning and Zupan:
1.5. Answered in book. Also, RAND could rent the land out instead of selling it.
1.10. If Hughes uses the land to produce military aircraft, the opportunity cost is the
value the same land would have in its next most valuable use. The next most valuable
use might be producing commercial aircraft. Or it might be residences or office space.
1.11. (a) Research production exhibits decreasing opportunity cost. The first 150 units
of research cost (200 - 150) = 50 units of teaching. The next 150 units of research
cost (150 - 110) = 40 units of teaching. The next 150 units of research cost (110 75) = 35 units of teaching. Etc. So it turns out that research production exhibits
decreasing opportunity cost. This is a very unusual case. (b) See chart below. (c)
To go from point B to point C, the university would give up 150 units of research
to get 25 more units of teaching. So the opportunity cost of teaching in this range
is 150/25 = 6 units of research per unit of teaching. (d) To go from point C to point
B, the university would give up 25 units of teaching to get 150 more units of
research. So the opportunity cost of research in this range is 25/150 = 0.167 units
of teaching per unit of research. (e) If the university’s main laboratory burned
down, and the lab was used only for research, then the PPF would keep the same
endpoint for teaching (200), but the endpoint for research would get smaller (say,
from 900 to 500). This would make the curve steeper. (I’m not including a graph
of this one.) (f) If all campus resources were cut in half, the whole PPF would
move inward, but it would not become flatter or steeper. (g) The university
president says that point B is better than point F because 750 + 20 = 770, and this is
larger than 150 + 150 = 300. This reasoning is incorrect, because to add up
teaching and research like that, you have to assume that research and teaching are
equally valuable.
PPF for Teaching and Research
250
200
150
Teaching
Points outside curve
= impossible points
(unattainable production)
Teaching
100
Points on curve
= technically efficient points
(effective use of resources)
Points inside curve
= technically inefficient points
(unemployed resources)
50
0
0
100
200
300
400
500
600
700
800
900
1000
Research
Additional questions:
1. The PPF on the left displays the law of increasing opportunity cost; the PPF on the
right does not. Notice that the two goods on the left require rather different resources,
whereas the two goods on the right are very similar. (There are many other possible
examples, of course.)
food
trucks
housing
cars
2. (a) The opportunity cost of one feature is three short films. The opportunity cost of
one short film is 1/3 of a feature.
(b) Here is the PPF for this situation:
features
10
30
short films
(c) This PPF is a straight line, because the trade-off between features and shorts is
constant. The usual PPF is bowed outward because some resources are more suited
to the production of one good than another (the law of increasing opportunity cost).
But the resources used for making films are probably equally suitable for both
features and shorts, so a straight-line PPF makes sense in this case.
3. The labor theory of value says that the market value of a good is equal to the amount
of labor that went into producing it. Here are two problems with the labor theory of
value: First, it is possible to spend a great deal of labor on something that nobody
wants to buy (like really bad artwork), which means more labor does not necessarily
make something more valuable. Second, the labor theory of value cannot explain the
market value (or wage) of labor itself.
4. (a) Aki has the absolute advantage in sushi (because 6 > 2) and also the absolute
advantage in tempura (because 10 > 6). (b) Aki has the comparative advantage in
sushi, because Aki's opportunity cost of one sushi is 5/3 tempura, while Miko's
opportunity cost of one sushi is 3 tempura, and 5/3 < 3. Miko has the comparative
advantage in tempura, because Aki's opportunity cost of one tempura is 3/5 sushi,
while Miko's opportunity cost of one tempura is 1/3 sushi, and 1/3 < 3/5. (c) If both
split their time equally between sushi and tempura, they would get 1/2(6) + 1/2(2) = 4
sushi and 1/2(10) + 1/2(6) = 8 tempura. (d) See the PPF below. The kink occurs
when they perfectly specialize according to comparative advantage. (e) See the PPF
below. The point from part c, marked with an X, is technically inefficient.
sushi
8
6
4
X
6
8
16
tempura
5. (a) In half a day, Cosmo will produce 1 graphic and 4 html pages, while Deke will
produce 3 graphics and 4 html pages. The total is 4 graphics and 8 html pages.
(b) Deke’s opportunity cost of 1 graphic is or 4/3 of an html page. (Why? Because
for Deke, 6 graphics correspond to 8 html pages. Dividing by 6, we find that 1
graphic corresponds to 4/3 of an html page.) Cosmo’s opportunity cost of 1 graphic
is 4 html pages. Since Deke has the lower opportunity cost of graphics, he has a
comparative advantage in graphics, so that’s what he should specialize in. Similarly,
Cosmo has a comparative advantage in html pages, so that’s what he should
specialize in.
(c) Here is the PPF for Deke and Cosmo:
graphics
8
6
4
X
8
16
html pages
(d) Point X in the graph above results from both workers splitting their time between
the two activities. Because X is inside the PPF, it is technically inefficient.
6. (a) The downward slope indicates the existence of trade-offs. (b) The outwardbowed shape shows the law of increasing opportunity cost. (c) Points inside the
curve are technically inefficient. (d) Points outside the curve are impossible with
current resources and technology.
7. (a) B is Pareto-superior to A. A and C are Pareto-incomparable. B and C are Paretoincomparable. Both B and C are Pareto-efficient, since neither one of them is Paretoinferior to anything else. (b) B is KH-superior to A. C is KH-superior to A. C is
KH-superior to B. Only C is KH-efficient.
8. Using the Pareto criterion, we can only say that the two policies are Paretoincomparable. (Some people are better off with one policy, and some people are
better off with the other.) Using the K-H criterion, having no tariff is K-H superior to
having the tariff. (If the tariff is implemented, the losses to the losers [foreign
producers and consumers] exceed the gains to the gainers [the domestic producers].)