© 2013 Pearson
The Economic Problem
3
CHECKPOINTS
© 2013 Pearson
Checkpoint 3.1
Problem 1
Checkpoint 3.2
Checkpoint 3.3
Problem 1
Problem 1
Problem 2
Problem 2
Clicker
version
Problem 2
Problem 3
Clicker
version
In the News
Problem 4
Clicker
version
In the News
Clicker
version
Checkpoint 3.4
Problem 1
Problem 2
In the News
© 2013 Pearson
CHECKPOINT 3.1
Practice Problem 1
Table 1 sets out the
production possibilities of a
small Pacific island economy.
Draw the economy’s PPF.
© 2013 Pearson
CHECKPOINT 3.1
Solution
The PPF is the boundary
between combinations of
goods that are attainable and
unattainable.
The figure shows the
economy’s PPF.
The graph plots each row of
the table as a point with the
corresponding letter.
© 2013 Pearson
CHECKPOINT 3.1
Practice Problem 2
The figure shows an
economy’s production
possibilities. Which points are
attainable?
© 2013 Pearson
CHECKPOINT 3.1
Solution
The PPF is the boundary between
combinations of goods that are
attainable and unattainable.
Any point on the PPF or below
(inside) the PPF is attainable.
Any point outside the PPF is
unattainable.
Point A, B, C, D and E are
attainable.
Point F and G are unattainable.
© 2013 Pearson
CHECKPOINT 3.1
Study Plan Problem
We can produce all combinations ______.
A. on the PPF but not inside or
outside the PPF
B. inside the PPF but not on the
PPF or outside the PPF
C. on the PPF and outside the
PPF
D. inside the PPF and on the PPF
© 2013 Pearson
CHECKPOINT 3.1
Practice Problem 3
The figure shows an economy’s
production possibilities. Which
points are efficient and which points
are inefficient?
© 2013 Pearson
CHECKPOINT 3.1
Solution
To be efficient, a point must be
attainable. So points F and G are
not efficient.
Points inside the PPF are not
efficient because more goods can
be produced at such points.
So points D and E not efficient.
The only efficient points are those
on the PPF—points A, B, and C.
© 2013 Pearson
CHECKPOINT 3.1
Inefficiency occurs when
resources are misallocated or
unemployed.
Inefficiency occurs at any point
inside the PPF.
Combinations at points D and E
are inefficient.
© 2013 Pearson
CHECKPOINT 3.1
Study Plan Problem
Production efficiency occurs when
Figure 1
A. it is not possible to produce
more of one good or service
without producing less of
something else.
B. we use the least possible
quantity of resources.
C. we produce only one good.
D. we produce at least possible
cost.
© 2013 Pearson
CHECKPOINT 3.1
Study Plan Problem
Which points are inefficient?
Figure 1
A. Points F and G only
B. Points D and E only
C. Points A, B, C, D, and E
D. Points A, B, and C only
© 2013 Pearson
CHECKPOINT 3.1
Practice Problem 4
The figure shows an economy’s
production possibilities. Which
points illustrate a tradeoff?
© 2013 Pearson
CHECKPOINT 3.1
Solution
A tradeoff is an exchange—giving
up something to get something else.
A tradeoff occurs when moving
along the PPF from one point to
another.
So moving from any point on the
PPF, point A, B, or C, to another
point on the PPF illustrates a
tradeoff.
© 2013 Pearson
CHECKPOINT 3.1
Study Plan Problem
A tradeoff occurs when we ____.
Figure 1
A. move from a point inside the
PPF to a point on the PPF
B. move from a point outside the
PPF to a point on the PPF
C. move from a point on the PPF to
another point on the PPF
D. move from a point on the PPF to
a point outside the PPF
© 2013 Pearson
CHECKPOINT 3.1
In the News
Loss of honeybees is less but still a threat
Honeybees are crucial for the pollination of almonds in
California’s Central Valley. During 2008, 30 percent of U.S.
honeybee hives died.
Source: USA Today, May 20, 2009
Explain how the loss of honeybees affected the Central
Valley PPF.
© 2013 Pearson
CHECKPOINT 3.1
Solution
Honeybees are a resource used in the production of
almonds.
In 2008, Central Valley farmers were at a point on their
PPF.
A 30 percent drop in bees hives will reduce the quantity of
almonds produced by about 30 percent.
With no change in the quantity of other crops produced, the
Central Valley PPF will shift inward.
© 2013 Pearson
CHECKPOINT 3.1
Study Plan Problem
A free lunch occurs at ____.
Figure 1
A.
B.
C.
D.
Points A, B, C, and D
Points F and G only
Points D and E only
Points A, B, and C
© 2013 Pearson
CHECKPOINT 3.2
Practice Problem 1
The table shows Robinson
Crusoe’s production possibilities.
If Crusoe increases production
of berries from 21 pounds to
26 pounds and his production is
efficient, what is his opportunity
cost of a pound of berries?
Does Crusoe’s opportunity cost
of berries increase as he
produces more berries?
© 2013 Pearson
CHECKPOINT 3.2
Solution
Production is efficient, so
Crusoe produces on his PPF.
The opportunity cost of an extra
pound of berries is the decrease
in the quantity of fish divided by
the increase in the quantity of
berries as he moves along his
PPF in the direction of
producing more berries.
© 2013 Pearson
CHECKPOINT 3.2
Table 1 tells you that to increase
the quantity of berries from 21
pounds to 26 pounds, Crusoe
moves from row F to row E.
His production of fish decreases
from 15 pounds to 13 pounds.
To gain 5 pounds of berries,
Crusoe must forego 2 pounds of
fish.
© 2013 Pearson
CHECKPOINT 3.2
The opportunity cost of 1 pound
of berries is the 2 pounds of fish
forgone divided by 5 pounds of
berries gained.
His opportunity cost is 2/5 of a
pound of fish.
© 2013 Pearson
CHECKPOINT 3.2
The opportunity cost of berries
increases as Crusoe produces
more berries.
To see why, move Crusoe from
row E to row D in Table 1.
The production of berries
increases by 4 pounds to 30
pounds and production of fish
decreases by 2.5 pounds to 10.5
pounds.
© 2013 Pearson
CHECKPOINT 3.2
To increase his production of
berries by 4 pounds he
forgoes 2.5 pounds of fish.
His opportunity cost of 1
pound of berries is 5/8 of a
pound of fish.
As Crusoe produces more
berries, his opportunity cost of
a pound of berries increases.
© 2013 Pearson
CHECKPOINT 3.2
Practice Problem 2
The table shows Robinson
Crusoe’s production
possibilities.
If Crusoe is producing 10
pounds of fish and 21 pounds
of berries, what is his
opportunity cost of an extra
pound of berries?
What is his opportunity cost of
an extra pound of fish?
© 2013 Pearson
CHECKPOINT 3.2
Solution
The figure graphs the data in the
table and shows Crusoe’s PPF.
If Crusoe is producing 10 pounds
of fish and 21 pounds of berries,
he is producing at point Z.
You can see that Z is a point
inside Crusoe's PPF.
© 2013 Pearson
CHECKPOINT 3.2
When Crusoe produces 21 pounds
of berries, he has sufficient time
available to produce 15 pounds of
fish at point F on his PPF.
To produce more berries, Crusoe
can move from point Z toward point
D on his PPF and forgo no fish.
His opportunity cost of a pound of
berries is zero.
© 2013 Pearson
CHECKPOINT 3.2
In the News
Obama drives up miles-per-gallon requirements
Emission levels of new automobiles must be cut from 354
grams in 2009 to 250 grams in 2016. To meet this
standard, the price of a new vehicle will rise by $1,300.
Source: USA Today, May 20, 2009
Calculate the opportunity cost of reducing the emission
level by 1 gram.
© 2013 Pearson
CHECKPOINT 3.2
Solution
By spending $1,300 extra on a new car, you forgo $1,300
of other goods.
With a new car, your emissions fall from 354 grams to 250
grams, a reduction of 104 grams.
The opportunity cost of a 1-gram reduction in emissions is
$1,300 of other goods divided by 104 grams, or $12.50 of
other goods.
© 2013 Pearson
CHECKPOINT 3.3
Practice Problem 1
The table shows an economy
that produces education services
and consumption goods.
If the economy currently
produces 500 graduates a year
and 2,000 units of consumption
goods, what is the opportunity
cost of one additional graduate?
© 2013 Pearson
CHECKPOINT 3.3
Solution
By increasing the number of
graduates from 500 to 750, the
quantity of consumption goods
produced decreases from 2,000
to 1,000 units.
The opportunity cost of a
graduate equals the decrease in
consumption goods divided by
the increase in the the number
of graduates.
© 2013 Pearson
CHECKPOINT 3.3
The opportunity cost of a
graduate equals 1,000 units
of consumption goods
divided by 250 graduates.
The opportunity cost of 1
additional graduate is 4 units
of consumption goods.
© 2013 Pearson
CHECKPOINT 3.3
Practice Problem 2
How does an economy grow? Explain why economic
growth is not free
© 2013 Pearson
CHECKPOINT 3.3
Solution
An economy grows if it expands its production
possibilities—if it develops better technologies; improves
the quality of labor by education, on-the-job training, and
work experience; and acquires more machines to use in
production.
When resources are used today to produce better
technologies, better quality labor, or more machines, they
cannot be used to produce goods and services.
The cost of economic growth is the goods and
services forgone today. Economic growth is not free.
© 2013 Pearson
CHECKPOINT 3.4
Practice Problem 1
Tables show Tony’s and Patty’s production possibilities.
© 2013 Pearson
CHECKPOINT 3.4
Who has a comparative advantage in producing
snowboards? Who has a comparative advantage in
producing skis?
© 2013 Pearson
CHECKPOINT 3.4
Solution
The person with a comparative advantage in producing
snowboards is the person who has the lower opportunity
cost of producing a snowboard.
To produce 5 more snowboards, Tony must produce 10
fewer skis, so his opportunity cost of 1 snowboard is 2 skis.
To produce 10 more snowboards, Patty must produce 5
fewer skis. Her opportunity cost of 1 snowboard is ½ a ski.
Patty has the lower opportunity cost of producing a
snowboard, so she has a comparative advantage in
producing snowboards.
© 2013 Pearson
CHECKPOINT 3.4
Tony’s production possibilities show that to produce 10 more
skis he must produce 5 fewer snowboards. So his
opportunity cost of producing a ski is 1/2 snowboard.
Patty’s production possibilities show that to produce 5 more
skis, she must produce 10 fewer snowboards, so her
opportunity cost of producing a ski is 2 snowboards.
Tony has the lower opportunity cost of producing a ski, so
he has a comparative advantage in producing skis.
© 2013 Pearson
CHECKPOINT 3.4
Practice Problem 2
Tony produces 10 snowboards and 5 skis. Patty produced 5
snowboards and 10 skis. If they specialize and trade, what
are the gains from the trade?
© 2013 Pearson
CHECKPOINT 3.4
Solution
Patty has a comparative advantage in producing
snowboards, so she specializes in producing snowboards.
She produces 20 snowboards a week.
Tony has a comparative advantage in producing skis, so he
specializes in producing skis. He produces 50 skis a week.
Before specializing, they produce 15 snowboards (Patty’s
10 plus Tony’s 5) and 45 skis (Tony’s 40 plus Patty’s 5).
By specializing, they increase their total production by
5 snowboards and 5 skis, which are the gains from trade.
They can share the gains by trading 1 ski for 1 snowboard.
© 2013 Pearson
CHECKPOINT 3.4
In the News
With big boost from sugar cane, Brazil is satisfying its
fuel needs
Brazil is almost self-sufficient in ethanol. Brazilian ethanol
is made from sugar and costs of 83 cents per gallon. U.S.
ethanol is made from corn and costs of $1.14 per gallon.
Source: The New York Times, April 12, 2006
Which country has a comparative advantage in producing
ethanol? Explain why both the United States and Brazil can
gain from specialization and trade.
© 2013 Pearson
CHECKPOINT 3.4
Solution
The cost of producing a gallon of ethanol is less in Brazil
than in the United States, so Brazil has a comparative
advantage in producing ethanol.
If Brazil specialized in producing ethanol and the United
States specialized in producing other goods (for example,
movies or food) and engaged in free trade, each country
would be able to get to a point outside its own PPF.
© 2013 Pearson