Macroeconomics Quiz

Macroeconomics Quiz

Chapter 2

Answer 1.1

Economic choices are largely based on a comparison between the expected marginal cost and the expected marginal benefit of the action under consideration. Marginal means incremental, additional, or extra. Rational decision makers will make the choice as long as the expected marginal benefit from the change incurred by the choice exceeds the expected marginal cost.

Sunk costs are costs that cannot be avoided for any non-zero units of products and that do not change regardless of the quantity of production.

So, in the given case, the problem with the thinking to eat the full meal is that the person is not considering the sunk cost but he wanted to derive the marginal benefit out of it. As we know that the sunk cost can not be avoided and no benefit can be derived out of it, so we can say that this is the wrong concept/thinking of the person eating the meal.

Answer 1.2

Opportunity Cost

Going to Florida

Working at Home

Benefits

$ 0

$ 400

Costs

($ 700)

($ 100)

Net

($ 700)

$ 300

Opportunity Cost of going to Florida = Working at Home

Going to Florida

Opportunity Cost of going to Florida = 300/ (700)

Opportunity Cost of going to Florida = - 0.4285

Answer 2.1

Labour Hours Required to Produce One Unit

United Kingdom

United States

Wheat

2

1

Cloth

6

5

a). Opportunity Cost

Opportunity Cost of producing Wheat = Producing Cloth

Producing Wheat

In United Kingdom:

Opportunity Cost of producing Wheat = 6/2 = 3

In United States:

Opportunity Cost of producing Wheat = 5/1 = 5

b). Absolute Advantage

Producing Wheat:

United States has the absolute advantage in producing wheat.

Producing Cloth:

United States has the absolute advantage in producing cloth.

c). Comparative Advantage

Producing Wheat:

United Kingdom has the absolute advantage in producing wheat.

Producing Cloth:

United Kingdom has the absolute advantage in producing cloth.

d). Specialization

Producing Wheat:

United Kingdom should specialize in producing wheat.

Producing Cloth:

United Kingdom should specialize in producing cloth.

Answer 2.2

A country has an absolute advantage over it trading partners if it is able to produce more of a good or service with the same amount of resources or the same amount of a good or service with fewer resources. In the case of Zambia, the country has an absolute advantage over many countries in the production of copper. This occurs because of the existence of reserves of copper ore or bauxite. We can see that in terms of the production of goods, there are obvious gains from specialization and trade, if Zambia produces copper and exports it to those countries that specialize in the production of other goods or services.

Answer 3.1

a).

b). The cost of producing an additional car when 50 cars are being produced is reducing the production of 16 washing machines.

c).The cost of producing an additional car when 150 cars are being produced is reducing the production of 2 washing machines.

d). The cost of producing an additional washing machine when 50 cars are being produced is reducing the production of 0.0625 cars.

The cost of producing an additional washing machine when 150 cars are being produced is reducing the production of 0.5 cars.

e). The above answers tells that Opportunity Cost is the measure of number of units of the ...