2.12 – Review and Practice

1. How does a college education increase one’s human capital?
2. Why does the downward-sloping production possibilities curve imply that factors of production are scarce?
3. In what ways are the bowed-out shape of the production possibilities curve and the law of increasing opportunity cost related?
4. Suppose an economy can produce two goods, A and B. It is now operating at point E on production possibilities curve RT. An improvement in the technology available to produce good A shifts the curve to ST, and the economy selects point E′. How does this change affect the opportunity cost of producing an additional unit of good B?

   

   Question 4 Figure 2.12a (Text version)

    Graph depicts two Goods, Good A is on the vertical axis and Good B is on the horizontal axis. Line 1 connects Points R and T. Point E in the middle of the trending slope between Good A and B.
   Line 1: Point R is located at 0 B Goods and half way up the vertical axis and is a curved slope trending downwards toward Point T, which is located at 0 A Goods and the top end of B Goods scale.
   Line 2: Depicts a steeper downward curve. Good A has now doubled and represented by Point S, which is located at 0 B Goods and the top of the vertical axis. Point T remains the same – located at 0 A Goods and the top end of B Goods scale. Point E remains in the middle of the trending slope between Good A and B, but has increased.

5. Could a nation’s production possibilities curve ever shift inward? Explain what such a shift would mean, and discuss events that might cause such a shift to occur.
6. Suppose blue-eyed people were banned from working. How would this affect a nation’s production possibilities curve?
7. Evaluate this statement: “The Canadian economy could achieve greater growth by devoting fewer resources to consumption and more to investment; it follows that such a shift would be desirable.”
8. Two countries, Sportsland and Foodland, have similar total quantities of labour, capital, and natural resources. Both can produce two goods, figs and footballs. Sportsland’s resources are particularly well suited to the production of footballs but are not very productive in producing figs. Foodland’s resources are very productive when used for figs but are not capable of producing many footballs. In which country is the cost of additional footballs generally greater? Explain.
9. Suppose a country is committed to using its resources based on the reverse of comparative advantage doctrine: it first transfers those resources for which the cost is greatest, not lowest. Describe this country’s production possibilities curve.
10. The U.S. Constitution bans states from restricting imports of goods and services from other states. Suppose this restriction did not exist and that states were allowed to limit imports of goods and services produced in other states. How do you think this would affect U.S. output? Explain.
11. By 1993, nations in the European Union (EU) had eliminated all barriers to the flow of goods, services, labour, and capital across their borders. Even such things as consumer protection laws and the types of plugs required to plug in appliances have been standardized to ensure that there will be no barriers to trade. How do you think this elimination of trade barriers affected EU output?
12. How did the technological changes described in the Case in Point “Technology Cuts Costs, Boosts Productivity and Profits” affect the production possibilities curve for the United States?

1. Nathan can mow four lawns in a day or plant 20 trees in a day.
   1. Draw Nathan’s production possibilities curve for mowing lawns and planting trees. Assume the production possibilities curve is linear and put the quantity of lawns mowed per day on the horizontal axis and the quantity of trees planted per day on the vertical axis.
   2. What is Nathan’s opportunity cost of planting trees?
   3. What is Nathan’s opportunity cost of mowing lawns?
2. David can mow four lawns in a day or plant four trees in a day.
   1. Draw David’s production possibilities curve for mowing lawns and planting trees. Again, assume a linear production possibilities curve and put the quantity of lawns mowed per day on the horizontal axis.
   2. What is David’s opportunity cost of planting trees?
   3. What is David’s opportunity cost of mowing lawns?
3. Given the production information in problems 1 and 2 above, who has the comparative advantage in planting trees? Mowing lawns?
4. The following graphs describe the production possibilities for Germany and Turkey. Use these graphs to answer the questions listed below:

   

   

    

   1. What is the slope of Germany’s production possibilities curve?
   2. What is the slope of Turkey’s production possibilities curve?
   3. What is the opportunity cost of producing T-shirts in Germany?
   4. What is the opportunity cost of producing T-shirts in Turkey?
   5. What is the opportunity cost of producing optical instruments in Germany?
   6. What is the opportunity cost of producing optical instruments in Turkey?
   7. In which good does Germany have a comparative advantage?
   8. In which good does Turkey have a comparative advantage?
5. The nation of Leisureland can produce two goods, bicycles and bowling balls. The western region of Leisureland can, if it devotes all its resources to bicycle production, produce 100 bicycles per month. Alternatively, it could devote all its resources to bowling balls and produce 400 per month—or it could produce any combination of bicycles and bowling balls lying on a straight line between these two extremes.
   1. Draw a production possibilities curve for western Leisureland (with bicycles on the vertical axis).
   2. What it is the opportunity cost of producing an additional bowling ball measured in terms of forgone bicycles in western Leisureland?
   3. Suppose that eastern Leisureland can, if it devotes all its resources to the production of bicycles, produce 400. If it devotes all its resources to bowling ball production, though, it can produce only 100. Draw the production possibilities curve for eastern Leisureland (again, assume it is linear and put bicycles on the vertical axis).
   4. What is the opportunity cost of producing an additional bowling ball measured in terms of forgone bicycles in eastern Leisureland?
   5. Explain the difference in opportunity cost between western and eastern Leisureland. Which region has a comparative advantage in producing bowling balls? Bicycles?
   6. Draw the production possibilities curve for Leisureland, one that combines the curves for western and eastern Leisureland.
   7. Suppose it is determined that 400 bicycles must be produced. How many bowling balls can be produced?
   8. Where will these goods be produced?
6. The table below shows the production possibilities schedule for an economy.

1. Putting capital goods per period on the horizontal axis and consumer goods per period on the vertical axis, graph the production possibilities curve for the economy.
2. If the economy is producing at alternative B, what is the opportunity cost to it of producing at alternative C instead?
3. If the economy is producing at alternative C, what is the opportunity cost to it of producing at alternative D instead?
4. Is it possible for this economy to produce 30 units of consumer goods per period while producing 1 unit of capital goods? Would this combination of goods represent efficient or inefficient production? Explain.
5. Which point, B or C, would lead to higher economic growth? Explain your answer.

Figure 2.12d shows the sources of growth in the United States between 1909 and 1929 and between 1950 and 1979, according to a study by Edward Denison (Denison, 1962). (Note: The sources of economic growth are cumulative and, taken collectively, explain 100% of total growth over the period.) Figure 2.12d data was extrapolated into two tables: Table 1 contains data for 1909 and 1929  and Table 2 contains data for 1909 and 1929.

 

Figure 2.12d. Sources of growth in the United States between 1909 and 1929 and between 1950 and 1979 (Text Version)

The tables below are an approximation of data reflected in Figure 2.12d. Sources of growth in the United States between 1909 and 1929 and between 1950 and 1979

Table 2.12b: Sources of growth in the United States between 1909 and 1929.  Data obtained from study by Edward Denison (Denison, 1962).

Source of Economic Growth	Source of Growth Percentage
Increase in quantity of labour	38
Increase in quantity of capital	26
Increase in human capital	13
Improved technology	12

Table 2.12c: Sources of growth in the United States between between 1950 and 1979. Data obtained from study by Edward Denison (Denison, 1962).

Source of Economic Growth	Source of Growth Percentage
Increase in quantity of labour	26
Increase in quantity of capital	15
Increase in human capital	30
Improved technology	23

1. Approximately what percentage of U.S. growth between 1909 and 1929 was due to increases in quantities of factors of production?
2. Approximately what percentage of U.S. growth between 1909 and 1929 was due to increases in quality of factors of production and technological improvement?
3. Approximately what percentage of U.S. growth between 1950 and 1979 was due to increases in quantities of factors of production?
4. Approximately what percentage of U.S. growth between 1950 and 1979 was due to increases in quality of factors of production and technological improvement?