Suppose that by devoting all of its resources to the production of A, the nation of Econia can produce 50 A. By devoting all of its resources to the production of B, Econia can produce 25 B. The comparable figures for the nation of Optima are 5 A and 5 B. According to the principle of comparative advantage, which nation will specialize in which product? What are the limits to the terms of trade?
What will be an ideal response?
In Japan, the cost of producing 1 C is 2 R (20 C = 40 R) given the stated cost conditions. In Mexico, the cost of producing 1 C is only 1 R. Thus, in terms of opportunity costs or the amount of R that must be given up to get each C, Mexico can produce units of C more cheaply. Therefore, Mexico should produce Cs and Japan should produce units of R, and Mexico should trade away some of its C to Japan for some of the units of R produced in Japan.
The limits to the terms of trade are set by the cost ratio in each country. In other words, it is to Japan’s advantage to trade away units of R for as many units of C as it can get above the lower limit of 0.5 C, which is what each R costs in Japan. However, Mexico will not be willing to trade more than one C for each R since any more than that could be gotten more cheaply by producing them at home. Therefore the limits to the terms of trade will be between 0.5 C and 1 C for each R. And Mexico will be able to get between 1 R and 2 R for each C.
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If the price received by a perfectly competitive firm is less than its average variable cost, what will the firm do in the short run? Why?
What will be an ideal response?
The law of increasing opportunity cost reflects the fact that
a. the production possibilities frontier is bowed inward b. resources are not perfectly substitutable c. resources cannot always be used efficiently d. an economy will operate at a point inside the production possibilities frontier e. an economy will operate at a point along the production possibilities frontier
To obtain economic profits we start with accounting profits and subtract ___________.
Fill in the blank(s) with the appropriate word(s).
Imposing a tax on sales of a product
A) shifts the market demand curve for the product. B) shifts the market supply curve for the product. C) shifts both the market supply and demand curve for the product. D) has no effect on either the market demand or the market supply curve for the product.