Basic Economic Concepts unit test
A test on this unit alone, marked as a percentage and a letter grade — for the test your class is actually sitting, rather than for May. Answer everything, then submit once: seeing the answer to question 3 before attempting question 4 makes the final percentage meaningless.
Ceteris paribus
Rational self-interest
Comparative advantage
The marginal decision rule
Market economy vs command economy
Law of diminishing marginal utility
Asymmetric PPC shift
Inside, on and outside the PPC
Why nobody has comparative advantage in both
Normal profit
Utility-maximizing rule
Terms of trade
Short answer 1. Define or explain: Why a sunk cost cannot distinguish options
3 ptsShort answer 2. Define or explain: Marginal vs average vs total
3 ptsShort answer 3. Define or explain: Utility
3 ptsShort answer 4. Define or explain: Why the PPC bows outward
3 ptsFree response
7 ptsTwo workers each have 24 hours available. Ana needs 2 hours per loaf of bread and 6 hours per shirt. Ben needs 3 hours per loaf and 3 hours per shirt. (a) Calculate each worker’s opportunity cost of one shirt. Show your work and identify who has the comparative advantage in shirts. (b) Identify the range of terms of trade, in loaves per shirt, that both would accept, and explain why terms at exactly one endpoint would be rejected. (c) Ana can produce more bread per hour than Ben. Explain why that fact does not determine whether trade is mutually beneficial. (d) Ana acquires a tool that halves her time per shirt to 3 hours. Recalculate her opportunity cost of a shirt and state whether the pattern of comparative advantage changes.
Calculate each worker’s opportunity cost of a shirt and identify the comparative advantage in shirts.
Identify the acceptable range of terms of trade and explain why an endpoint is rejected.
Explain why absolute advantage does not determine whether trade is beneficial.
Recalculate after the tool and state whether comparative advantage changes.