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.
Economic vs accounting profit
Terms of trade
Law of diminishing marginal utility
Utility-maximizing rule
Substitution vs income effect
Production possibilities curve (PPC)
Rational self-interest
Ceteris paribus
Product vs resource market
Comparative advantage
Explicit and implicit costs in economic profit
Utility
Short answer 1. Define or explain: Utility maximization rule
3 ptsShort answer 2. Define or explain: Productive efficiency
3 ptsShort answer 3. Define or explain: Marginal vs average vs total
3 ptsShort answer 4. Define or explain: Absolute vs comparative advantage
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.