Order Economic Issues and Concepts Discussion

Order Economic Issues and Concepts

Question 2

Traditional systems: Behaviour is based primarily on tradition, custom, and habit.

Command systems: Decisions about production and consumption are determined by a

central planning authority.

Free-market systems: Production and consumption decisions are made privately, by

decentralized producers and consumers.

and free markets.

Question 4

a) At point A, 2.5 tonnes of clothing and 3 tonnes of food are being produced per year. At

point B, annual production is 2.5 tonnes of clothing and 7 tonnes of food. At point C,

annual production is 6.5 tonnes of clothing and 3 tonnes of food.

b) At point A the economy is either using its resources inefficiently or it is not using all

of its available resources. Point B and C represent full and efficient use of available

resources because they are on the PPB.

c) At point B, the opportunity cost of producing one more tonne of food (and increase

from 7 to 8) is the 2.5 tonnes of clothing that must be given up. The opportunity cost of

producing one more tonne of clothing (from 2.5 to 3.5) appears, from the graph, to be

approximately 0.75 tonnes of food.

d) Point D is unattainable given the economy’s current technology and resources. Point D

can become attainable with a sufficient improvement in technology or increase in

available resources.

Question 6

a) As the table shows, there are only 250 workers in Choiceland, and to construct the

production possibilities boundary we must imagine all the combinations of workers in

each sector. Using the two middle columns from the table, we can plot the output levels

on a graph to get the following:

© 2005 Pearson Education Canada Inc.

b) If the economy is already producing 60 units of X and 600 units of Y, then 10 extra

units of X can only be produced by reducing the production of Y by 250 units. The

opportunity cost of 10 units of X is therefore 250 units of Y (or 25 units of Y per unit of

X). If the economy is already producing 70 units of X, the opportunity cost of producing

an additional 5 units of X is the forgone 350 units of Y (or 70 units of Y per unit of X).

Thus, we see that the opportunity cost of X rises when more of X is already being

produced.

Order Economic Issues and Concepts Discussion

c) If any given amount of labour can now produce 10 percent more of good Y, then the

PPB shifts up in a particular way. Specifically, the Y values increase by 10 percent for

any given X value, as shown below.

Question 8

In general, the opportunity cost for any activity includes three things:

• the direct cost of the activity, plus

• whatever you give up in order to do the activity, minus

• whatever “savings” the activity generates

In this case, the direct cost of transportation, lift tickets and accommodation of $300 is

definitely included. The income of $120 that you give up also counts. Finally, we must

deal with the restaurant meals of $75. Surely you would have eaten some food even if

you hadn’t gone skiing, so the full $75 is not included. But given the relatively high price

of restaurant meals compared to buying your own groceries, you will probably include

most of the $75. Thus the opportunity cost of the ski trip is $420 plus some (large)

fraction of the $75.

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