SFU Econ 103

Analytical questions Chapter 1 & 2

1. Brazil produces ethanol from sugar, and the land used to grow sugar can be used to grow food crops. Suppose
that Brazil's production possibilities for ethanol and food crops are as follows:

Ethanol

70
64

54

40

22

0 1 2 3 4 5 Food crops

a. Explain what the PPF curve outlines and how it illustrates concepts of scarcity, opportunity cost and choice.

b. If Brazil increases ethanol production from 40 barrels to 54 barrels per day, what is the opportunity cost of
producing each barrel of ethanol?

c. If Brazil currently produces 40 barrels of ethanol and 2 tonnes of food crops, does Brazil achieve production
efficiency? What do we know about using the available resources at this production of both commodities
in Brazil?

d. What will be the opportunity cost of producing an additional tonne of food crops if Brazil increases food
crops production by one unit from the production combination in part (c)? Explain.

e. What is meant by long-run economic growth, and how can it be achieved? Also, how does the PPF curve
illustrate long-run economic growth?

f. What is the difference between scarcity and poverty? And which one can be eliminated through the process
of long-run economic growth? Explain your answers.

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SFU Econ 103
Analytical questions Chapter 1 & 2

2. Consider your decision about whether to go skiing during the coming weekend. Suppose transportation, lift
tickets, and accommodation for the weekend cost $300. Suppose also that restaurant food for the weekend
in the ski resort will cost $75. Finally, suppose you have a weekend job that you have to miss if you go skiing,
which pays you a total $120 for the weekend.

a. What is the opportunity cost of going skiing? Besides the information given this question, what other
information would you consider measuring the opportunity cost of going skiing?

b. With the given opportunity cost of going skiing in part (a), what is the opportunity cost of working during
the weekend? Also, Discuss why the opportunity cost of weekend work you have computed may differ
from the others.

c. If you have computed opportunity costs of going skiing and weekend work in part (a) and (b), which
activity will you choose? Explain your answer.

3. The chart below shows the number of resource units that two-output countries, Gamma and Omega, must
use to produce one unit of each output: food and clothing.

Gamma Omega
Food 10 resource units 5 resource units
Clothing 9 resource units 3 resource units

a. Which economy has an absolute advantage in producing both food and clothing? What does this mean?
b. What is the opportunity cost of produce one unit of food for Gamma and Omega?
c. What is the opportunity cost of produce one unit of clothing for Gamma and Omega?
d. Which country has a comparative advantage in the production of each good? Explain.
e. Explain how both countries can have mutual gains from trade.
f. What would happen to the trading pattern between Gamma and Omega if Gamma’s productivity of
clothing is doubled? (Now Gamma needs only 4.5 resource units for a unit of clothing.) Explain.

4. Determine whether each of the following statements is positive or normative.

a. The government should impose stricter regulations on the banking sector to avoid future financial crises.
b. Financial aid to developing countries has no impact on per capita GDP in those countries
c. Tuition fee increases at Canadian universities lead to reduced access for low-income students
d. It is unfair that Canadians have universal access to health care but not to dental care.
e. Canadians currently have too much personal debt.

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SFU Econ 103
Analytical questions Chapter 1 & 2

Answers

Question 1

Part a)

The PPF curve outlines all combinations of commodities produced if all available resources are efficiently
used, with a given technology and productivity.

Scarcity: The production possibilities boundary (PPB) separates attainable combinations of goods from
those that are unattainable. Thus scarcity is shown by the existence of some unattainable bundles
of goods.

Choice: Because of scarcity, societies must somehow choose how resources are to be allocated from the
production of output; thus, a particular point on the PPB must be selected.

Opportunity Cost: The slope of the PPB is negative, revealing the opportunity cost that is unavoidable every
time a choice is made. For the economy as a whole, the decision to produce more of one good
must involve a decision to produce less of some other good.

Part b)

If the production of ethanol increases by 14 barrels per day, this economy must give up producing 1 tonne
of food crop. Thus, the opportunity costs of producing an additional barrel of ethanol is 0.071 ( = 1/14)
tonne of food crop that must be given up.

Part c)

This production is not efficient since Brazil does not fully utilize all available resources, so Brazil's production
is located inside its PPB. Thus, the production of two commodities attributes to the under-utilization of
resources, thus inefficient production.

Part d)

With given inefficient production of 40 barrels of ethanol and 2 tonnes of food crops, producing an
additional tonne of food crop does not lead Brazil to sacrifice any barrels of ethanol. Thus, the opportunity
cost of the extra tonne of food crop is zero or undefined.

Part e)

The productive capacity grows over time, so some combinations of producing outputs that are unattainable
today will become attainable in the future.

Economic growth can be achieved through technological improvements and gaining more economic
resources illustrated by an outward shift of the production possibilities boundary curve.

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SFU Econ 103
Analytical questions Chapter 1 & 2

Part f)

By scarcity, we mean simply an excess of wants over the resources available to satisfy those wants. At the
same time, poverty is concerned with a level of resources below some threshold of sufficiency. Thus, one
can conceivably eliminate poverty, but that would not eliminate scarcity.

Through economic growth, the PPB curve expands outward with the existence of an unattainable set of
production. Thus, scarcity is never defeated. However, a basic need for human survival can be satisfied
through the process of economic growth. Therefore, poverty can be eliminated, but the scarcity of
resources.

Question 2

Part a)

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 and restaurant meals
of $75 is included. In addition, the income of $120 given up also counts as a benefit foregone. Lastly, any
savings from not working weekends due to skiing activity must be subtracted from $495. This will vary,
depending on what cost each individual incurs if working during the weekend, such as money spent on
lunch, transit to work, etc.

Thus, the opportunity costs of going skiing will be $495 minus whatever savings the skiing
activity generates.

Ex) opportunity cost of skiing = $375+ $120 - $30 (usually spent on house meals during
the weekend) - $10 (bus fare to work) = $455

(The green colour highlighted values would vary depending on how much each student spends on meals
and transportation if working weekends.)

Part b)

Ideas of part a) apply to computing the opp cost of the weekend working in terms of $.

Opportunity costs of weekend work would be, first of all, summing all direct costs of this activity ( =
whatever savings in part (a)) and whatever you give up to work during the weekend (=benefit from
skiing measured in terms of dollars), minus whatever “savings” the weekend work generates ( = the
direct costs of the skiing in part a)).

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SFU Econ 103
Analytical questions Chapter 1 & 2

Ex) opportunity cost of weekend work = $30 (amount spent on house meals during the weekends) + $10
(i.e. bus fare to work) + $400 (benefits from skiing) - $375 = $65

(The green colour highlighted value will vary depending on how much monetary value each student places
on happiness from skiing activity. However, the $ value placed on satisfaction from skiing must be greater
than or equal to $375. Otherwise, going skiing is not considered another best alternative activity.)

Part c)

Using my example above, the opportunity cost of weekend work is less than that of going skiing. Since
every individual wants to choose an economic activity with the lowest costs, I will choose to work during
the weekend rather than going skiing, with the given circumstance.

Question 3

Part a)

Omega has an absolute advantage of producing both food and clothing, which means Omega can produce
both goods using fewer resource units than that required for each good in Gamma.

Part b)

In Gamma, the opportunity cost of producing one unit of food is 10/9 (=1.11) units of clothing that must
be given up.

In Omega, the opportunity cost of producing one unit of food is 5/3 (=1.67) unit of clothing that must be
given up.

Part c)

In Gamma, the opportunity cost of producing one unit of clothing is 9/10 (=0.9) units of food that must be
given up.

In Omega, the opportunity cost of producing one unit of clothing is 3/5 (=0.6) units of food that must be
given up.

Part d)

Gamma should specialize in producing food because it has lower opportunity costs of producing one unit
of food than Omega.

Omega should specialize in producing clothing because it has lower opportunity costs of producing one
unit of clothing than Gamma.

Part e)

Gamma produces only food, while Omega produces only clothing. And then they trade at the deal that
makes both countries consume both goods beyond the PPF.

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SFU Econ 103
Analytical questions Chapter 1 & 2

Part f)

In Gamma, after productivity growth in clothing, opp. cost of food changes to be 2.22 units of clothing,
while opp. cost of clothing will be 0.45 units of food. However, opp. costs of each good in Omega remain
unchanged.

Now, Gamma has a comparative advantage of clothing, while Omega has a comparative advantage of the
food. Thus, compared to the previous result, both countries can now change their specialized output for
mutual gain from trade.

Question 4

Part a) normative (“The government should impose…” is inherently a value judgement.)

Part b) positive (In principle, we could determine the impact foreign aid has.)

Part c) positive (In principle, we could determine the extent to which fee increases affect access.)

Part d) normative (What is or is not unfair is based on a value judgement.)

Part e) normative (Use of the expression “too much” is a value judgement.)

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