Answers to end-of-chapter questions

1-11 Specify and explain the typical shapes of marginal-benefit and marginal-cost curves. How are these curves used to determine the optimal allocation of resources to a particular product? If current output is such that marginal cost exceeds marginal benefit, should more or fewer resources be allocated to this product? Explain.

The marginal benefit curve is down-sloping, reflecting that each additional unit of a good provides less benefit than the previous unit. The marginal cost curve slopes upward, indicating that each additional unit of a good costs more to produce than the previous one. The intersection of the two curves (MB=MC) reveals the optimal allocation.

If marginal cost exceeds marginal benefit, fewer resources should be allocated to this product. At the current output, what is being sacrificed to obtain the last unit (MC) is greater than what is gained by having the last unit (MB).

1-12 Explain how (if at all) each of the following events affects the location of a country’s production possibilities curve.

a. The quality of education increases.

b. The number of unemployed workers increases.

c. A new technique improves the efficiency of extracting copper from ore.

d. A devastating earthquake destroys numerous production facilities.

(a) The curve will shift out as the labor resource improves.

(b) The curve will not shift, but the economy will produce further inside the curve.

(c) The curve will shift out as a result of the technological improvement.