trading

1.Suppose Bob and Sara are producing food and are thinking of trading. They produce ice cream and salad. Bob can

produce 10 units of ice cream or 6 units of salad; Sara can produce 6 units of ice cream or 4 units of salad. Remember to take what each person gives up (opportunity cost) and then divide by what they get. Check all that apply:

Bob’s opportunity cost of ice cream 3/5 of a salad, and his opportunity cost of a salad is 5/3 ice cream.

Sara’s opportunity cost of ice cream is 2/3 of a salad and her opportunity cost of a salad is 3/2 of an ice cream.

Bob should specialize in ice cream, while Sara should specialize in salad.

Bob should specialize in salad, while Sara should specialize in ice cream.

2/ _________ economics discusses how the economy should work, __________ economics deals with how it works in fact.

Positive, normative

Normative, positive

3/ According to your reading (article #2.1), why do we see giant jumps in price (and industry profitability) in markets like gasoline, when the supply and demand model suggests prices should correspond to costs?

Because corporations are gouging the public illegally

Because of market manipulation by OPEC

Because short-run behavior is inflexible, spiking prices until behavior is forced to change

4/ Exchanging goods and services directly for other goods and services is

Barter

Local markets

Co-ops

Factor markets

5/ The intersection of the supply and demand curves is called the ____________ price, and is special because at that price __________.

Producer, the market clears

Equilbirum, all consumer incomes are equal

Producer, returns to factors are identical

Equilibrium, market supply exactly equals demand