Question

What are five foundations of economics? Calvin and Hobbes run a company that sells wallet chains and wallet decals. Calvin is faster at making decals than chains, and Hobbes is faster at making chains than decals. Which statements accurately describe the situation?

Answer 1

What are five foundations of economics?

1. incentives
2. trade-offs
3. opportunity cost
4. marginal thinking
5. trade creates value

Which statements accurately describe the situation?

Opportunity costs ⇒ the extra costs or benefits lost resulting from choosing one activity or investment over another alternative.

Hobbes is better at making chains while Calvin is better at making decals. This means that Hobbes's opportunity cost of producing chains over decals is lower, therefore, he should specialize in the production of chains. On the other hand, Calvin's opportunity cost of producing decals over chains is lower, therefore, he should specialize in the production of decals.