Chapter 2
Practice Quiz
Production Possibilities, Opportunity Cost and
Economic Growth
1. Which of the following decisions must be made by all economies?
a. How much to produce? When to produce? How much does it cost?
b. What is the price? Who will produce it? Who will consume it?
c. What to produce? How to produce? For whom to produce?
d. None of the above.
ANS:
c. Regardless of the size of wealth of a nation, it must choose a system to answer these
three basic questions
2. A student who has one evening to prepare for two exams on the following day has the
following alternatives:
Possibility
A
B
Score in
Economics
Score in
Accounting
95
80
80
90
The opportunity cost of receiving 90, rather than 80, on the accounting exam is
represented by how many points on the economic exam?
a. 15 points.
b. 80 points.
c. 90 points.
d. 10 points.
ANS:
a. By spending more time studying for accounting and therefore spending less time
studying for the economics exam, 15 points on the economics are given up.
3. Opportunity cost is the
a. purchase price of a good or service.
b. value of leisure time plus out-of-pocket costs.
c. best option given up as a result of choosing an alternative.
d. undesirable sacrifice required to purchase a good.
ANS:
c. Opportunity cost is the best option given up, and not the money paid for the good.
4. On a production possibilities curve, the opportunity cost of good X in terms of good Y
is represented by
a. the distance to the curve from the vertical axis.
b. the distance to the curve from the horizontal axis.
c. the movement along the curve.
d. all of the above.
ANS:
c. To have more units of good X a person will have to give up units of good Y as
represented on the horizontal axis.
5. If a farmer adds 1 pound of fertilizer per acre, the value of the resulting crops rises
from $80 to $100 per acre. According to marginal analysis, the farmer should add
fertilizer if it costs less than
a. $12.50 per pound.
b. $20 per pound.
c. $80 per pound.
d. $100 per pound.
ANS:
b. As long as the fertilizer costs less than $20 per acre, the farmer will gain more by
fertilizing than he or she will lose by the expense of the fertilizer.
6. On a production possibilities curve, a change from economic inefficiency to economic
efficiency is obtained by
a. movement along the curve.
b. movement from a point outside the curve to a point on the curve.
c. movement from a point inside the curve to a point on the curve.
d. a change in the slope of the curve.
ANS:
c. All points on the production possibilities curve represents combinations of both goods
while operating at the most efficient level possible.
7. Any point inside the production possibilities curve is a (an)
a. efficient point.
b. unfeasible point.
c. inefficient point.
d. maximum output combination.
ANS:
c. While operating within the boundaries of the production possibilities curve, more of
both goods can be attained if efficiency is improved. However, points beyond the curve
are not possible without an increase in resources or technological advance.
8. Using a production possibilities curve, unemployment is represented by a point located
a. near the middle of the curve.
b. at the top corner of the curve.
c. at the bottom corner of the curve.
d. outside the curve.
e. inside the curve.
ANS:
e. Any point underneath the production possibilities curve indicates that the economy’s
resources are not being used efficiently, including labor.
9. Along a production possibilities curve, an increase in the production of one good can
be accomplished only by
a. decreasing the production of another good.
b. increasing the production of another good.
c. holding constant the production of another good.
d. producing at a point on a corner of the curve.
ANS:
a. Along the production possibilities curve there are no unemployed resources. Therefore,
in order to produce more of one product, units of the other product must be given up.
10. Education and training that improve the skill of the labor force are represented on the
production possibilities curve by a(an)
a. movement along the curve.
b. inward shift of the curve.
c. outward shift of the curve.
d. movement toward the curve from an exterior point.
ANS:
c. Investment in human capital enhances people’s ability being able to more effectively
use the economy’s capital and push the production possibilities curve outward where
more units of both products can be attained.
11. A nation can accelerate its economic growth by
a. reducing the number of immigrants allowed into the country.
b. adding to its capital stock.
c. printing more money.
d. imposing tariffs and quotas on imported goods.
ANS:
b. By increasing its stock of capital a nation can increase its productivity.
Exhibit 6 Production Possibilities Curve
A
7
6
B
E
5
W
Consumption 4
Goods
3
2
U
C
1
D
0 1
2 3 4 5 6
Capital Goods
7
13
12. From the information in Exhibit 6, which of the following points on the production
possibilities curve are attainable with resources and technology currently available?
a. A,B,C,E,U
b. A,B,C,D,W
c. E,U,W
d. B,C,D,U
e. A,B,C,E
ANS:
d. Points E and W are outside the curve and they are therefore unattainable points. Point
U is inefficient, but it is attainable.
13. In Exhibit 6, which of the following points on the production possibilities curve are
efficient production points?
a. A,B,C,U
b. A,B,C,D,U
c. E,U,W
d. B,C,D,U
e. A,B,C,D
ANS:
e. All points along the curve are efficient because a movement between them requires the
opportunity cost of not producing units of the other output.
14. In Exhibit 6, to move from U to B, the opportunity cost
a. would be 4 units of consumption goods.
b. would be 2 units of capital goods.
c. would be zero.
d. would be 5 units of capital goods.
e. cannot be estimated.
ANS:
c. Since U is an inefficient point, it is possible to continue the production of 2 capital
goods and increase the production of consumption goods from 2 to 6 units at point B.
15. In Exhibit 6, which of the following points on the production possibilities are fullemployment production points?
a. A,B,C,D
b. A,B,C,D,U
c. E,U,W
d. B,C,D,U
e. A,B,C,U
ANS:
A. All points along the production possibilities curve by definition fully employ
resources. Points outside the curve (E,W) are beyond the capacity of the economy, and
point U is an interior point resulting from less than full use of resources.