Chapter2 Review Questions
1
Key Concepts
 Three Basic questions
-- What gets produced?
-- How is it produced
-- Who gets what is produced
2
Key Concepts
Scarcity
 A situation in which unlimited wants exceed the
limited resources available to fulfill those wants
Opportunity Cost
 The best alternative that we give up, when we make a
choice or decision
3
Key Concepts
Model:
 A formal statement of a theory
 It is usually a mathematical statement of a
presumed relationship between two or more
variables.
 It is an abstract representation of reality
4
Key Concepts
Production possibilities frontier (PPF)
 It is a graph showing the maximal different
combinations of output for a given amount of inputs
What are opportunity costs?
 Slope– O.C. of whatever on the horizontal axis in
terms of whatever on the vertical axis
5
Key Concepts
Production efficiency
 All available resources are used
 Cannot produce more of one good without decreasing
production of the another good.
6
Key Concepts
 Any point _____ the PPF is a point where we’re
wasting resources
 Any point _____the PPF is a point of efficiency
 Any point ______the PPF is a point that we might love
to be at, but it’s at a point that’s unattainable
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Key Concepts
Economic growth
 An increase in the production of goods and services
 Shift of the PPF out
How to have economic growth?
 More resources -- investment in capital goods.
 Technological improvement
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Key Concepts
Absolute Advantage
 A person (or country, or firm) has an absolute
advantage if they can produce more per unit of input
Comparative Advantage
 a person or nation has a comparative advantage in an
activity if he/she/it can perform an activity at a lower
opportunity cost than other
9
Key Concepts
Principle of comparative advantage
 People should specialize in producing the good for
which they have lower opportunity cost of production
 It’s the difference in comparative advantage that leads
to specialization
10
Key Concepts
Command economy (centrally planned economy):
 Central authority, or “planner”, directs all economic
decisions
Free-Market Economy(lasses-faire economy):
 People and firms are “free to choose” all activities
Mixed Economy:
 Combination of the two system. Government plays a
role (to varying degrees) in economic decisions
11
Question 1
 Which of the following is a resource as the term used
by economists?
A) buildings
B) labor
C) land
D) all of the above
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Question 2
 The principle that the cost of something is equal to
what is sacrificed to get it is known as the
A) marginal principle
B) principle of opportunity cost
C) principle of diminishing returns
D) reality principle
13
Question 3
 According to the theory of ____, specialization and
free trade will benefit all trade partners, even when
some are absolutely more efficiently producers than
others.
A) comparative advantage
B) absolute advantage
C) social equity
D) Laissez-faire
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Question 4
Molly
Peter
Avatar Design
6
8
Tattoo Design
3
2
 For Molly, the opportunity cost of designing one tattoo
is
A) ½ of an avatar design
B) 1 avatar design
C) 2 avatar design
D) 3 avatar design
15
Question 5
Molly
Peter
Avatar Design
6
8
Tattoo Design
3
2
 For Peter, the opportunity cost of designing one tattoo
is
A) 1/4 of an avatar design
B) 2 avatar design
C) 4 avatar design
D) 6 avatar design
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Question 6
Molly
Peter
Avatar Design
6
8
Tattoo Design
3
2
 Which of the following statements is true?
A) Molly has a comparative advantage in both avatar design and
tattoo design.
B) Peter has a comparative advantage in both avatar design and
tattoo design.
C) Molly has a comparative advantage in avatar design, and Peter
has a comparative advantage in tattoo design
D) Peter has comparative advantage in avatar design, and Molly
has a comparative advantage in tattoo design
17
Question 7
Molly
Peter
Avatar Design
6
8
Tattoo Design
3
2
 To maximize total production
A) Molly should specialize in avatar design, and Peter should
specialize in tattoo design
B) Peter should specialize in avatar design, and Molly should
specialize in tattoo design
C) Molly and Peter should both split their time between
designing avatars and tattoos
D) Molly should design avatars and tattoos, but Peter should
only design avatars
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Question 8
Molly
Peter
Avatar Design
6
8
Tattoo Design
3
2
 For Peter, the opportunity cost of designing three
tattoos is ___ avatar designs.
A) 6
B) 12
C) 24
D) an indeterminate number
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Question 9
Molly
Peter
Avatar Design
6
8
Tattoo Design
3
2
 For Molly, the opportunity cost of designing four
tattoos is ___ avatar designs.
A) 6
B) 8
C) 12
D) 24
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Question 10
 In economics, the creation of capital is referred to as
A) investment
B) comparative advantage
C) consumption
D) allocation
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Question 11
 The economy is currently operating at Point A. The best
explanation for this is that
A) the economy has experienced increasing technology
B) the economy’s resources are being underemployed
C) the economy has too few resources to operate on the
production curve
D)the economy is operating above full employment
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Question 12
 The shape of the economy’s production possibility
frontier shows
A) decreasing opportunity costs
B) constant opportunity costs
C) increasing opportunity costs
D) random opportunity costs
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Question 13
 Full resource employment and production efficiency is
represented by a point
A) inside the production curve
B) along the production curve
C) outside the production curve
D) either inside or along the production curve
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Question 14
 The value of the slope of a society’s production
possibility frontier is called its
A) value of diminishing efficiency
B) marginal rate of substitution
C) marginal rate of transformation
D) diminishing opportunity cost of capitalization
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Question 15
 Because resources are not equally well suited to
producing all goods,
A) as more of a good is produced, the inputs used to
produce that the good will increase in price
B) the opportunity costs of producing a good will
increase as more of that good is produced
C) the opportunity costs of producing a good will
decrease as more of that good is produced
D) as more of a good is produced, the quality of that
good declines, and therefore the costs of production
increase
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