1 Why Study Economics?

1) Which of the following i not listed in the book as a reason to study economics?

A) to learn a way of thinking

B) to understand society

C) to be an informed citizen

D) to learn how to make lots of money

Answer: D

2) Among the fundamental concepts in economics is (are)

A) opportunity cost.

B) marginalism.

C) efficient markets.

D) all of the above

Answer: D

3) Which of the following is the best definition of economics?

A) the study of how individuals and societies choose to use the scarce resources that nature
and previous generations have provided

B) the study of how consumers spend their income

C) the study of how business firms decide what inputs to hire and what outputs to produce

D) the study of how the federal government allocates tax dollars

Answer: A

4) The rise of the modern factory system in England during the late eighteenth and early
nineteenth centuries is known as the

A) Great Migration.

B) Industrial Revolution.

C) Wealth of Nations.

D) Dark Ages.

Answer: B

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5) Which of the following statements is not correct?

A) Economics is a behavioral science.

B) In large measure, economics is the study of how people make choices.

C) If poverty were eliminated, there would be no reason to study economics.

D) Economic analysis can be used to explain how both individuals and societies make
decisions.

Answer: C

6) The study of economics

A) is a very narrow endeavor.

B) is a way of analyzing decision-making processes caused by scarcity.

C) is concerned with proving that capitalism is better than socialism.

D) focuses on how a business should function.

Answer: B

7) Which of the following is not one of the three fundamental concepts of economics?

A) profit maximization

B) marginalism

C) opportunity cost

D) the working of efficient markets

Answer: A

8) Suppose that you purchased a ticket to a jazz festival for $100 from an online ticket broker.
Once you arrived at the festival, you discovered that parking costs you an additional $15. In
this situation, the additional $15 you pay for parking is an example of

A) an economic loss.

B) opportunity cost.

C) marginal cost.

D) an inefficient cost.

Answer: C

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9) You have decided that you want to attend a costume party as Iron Man. You estimate that
it will cost $40 to assemble your costume. After spending $40 on the costume, you realize that
the additional pieces you need will cost you $25 more. The marginal cost of completing the
costume is

A) $15.

B) $25.

C) $40.

D) $65.

Answer: B

10) The concept of opportunity cost

A) is relevant only to economics.

B) can be applied to the analysis of any decision-making process.

C) applies to consumers but not to firms.

D) refers only to actual payments and incomes.

Answer: B

11) Opportunity cost is

A) that which we forgo, or give up, when we make a choice or a decision.

B) a cost that cannot be avoided, regardless of what is done in the future.

C) the additional cost of producing an additional unit of output.

D) the additional cost of buying an additional unit of a product.

Answer: A

12) The reason that opportunity costs arise is that

A) an economy relies on money to facilitate exchange of goods and services.

B) resources are scarce.

C) there are no alternative decisions that could be made.

D) people have limited wants.

Answer: B

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13) Which of the following is not an opportunity cost of attending college?

A) the tuition you pay

B) the income you could have earned if you didn't attend college

C) the alternative uses of the time you spend studying

D) the cost of the food that you consume while you are attending college

Answer: D

14) If your tuition is $5,000 this semester, your books cost $600, you can only work 20 rather
than 40 hours per week during the 15 weeks you are taking classes and you make $15 per
hour, and your room and board is $3,000 this semester (same as if not attending college), then
your opportunity cost of attending college this semester is

A) $5,600.

B) $5,900.

C) $10,100.

D) $11,600.

Answer: C

15) If your tuition is $25,000 this semester, your books cost $1,500, you can only work 20
rather than 40 hours per week during the 15 weeks you are taking classes and you make $15
per hour, and your room and board is $7,500 this semester (same as if not attending college),
then your opportunity cost of attending college this semester is

A) $26,500.

B) $26,800.

C) $31,000.

D) $38,500.

Answer: C

16) If you own a building and you decide to use that building to open a book store,

A) there is no opportunity cost of using this building for a book store because you own it.

B) there is an opportunity cost of using this building for a book store because it could have
been used in other ways.

C) the opportunity costs equal the cost of inventory.

D) the only cost relevant to this decision is the price you paid for the building.

Answer: B

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17) You own the video game Grand Theft Auto V. The opportunity cost of playing this game
for the second time

A) is zero.

B) is one-half the cost of the game, as this is the second time you have played it.

C) is the value of the alternative use of the time you spend playing the game.

D) cannot be calculated.

Answer: C

18) That which we forgo, or give up, when we make a choice or decision is called

A) out-of-pocket cost.

B) marginal cost.

C) real cost.

D) opportunity cost.

Answer: D

19) Economists often refer to risk-free ventures as

A) efficient market outcomes.

B) profit opportunities.

C) those with no opportunity costs.

D) break-even propositions.

Answer: B

20) If you can buy 9 DVDs for $126 or you could buy 10 DVDs for $130, then the marginal
cost of the tenth DVD is

A) $4.

B) $13.

C) $14.

D) $130.

Answer: A

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21) If you eat at a sushi restaurant that charges $20 for its all-you-can-eat sushi special, then
the marginal cost of your 10th piece of sushi is

A) zero.

B) $2.

C) $200.

D) $2,000.

Answer: A

22) A market in which profit opportunities are eliminated almost instantaneously is

A) a laissez-faire market.

B) a capitalist market.

C) a socialist market.

D) an efficient market.

Answer: D

23) If information is less costly and more easily available, then usually this

A) makes markets more efficient.

B) makes markets less efficient.

C) increases profit opportunities.

D) increases the opportunity cost of acquiring more information.

Answer: A

24) An efficient market is a market in which

A) everyone always gets what they want.

B) profit opportunities are eliminated almost instantaneously.

C) profits are always very high and persistent.

D) opportunity costs are zero.

Answer: B

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25) Related to the Economics in Practice on page 5: According to the Economics in Practice, a
majority of the $10 retail value of the Barbie doll

A) is needed to pay for the cost of the Taiwanese plastic used to make the dolls.

B) pays for the Chinese labor used to assemble the doll.

C) is captured in the United States.

D) goes to the Japanese manufacturer of the hair which is used for the dolls.

Answer: C

26) Related to the Economics in Practice on page 5: The opportunity cost to Mattel of having its
Barbie doll assembled in China is

A) the low wages paid to Chinese workers.

B) the $2 export value the doll carries when it leaves Hong Kong.

C) the $8 of its $10 retail value which is captured in the United States.

D) having the Barbie doll assembled in the next best available location.

Answer: D

27) The reasons to study economics include which of the following?

A) to be an informed citizen

B) to understand society

C) to learn a way of thinking

D) all of the above

Answer: D

28) Marginalism is

A) the best alternative that we forgo when making a decision.

B) the study of how societies choose to use scarce resources.

C) a market situation in which profit opportunities are eliminated almost instantaneously.

D) the process of analyzing the additional costs or benefits arising from a decision.

Answer: D

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29) Economics is best defined as the study of

A) financial decision making.

B) how consumers make purchasing decisions.

C) choices made by people faced with scarcity.

D) inflation, unemployment, and economic growth.

Answer: C

30) The Industrial Revolution refers to the rise of the modern factory system in ________
during the late eighteenth and early nineteenth centuries.

A) the United States

B) England

C) France

D) Germany

Answer: B

31) Which of the following statements is correct?

A) Economics is a natural science.

B) In large measure, economics is the study of how people make choices.

C) If poverty was eliminated, there would be no reason to study economics.

D) Economic analysis can be used to explain how societies, but not individuals, make
decisions.

Answer: B

32) Economics is the study of

A) how to invest in the stock market.

B) how society uses limited resources.

C) the role of money in markets.

D) how government officials decide which goods and services are produced.

Answer: B

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33) You decide to go to LEGOLAND after you visit Disneyworld in Orlando. The cost of
going to LEGOLAND after you visit Disneyworld is the ________ cost of getting from
Disneyworld to LEGOLAND.

A) efficiency

B) marginal time and money

C) opportunity

D) profit-maximizing

Answer: B

34) Suppose that you sign up for a one-day cooking class at the local culinary school for $75.
Once you arrive at the class, you discover that you must purchase an apron for an additional
$5. In this situation, the additional $5 you pay for the apron is an example of

A) an inefficient cost.

B) marginal cost.

C) opportunity cost.

D) an economic loss.

Answer: B

35) You have decided that you want to attend a renaissance fair as King Henry VIII. You
estimate that it will cost $80 to assemble your costume. After spending $80 on the costume,
you realize that the additional pieces you need will cost you $20 more. The marginal cost of
completing the costume is

A) $20.

B) $60.

C) $80.

D) $100.

Answer: A

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36) You have narrowed down your Friday night plans to either going bowling or playing
billiards. If you choose to go bowling, then for you playing billiards is the ________ of going
bowling.

A) opportunity cost

B) marginal cost

C) empirical cost

D) variable cost

Answer: A

37) That which we forgo, or give up, when we make a choice or a decision is known as

A) equity.

B) causation.

C) correlation.

D) opportunity cost.

Answer: D

38) Scarce resources give rise to the concept of

A) efficient markets.

B) opportunity costs.

C) laissez-faire.

D) positive economics.

Answer: B

39) Which of the following is an opportunity cost of attending college?

A) the cost of your apartment or dorm

B) the income you could have earned if you didn't attend college

C) the cost of the food that you consume while you are attending college

D) the education you gain from attending college

Answer: B

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40) If your tuition is $2,000 this semester, your books cost $400, you can only work 10 rather
than 40 hours per week during the 15 weeks you are taking classes and you make $12 per
hour, and your room and board is $4,000 this semester (same as if not attending college), then
your opportunity cost of attending college this semester is

A) $2,400.

B) $2,760.

C) $7,800.

D) $11,800.

Answer: C

41) If your tuition is $20,000 this semester, your books cost $2,000, you can only work 10
rather than 40 hours per week during the 15 weeks you are taking classes and you make $15
per hour, and your room and board is $8,000 this semester (same as if not attending college),
then your opportunity cost of attending college this semester is

A) $22,000.

B) $22,150.

C) $28,750.

D) $36,750.

Answer: C

42) If you own a condo and you decide to lease it to your cousin,

A) there is no opportunity cost of leasing the condo because you own it.

B) there is an opportunity cost of leasing the condo because you could have chosen to live in
it.

C) there is no opportunity cost of leasing the condo because you collect rent from your
cousin.

D) the only cost relevant to this decision is the price you paid for the condo.

Answer: B

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43) You own American Sniper on DVD. The opportunity cost of watching this DVD for the
fourth time

A) is zero, since you own it.

B) is one-fourth the cost of the DVD, as this is the fourth time you have watched it.

C) is the value of the alternative use of the time you spend watching the DVD.

D) must be the same as the opportunity cost of watching it the first time.

Answer: C

44) Opportunity cost is

A) what we give up to get something else.

B) marginal cost divided by total cost.

C) the same as real cost.

D) all of the above

Answer: A

45) Economists often refer to "good deals" as

A) profit opportunities.

B) break-even propositions.

C) efficient market outcomes.

D) those with no opportunity cost.

Answer: A

46) If you can download 10 ring tones for your cell phone for $10 or you could download 11
ring tones for your cell phone for $10.50, then the marginal cost of the eleventh ring tone is

A) $0.50.

B) $10.00.

C) $10.50.

D) $20.50.

Answer: A

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47) If you eat at a Las Vegas casino that charges $12 for its all you can eat buffet, then the
marginal cost of your third trip to the buffet is

A) zero.

B) $4.

C) $12.

D) $36.

Answer: A

48) An efficient market is a market

A) that deals in unlimited resources.

B) in which long-term profits are guaranteed.

C) in which profit opportunities are eliminated almost instantaneously.

D) in which there are no opportunity costs.

Answer: C

49) If information is more costly and less easily available, then usually this

A) makes markets more efficient.

B) makes markets less efficient.

C) decreases profit opportunities.

D) decreases the opportunity cost of acquiring more information.

Answer: B

50) The common way of expressing the efficient market concept is

A) "the only true market is a profitable market."

B) "there's no such thing as a free lunch."

C) "only without government interference can a market survive."

D) "once an efficient market, always an efficient market."

Answer: B

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51) Opportunity cost is

A) the additional cost incurred from the consumption of one more unit of output.

B) the cost involved when choosing between alternatives.

C) the cost of production which cannot be recaptured.

D) the total cost incurred from the consumption of additional output.

Answer: B

52) The cost involved when choosing between alternatives is known as the

A) marginal cost.

B) sunk cost.

C) opportunity cost.

D) normative cost.

Answer: C

53) Related to the Economics in Practice on p. 5: According to the Economics in Practice,

________ of the $10 retail value of a Barbie doll is captured in the United States.

A) none

B) 35 cents

C) $2

D) $8

Answer: D

54) Related to the Economics in Practice on p. 5: The opportunity cost to Apple of having the
hard drive produced in Japan by Toshiba is

A) the wages paid to Japanese workers.

B) the components of the hard drive which are not produced by Toshiba.

C) having the hard drive produced by the next best available company.

D) the value-added captured by Apple in the United States.

Answer: C

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55) Resources are unlimited in a wealthy society.

Answer: FALSE

56) The value of the best alternative foregone is the opportunity cost of making a decision.

Answer: TRUE

57) Opportunity costs arise due to scarce resources.

Answer: TRUE

58) Marginal cost refers to the incremental cost arising from a decision.

Answer: TRUE

59) A market is considered efficient if profit opportunities remain continually available.

Answer: FALSE

60) Resources are limited in both wealthy and poor societies.

Answer: TRUE

61) A basic understanding of economics is needed to be an informed citizen.

Answer: TRUE

62) Opportunity costs are another name for marginal costs.

Answer: FALSE

63) The phrase "there's no such thing as a free lunch" is a common way of expressing the
concept of efficient markets.

Answer: TRUE

64) Studying economics helps us to better understand society.

Answer: TRUE

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1.2 The Scope of Economics

1) The branch of economics that examines the functioning of individual industries and the
behavior of individual decision-making units is

A) positive economics.

B) normative economics.

C) macroeconomics.

D) microeconomics.

Answer: D

2) Studying how the management of Hewlett Packard decides how many computers to
produce and the price to charge for its computers would be considered

A) descriptive economics.

B) empirical economics.

C) microeconomics.

D) macroeconomics.

Answer: C

3) Studying how Joshua allocates his time between school and video games is an example of

A) macroeconomics.

B) microeconomics.

C) industrial organization.

D) descriptive economics.

Answer: B

4) The study of how benefits are determined for city employees would be considered

A) microeconomics.

B) macroeconomics.

C) descriptive economics.

D) institutional economics.

Answer: A

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5) Inflation and unemployment

A) are the focus of normative economics.

B) are a focus of microeconomics.

C) are a focus of positive economics.

D) are a focus of macroeconomics.

Answer: D

6) Microeconomics is best described as the study of

A) the choices made by individual households, firms, and governments.

B) inflation, unemployment, gross national product, and the nation's economy as a whole.

C) how markets interact in the aggregate economy.

D) marginal changes in the economy.

Answer: A

7) Macroeconomics is best described as the study of

A) very large issues.

B) the choices made by individual households, firms, and governments.

C) the nation's economy as a whole.

D) the relationship between inflation and wage inequality.

Answer: C

8) Which of the following is a microeconomics question?

A) Is it sensible for a government to subsidize tobacco production?

B) Why do some countries grow faster than others?

C) Should Congress and the president take action to reduce global warming?

D) Should the government attempt to influence the interest rate to lower inflation?

Answer: A

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9) Which of the following is a macroeconomics question?

A) Should we have a constitutional amendment to balance the federal budget?

B) Why does a firm decide to enter a particular market?

C) Should the government prevent the merger of two large firms?

D) Should the government put a tax on alcohol in an attempt to reduce highway fatalities?

Answer: A

10) We can use macroeconomic analysis to

A) learn how to balance a checkbook.

B) study the choices made by households.

C) understand marginal changes in the macroeconomy.

D) understand why economies grow.

Answer: D

11) The rate of economic growth is a topic of microeconomics.

Answer: FALSE

12) The aggregate price level is a topic of macroeconomics.

Answer: TRUE

13) The rate of unemployment is a topic of microeconomics.

Answer: FALSE

14) The rate of inflation is a topic of macroeconomics.

Answer: TRUE

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Chapter 2 The Economic Problem: Scarcity and Choice

2.1 Scarcity, Choice, and Opportunity Cost

1) The process by which resources are transformed into useful forms is

A) capitalization.

B) consumption.

C) production.

D) allocation.

Answer: C

2) Outputs in the production process are

A) pollution.

B) money.

C) goods and services of value to households.

D) resources.

Answer: C

3) Which of the following is not a resource as the term is used by economists?

A) land

B) labor

C) buildings

D) money

Answer: D

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4) Which of the following would an economist classify as capital?

A) a $50 bill

B) a corporate bond

C) a post office employee

D) a guitar used by a musician

Answer: D

5) Capital, as economists use the term,

A) is the money the firm spends to hire resources.

B) is money the firm raises from selling stock.

C) refers to the process by which resources are transformed into useful forms.

D) refers to things that have already been produced that are in turn used to produce other
goods and services.

Answer: D

6) The concept of opportunity cost is based on the principle of

A) need.

B) consumption.

C) scarcity.

D) profit.

Answer: C

7) The concept of trade-offs would become irrelevant if

A) we were dealing with a very simple, one-person economy.

B) poverty were eliminated.

C) scarcity were eliminated.

D) capital were eliminated.

Answer: C

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8) Suppose you are deciding whether to spend your tax rebate check on a new iPod or a new
digital camera. You are dealing with the concept of

A) equity.

B) comparative advantage.

C) opportunity costs.

D) the fallacy of composition.

Answer: C

9) According to the theory of comparative advantage, specialization and free trade will
benefit

A) only that trading party that has both an absolute advantage and a comparative advantage
in the production of all goods.

B) all trading parties, even when some are absolutely more efficient producers than others.

C) only that trading party that has an absolute advantage in the production of all goods.

D) only that trading party that has a comparative advantage in the production of all goods.

Answer: B

Refer to the information provided in Table 2.1 below to answer the following question(s).

Table 2.1

Krystal Mark

Writing Poems 8 12

Writing TV Commercials 2 4

10) Refer to Table 2.1. For Krystal, the opportunity cost of writing one TV commercial is

A) 1/4 of a poem.

B) 2 poems.

C) 4 poems.

D) 6 poems.

Answer: C

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11) Refer to Table 2.1. For Mark, the opportunity cost of writing one TV commercial is

A) 1/3 of a poem.

B) 2 poems.

C) 3 poems.

D) 8 poems.

Answer: C

12) Refer to Table 2.1. Which of the following statements is true?

A) Krystal has a comparative advantage in both writing TV commercials and writing poems.

B) Mark has a comparative advantage in both writing TV commercials and writing poems.

C) Krystal has a comparative advantage in writing TV commercials, and Mark has a

comparative advantage in writing poems.

D) Mark has a comparative advantage in writing TV commercials, and Krystal has a

comparative advantage in writing poems.

Answer: D

13) Refer to Table 2.1. To maximize total production,

A) Krystal should specialize in writing TV commercials, and Mark should specialize in

writing poems.

B) Mark should specialize in writing TV commercials, and Krystal should specialize in

writing poems.

C) Krystal and Mark should both split their time between writing poems and writing TV
commercials.

D) Krystal should write poems and write TV commercials, but Mark should only write
poems.

Answer: B

14) Refer to Table 2.1. For Mark, the opportunity cost of writing six TV commercials is
________ poems.

A) 2

B) 18

C) 24

D) an indeterminate number of

Answer: B

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15) Refer to Table 2.1. For Krystal, the opportunity cost of writing four TV commercials is
________ poems.

A) 2

B) 8

C) 16

D) 32

Answer: C

16) According to the theory of comparative advantage, ________ raise(s) productivity by

lowering opportunity costs.

A) trade and specialization

B) investment in capital goods

C) economic growth

D) exchange and consumption

Answer: A

17) When two people trade,

A) both of them expect to be made worse off by the exchange.

B) they are trying to help out each other.

C) they know one of them will get the better of the other.

D) they both expect to be made better off by the exchange.

Answer: D

18) Someone has a comparative advantage in producing a good if she can produce that good

A) in greater quantities.

B) at a lower opportunity cost.

C) using more capital and less labor.

D) using more labor and less capital.

Answer: B

23
19) If someone has a comparative advantage in growing pineapples,

A) she can grow pineapples at a lower opportunity cost than other pineapple growers.

B) she also has an absolute advantage in growing pineapples.

C) she can grow more pineapples using the same resources than other pineapple growers.

D) pineapples are the only product she can grow.

Answer: A

20) Which of the following does not constitute an act of "investment" as economists use the
term?

A) The city council authorizes the construction of a new fire station.

B) A retiree buys 50 shares of stock at $10 a share and then sells the stock at a profit for $20 a
share.

C) An accountant attends a seminar on changes in the federal tax code.

D) A department store increases its inventory of football jerseys before the Super Bowl.

Answer: B

21) In economics, investment always refers to

A) the act of buying stocks or bonds.

B) the creation of capital.

C) increasing the quantity of labor.

D) an increase in per capita output.

Answer: B

22) The process of using resources to produce new capital is

A) research and development.

B) investment.

C) consumption.

D) economic growth.

Answer: B

24
23) An example of forgoing present benefits in order to receive future benefits is

A) production.

B) saving.

C) consumption.

D) growth.

Answer: B

24) Because resources are scarce, the opportunity cost of investment in capital is

A) zero.

B) forgone future consumption.

C) forgone present consumption.

D) infinite.

Answer: C

25) An example of an investment is

A) the purchase of a share of Google stock.

B) the purchase of an ExxonMobil bond.

C) the purchase of a Hewlett Packard laser printer for use by a business.

D) all of the above.

Answer: C

26) The opportunity cost of investment in capital is forgone present consumption because

A) capital takes a long time to produce.

B) capital increases the productivity of labor.

C) resources are scarce.

D) capital is an intangible good.

Answer: C

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27) If the unemployment rate increases from 10% to 14%, the economy will

A) move closer to a point on the ppf.

B) move away from the ppf toward the origin.

C) remain on the ppf.

D) remain on the origin.

Answer: B

28) Periods of less than full employment correspond to

A) points outside the ppf.

B) points underneath the ppf.

C) points on the ppf.

D) either points inside or outside the ppf.

Answer: B

26
Refer to the information provided in Figure 2.1 below for the economy of Macroland to
answer the question(s) that follow.

Figure 2.1

29) Refer to Figure 2.1. Macroland is currently operating at Point A. The best explanation for
this is that

A) the economy has very poor technology.

B) the economy's resources are being used inefficiently.

C) the economy has very few resources.

D) the economy operates as an efficient market.

Answer: B

30) Refer to Figure 2.1. Macroland's production possibility frontier is bowed out from the
origin due to

A) decreasing opportunity costs.

B) trade.

C) unemployment.

D) specialized resources.

Answer: D

27
31) Refer to Figure 2.1. The shape of Macroland's production possibility frontier shows

A) increasing opportunity costs.

B) constant opportunity costs.

C) decreasing opportunity costs.

D) random opportunity costs.

Answer: A

32) Refer to Figure 2.1. If Macroland's economy is at Point A, it could produce more consumer
goods

A) without sacrificing any capital goods.

B) only by sacrificing some capital goods.

C) only with technological improvements.

D) only with additional resources.

Answer: A

33) Refer to Figure 2.1. If Macroland's economy is at Point A, it could produce more capital
goods

A) without sacrificing any consumer goods.

B) only by sacrificing some consumer goods.

C) only with technological improvements.

D) only with additional resources.

Answer: A

34) The production possibility frontier is used to illustrate the concept of

A) the laissez-faire economy.

B) opportunity costs.

C) equilibrium.

D) aggregate demand.

Answer: B

28
Refer to the information provided in Figure 2.2 below for the economy of Microland to
answer the question(s) that follow.

Figure 2.2

35) Refer to Figure 2.2. Point B represents a situation of

A) full employment but production inefficiency.

B) less than full employment but production efficiency.

C) both full resource employment and production efficiency.

D) less than full employment and production inefficiency.

Answer: C

36) Refer to Figure 2.2. Microland is currently operating at Point B. You correctly deduce that

A) in Microland, all resources are fully employed and there are no production inefficiencies.

B) Microland has achieved a position of inefficiency.

C) Microland has recently experienced some type of technological breakthrough.

D) Microland has overcome the problem of scarcity.

Answer: A

29
37) Refer to Figure 2.2. If Microland's economy is at Point A, it could produce more consumer
goods

A) without sacrificing any capital goods.

B) by sacrificing some capital goods.

C) only with technological improvements.

D) only with additional resources.

Answer: B

38) Refer to Figure 2.2. If Microland's economy is at Point A, it could produce more capital
goods

A) without sacrificing any consumer goods.

B) by sacrificing some consumer goods.

C) only with technological improvements.

D) only with additional resources.

Answer: B

39) Refer to Figure 2.2. Full resource employment and production efficiency is represented by
a point

A) inside the production possibility frontier.

B) along the production possibility frontier.

C) outside the production possibility frontier.

D) either inside or along the production possibility frontier.

Answer: B

40) Refer to Figure 2.2. You correctly deduce that all resources are fully employed and there
are no production inefficiencies if this economy is currently operating at a point

A) inside the production possibility frontier.

B) along the production possibility frontier.

C) outside the production possibility frontier.

D) either inside or along the production possibility frontier.

Answer: B

30
41) The production possibility frontier is a graph that shows

A) all the combinations of goods and services that are consumed over time if all of society's
resources are used efficiently.

B) the amount of goods and services consumed at various average price levels.

C) the rate at which an economy's output will grow over time if all resources are used
efficiently.

D) all the combinations of goods and services that can be produced if all of society's resources
are used efficiently.

Answer: D

42) Production inefficiency occurs

A) only when an economy produces underneath its production possibility frontier.

B) only when an economy produces at the wrong point on the production possibility frontier.

C) either when an economy produces underneath the production possibility frontier or when
the economy is producing the wrong combination of goods on the production possibility
frontier.

D) only when the economy produces outside the production possibility frontier.

Answer: A

43) An economy that is producing on the production possibility frontier at some point other
than the output of efficient allocation is

A) efficient, as it is on the production possibility frontier.

B) inefficient, as the combination of goods and services produced is not what people want.

C) efficient, as the economy is producing goods at the lowest possible cost.

D) inefficient, as that combination of goods could be produced at a lower cost if more efficient
technology were employed.

Answer: B

31
44) If resources are combined efficiently in production, then the society

A) is producing at the most-desirable point on the production possibility frontier.

B) is producing at a point on the production possibility frontier but not necessarily at the
most-desirable point.

C) is producing at a point outside the production possibility frontier.

D) is experiencing economic growth.

Answer: B

45) If an economy begins to use its resources more efficiently, it will move

A) closer to its ppf.

B) farther away from its ppf.

C) from a point along its ppf to a point outside its ppf.

D) from one point to another point along its ppf.

Answer: A

46) The value of the slope of a society's production possibility frontier is called its

A) marginal rate of substitution.

B) inflation rate.

C) unemployment rate.

D) marginal rate of transformation.

Answer: D

47) The marginal rate of transformation is the

A) slope of the production possibility frontier.

B) dollar value of the best forgone alternative.

C) process of using resources to produce new capital.

D) transformation of resources into a form that is useful to people.

Answer: A

32
Refer to the information provided in Figure 2.3 below to answer the question(s) that follow.

Figure 2.3

48) Refer to Figure 2.3. Assume that in this society the marginal rate of transformation of
sailboats for surfboards is constant and equal to -10. A graph of this society's production
possibility frontier will be represented by Panel

A) A.

B) B.

C) C.

D) D.

Answer: C

33
49) Refer to Figure 2.3. Assume that in this society the opportunity cost of sailboats in terms
of surfboards is increasing. A graph of this society's production possibility frontier will be
represented by Panel

A) A.

B) B.

C) C.

D) D.

Answer: A

50) Refer to Figure 2.3. The law of ________ opportunity costs is best depicted by the
production possibilities frontier in Panel A.

A) increasing

B) constant

C) decreasing

D) zero

Answer: A

51) Refer to Figure 2.3. Assume that this society's production possibility frontier is
represented by Panel C. The marginal rate of transformation of sailboats for surfboards is

A) 1/10.

B) -1/10.

C) 10.

D) -10.

Answer: D

52) Refer to Figure 2.3. Assume that this society's production possibility frontier is
represented by Panel C. The opportunity cost of sailboats in terms of surfboards is

A) constant.

B) increasing.

C) decreasing.

D) infinite.

Answer: A

34
53) Refer to Figure 2.3. Increasing opportunity costs are best depicted by the production
possibility frontier in Panel

A) A.

B) B.

C) C.

D) D.

Answer: A

54) A society can produce two goods: donuts and beer. The society's production possibility
frontier is negatively sloped and "bowed outward" from the origin. As this society moves up
its production possibility frontier, producing more and more units of donuts, the opportunity
cost of producing beer

A) decreases.

B) remains constant.

C) increases.

D) could decrease or increase depending on the technology.

Answer: C

35
Refer to the information provided in Figure 2.4 below to answer the question(s) that follow.

Figure 2.4

55) According to Figure 2.4, the point where only motorcycles are produced is

A) A.

B) B.

C) C.

D) E.

Answer: D

56) According to Figure 2.4, the optimal point for the economy is

A) A.

B) B.

C) F.

D) indeterminate from the information given.

Answer: D

36
57) According to Figure 2.4, which point cannot be produced with the current state of
technology?

A) A

B) B

C) C

D) F

Answer: D

58) According to Figure 2.4, the point where only hybrid cars are produced is

A) A.

B) B.

C) C.

D) D.

Answer: A

59) According to Figure 2.4, a decrease in unemployment may be represented by the

movement from

A) B to A.

B) B to D.

C) C to D.

D) A to C.

Answer: C

60) According to Figure 2.4, as the economy moves from Point A to Point E, the opportunity
cost of motorcycles, measured in terms of hybrid cars,

A) decreases.

B) increases.

C) remains constant.

D) initially increases, then decreases.

Answer: B

37
61) According to Figure 2.4, as the economy moves from Point E to Point A, the opportunity
cost of hybrid cars, measured in terms of motorcycles,

A) increases.

B) decreases.

C) remains constant.

D) initially increases, then decreases.

Answer: A

62) Refer to Figure 2.4. The economy moves from Point A to Point D. This could be explained
by

A) a reduction in unemployment.

B) an improvement in technology.

C) an increase in economic growth.

D) a change in society's preferences for motorcycles versus hybrid cars.

Answer: D

63) According to Figure 2.4, Point A necessarily represents

A) an unattainable production point.

B) only hybrid cars being produced.

C) the economy's optimal production point.

D) what society wants.

Answer: B

64) According to Figure 2.4, Point F

A) is efficient and attainable.

B) represents underallocation of resources.

C) represents what the people want.

D) cannot be produced with the current state of technology.

Answer: D

38
65) According to Figure 2.4, Point E necessarily represents

A) an impossible production point.

B) technological advancement.

C) overallocation of resources.

D) only motorcycles being produced.

Answer: D

66) According to Figure 2.4, an increase in unemployment may be represented by the

movement from

A) B to A.

B) B to D.

C) C to D.

D) A to C.

Answer: D

67) According to Figure 2.4, as the economy moves from Point B to Point D, the opportunity
cost of motorcycles, measured in terms of hybrid cars

A) remains constant.

B) decreases.

C) increases

D) initially increases, then decreases.

Answer: C

68) According to Figure 2.4, as the economy moves from Point D to Point B, the opportunity
cost of hybrid cars, measured in terms of motorcycles

A) remains constant.

B) decreases.

C) increases.

D) initially increases, then decreases.

Answer: C

39
69) Refer to Figure 2.4. The economy moves from Point E to Point B. This could be explained
by

A) an increase in unemployment.

B) a reduction in unemployment.

C) a change in society's preferences for hybrid cars versus motorcycles.

D) an increase in economic growth.

Answer: C

40