The Foundation of Economics

Chapter 01

Review Questions

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Question 01.
How do we apply the concept of opportunity cost in day today
decision making?

Question 02.
“Scarcity involves opportunity costs”. Elaborate this statement.

Question 03.
You won a lottery of Rs. 1000. You have a choice between
spending the money now or depositing it in a bank account for
a one year at 5% interest. What is the opportunity cost of
spending the Rs. 1000 now?

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Question 04.
Discuss how noneconomic resources could be converted in
to economic resources. Support your answer with examples.

Question 05.
What is the difference between positive economics and
normative economics?

Question 06.
What is a Production Possibility Curve (PPC)? What are the
assumptions made in constructing a PPC?
Question 07.
How is the shape of a PPC determined?

Question 08.
Show the following economic concepts using a PPC.
▪ Scarcity
▪ Opportunity cost
▪ Unemployment of resources
▪ Productive, allocative and economic efficiencies
▪ Improvements in technology
▪ Economic recession
Question 09.
Suppose we can divide all the goods produced by an economy
into two types: consumption goods and capital goods.

a. Suppose that a technological advancement occurs which

affects the production of capital goods, but not consumption
goods. Show the effect on the PPC.

b. Suppose that country A and country B currently have

identical PPCs, but that country A will devote only 5 percent
of its resources to produce capital goods over each of the
next 10 years, whereas country B will devote 30 percent.
Graphically illustrate which country is likely to experience a
rapid economic growth in future?
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Thank You