The Economizing Problem
1. The fundamental problem of economics implies that:
a. governments must be relied upon to supply essential goods and services
b. inflation and unemployment are unavoidable
c. growing populations will deplete natural resources
d. individuals and communities must make choices among competing alternatives
Feedback: The fundamental economic problem is one of scarce resources relative to human wants. Such scarcity can never be eliminated; it implies we must make choices.
2. An economy that has achieved “full production” has achieved:
a. Both allocative and productive efficiency
b. Allocative but not productive efficiency
c. Productive but not allocative efficiency
d. Neither allocative nor productive efficiency
Feedback: An economy that is both producing the goods and services most desired by society (allocative efficiency) and is producing them at lowest cost (productive efficiency) is said to have achieved “full production.”
3. Government authorities have managed to reduce the unemployment rate from 6% to 4% in a hypothetical economy. As a result:
a. the economy’s production possibilities curve has shifted outward
b. the economy has moved downward along its production possibilities curve
c. the economy has moved from a point inside to a point closer to its production possibilities curve
d. the economy’s production possibilities curve has become steeper
Feedback: The construction of the production possibilities curve assumes that all available resources are fully employed. A reduction in unemployment will bring the economy closer to this frontier.
4. Consider an economy that can produce either capital goods or consumer goods. If the opportunity cost of consumer goods is always 5 capital goods, then:
a. the production possibilities curve is a straight line
b. the opportunity cost of capital goods is always 5 consumer goods
c. the production possibilities curve is upward sloping
d. the production possibilities curve is bowed inward
Feedback: A constant opportunity cost implies that any increase in consumer goods always requires the same sacrifice of capital goods, in this case 5 units. In this case, the law of increasing cost does not apply and the production possibilities curve is straight line.
5. Which of the following would most likely shift the production possibilities curve for a nation outward?
a. A reduction in unemployment
b. An increase in the production of capital goods
c. A reduction in discrimination
d. An increase in the production of consumer goods
Feedback: Increased production of capital goods will create more productive resources and increase the productive capacity of the nation. A reduction in unemployment or discrimination will not increase productive capacity, but will push the nation closer to its production possibilities curve from a point inside it.
6. Margaret decides to stay home and study for her exam rather than going out with her friends to a movie. Her dilemma is an example of:
a. the economic perspective
b. marginal analysis
c. allocative efficiency
d. opportunity cost
Feedback: Opportunity cost is defined as the value of the best foregone alternative. In this case, Margaret has foregone the movie in order to study.
9. A nation achieves “allocative efficiency” if:
a. it produces at a point on, rather than inside, its production possibilities curve
b. it produces that combination of goods most desired by society
c. all available resources are fully employed
d. marginal benefit exceeds marginal cost for every possible good
Feedback:Allocative efficiency refers to the production of society’s most desired goods, while productive efficiency refers to the production of goods at lowest cost. Productive efficiency implies production at a point on the production possibilities curve, but not necessarily the point that society most prefers.
10. In the circular flow diagram, firms:
a. receive revenue and supply resources in the resource market
b. receive revenue and demand resources in the product market
c. incur costs and demand resources in the resource market
d. incur costs and supply goods and services in the product market
Feedback: In the resource market, households supply resources in exchange for incomes; firms demand those resources and incur costs in acquiring them.