Multiple Choice Answers

Definition of Economics

1. The fact that wants cannot be fully satisfied with available resources reflects the definition of

a. the standard of living.

b. scarcity.

c. the output-inflation tradeoff.

d. for whom to produce.

Ans. b Scarcity refers to the observation that wants are unlimited but that the resources available to satisfy these wants are limited.

2. Studying the effects choices have on the national economy is part of

a. scarcity.

b. microeconomics.

c. macroeconomics.

d. global science.

Ans. c Macroeconomics studies the national economy as well as the global economy.

Three Big Microeconomic Questions

3. Which of the following is NOT one of the three big microeconomic questions?

a. What goods and services are produced?

b. How are goods and services produced?

c. For whom are goods and services produced?

d. Why are goods and services produced?

Ans. d “Why” is not one of the three big microeconomic questions.

4. The question, “Should personal computers or mainframe computers be produced?” is an example of the

a. “what” question.

b. “how” question.

c. “where” question.

d. “who” question.

Ans. a The “what” question asks in part, “What goods and services are produced?”

5. People have different amounts of income. This observation is most directly related to which of the big microeconomic questions?

a. The “what” question.

b. The “how” question.

c. The “why” question.

d. The “who” question.

Ans. d People with high incomes will get more goods and services than those with low incomes.

Three Big Macroeconomic Questions

6. Of the following, which country or region has the highest standard of living?

a. Japan

b. Central and Eastern Europe

c. The United States

d. Africa

Ans. c Of the areas listed, the United States has the highest standard of living.

7. During an inflation, the cost of living is ____ and the value of the dollar is ____.

a. rising; rising

b. rising; falling

c. falling; rising

d. falling; falling

Ans. b Inflation is defined as a rising cost of living and when the cost of living is rising, dollars are falling in value because each dollar buys fewer goods and services.

8. Which of the following is the correct order for the parts of a business cycle?

a. expansion, trough, recession, peak

b. expansion, recession, trough, peak

c. expansion, recession, peak, trough

d. expansion, peak, recession, trough

Ans. d Answer d is the correct ordering of the business cycle.

The Economic Way of Thinking

9. The fact that Intel decides to produce CPU chips rather than memory chips best reflects a ____ tradeoff.

a. what

b. how

c. for whom

d. standard of living

Ans. a The “what” tradeoff reflects Intel's decisions about “what” to produce.

10. The standard of living tradeoff reflects trading off

a. consumption in the United States for consumption in Africa .

b. higher inflation for higher consumption.

c. current consumption for economic growth.

d. consumption and equality.

Ans. c Economic growth will increase if people save more, but saving more means cutting current consumption of goods and services.

11. From 9 to 10 A . M . , Fred can sleep in, go to his economics lecture, or play tennis. Suppose that Fred decides to go to the lecture but thinks that, if he hadn't, he would otherwise have slept in. The opportunity cost of attending the lecture is

a. sleeping in and playing tennis.

b. playing tennis.

c. sleeping in.

d. one hour of time.

Ans. c The opportunity cost of an action is the (single) highest-valued alternative foregone by taking the action.

12. When the government chooses to use resources to build a dam, these resources are no longer available to build a highway. This choice illustrates the concept of

a. a market.

b. macroeconomics.

c. opportunity cost.

d. marginal benefit.

Ans. c Because the resources are used to build a dam, the opportunity of using them to build a highway is given up.

13. To make a choice on the margin, an individual

a. ignores any opportunity cost if the marginal benefit from the action is high enough.

b. will choose to use his or her scarce resources only if there is a very large total benefit from so doing.

c. compares the marginal cost of the choice to the marginal benefit.

d. makes the choice with the smallest opportunity cost.

Ans. c Comparing marginal cost and marginal benefit is an important technique, especially in microeconomics.

Production Possibilities and Opportunity Cost

14. Production points on the PPF itself are

a. efficient but not attainable.

b. efficient and attainable

c. inefficient but not attainable.

d. inefficient and attainable.

Ans. b Only points on the frontier are both attainable and efficient.

15. If the United States can increase its production of automobiles without decreasing its production of any other good, the United States must have been producing at a point

a. within its PPF .

b. on its PPF .

c. beyond its PPF .

d. None of the above are correct because increasing the production of one good without decreasing the production of another good is impossible.

Ans. a Only from points within the frontier can the production of a good increase without decreasing the production of another good.

16. In Figure 2.5, at point a what is the opportunity cost of producing one more video tape?

a. 14 audio tapes

b. 3 audio tapes

c. 2 audio tapes

d. There is no opportunity cost.

Ans. c By producing 1 more video tape, audio tape production falls by 2 (from 14 to 12), so the opportunity cost of the video tape is the ratio of 2 audio tapes to the 1 video tape, that is, 2 audio tapes per video tape.

17. In Figure 2.5, at point b what is the opportunity cost of producing one more video tape?

a. 12 audio tapes

b. 3 audio tapes

c. 2 audio tapes

d. There is no opportunity cost.

Ans. b As more video tapes are produced, the opportunity cost of an additional video tape gets larger.

18. Production efficiency means that

a. scarcity is no longer a problem.

b. producing more of one good without producing less of some other good is not possible.

c. as few resources as possible are being used in production.

d. producing another unit of the good has no opportunity cost.

Ans. b This answer is the definition of production efficiency.

19. The existence of the tradeoff along the PPF means that the PPF is

a. bowed outward.

b. linear.

c. negatively sloped.

d. positively sloped.

Ans. c When production is on the PPF , the tradeoff is that if more of one good is produced, then some other good must be foregone. This result means that the PPF has a negative slope.

20. The bowed-outward shape of a PPF

a. is due to capital accumulation.

b. reflects the unequal application of technology in production.

c. illustrates the fact that no opportunity cost is incurred for increasing the production of the good measured on the horizontal axis but it is incurred to increase production of the good measured along the vertical axis.

d. is due to the existence of increasing opportunity cost.

Ans. d Increasing opportunity cost means that, as more of a good is produced, its opportunity cost increases. As a result, the PPF bows outward.

A nation produces only two goods — yak butter and rutabagas. Three alternative combinations of production that are on its PPF are given in Table 2.1. Use this information to answer the next three questions.

21. In moving from combination a to b , the opportunity cost of producing more rutabagas is

a. 6 pounds of yak butter per rutabaga.

b. 4 pounds of yak butter per rutabaga.

c. 2 pounds of yak butter per rutabaga.

d. 0 pounds of yak butter per rutabaga.

Ans. c Moving from a to b gains 100 rutabagas and loses 200 pounds of yak butter, so the opportunity cost is (200 pounds of yak butter)/(100 rutabagas), or 2 pounds of yak butter per rutabaga.

22. In moving from combination b to a , the opportunity cost of producing more pounds of yak butter is

a. 0.10 rutabaga per pound of yak butter.

b. 0.50 rutabaga per pound of yak butter.

c. 1.00 rutabaga per pound of yak butter.

d. 2.00 rutabagas per pound of yak butter.

Ans. b 100 rutabagas are foregone, so the opportunity cost is (100 rutabagas)/(200 pounds of yak butter), or 0.50 rutabagas per pound of yak butter. Note how the opportunity cost of a rutabaga is the inverse of the opportunity cost of a pound of yak butter, as calculated in the answer to the previous question.

23. Producing 400 pounds of yak butter and 50 rutabagas is

a. not possible for this nation.

b. possible and is an efficient production point.

c. possible, but is an inefficient production point.

d. an abhorrent thought.

Ans. c When 400 pounds of yak butter are produced, a maximum of 100 rutabagas can be produced; if only 50 rutabagas are produced, the combination is inefficient.

Using Resources Efficiently

24. Moving along a bowed-out PPF between milk and cotton, as more milk is produced the marginal cost of an additional gallon of milk

a. rises.

b. does not change.

c. falls.

d. probably changes, but in an ambiguous direction.

Ans. a Along a bowed-out PPF , as more of a good is produced, its marginal cost — the opportunity cost of producing another unit — rises.

25. The most anyone is willing to pay for another purse is $30. Currently the price of a purse is $40, and the cost of producing another purse is $50. The marginal benefit of a purse is

a. $50.

b. $40.

c. $30.

d. An amount not given in the answers above.

Ans. c The marginal benefit from a good is the maximum that a person is willing to pay for the good.

26. If the marginal benefit from another computer exceeds the marginal cost of the computer, then to use resources efficiently,

a. more resources should be used to produce computers.

b. fewer resources should be used to produce computers.

c. if the marginal benefit exceeds the marginal cost by as much as possible, the efficient amount of resources are being used to produce computers.

d. none of the above is correct because marginal benefit and marginal cost have nothing to do with using resources efficiently.

Ans. a The benefit from the computer exceeds the cost of producing the computer, so society will gain if resources are allocated so that the computer is produced.

Economic Growth

27. Economic growth

a. creates unemployment.

b. has no opportunity cost.

c. shifts the PPF outward.

d. makes it more difficult for a nation to produce on its PPF .

Ans. c Economic growth makes attainable previously unattainable production levels.

28. The PPF shifts if

a. the unemployment rate falls.

b. people decide they want more of one good and less of another.

c. the prices of the goods and services produced rise.

d. the resources available to the nation change.

Ans. d An increase in resources shifts the PPF outward; a decrease shifts it leftward. (A decrease in the unemployment rate moves the nation from a point in the interior of the PPF to a point closer to the frontier.)

29. An increase in the nation's capital stock will

a. shift the PPF outward.

b. cause a movement along the PPF upward and leftward.

c. cause a movement along the PPF downward and rightward.

d. move the nation from producing within the PPF to producing at a point closer to the PPF .

Ans. a Increases in a nation's resources create economic growth and shift the nation's PPF outward.

30. One of the opportunity costs of economic growth is

a. capital accumulation.

b. technological change.

c. reduced current consumption.

d. the gain in future consumption.

Ans. c If a nation devotes more resources to capital accumulation or technological development, which are the main sources of growth, fewer resources can be used to produce goods for current consumption.

31. In general, the more resources that are devoted to technological research, the

a. greater is current consumption.

b. higher is the unemployment rate.

c. faster the PPF shifts outward.

d. more the PPF will bow outward.

Ans. c The more resources used for technological research, the more rapid is economic growth.