1 Chapter 2 Practice Quiz Tutorial Production Possibilities and Opportunity Cost ©2004 South-Western

2 1. Which of the following decisions must be made by all economies? a. How much to produce? When to produce? How much does it cost? b. What is the price? Who will produce it? Who will consume it? c. What to produce? How to produce? For whom to produce? d. none of the above. C. Regardless of the size of wealth of a nation, it must choose a system to answer these three basic questions

3 2. The student who has one evening in which to prepare for two exams on the following day has the following two alternatives: A B Possibility Score in Economics Score in Accounting

4 The opportunity cost of receiving 90, rather than 80, on the accounting exam is represented by how many points on the economic exam? a. 15 points. b. 80 points. c. 90 points. d. 10 points. Possibility Score in Economics Score in Accounting A B A. By spending more time studying for accounting and therefore spending less time studying for the economics exam, 15 points on the economics exam are given up.

5 3. Opportunity cost is the a. purchase price of a good or service. b. value of leisure time plus out-of-pocket costs. c. best option given up as a result of choosing an alternative. d. undesirable sacrifice required to purchase a good. C. Opportunity cost is that which is given up in the best alternative, not that which is paid in money for the good bought.

6 A B Military Goods Consumer Goods Unattainable Inefficient Production Possibilities Curve Efficient

7 4. On a production possibilities curve, the opportunity cost of more units of good A in terms of units of good B is represented by a. the distance to the curve from the vertical axis. b. the distance to the curve from the horizontal axis. c. the movement along the horizontal axis. d. all of the above. C. To have more units of good A a person will have to give up units of good B as represented on the horizontal axis.

8 5. If a farmer adds 1 pound of fertilizer per acre, the value of the resulting crops rises from $80 to $100 per acre. According to marginal analysis, the farmer should add fertilizer if it costs less than a. $12.50 per pound. b. $20 per pound. c. $80 per pound. d. $100 per pound. B. As long as the fertilizer costs less than $20 per pound, the farmer will gain more by fertilizing then he or she will lose by the expense of the fertilizer.

9 6. On a production possibilities curve, a change from economic inefficiency to economic efficiency is obtained by a. movement along the curve. b. movement from a point outside the curve to a point on the curve. c. movement from a point inside the curve to a point on the curve. d. a change in the slope of the curve. C. All points on the production possibilities curve represents combinations of both goods while operating at the most efficient level possible.

10 7. Any point inside the production possibilities curve is a (an) a. efficient point. b. unfeasible point. c. inefficient point. d. maximum output combination. C. While operating within the boundaries of the production possibilities curve, more of both goods can be attained if efficiency is improved. However, points beyond the curve are not possible without an increase in resources or technological advance.

11 8. Using a production possibilities curve, unemployment is represented by a point located a. near the middle of the curve. b. at the top corner of the curve. c. at the bottom corner of the curve. d. outside the curve. e. inside the curve. E. Any point underneath the production possibilities curve indicates that the economy’s resources are not being used efficiently, including labor.

12 9. Along a production possibilities curve, an increase in the production of one good can be accomplished only by a. decreasing the production of another good. b. increasing the production of another good. c. holding constant the production of another good. d. producing at a point on the corner of the curve. A. Along the production possibilities curve, there are no unemployed resources. Therefore, in order to produce more of one product, units of the other product must be given up.

Education and training that improve the skill of the labor force are represented on the production possibilities curve by a (an) a. movement along the curve. b. inward shift of the curve. c. outward shift of the curve. d. movement toward the curve from an exterior point. C. Investment in human capital enhances people’s ability being able to more effectively use the economy’s capital and push the production possibilities curve outward where more units of both products can be attained.

A nation can accelerate its economic growth by a. reducing the number of immigrants allowed into the country. b. adding to its capital stock. c. printing more money. d. imposing tariffs and quotas on imported goods. B. By increasing its stock of capital a nation can increase its productivity.

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