The Economizing Problem
1. Economics is primarily the study of:
a. how scarcity can be eliminated
b. how firms manipulate prices
c. how government influence resource allocation decisions
d. the problem of scarce resources relative to human wants
Answer: d
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. The production possibilities curve:
a. shows all combinations of goods that society most desires
b. indicates that any combination of goods lying outside the curve is attainable
c. separates all combinations of two goods that can be produced from those that cannot
d. shows only those combinations of two goods that reflect “full production”
Answer: c
Feedback: The production possibilities curve is a frontier, indicating the maximum amount of one good achievable for a given amount of the other good. Only one of these combinations represents the combination society most desires and therefore represents “full production.”
3. Moving from left to right, the typical production possibilities curve has:
a. an increasingly steep negative slope
b. a decreasingly steep negative slope
c. an increasingly steep positive slope
d. a constant and negative slope
Answer: a
Feedback: As resources are typically not perfectly shiftable between production of the two goods, increased production of one good will require increasing sacrifices of the other.
4. Refer to the following:
The above is a circular flow model of the economy. In the diagram, consumer expenditures are represented by:
a. Flow 1
b. Flow 2
c. Flow 3
d. Flow 4
Answer: d
Feedback: Consumer expenditures represent a flow of money from households to firms in the product market.
5. When constructing a typical production possibilities curve, economists assume:
a. economic resources are underutilized
b. resources are equally productive in many alternative uses
c. all available resources are employed efficiently
d. production technology is allowed to vary
Answer: c
Feedback: The production possibilities curve represents the maximum possible production of one good for a given amount of the other. This requires that all resources be employed efficiently.
6. Answer the next question on the basis of the data given in the following production possibilities table:
Refer to the above table. These data indicate that increasing production of capital goods requires:
a. increasing sacrifices of consumer goods
b. decreasing sacrifices of consumer goods
c. constant sacrifices of consumer goods
d. no sacrifices of consumer goods
Answer: a
Feedback: As capital goods production increases by one unit, production of consumer goods initially decreases by one unit (moving from combination F to combination E), then 2 units (E to D), and so on. This reflects the principle of increasing costs.
7. A nation’s production possibilities curve is “bowed out” from the origin because:
a. resources are not perfectly shiftable between production of the two goods
b. capital goods and consumer goods utilize the same production technology
c. resources are scarce relative to human wants
d. opportunity costs are decreasing
Answer: a
Feedback: As resources are typically not perfectly shiftable between production of the two goods, increased production of one good will require increasing sacrifices of the other.
8. The negative slope of the production possibilities curve illustrates that:
a. some resources are always unemployed
b. an economy can produce more of one thing only by producing less of something else
c. opportunity costs are constant
d. business can sell more when prices are low
Answer: b
Feedback: When all resources are employed efficiently, the economy has achieved maximum production of one good for a given amount of the other. Increased production of any good requires sacrificing some of the other; the production possibilities curve will exhibit an inverse relationship between production of the two goods.
9. Of the following countries, the one that best exemplifies a centrally planned economy is:
a. Germany
b. Canada
c. North Korea
d. Sweden
Answer: c
Feedback: German, Canada, and Sweden all have mixed economies reflecting a large degree of free markets. North Korea’s economy, however, is largely centrally planned.
10. The scarcity problem:
a. can be eliminated if all countries adopt laissez-faire capitalism
b. will persist so long as productive resources are limited
c. persists only in the developing countries
d. will be eliminated if full employment is achieved
Answer: b
Feedback: The problem of scarcity arises because resources are limited relative to human wants. This condition will persist because our productive resources are limited while our wants are without limit.