Unit 1 Multiple Choice and FRQ examples.
1. Scarcity of resources implies that
a. People can do whatever they want and do not need to worry about making choices.
b. Life involves making choices about how to best use these scarce resources.
c. Societies need to invest time and money to discover more resources.
d. Only very wealthy individuals are not constrained by their resources.
2. Camillio is offered two jobs: one pays a salary of $30,000 per year and offers four weeks
of vacation, and the other pays a salary of $32,000 per year and offers two weeks of
vacation. What is the opportunity cost for Camillo of taking the job offering $32,000 per
year?
a. $2,000 plus two weeks of vacation per year.
b. $2,000 per year.
c. Two weeks of vacation per year.
d. $30,000 plus two weeks of vacation per year.
3. Which of the following statements is true about positive economics?
I.
Positive economics is about how the world should work.
II.
Positive economics is about how the world works.
III.
Positive economics is descriptive.
a. Statements I, II, and III are all true.
b. Statements I and III are true.
c. Statements II and III are true.
d. Statement II is true.
4. Which of the following statements is an example of normative economics?
I.
The United States should pass a value-added tax because this is a tax that will
work best.
II.
A value-added tax will add $10 billion to the administrative costs of the U.S. tax
system.
III.
A value-added tax will increase the economic burden of taxes on poor people by
15%.
a. Statements I, II, and III.
b. Statements I and III.
c. Statements I and II
d. Statement I
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14. Suppose Mike has a linear PPC in the production of potatoes and tomatoes. If he
devotes all his time to the production of potatoes, he can produce 1,000 pounds of
potatoes per year; if he devotes all his time to the production of tomatoes, he can
produce 2,000 pounds of tomatoes a year. Which of the following combinations of
potatoes and tomatoes is not feasible for Mike?
a. 1,000 pounds of potatoes and 2,000 pounds of tomatoes per year.
b. 1,000 pounds of potatoes and 0 pounds of potatoes per year.
c. 0 pounds of potatoes and 2,000 pounds of tomatoes per year.
d. 500 pounds of potatoes and 1,000 pounds of tomatoes per year.
15. Utopia has a linear PPC in the production of widgets and gadgets. It can produce three
gadgets per hour of labor or four widgets per hour of labor time. What is the
opportunity cost of producing one widget in Utopia?
a. 3 gadgets
b. 4 widgets
c. .75 gadget
d. 1.33 gadgets
16. (a) Jonesville produces widgets and gadgets, and its PPC is linear. It takes 5 hours of
labor to produce a gadget and 10 hours of labor to produce a widget. Suppose that
Jonesville has 100 hours of labor. What is the maximum number of widgets it can
produce?
a. 10 widgets
b. 20 widgets
c. 1 widget
d. 100 widgets
(b) What is the maximum number of widgets and gadgets it can produce if it devotes
half of its labor time to the production of gadgets and half of its labor time to the
production of widgets?
a.
b.
c.
d.
20 gadgets and 5 widgets
10 gadgets and 5 widgets
5 gadgets and 20 widgets
5 gadgets and 10 widgets
(c) What happens to the opportunity cost of producing a widget if Jonesville’s labor
resource increases to 200 hours of labor? The opportunity cost of producing a widget.
a. decreases
b. increases
c. does not change
d. may increase, decrease, or remain unchanged, depending on the number of gadgets
produced.
(d) If Jonesville has 100 units of labor, which of the following combinations of gadgets
and widgets is not feasible?
a. 4 gadgets and 8 widgets
b. 7 gadgets and 7 widgets
c. 8 gadgets and 6 widgets
d. 0 gadgets and 10 widgets
17. Suburbia has a PPC bowed out from the origin of the two goods, guns and butter, that it
produces from its available resources and technology. The following table describes six
points that lie on Suburbia’s PPC.
(a) Suppose Suburbia is initially producing at point D. What is the opportunity cost of
moving to point E?
a. 10 guns
b. 20 f\Guns
c. 20 pounds of butter
d. 30 pounds of butter
(b) Suppose Suburbia is initially producing at point D. What is the opportunity cost of
moving to point B.
a. 25 pounds of butter
b. 20 guns
c. 10 guns
d. 75 pounds of butter
18. Suppose that two countries, Texia and Urbania, produce food and clothing, and
currently do not trade. Both countries have linear PPCs. Id Texia devotes all of its
resources to food production, it can produce 1,000 units of food this year and 0 units of
clothing. If it devotes all of its resources to clothing production, it can produce 500 units
of clothing and 0 units of food. Urbania can produce either 500 units of food and 0 units
of clothing or 200 units of clothing and 0 units of food. Which country has the absolute
advantage in the production of clothing, and which has the absolute advantage in the
production of food?
a. Texia; texia
b. Texia; Urbania
c. Urbania; Texia
d. Urbania; Urbania
19. With regard to the two countries described in question 18, which country has the
comparative advantage in the production of clothing, and which has the comparative
advantage in the production of food.
a. Texia; Texia
b. Texia; Urbania
c. Urbania; Texia
d. Urbania; Urbania
20. Specialization and trade benefit
a. Usually only one of the trading partners.
b. The wealthier country more than the poorer country.
c. The poorer country more than the wealthier country.
d. Both countries if they specialize according to their comparative advantages.
Use the information on the graphs above to fill in the blanks.
1. The opportunity cost of 1 unit of textiles in the United States is ____________ and in Portugal is
___________.
2. The opportunity cost of 1 unit of wine in the United States is ____________ and in Portugal is
___________.
3. Assuming that the countries have identical resources, the United States has an absolute
advantage in ____________. Portugal has an absolute advantage in ____________.
4. The United States has a comparative advantage in _____________. Portugal has a comparative
advantage in ____________.
5. What happens to total world output when countries specialize and trade?
6. What is this called?
7. Are the countries better off? Explain.
Problems
1. For each of the following situations, describe the opportunity cost of each decision.
a. Sarah considers two options for Saturday night: She can attend a concert that costs $10 per
ticket or she can see a free movie. She attends the concert.
b. A new firm in town debates paying $20,000 for the prime location versus $10,000 for
another location. The firm estimates that it will eventually serve the same number of
customers in either location, but that it will take six months before the suboptimal location
provides the same outcome as the prime location. The firm purchases the $10,000
property.
c. Jamie can be either an unpaid intern at a company or he can earn $2,000 working as a camp
counselor. He takes the internship.
2. The following table presents the possible combinations of study time available to Roberto this
week as he prepares for his two midterms: economics and chemistry. Assume Roberto has 20
hours to study and that he will use all 20 hours studying economics and chemistry. Roberto
currently plans to study 10 hours for economics and 10 hours for chemistry.
a. If he alters his plan and studies 15 hours for economics, what is his opportunity cost?
b. If he alters his plan and studies 15 hours for chemistry, what is his opportunity cost?
c. If he alters his plan and studies 20 hours for economics, what is his opportunity cost?
3. Decide whether each statement is a normative statement or a positive statement.
a. The gasoline tax is projected to yield $10 million in tax revenue next year.
b. If the gasoline tax were raised by 10 cents per gallon, tax revenue would increase by 4%.
c. The state should raise the gasoline tax for the coming year. An increase in the tax will
reduce congestion and smog, which is more important than the cost to commuters if they
shift from private car transportation to public transportation.
d. Mandatory school enhances the work skills of students.
e. The age of mandatory school should be extended.
f.
An extension of mandatory school attendance will increase government education costs by
$2 million for the state.
4. Economists sometime disagree about positive economics, but more often they disagree about
normative economics. Define both of these terms, and explain why economists do not always
agree.
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7. The country of Utopia produces two goods from its available resources and technology. The
only resource that utopia has is labor. It takes 3 hours of labor to produce 2 widgets and 4 hours
of labor to produce 1 gadget. For this question, assume that the PPC for Utopia is a straight line.
a. Sketch the PPC for the country of Utopia. (Hint: Choose a relative time period, e.g., 20 hours
as your labor constraint, and sketch your PPC based on this amount of time and labor.)
Graph widgets on the y-axis and gadgets on the x-axis.
b. What is the slope of your PPC?
c. What is the opportunity cost of producing an additional widget in Utopia?
d. What is the opportunity cost of producing an additional gadget in Utopia?
8. The country of Jonesville produces two goods from its available resources and technology. The
only resource that Jonesville has is labor. It takes two hours of labor to produce a gadget and 5
hours of labor to produce a widget. For this question, assume that the PPC for Jonesville is
linear.
a. Suppose that you want to draw a PPC for Jonesville. What must you do first?
b. Sketch the PPC for Jonesville assuming that 120 hours of labor is available. Place gadgets on
the x-axis and widgets on the y-axis.
c. What is the slope of the PPC?
d. What is the opportunity cost of producing an additional gadget?
e. What is the opportunity cost of producing an additional widget?
f.
Suppose that Jonesville has 240 hours of labor available instead of 120 hours of labor. Does
this affect the opportunity cost of producing widgets or gadgets? Explain your answer.
9. The following table provides six possible production combinations that Smithtown can produce
from its available resources and technology during this year. Assume that Smithtown produces
only bicycles and tents from its available resources.
a. Sketch Smithtown’s PPC. Measure bicycles along the x-axis and tents along the y-axis.
b. Suppose Smithtown is producing at combination C. If Smithtown chooses to produce at
combination B, what is the opportunity cost of moving from combination C to B?
c. Suppose Smithtown is producing at combination C. If Smithtown chooses to produce at
combination D, what is the opportunity cost of moving from combination C to D?
d. Smithtown’s PPC is not linear. Explain why not.
There are two islands in the middle of the ocean, and these two islands produce fish and baskets. Big
Island can produce either 100 fish per day and 0 baskets per day or 0 fish per day and 200 baskets per
day. Big Island can also produce any combination of fish and baskets that lies on its linear PPC. Small
Island can produce either 80 fish per day and 0 baskets per day or 0 fish per day and 80 baskets per day.
Like Big Island, Small Island has a linear PPC.
a. Sketch two graphs. Sketch Big Island’s PPC on the first graph and Small Island’s PPC on the
second graph. Place fish/day on the y-axis and baskets/day on the x-axis.
b. What is the slope of Big Island’s PPC?
c. What is the slope of Small Island’s PPC?
d. What is the opportunity cost of producing an additional basket on Big Island? What is the
opportunity cost of producing an additional basket on Small Island? Which island can
produce baskets at a lower opportunity cost?
e. What is the opportunity cost of producing an additional fish on Big Island? What is the
opportunity cost of producing an additional fish on Small Island? Which island can produce
fish at a lower opportunity cost?
f.
What good should Big Island specialize in producing?
g. What good should Small Island specialize in producing?