EC120 Study Guide - Final Guide: Opportunity Cost

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EC120 Full Course Notes

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Document Summary

Assumptions simplify the complex world, make it easier to understand. Example: to study international trade, assume two countries and two goods. Unrealistic, but simple to learn and gives useful insights about the real world. Model: a high simplified representation of a more complicated reality. The production possibilities frontier (ppf) is a graph that shows the combinations of two goods the economy can possible produce given the available resources and the available technology. Example: two goods computers and wheat. One resource labour (measured in hours). Economy has 50,000 labour hours per month available for production. Recall: the opportunity cost of an item is what must be given up to obtain that item. Moving along a ppf involves shifting resources (e. g. , labor) from the production of one good to the other. *** this is how the opportunity costs relates to the ppf. The trade off from switching resources of production is the opportunity cost.

Related Questions

A bowed out PPF reflects which of the following ideas?

i.increasing opportunity cost

ii. resources are not equally productive in all activities

iii. prices of goods increase over time

		I only
		I and iii
		ii and iii
		I and ii

1 point

QUESTION 2

With no international trade, a country ________ consume at a point outside of its PPF; with international trade, a country ________ consume at a point outside of its PPF.

		can; cannot
		cannot; can
		cannot; cannot
		can; can

1 point

QUESTION 3

If the production possibilities frontier between two goods is a straight line, then the

		the line does not qualify as a production possibilities frontier because the unattainable production points are too close to the inefficient production points.
		opportunity cost is not a ratio.
		increasing opportunity costs.
		resources are equally productive in both goods.

1 point

QUESTION 4

As an economy produces more of one of the goods on a bowed out production possibilities frontier, what happens to the opportunity cost of producing the good?

		It might increase, decrease, or remain constant depending on how much people value the additional units of the good.
		It decreases.
		It increases.
		It remains constant.

1 point

QUESTION 5

"Comparative advantage" is defined as a situation in which one person can produce

		more of a good than another person.
		a good for a lower dollar cost than another person.
		a good for a lower opportunity cost than another person.
		more of all goods than another person.

1 point

QUESTION 6

When a production possibilities frontier is bowed outward, as more of one good is produced, its opportunity cost

		increases.
		decreases.
		might increase, decrease, or remain constant depending on how much people value the additional units of the good.
		remains constant.

1 point

QUESTION 7

A bowed out production possibility frontier shows that the

		opportunity cost relationship is linear.
		the opportunity cost of a good is constant as more of the good is produced.
		the opportunity cost of a good increase as more of the good is produced.
		the opportunity cost of a good decrease as more of the good is produced.

1 point

QUESTION 8

Which of the following statements is correct?

		The production possibilities frontier shows that there are no limits to production.
		Any point on or within the PPF is production efficient.
		If capital is idle, the economy is producing at its full potential.
		A tradeoff is a limit that forces an exchange or a substitution of one thing for something else.

1 point

QUESTION 9

A major earthquake occurs in the central part of the United States. What impact would this have on the nation's production possibilities frontier and why?

		A tradeoff would occur to replace the resources and goods destroyed.
		It would shift inward because some of the nation's resources, such as capital and labor, would be destroyed.
		It would shift outward because unemployment would be reduced.
		Nothing would happen because the nation would still have the same capabilities.

1 point

QUESTION 10

When a nation is producing on its production possibilities frontier, if more resources are used to produce one good, then the production of other goods

		must increase.
		must decrease.
		must remain the same.
		must change but they might increase or decrease.

1 point

QUESTION 11

Moving along a country's PPF, a reasonable opportunity costs increase is that

		unemployment increases as a country produce more and more of one good.
		unemployment decreases as a country produces more and more of one good.
		some resources are better suited for producing one good rather than the other.
		technology declines as a country produce more and more of one good.

1 point

QUESTION 12

A reason the production possibilities frontier exists is

		scarcity of resources and unlimited technology.
		unemployment.
		scarcity of resources.
		unlimited resources and technology.

1 point

QUESTION 13

Moving from one point to another on a production possibilities frontier implies

		increasing the production of one good and decreasing the production of another.
		increasing the production of both goods.
		decreasing the production of both goods.
		holding the production levels of both goods constant.

1 point

QUESTION 14

Specialization and trade make a country better off because with trade the country can consume at a point

		outside its production possibilities frontier.
		on its trading partner's production possibilities frontier.
		inside its production possibilities frontier.
		on its production possibilities frontier.

1 point

QUESTION 15

The production possibilities frontier is the

		the boundary between the combinations of goods and services that can be produced and the combinations that cannot be produced when technology is changing.
		the minimum output that can be produced when resources are used inefficiently.
		the boundary between the combinations of goods and services that can be produced and the combinations that cannot be produced, given the available factors of production and the state of technology.
		maximum output that can be produced at an opportunity cost of zero.

1 point

QUESTION 16

The opportunity cost of economic growth is ________ and the benefit of economic growth is ________.

		decreased current consumption; decreased future consumption
		decreased current consumption; increased future consumption
		increased current consumption; increased future consumption
		increased current consumption; decreased future consumption

1 point

QUESTION 17

In terms of a nation's production possibilities frontier, what impact does international trade have?

		International trade shifts the nation's production possibilities frontier outward.
		International trade shifts the production possibilities frontier outward for the goods that are exported and inward for the goods that are imported.
		International trade shifts the nation's production possibilities frontier inward.
		International trade allows the nation to consume at a point outside its production possibilities frontier.

1 point

QUESTION 18

The production possibilities frontier illustrates the

		goods and services that people want.
		limits to people's wants.
		resources the economy possesses, but not it is the level of technology.
		maximum combinations of goods and services that can be produced.

1 point

QUESTION 19

As we move along the production possibilities frontier,

		the possibilities of tradeoffs diminish.
		the production of one good increases as the production of the other good decreases.
		more of both goods can be produced.
		a tradeoff is not possible because nations need all goods.

1 point

QUESTION 20

What is the opportunity cost of economic growth?

		Eliminate scarcity
		Land.
		Capital goods.
		Consumption of goods.

1 point

QUESTION 21

Which of the following statements is correct?

i.As the economy grows, the opportunity costs of economic growth decrease.

ii. Economic growth has no opportunity cost.

iii. The opportunity cost of economic growth is current consumption forgone.

		ii only
		iii only
		I only
		I and iii

1 point

QUESTION 22

Does economic growth depend upon which of the following?

i. Increasing the quantity of labor.

ii. Lowering the prices of goods and services.

iii. Advancing technology.

		ii only.
		I only.
		I and iii.
		iii only.

1 point

QUESTION 23

When drawing a production possibilities frontier, which of the following is held constant?

		the amount of money in the economy
		the prices of goods and services
		the quantity of the goods and services that are produced
		the available factors of production and the state of technology

1 point

QUESTION 24

To increase its economic growth, a nation should

		encourage spending on goods and services.
		increase in current consumption.
		encourage education because that increases the quality of labor.
		limit the number of people in college because they produce nothing.

1 point

QUESTION 25

The opportunity cost of one more slice of pizza in terms of sodas is the

		some pizza slices we have to give up to get one extra soda.
		the total number of sodas that we have divided by the total number of pizza slices that we have.
		the total number of pizza slices that we have divided by the total number of sodas that we have.
		the number of sodas we have to give up to get one extra pizza slice.

jadecrow966

The opportunity cost of one more slice of pizza in terms of sodas is the

		the total number of pizza slices that we have divided by the total number of sodas that we have.
		the number of sodas we have to give up to get one extra pizza slice.
		the number of pizza slices we have to give up to get one extra soda.
		the total number of sodas that we have divided by the total number of pizza slices that we have.

1 point

QUESTION 2

A production possibilities frontier shows

		how money can be allocated among two kinds of goods.
		the limits to the future growth of a nation.
		the various combinations of output a nation can produce at a certain time, given its available resources and technology.
		that if the price of one good decreases, the price of the other has to increase.

1 point

QUESTION 3

When a production possibilities frontier is bowed outward, as more of one good is produced, its opportunity cost

		remains constant.
		might increase, decrease, or remain constant depending on how much people value the additional units of the good.
		increases.
		decreases.

1 point

QUESTION 4

When all of the available factors of production are being efficiently employed, the

		the economy is producing at a point within its PPF.
		PPF disappears.
		the economy is producing at a point beyond its PPF.
		the economy is producing at a point on its PPF.

1 point

QUESTION 5

If a nation devotes a larger share of its current production to consumer goods, then

		its PPF will shift inward.
		its economic growth will slow down.
		its PPF will shift outward.
		some productive factors will become unemployed.

1 point

QUESTION 6

A point on the production possibilities frontier reflects an

		the attainable point with full employment of all resources.
		attainable point without full employment of all resources.
		unattainable point without full employment of all resources.
		the unattainable point with full employment of all resources.

1 point

QUESTION 7

When drawing a production possibilities frontier, which of the following is held constant?

		the available factors of production and the state of technology
		the amount of money in the economy
		the prices of goods and services
		the quantity of the goods and services that are produced

1 point

QUESTION 8

As we move along the production possibilities frontier,

		more of both goods can be produced.
		the possibilities of tradeoffs diminish.
		a tradeoff is not possible because nations need all goods.
		the production of one good increases as the production of the other good decreases.

1 point

QUESTION 9

Which of the following is an assumption used when drawing a production possibilities frontier?

i.Human wants and desires are limited to what is available.

ii. Only two goods are considered.

iii. The level of technology is fixed and unchanging.

		I and iii
		ii only
		I, ii, and iii
		I only

1 point

QUESTION 10

To achieve gains from trade, a country

		needs to have an absolute advantage in the production of all goods.
		specializes in producing a good in which it has a lower opportunity cost.
		must produce at a point beyond its PPF.
		should produce at the midpoint of its PPF.

1 point

QUESTION 11

Relative to Al, Joe has ________ if Joe can produce a good at a lower opportunity cost than Al.

		a comparative advantage
		more production efficiency
		a marginal benefit
		a comparative benefit

1 point

QUESTION 12

Does economic growth depend upon which of the following?

i.Improving the quality of labor

ii. Technological advancement

iii. Increasing the amount of capital

		iii only
		ii only
		I only
		I, ii, and iii

1 point

QUESTION 13

In one hour John can produce 20 loaves of bread or 18 cakes. In one hour Phyllis can produce 30 loaves of bread or 15 cakes. Which of the following statements is true?

		John has a comparative advantage in producing cakes.
		Phyllis has an absolute advantage in both goods.
		Phyllis has a comparative advantage in producing cakes.
		John has an absolute advantage in both goods.

1 point

QUESTION 14

As an economy produces more of one of the goods on a bowed out production possibilities frontier, what happens to the opportunity cost of producing the good?

		It decreases.
		It might increase, decrease, or remain constant depending on how much people value the additional units of the good.
		It remains constant.
		It increases.

1 point

QUESTION 15

The production possibilities frontier illustrates the

		goods and services that people want.
		maximum combinations of goods and services that can be produced.
		resources the economy possesses, but not it is the level of technology.
		limits to people's wants.

1 point

QUESTION 16

The United States produced approximately ________ worth of goods and services in 2007.

		$14 billion
		$14 trillion
		$140 billion
		$140 trillion

1 point

QUESTION 17

The fact of increasing opportunity cost when moving on the PPF means that

		to increase the production of one product requires smaller and smaller sacrifices of the other good.
		to decrease the production of one product requires smaller and smaller sacrifices of the other good.
		to increase the production of one product requires larger and larger sacrifices of the other good.
		when the government forces a movement from one point on the PPF to another point, no production is lost.

1 point

QUESTION 18

Other things equal, if India devotes more resources to educate its population than China,

		China will grow faster than India.
		India will be able to eliminate scarcity faster than China.
		India will be able to eliminate opportunity cost faster than China.
		India will grow faster than China.

1 point

QUESTION 19

For Ireland to grow more potatoes, wool production must decrease. This situation is an example of

		zero opportunity cost.
		producing at a point that lies beyond the PPF.
		opportunity benefit.
		a tradeoff.

1 point

QUESTION 20

Moving from one point to another on a production possibilities frontier implies

		increasing the production of both goods.
		increasing the production of one good and decreasing the production of another.
		holding the production levels of both goods constant.
		decreasing the production of both goods.

1 point

QUESTION 21

The United States is one of the richest nations in the world,

		but it can still benefit from specialization and trade.
		so does not need to trade with poor nations to achieve any gains from trade.
		so might not have a comparative advantage in producing any goods.
		so it must have a comparative advantage in the production of all goods.

1 point

QUESTION 22

"Comparative advantage" is defined as a situation in which one person can produce

		more of all goods than another person.
		a good for a lower opportunity cost than another person.
		a good for a lower dollar cost than another person.
		more of a good than another person.

1 point

QUESTION 23

The idea of increasing opportunity cost is reflected in the

		the linear shape of the production possibilities frontier.
		bowed in the shape of the production possibilities frontier.
		bowed out the shape of the production possibilities frontier.
		the positive slope of the production possibilities frontier.

1 point

QUESTION 24

Suppose that after specializing according to comparative advantage, a country is trading with another nation that also specializes according to its comparative advantage. Which of the following statements are true for the first country?

i)It enjoys gains from trade.

ii)It must have an absolute advantage in the production of the good it produces.

iii)It is producing at a point beyond its PPF.

		I only.
		I and ii.
		I and iii.
		ii and iii.

1 point

QUESTION 25

If society moves from a period of time with significant unemployment to a time with full employment, its production possibilities frontier will

		shift rightward.
		not shift because the society moves from one point on the frontier to a point inside the frontier.
		not shift because the society moves from a point inside the frontier to a point on the frontier.
		shift leftward.

1 point

ochresea-lion6

1) Which of the following transactions would be included in GDP?

a) The purchase of a Monet painting.

b) The purchase of paper clips.

c) The purchase of Telstra shares.

d) The purchase of a used car.

2) Economics is the study of

a) the choices everybody makes to attain their goals, given their scarce resources.

b) supply and demand.

c) how to make money in a market economy.

d) how to make money in the stock market.

3) The economy is considered to be at full employment when

a) all unemployment is voluntary.

b) all unemployment is frictional or structural.

c) there are no unemployed workers.

d) there are more unemployed workers than job vacancies

4) An example of an intermediate good would be

a) a can of cool drink sold by a super‐market.

b) a microwave used at home.

c) the bread that goes into a sandwich sold by a lunch bar.

d) the petrol purchased by consumers for their cars

5) From 2004 to 2005, the CPI for medical care increased from 260.8 to 272.8. What was the inflation rate for medical care?

a) 12 percent

b) 11.1 percent

c) 4.9 percent

d) 4.6 percent

6) A shift outwards of the nation's production possibility frontier can occur from

a) a reduction in unemployment.

b) an increase in the size of the labour force.

c) a change in the amounts of one good desired.

d) a natural disaster like a hurricane or severe earthquake

7) What assumptions about humans do economists make?

a) People are greedy and selfish.

b) None, because economics takes humans as given.

c) People are rational and respond to incentives.

d) Humans prefer to live in a society that values fairness above all else.

8) The labour force is the

a) a number of people employed minus the number of people unemployed.

b) ratio of the number of people employed by the number of people unemployed.

c) ratio of the number of people employed to the working-age population.

d) the number of people employed plus the number of people unemployed.

9) The production possibility frontier shows

a) attainable combinations of two products that may be produced with available resources.

b) the various products that can be produced now and in the future.

c) what an equitable distribution of products among citizens would be.

d) the rate of substitution between capital and labour.

10) Which of the following transactions would be included in the official calculation of GDP?

a) Bridgestone sells $2 million worth of tyres to General Motors Holden

b) You illegally download music off the Internet to put on your new iPod.

c) A new iPod.

d) A student buys a used textbook at the bookstore.

11) What are the three fundamental questions that any economy must answer?

a) What will be the prices of goods, how will these goods be produced, and who gets them?

b) What will be the prices of goods, what will be produced, and who gets them?

c) What will be produced, how will these goods be produced, and who gets them?

d) How much will be saved, what will be produced, and how can these goods be fairly distributed?

12) If the nominal interest rate is 6% and the inflation rate is 2%, then the real interest rate is

a) 3%.

b) 2%.

c) 4%.

d) 8%.

14) Suppose that a very simple economy produces three goods: movies, burgers, and bikes. Suppose the quantities produced and their corresponding prices for 2004 and 2009 are shown in the following table:

	2004		2009
	Quantity	Price	Quantity	Price
Movies	20	$6	30	$7
Burgers	100	$2	90	$2.5
Bikes	3	$1000	6	$1100

What is real GDP in 2009, using 2004 as the base year?

a) $3690

b) $7035

c) $6360

d) $3320

15) If the production possibility frontier is graphed as a straight line, what does this mean?

a) Opportunity costs are constant as production shifts from one product to the other.

b) It is easy to efficiently produce output.

c) Nothing, there is no significance of a straight line production possibility frontier.

d) Opportunity costs are increasing as production shifts from one product to the other.

16) If you have both an economics exam and a management exam tomorrow, but find that you have time to fully study for only one of them, what are you facing?

a) A failing grade in both exams

b) A zero opportunity cost

c) A trade‐off

d) An impossible situation

17) Which of the following is a problem inherent in centrally planned economies?

a) Production managers do not satisfy consumer wants but the government's orders.

b) Too much production of low‐cost, high‐quality goods and services.

c) There are no problems, everyone, including consumers are satisfied.

d) None of these describe the problem inherent in a centrally planned economy.

18) Inflation is an increase in the

a) average hourly wage rate.

b) general price level in the economy.

c) the overall level of economic activity.

d) rate of growth of GDP.

19) Total production in the economy is measured as the

a) dollar value of all final goods and services produced in the economy.

b) the total number of services produced in the economy.

c) the total number of goods produced in the economy.

d) the total number of goods and services produced in the economy.

20) An increase in the price of dairy products produced domestically will be reflected in

a) Both the GDP deflator and the consumer price index.

b) Neither the GDP deflator nor the consumer price index.

c) The GDP deflator but not in the consumer price index.

d) The consumer price index but not in the GDP deflator.

21) The reason that opportunity cost arises is that

a) money has proven to be an inefficient means of facilitating exchange in a market.

b) sometimes there are no alternative decisions that can be made.

c) resources are limited at any point in time. d) people have unlimited wants.

21) You have an absolute advantage whenever you

a) are better educated than someone else.

b) can produce something at a lower opportunity cost than others.

c) can produce more of something than others with the same resources.

d) prefer to do one particular activity.

22) Which of the following is an example of a worker experiencing cyclical unemployment?

a) A Freightliner employee who was sacked because of a recession.

b) A worker who quits his job because he does not get along with his boss

c) A worker that changes jobs to move closer to her family.

d) An assembly line worker who loses his job because of automation.

23) A company named Home Depot sells new and used doors to contractors who build new homes. Home Depot also sells new and used doors to home‐owners. Which of the following would be counted in GDP?

a) The sale of a used door to a home‐owner

b) The sale of a used door to for construction for installation into a new home.

c) The sale of a new door to for construction for installation into a new home.

d) The sale of a new door to home‐owner.

24) If you buy shares, the dollar value is

a) not included in GDP.

b) included in GDP under consumer expenditure.

c) included in GDP as a business expense.

d) included in GDP under-investment.

25) During the 1930s, Australia and other industrialised countries experienced the Great Depression with a large number of workers and factories unemployed.Which of the following points on a production possibility frontier model would represent this experience?

a) A point on the frontier

b) A point inside the frontier

c) An increase in the opportunity cost of the substitution between capital and labour

d) A point outside the frontier

26) How is the decision about what goods and services will be produced made in a market economy?

a) The government decides on what will be produced.

b) Producing firms decide to produce only what the firms' owners say must be produced.

c) By consumers, firms, and government choosing which goods and services to buy.

d) What will be produced is determined by what society needs the most.

27) In the country of Shem, the CPI is calculated using a market basket consisting of 5 apples, 4 loaves of bread, 3 robes and 2 gallons of gasoline. The per‐unit prices of these goods have been as follows: Using 2002 as the base year, what was the inflation rate between 2003 and 2004?

a) 28.5 percent

b) 34.2 percent

c) 47 percent

d) It is impossible to determine without knowing the base year.

28) Given the following information, calculate the unemployment rate: Full‐time employed = 80 Part‐time employed = 25 Unemployed = 15 Discouraged workers = 5 Members of underground economy = 6 Consumer Price Index = 110

a) 18.8 per cent.

b) 12.5 per cent.

c) 16.7 per cent.

d) 25 per cent.

29) If the quantity of resources available is fixed, as more of a good is produced, the opportunity cost of producing it increases. The most probable reason for this is that

a) as more of a good is produced, the quality of technology available to produce additional units declines.

b) the price of the inputs used to produce the good will rise.

c) consumers are unwilling to pay higher prices to cover the increases in production costs.

d) resources are not equally well‐suited to producing all goods.

30) Which of the following is a normative statement?

a) The current high price of petrol is the result of strong worldwide demand.

b) The price of petrol is too high.

c) Larger vehicles always use more fuel per kilometre than smaller vehicles

d) The supply of petrol has not been able to meet the demand for petrol.

31) Transfer payments are not included in GDP because

a) they do not generate income.

b) their market value is difficult to measure.

c) they are not purchases of goods or services.

d) their value is included in government expenditure.

32) The opportunity cost of going to your economics class

a) depends on the cost of your transport getting to class.

b) is equal to the highest value of alternative use of the time.

c) is zero because there is no admission charged if you are enrolled in the class.

d) depends on the salary of the lecturer.

33) Establishing employment agencies that speeds up the process of matching unemployed workers with unfilled jobs are an attempt to lower

a) cyclical unemployment.

b) seasonal unemployment.

c) structural unemployment.

d) frictional unemployment.

34) Suppose that money GDP for 2009 was $15 000 billion and the price index was 150 and in 2010 money GDP was $17 050 billion with a price index of 155. What is the rate of economic growth?

a) 5%

b) 10%

c) 2%

d) 1%

35) An individual has a comparative advantage in activity whenever she

a) also has an absolute advantage in that activity.

b) can perform the activity at a lower opportunity cost than another person can.

c) can do everything better than everyone else can.

d) can do the activity in less time than anyone else.

36) GDP is not a perfect measure of wellbeing because

a) GDP is adjusted for increases in drug addiction.

b) GDP is not adjusted for the effects of pollution.

c) GDP is adjusted for changes in crime.

d) the value of leisure is included in GDP.

37) What does an entrepreneur do in a market economy?

a) Organise the factors of production in a working unit.

b) Stand to lose the personal funds provided.

c) Develop the vision for the firm and ensure funding for the firm.

d) An entrepreneur does all of these things.

38) An example of a transfer payment is

a) the purchase of a new government office block.

b) a teacher's pay is transferred electronically from the government to the teacher.

c) interest repayments on a loan.

d) an unemployment benefit.

39) Which of the following is a microeconomics question?

a) What will be the level of total production in the national economy?

b) How much income will be saved and how much will be spent on consumer goods?

c) What factors determine the price of computers in the market?

d) Why is the rate of unemployment rising?

40) The measure of production that values production using current prices is called

a) value-added GDP.

b) nominal GDP.

c) black economy GDP.

d) real GDP.

41) Which of the following causes the official measure of the unemployment rate to understate the true extent of joblessness?

a) People who collect unemployment benefits report themselves to be searching for a job.

b) Discouraged workers are counted as unemployed.

c) Discouraged workers are not counted as unemployed.

d) Many full-time workers really want to be part-time workers.

42) A production possibility frontier will shift inwards if

a) inefficiency in production processes arise.

b) there is an increase in the rate of unemployment.

c) productive resources are destroyed due to war.

d) all of these options are correct.

43) Structural unemployment would increase when

a) discouraged workers drop out of the workforce.

b) the economy enters a recession.

c) the number of individuals who quit their job to find another increase.

d) workers are replaced by machines and the workers do not have the skills to perform new jobs.

44) The 2005 CPI was 196 and the 1982 CPI was 96.5. If your parents put aside $1,000 for you in 1982, how much would you have needed in 2005 in order to buy what you could have bought with the $1,000 in 1982?

a) $1,834.20

b) $2,031.09

c) $2,308.89

d) None of the above is correct.

45) What is an economic model?

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EC120 Study Guide - Final Guide: Opportunity Cost

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