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BUS 207 Chapter 1: Chapter 1Exam

Business Administration
Course Code
BUS 207
Bernie Maroney
Study Guide

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Chapter 1: Economic Issues and Concepts
Answers to Study Exercises
Fill-in-the-Blank Questions
Question 1
a) land, labour, capital; factors
b) opportunity cost
c) production possibilities boundary
d) scarcity (because points outside the boundary are unattainable); downward (or negative); the
opportunity cost associated with any choice
e) constant; increasing
f) increases (meaning that more units of good B must be given up to get an extra unit of good A)
Question 2
a) self; self-interest
b) incentives created by market prices
c) firms; households; governments
d) increase (maximize); increase (maximize)
e) margin; (marginal) cost
Question 3
a) division; specialization
b) trade
c) money
d) globalization

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Review Questions
Question 4
Any realistic production possibilities boundary displays scarcity, the need for choice, and
opportunity cost.
Scarcity: The production possibilities boundary (PPB) separates attainable combinations of
goods from those that are unattainable. Thus scarcity is shown by the existence of some
unattainable bundles of goods.
Choice: Because of scarcity, societies must somehow choose how resources are to be allocated;
thus a particular point on the PPB must be chosen.
Opportunity Cost: The slope of the PPB is negative, revealing the opportunity cost that is
unavoidable every time a choice is made. For the economy as a whole, the decision to produce
more of one good must involve a decision to produce less of some other good.
Question 5
Consider any country’s production possibilities boundary, and suppose the two products are X
and Y. A technological improvement in industry X shifts the PPB out (along the X axis),
increasing the maximum amount of X that can be produced. Note that the maximum amount of Y
that can be produced has not changed. But since the PPB has shifted out, there are many
combinations of both goods that are now available that were not before, and some of these
involve producing more of both goods. Thus, even though the technology for producing Y has
not changed, the technological improvement in X does allow the country to choose to produce
more of both products.
Question 6
The central ideas illustrated by the two-good version of the production possibilities boundary (PPB)
are scarcity, choice, and opportunity cost. Exactly the same ideas can be illustrated in a more
realistic three-good version of the model, which is more complicated to draw, or by the much more
realistic N-good version of the model (with N 4), which is impossible to draw. Thus the
assumption of only two goods is merely a simplifying one: it allows us to easily grasp and illustrate
some central points that would be more difficult to understand in the more general N-good case.
Question 7
a) If all Canadian families had $80,000 of after-tax income (roughly the Canadian average), it
would be difficult to say that real poverty existed in Canada. At this level of income, all families
would easily have enough income to provide the essentials of food, shelter, and clothing, and
could also have much beyond these essentials. However, there would still be many things that

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these families could not afford, such as expensive university education, expensive vacations, a
cottage in the country, etc. Defining poverty with any precision is difficult, and we will say more
about this in Chapter 18.
b) Would scarcity exist in such a setting? Yes, certainly. By scarcity we mean simply an excess
of wants over the resources available to satisfy those wants. And scarcity would exist for each of
those families because most (if not all) of them would still desire to have more than they actually
c) Scarcity is an excess of wants over the resources available to satisfy those wants. Povertyat
least in its “absolute form”—is concerned with a level of resources below some threshold of
sufficiency. One can conceivably eliminate poverty, as in part (a), but that would not eliminate
Question 8
Microeconomics is the study of the allocation of resources within and across individual markets,
and the determination of relative prices and quantities in those specific markets. Little or no
attention is paid to the behaviour of the aggregate economy. Macroeconomics is the study of the
determination of aggregates such as aggregate output, employment, the price level, the
unemployment rate, and the exchange rate. When doing macroeconomics, little or no attention is
paid to what is going on in the individual markets for specific products.
Question 9
In the answers that follow, note that the statements are made ceteris paribus. In other words, the
predicted result of a change in some specific price is made under the assumption that nothing else
a) As the price of ski-lift tickets rises, you are likely to substitute toward other leisure activities
(whose price has not increased) and thus reduce your purchases of ski-lift tickets.
b) As the hourly wage for your weekend job rises, the opportunity cost of not working rises. So
you are more likely than before to decide not to go skiing, and to work instead.
c) As the fine for speeding rises, the cost of being caught speeding clearly increases. The benefit
of driving over the speed limit is presumably unchanged, however. So an increase in the value of
speeding tickets is likely to cause you to reduce your speed (and to watch more carefully for
hidden police cars!).
d) The higher the weight placed on the assignment, the greater is the incentive for you to work
hard on that assignment (and thus hopefully receive a higher grade on the assignment and on the
course). This is one obvious reason why professors like to put significant weight on midterm
exams to get students to work hard early in the course rather than leaving all the work to the
few days before the final exam!
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