ECON 202 CH. 2

9) O'Sullivania, a small country, produces two types of goods: computers and food. O'Sullivania's initial production possibilities frontier is denoted by the solid line in Figure 1.4. Suppose that O'Sullivania's population doubles. Which diagram shows the most likely change in the country's production possibilities frontier? A)A B) B C) C D) D

A) A (There are more human resources to produce both goods, so both intercepts shift out)

29) The value of money or income in terms of the quantity of goods the money can buy is called its: A) real value. B) marginal value. C) nominal value. D) implicit value.

A) real value

30) Suppose your bank pays you 4% interest per year on your savings account, so that $100 grows to $104 over a one-year period. If prices increase by 3% per year over that time, approximately how much do you gain by keeping $100 in the bank for a year? A)$0 B) $1 C) $3 D) $4

B) $1

14) Mark quit his job as a salesman where he made $35,000 per year to start his own t-shirt making business. His business expenses are $6,000 per year on rent, $12,000 per year on supplies, and $4,000 per year on part time help. As for his personal expenses, his apartment costs him $4,800 per year and his personal bills are an extra $1,200 per year. What is Mark's opportunity cost of running the business? A) $63,000 B) $57,000 C) $41,000 D) $35,000

B) $57,000

17) Figure 2.1 presents a production possibilities curve for a country that can either produce highways or provide people with medical care in a given year. The opportunity cost of the third new highway built in a year is: A) 10,000 people provided with medical care. B) 50,000 people provided with medical care. C) 90,000 people provided with medical care. D) 450,000 people provided with medical care.

B) 50,000 people provided with medical care

22) The principle of diminishing returns implies that as one input increases while the other inputs are held fixed, output: A) increases at an increasing rate. B) increases at a decreasing rate. C) decreases at a decreasing rate. D) decreases at an increasing rate.

B) increases at a decreasing rate.

19) The extra benefit resulting from a small increase in an activity is called the: A) opportunity cost. B) marginal benefit. C) marginal cost. D) diminishing returns of the activity.

B) marginal benefit

3) If a society is at a point inside its production possibilities frontier it implies that: A) goods are produced with the optimal mixture of resources. B) more output could be produced using the same resources. C) technology is improving. D) all resources are used in production.

B) more output could be produced using the same resources.

25) The principle of diminishing returns occurs: A) only in the long run. B) only in the short run. C) in both the short run and the long run. D) in either the short run or the long run, depending on the circumstances.

B) only in the short run

18) A group of people has formed a house cleaning and yard maintenance business. The number of houses or yards that they can clean or maintain in any given day is depicted in Table 2.1. As the group cleans more houses the opportunity cost of cleaning houses: A) falls. B) rises. C) stays the same. D) is the sum of the opportunity costs of cleaning all the houses prior to that one.

B) rises

24) A firm produces its product using both capital and labor. When it does not change its capital usage, but doubles its labor input, its output increases by less than 50%. Which of the following is the most likely explanation of this finding? A) the principle of opportunity cost B) the principle of diminishing returns C) the marginal principle D) the spillover principle

B) the principle of diminishing returns

27) Refer to Table 2.4. The principle of diminishing returns sets in with the addition of the ________ tank of fertilizer. A) second B) third C) fourth D) fifth

B) third

12) The opportunity cost of something is: A) the cost of the labor used to produce it. B) what you sacrifice to get it. C) the price charged for it. D) the search cost required to find it.

B) what you sacrifice to get it.

26) Refer to Table 2.4. The marginal product of the 2nd tank of fertilizer is: A) 45 truckloads of fruit. B) 37 truckloads of fruit. C) 20 truckloads of fruit. D) 5 truckloads of fruit.

C) 20 truckloads of fruit

10) O'Sullivania, a small country, produces two types of goods: computers and food. O'Sullivania's initial production possibilities frontier is denoted by the solid line in Figure 1.4. Suppose that O'Sullivania's computer industry enjoys a technological innovation. Which diagram shows the most likely change in the production possibilities frontier? A)A B) B C) C D) D

C) C (The innovation is only for computers so only the intercept for computers shifts out)

2) Which of the points on Figure 1.1 is attainable and is a point where it is impossible for the society to produce more of both goods? A)E B) F C) G D) H

C) G

32) You borrow money to buy a house in 1999 at a fixed interest rate of 6.5%. By 2003, the inflation rate has risen to 8.5%. Considering onlyour mortgage, is inflation good news or bad news for you? A) Bad news, because inflation hurts everyone. B) Bad news, because it makes the real value of your mortgage payments increase. C) Good news, because it makes the real value of your mortgage payments decrease. D) Bad news, because it makes the nominal value of your mortgage payments increase.

C) Good news, because it makes the real value of your mortgage payments decrease

16) Suppose that you own a house. What is the opportunity cost of living in the house? A) There is no opportunity cost because you own the house. B) There is no opportunity cost unless you could set up a business in the house. C) The opportunity cost is the rent you could have received from a tenant if you didn't live there. D) The opportunity cost is the cost of your monthly mortgage payment plus bills.

C) The opportunity cost is the rent you could have received from a tenant if you didn't live there

28) The face value of money or income is called its ________ value. A) real B) marginal C) nominal D) external

C) nominal

13) The saying that "There's no such thing as a free lunch" refers to the: A) marginal principle. B) spillover principle. C) principle of opportunity cost. D) reality principle.

C) principle of opportunity cost.

6) A production possibilities curve is bowed out because: A) society has fixed amounts of productive resources. B) the curve is negatively sloped. C) resources are not perfectly adaptable to different uses. D) it becomes less and less costly to produce each additional unit of output.

C) resources are not perfectly adaptable to different uses. (Note that a PPC is not a straight line, i.e., perfectly adaptable resources. Some resources are more suited to producing some goods)

23) The period of time over which one or more factors of production is fixed is the: A) long run. B) period of marginal costs. C) short run. D) none of the above

C) short run

20) Joe runs a business and needs to decide how many hours to stay open. Figure 2.2 illustrates his marginal benefit of staying open for each additional hour. Suppose that we observe Joe staying open 3 hours per day. If he is following the marginal principle, what must his marginal cost be? A) $24 B) $32 C) $40 D) $48

D) $48

31) Suppose prices increase by 5% per year. What nominal percentage return on your savings account would you require to get a 2% real return? A)0% B) 2% C) 5% D) 7%

D) 7%

21) Julianne runs a business and needs to decide how many hours to stay open. Table 2.2 illustrates her marginal costs of staying open for each additional hour. Suppose that Julianne's marginal benefit of staying open per hour is $28. If she is following the marginal principle, how many hours should Julianne stay open? A)1hour B) 3hours C) 6hours D) 7hours

D) 7hours ( D Choose where MB = MC)

7) The production possibilities frontier may shift if the: A) amount of natural resources available increases. B) amount of physical capital available increases. C) level of technology increases. D) All of the above could shift the production possibilities curve.

D) All of the above could shift the production possibilities curve.

15) An unemployed individual decides to spend the day fishing. The opportunity cost of fishing is equal to: A) the cost of bait and any other monetary expenses. B) zero, because the person doesn't have a job. C) the cost of bait, any other monetary expenses, and the value of the individual's wages while he was working. D) the cost of bait, any other monetary expenses, and the value of the best alternative use of the individual's time.

D) the cost of bait, any other monetary expenses, and the value of the best alternative use of the individual's time.

5) According to Figure 1.3, the best possible point of production for this economy is: A) R B) S C) W D) Cannot be determined based on the information provided.

D) Cannot be determined based on the information provided.

1) Which of the points on Figure 1.1 is unattainable? A)E B) FC) GD) H

D) H (Points D, F, and G are attainable; only G is efficient, i.e., on the frontier.)

11) O'Sullivania, a small country, produces two types of goods: computers and food. O'Sullivania's initial production possibilities frontier is denoted by the solid line in Figure 1.4. Suppose that O'Sullivania's computer industry enjoys a technological innovation while its agricultural community faces a significant drought. Which diagram shows the most likely change in the production possibilities frontier? A)AB) B C) C D) None of the above is correct.

D) None of the above is correct.

4) According to Figure 1.3, the economy produces only satellites (and no fighter jets) at point: A)R B) S C) T D) V

D) V

8) Which of the following would shift a production possibilities curve inward? A) improved access to transportation B) a decrease in the rate of inflation C) an increase in the number of people graduating from college D) a drought that caused crop failures

D) a drought that caused crop failures