Section 1: Basic Economic Concepts

Macroeconomics is the branch of economics that studies:

fluctuations in the overall level of business activity.

Outdoorland can produce using all of its resources and technology. Alternative Tents Bicycles A 100 0 B 95 1 C 85 2 D 64 3 E 35 4 F 0 5 The opportunity cost of the third bicycle is _____ tents.

20 Correct: In order to produce 3 bicycles, resources must be shifted away from making tents to producing bicycles. At alternative C, 85 tents are produced. At alternative D, when 3 bicycles are produced, only 65 tents are produced, so the opportunity cost is 20 tents.

Which of the following is a normative statement?

A laptop makes a good graduation gift.

All of the following are positive statements EXCEPT: a. Tax revenue increases during economic expansions. b. Nearly 50% of individuals in this country pay no federal income tax. c. Everyone should have access to health care. d.Lower-income individuals pay taxes at a lower marginal rate than higher-income earners.

Everyone should have access to health care

With which statement would economists most likely DISAGREE?

Production resources and inputs unlimited.

Suppose you get a college scholarship so that tuition is free. The college education will increase your income by $400,000 over your lifetime. Your other alternative is to work in a job after high school that pays $25,000 per year. Room and board in both cases cost you $15,000 per year. Compare the opportunity costs of the two situations.

The opportunity cost of college is less than the opportunity cost of working. Correct: The opportunity cost of college is the $25,000 you will give up each year you go to college, or $100,000 during the next four years. We don't count the money you spend on room and board since you spend that in either situation. The opportunity cost of working is the extra $400,000 you would earn in a job with a college education over your lifetime.

Bill Gates decided to drop out of college to found a start-up software company that eventually became Microsoft. The choice between staying in college to earn a degree or pursuing his dream to create a new company involved:

an opportunity cost.

Which of the following is NOT considered to be a resource? a. economic aggregates b. physical capital c. labor d. land

economic aggregates

If an economy is operating at a point on its production possibilities frontier, it is:

efficient in production and may be efficient in allocation.

The focal point of economic activity is:

individual choice.

Scarcity of resources:

means that choices have to be made.

Economists typically depict the production possibility frontier as a bowed-out curve rather than as a straight line in order to show that:

the opportunity cost of producing a good rises as more is produced. Correct: The opportunity cost rises as more is produced, because expanding the output level means that some resources that are not well-suited to produce this good will be used in providing it. Resources used in the production of two goods are not necessarily homogeneous or similar. As more is produced of one product, resources are increasingly less and less suited to its production and its opportunity cost rises.

A model that helps economists think about the trade-offs that every economy faces is called:

the production possibility frontier.

What is measured along the horizontal axis in a graph of the production possibility frontier?

the quantity of one good produced

An opportunity cost arises:

whenever any choice is made