Microeconomics CHAPTER 2

Which of the following quotations best illustrates a tradeoff?

"The more and more gadgets the firm produces, the bigger the fall in widget production."

Refer to the production possibilities frontier in Figure 2.1.2. At point C, what is the opportunity cost of increasing the production of Y from 20 to 50 units?

2 units of X

A medical clinic has 10 workers. Each worker can produce a maximum of either 2 units of medical services or 5 units of secretarial services a day. The opportunity cost of one more unit of medical services is

2.5 units of secretarial services

45) The economy illustrated by the data in Table 2.1.1 exhibits

D) increasing opportunity cost.

) Opportunity cost of an action is

the highest-valued alternative forgone.

On a graph of a production possibilities frontier, opportunity cost is represented by

the slope of the production possibilities frontier

Which one of the following concepts is illustrated by a production possibilities frontier?

the tradeoff between producing one good versus another

Production efficiency is achieved when

) we produce goods and services at the lowest possible cost.

Refer to the production possibilities frontier in Figure 2.1.2. At point C, the opportunity cost of producing one more unit of X is

20 units of Y.

Refer to the production possibilities frontier in Figure 2.1.2. At point A, the opportunity cost of increasing production of Y to 80 units is

3 units of X.

Refer to the production possibilities frontier in Figure 2.1.2. If 6 units of X are currently being produced, then

50 units of Y can be produced if all resources are used and assigned to the task for which they are the best match.

Refer to the production possibilities frontier in Figure 2.1.2. Suppose that 50 units of Y are currently being produced. Then

6 units of X are being produced.

Agnes can produce either 1 unit of X or 1 unit of Y in an hour, while Brenda can produce either 2 units of X or 4 units of Y in an hour. 12) Given Fact 2.4.2, the opportunity cost of producing a unit of X is

A) 1 unit of Y for Agnes and 2 units of Y for Brenda.

21) Refer to Table 2.4.1. For Romulus, the opportunity cost of producing an additional unit of Y is

A) 2/3 units of X.

1) Individuals A and B can both produce good X. We say that A has a comparative advantage in the production of good X if

A) A has a lower opportunity cost of producing X than B.

8) Refer to the production possibilities frontier in Figure 2.3.1. The production possibilities frontier will shift rightward most rapidly if current production is at

A) A.

Agnes can produce either 1 unit of X or 1 unit of Y in an hour, while Brenda can produce either 2 units of X or 4 units of Y in an hour. 11) Refer to Fact 2.4.2. Which one of the following statements is true?

A) Brenda has an absolute advantage over Agnes in the production of both goods.

37) As we increase the production of X, we find we must give up larger and larger amounts of Y per unit of X. Select the best statement.

A) This illustrates increasing opportunity cost.

18) The principle of decreasing marginal benefit implies that the ________.

A) additional benefit from obtaining one more unit of a good or service decreases as more of that good or service is consumed

4) Which one of the following would cause a production possibilities frontier to shift outward?

A) an increase in the stock of capital

1) A technological improvement is represented by

A) an outward shift of the production possibilities frontier.

40) Refer to the production possibilities frontier in Figure 2.1.3. The opportunity cost of moving from C to B will be

A) greater than moving from D to C but less than moving from B to A.

56) As we move down the bowed-out production possibilities frontier, opportunity cost

A) increases.

54) Refer to Table 2.1.4. Complete the following sentence. The production possibilities frontier in the table shows

A) increasing opportunity cost.

1) Complete the following sentence. Marginal cost

A) is the opportunity cost of producing one more unit of a good or service.

15) With allocative efficiency, for each good produced,

A) marginal benefit equals marginal cost.

9) In Figure 2.2.1, the curve labelled A is the ________ curve and the curve labelled B is the ________ curve.

A) marginal cost; marginal benefit

6) In an economy lacking property rights, it would be ________ to realize the gains from trade and there would be ________ specialization compared to an economy with property rights.

A) more difficult; less

55) The slope of the production possibilities frontier curve indicates

A) opportunity cost.

7) In Figure 2.2.1, the curve labeled B shows

A) the bottles of pop that people are willing to forgo to get another bicycle.

50) From the data in Table 2.1.1, the production of 10 units of X and 28 units of Y is

A) unattainable.

36) Tom takes 20 minutes to cook an egg and 5 minutes to make a sandwich. Jerry takes 15 minutes to cook an egg and 3 minutes to make a sandwich. Both individuals gain if ________. A) Jerry produces eggs and trades them to Tom for sandwiches B) Jerry produces sandwiches and trades them to Tom for eggs C) they trade with each other regardless of who produces sandwiches and who produces eggs D) the opportunity cost of producing an egg is greater than the opportunity cost of producing a sandwich E) the opportunity cost of producing a sandwich is greater than the opportunity cost of producing an egg

Answer: B

4) The flows in the market economy that go from firms to households are ________. The flows in the market economy that go from households to firms are ________. A) all flowing through goods markets; all flowing through factor markets B) the real flows of goods and services and the income flows of wages, rent, interest and profits; the real flows of labour, land, capital and entrepreneurship and the flow of expenditure on goods and services C) the income flows of wages, rent, interest, and profits and the flow of expenditure on goods and services; the real flows of goods and services and the real flows of labour, land, capital and entrepreneurship D) the real flows of goods and services and the real flows of labour, land, capital and entrepreneurship; the income flows of wages, rent, interest, and profits and the flow of expenditure on goods and services E) all flowing through factor markets; all flowing through goods markets

Answer: B

2) Markets I. enable buyers and sellers to get information II. are defined by economists as geographical locations where trade occurs. III. have evolved because they facilitate trade. Which of the above statements are correct? A) I only B) III only C) I and III only D) II and III only E) I, II and III

Answer: C

29) It pays for people to specialize and trade with each other because A) otherwise they would not survive. B) they can take advantage of the fact they have an absolute advantage in the production of something. C) this way they can consume outside their production possibilities frontier. D) this way the strong can exploit the weak.

Answer: C

32) In Portugal, the opportunity cost of a bale of wool is 3 bottles of wine. In England, the opportunity cost of 1 bottle of wine is 3 bales of wool. Given this information, A) England has an absolute advantage in wine production. B) Portugal has an absolute advantage in wool production. C) Portugal has a comparative advantage in wine production. D) Portugal has a comparative advantage in wool production. E) no trade will occur.

Answer: C

5) The main functions of markets include A) promoting the social interest, but not the self-interest. B) selling goods but not factors of production. C) enabling buyers and sellers to get information about each other. D) establishing a physical location for business transactions. E) promoting the self-interest but not the social interest.

Answer: C

28) Suppose John and Joe each have different production possibility frontiers; John specializes in cloth and Joe specializes in corn. John's island unexpectedly has exceptionally good weather, and suddenly he is twice as productive in the production of both corn and cloth. Select the best statement. A) This is an example of unemployed resources becoming employed. B) As a result, John will have an absolute advantage in both corn and cloth. C) As a result, it is possible that John and Joe will switch what they specialize in. D) There will be no change in what John and Joe specialize in, because John's comparative advantage has not changed. E) There will be a change in what John and Joe specialize in, because John's opportunity cost of production will have risen.

Answer: D

3) A property right is A) any commodity or token that is generally acceptable as a means of payment. B) an economic unit that hires factors of production and organizes those factors to produce and sell goods and services. C) any arrangement that enables buyers and sellers to get information and to do business with each other. D) a social arrangement that governs the ownership, use, and disposable of anything that people value. E) a medium of exchange.

Answer: D

31) Mexico and Canada produce both oil and apples using labour only. A barrel of oil is produced with 4 hours of labour in Mexico and 8 hours of labour in Canada. bushel of apples is produced with 8 hours of labour in Mexico and 12 hours of labour in Canada. Canada has A) an absolute advantage in oil production. B) an absolute advantage in apple production. C) a comparative advantage in oil production. D) a comparative advantage in apple production. E) none of the above.

Answer: D

34) In one hour, Sue can produce 50 caps or 10 jackets and Tessa can produce 70 caps or 7 jackets. Sue's opportunity cost of producing a cap is ________ jackets and Tessa's opportunity cost of producing a cap is ________ jackets. ________ has a comparative advantage in producing caps. If Sue and Tessa each specialize in producing the good in which they have a comparative advantage and trade 1 jacket for 7 caps, ________. A) 0.2; 0.10; Sue; Tessa gains but Sue loses B) 5.0; 10.0; Tessa; Sue loses but Tessa gains C) 5.0; 10.0; Sue; both Sue and Tessa gain D) 0.2; 0.10; Tessa; both Sue and Tessa gain E) 0.2; 0.10; Sue; both Sue and Tessa gain

Answer: D

1) Trade is organized using the social institutions of A) firms. B) property rights. C) money. D) markets. E) all of the above.

Answer: E

27) Given the information in Table 2.4.2, which one of the following is true? A) Sheila should specialize in good X. B) Bruce should specialize in good X. C) The opportunity cost to Bruce of an additional unit of X is 0.4 units of Y. D) A and B. E) B and C.

Answer: E

30) There are two goods, X and Y. If the opportunity cost of producing good X is lower for Pam than for Gino, then A) Pam has an absolute advantage in the production of X. B) Gino has an absolute advantage in the production of Y. C) Pam has a comparative advantage in the production of X. D) Gino has a comparative advantage in the production of Y. E) C and D.

Answer: E

33) To gain from comparative advantage, countries must not only trade, they must also A) save. B) invest. C) engage in research and development. D) engage in capital accumulation. E) specialize.

Answer: E

35) Tom takes 20 minutes to cook an egg and 5 minutes to make a sandwich. Jerry takes 15 minutes to cook an egg and 3 minutes to make a sandwich. If Tom and Jerry specialize and trade eggs and sandwiches with each other ________. A) Tom benefits but Jerry does not B) Jerry benefits but Tom does not C) neither Tom nor Jerry benefit D) either Tom or Jerry benefit but we don't have enough information to know which one benefits E) both of them benefit

Answer: E

22) Refer to Table 2.4.1. For Vulcan, the opportunity cost of producing an additional unit of Y is

B) 1/2 units of X.

In an eight-hour day, Andy can produce either 24 loaves of bread or 8 kilograms of butter. In an eight-hour day, Rolfe can produce either 8 loaves of bread or 8 kilograms of butter.

B) 1/3 kilogram of butter for Andy and 1 kilogram of butter for Rolfe.

19) Refer to Table 2.4.1. For Vulcan, the opportunity cost of producing an additional unit of X is

B) 2 units of Y.

44) Refer to Table 2.1.1. The opportunity cost of increasing the production of Y from 16 to 36 units is

B) 8 units of X.

24) If individuals A and B can both produce only goods X and Y and A does not have a comparative advantage in the production of either X or Y, then we know

B) A and B have the same opportunity costs for X and for Y.

42) Refer to Table 2.1.1. What does point C mean?

B) If 8 units of X are produced, then at most 28 units of Y can be produced.

14) Suppose a hurricane causes extensive devastation, destroying houses, roads, schools and factories. What would be the effect of this hurricane on a production possibilities frontier consisting of consumption goods and capital goods?

B) It would shift inward at all points.

58) The graph in Figure 2.1.5 shows Sunland's PPF for food and sunscreen. Sunland faces ________ opportunity cost of food and ________ opportunity of sunscreen, which can be seen by the shape of the PPF.

B) a constant; a constant

7) Which one of the following would likely shift a production possibilities frontier inward?

B) a drought.

2) The quantity of shoes produced is measured along the x-axis of a bowed-outward production possibilities frontier and the quantity of shirts produced is measured along the y-axis. As you move down towards the right along the production possibilities frontier, the marginal cost of

B) a pair of shoes increases.

46) From the data in Table 2.1.1, the production of 7 units of X and 28 units of Y is

B) attainable but leaves some resources unused or misallocated or both.

9) Given Fact 2.4.1, Andy and Rolfe

B) can gain from trade if Andy specializes in bread production and Rolfe specializes in butter production.

6) The growth of capital resources, including human capital is

B) capital accumulation.

12) In general, the higher the proportion of resources devoted to technological research in an economy, the

B) faster the production possibilities frontier will shift outward.

41) Refer to the production possibilities frontier in Figure 2.1.3. The fact that less of X must be given up when moving from D to C than when moving from B to A indicates

B) increasing opportunity cost.

5) Complete the following sentence. As you consume more and more of a good,

B) marginal benefit decreases.

6) The marginal benefit curve for a good

B) shows the most a consumer is willing to pay for one more unit of that good.

5) The development of new goods and better ways of producing goods and services is

B) technological change.

2) Individuals A and B can both produce goods X and Y. Individual A has a comparative advantage in the production of X if

B) the amount by which A must reduce production of Y is less than the amount by which B must reduce production of Y to produce an additional unit of X.

11) A marginal benefit curve measures

B) willingness to pay.

15) Given Fact 2.4.2, what would be the total output of X and Y in an eight-hour day if Agnes and Brenda each specialized in producing the good in which they have a comparative advantage?

C) 8 units of X and 32 units of Y

7) Refer to Fact 2.4.1. Which one of the following statements is true?

C) Andy has a comparative advantage in bread production.

6) From Fact 2.4.1, we know that

C) Andy has the lower opportunity cost of producing bread, while Rolfe has the lower opportunity cost of producing butter.

36) Consider the production possibilities frontier in Figure 2.1.2, and assume that everything that is produced is also consumed. Which of the following statements is false?

C) Starting at point A, an increase in the production of Y will shift the frontier outward.

3) Debra has an absolute advantage in producing a good when she

C) can produce more of that good than anyone else, using the same quantity of inputs.

17) Refer to Table 2.2.1. Marginal benefit from food crops

C) cannot be calculated from the table.

13) As production of food increases, marginal benefit from food

C) decreases and marginal cost increases.

17) Economic growth ________ overcome scarcity because ________.

C) does not; we can produce more goods and services but it is still impossible to satisfy all our wants

10) In Figure 2.2.1, when 4,000 bicycles are produced each month

C) fewer bicycles must be produced to reach the efficient level of output.

12) Allocative efficiency refers to a situation where

C) goods and services are produced at the lowest possible cost and in the quantities that provide the greatest possible benefit.

39) Figure 2.1.3 illustrates Mary's production possibilities frontier. If Mary wants to move from point D to point C,

C) it will be necessary to give up some of good X to obtain more of good Y.

4) To describe preferences, economists use the concept of

C) marginal benefit.

49) The diagram of the production possibilities frontier corresponding to the data in Table 2.1.1 would be

C) negatively sloped and bowed outward.

16) Marginal benefit from a good or service is the benefit received from consuming ________. It is measured by the most that people are willing to pay for ________.

C) one more unit of it; an additional unit of it

11) The opportunity cost of pushing the production possibilities frontier outward is

C) reduced current consumption.

47) Refer to Table 2.1.1. As we increase the production of X,

C) the opportunity cost of each additional unit of X increases.

48) From the data in Table 2.1.1 we can infer that

C) the opportunity cost of producing an additional unit of Y increases as the production of Y increases.

13) Consider a country that has two industries. In the north, they grow wild rice, which requires a lot of rainfall. In the south, they grow wheat, which requires just a moderate amount of rainfall (too much rainfall is bad for wheat production). One year, there is a record rainfall. This will result in

C) the production possibilities frontier swiveling, with the wild rice intercept increasing, and the wheat intercept decreasing.

20) Consider a production possibilities frontier with corn production measured on the vertical axis and car production measured on the horizontal axis. Unusually good weather for growing corn shifts ________.

C) the vertical intercept of the PPF upward but does not shift the horizontal intercept of the PPF

16) Any two individuals will gain from exchange

C) unless they have the same opportunity costs for producing all goods.

2) In general, if country A is accumulating capital at a faster rate than country B, then country A

C) will have a production possibilities frontier that is shifting out faster than country B's.

16) Which of the following quotations illustrates economic growth?

D) "If the firm invests more in capital equipment, it can expand production next year."

43) Refer to Table 2.1.1. The opportunity cost of increasing the production of X from 8 to 12 units is

D) 12 units of Y.

8) Refer to Fact 2.4.1. The opportunity cost of producing 1 kilogram of butter is

D) 3 loaves of bread for Andy and 1 loaf of bread for Rolfe.

3) Which of the following is true regarding marginal benefit? I. The marginal benefit curve shows the benefit firms receive by producing another unit of a good. II. Marginal benefit increases as more and more of a good is consumed. III. Marginal benefit is the maximum amount a person is willing to pay to obtain one more unit of a good.

D) III only

25) Consider the following household. In 5 hours, Bob can cook 5 meals or clean 6 rooms. In 5 hours, Mary can cook 30 meals or clean 10 rooms. Select the best statement.

D) Mary should specialize in cooking.

17) Refer to Table 2.4.1. Which one of the following is true?

D) Romulus has a comparative advantage in the production of X.

18) Refer to Table 2.4.1. Which one of the following is true?

D) The opportunity cost of producing more of good Y is lower in Vulcan.

59) Figure 2.1.6 shows the production possibilities frontier for a firm that produces pet food. Point A is ________ and point B is ________. This PPF ________ illustrate scarcity because ________.

D) attainable; unattainable; does; the firm cannot produce points outside the frontier and as the firm moves along the PPF, it cannot produce more dog biscuits without producing less cat food

18) In 1960, the production possibilities per person in Canada were ________ than those in Hong Kong. Canada devoted ________ of its resources to accumulating capital and the remainder to consumption. Hong Kong devoted ________ of its resources to accumulating capital and the remainder to consumption. Because Hong Kong devoted a ________ fraction of its resources to accumulating capital, its production possibilities have ________.

D) greater; one-fifth; one-third; greater; expanded more quickly

19) The production possibilities frontier shifts outward when ________.

D) human capital accumulates

38) Figure 2.1.3 illustrates Mary's production possibilities frontier. If Mary wants to move from point B to point C,

D) it will be necessary to give up some of good Y to obtain more of good X.

9) A production possibilities frontier will shift outward FOR ALL OF THE FOLLOWING REASONS EXCEPT

D) opportunity cost is increasing.

52) Refer to Table 2.1.2. According to this production possibilities frontier,

D) the opportunity cost of producing guns increases as more guns are produced.

60) When producing at a point of production efficiency, ________.

D) we face a tradeoff and incur an opportunity cost

19) The most anyone is willing to pay for another purse is $30. Currently the price of a purse is $40, and the cost of producing another purse is $50. The marginal benefit from a purse is ________.

E) $30

Agnes can produce either 1 unit of X or 1 unit of Y in an hour, while Brenda can produce either 2 units of X or 4 units of Y in an hour. 13) Given Fact 2.4.2, the opportunity cost of producing a unit of Y is

E) 1 unit of X for Agnes and 1/2 unit of X for Brenda.

51) Refer to Table 2.1.2. In moving from combination B to combination C, the opportunity cost of producing one additional unit of guns is

E) 3 kilograms of butter.

53) Refer to Table 2.1.3. In moving from combination C to combination B, the opportunity cost of producing one additional hockey stick is

E) 3 maple leaves.

20) Refer to Table 2.4.1. For Romulus, the opportunity cost of producing an additional unit of X is

E) 3/2 units of Y.

57) Refer to the production possibilities frontier in Figure 2.1.4. Which point is unattainable?

E) E

3) The principal reason that production possibilities have grown more rapidly in Hong Kong than in Canada over the last 50 years is because

E) Hong Kong has devoted a larger proportion of its resources to capital accumulation.

23) Refer to Table 2.4.1. Each country will gain from trade if

E) Romulus specializes in good X and Vulcan specializes in good Y.

26) Given the information in Table 2.4.2, can Sheila and Bruce gain by specialization?

E) Yes, if each specializes in the good in which he has a comparative advantage.

10) Consider Fact 2.4.1. After specialization, total consumption will

E) be 24 loaves of bread and 8 kilograms of butter.

8) In Figure 2.2.1, when 2,000 bicycles are produced each month

E) both A and B.

7) Intellectual property ________. A) includes land and buildings B) includes stocks and bonds and money in the bank C) is the intangible product of creative effort D) is protected by copyrights and patents E) both C and D are correct

E) both C and D are correct

14) Suppose the production possibilities frontier for skirts and pants is a straight line. As the production of skirts increases, the marginal benefit from skirts

E) decreases and marginal cost is constant.

4) A person who has an absolute advantage in the production of all goods will

E) have a comparative advantage in the production of only some goods and not others.

61) Jane produces only corn and cloth. If her preferences for corn and cloth change, then ________.

E) her PPF does not change

10) A movement along the production possibilities frontier will result from

E) none of the above.

15) The depletion of fish stocks in Eastern Canada, with its accompanying unemployment, will lead to a

E) shift inward of the existing production possibilities frontier plus a movement to a point inside the new production possibilities frontier.

Agnes can produce either 1 unit of X or 1 unit of Y in an hour, while Brenda can produce either 2 units of X or 4 units of Y in an hour. 14) Complete the following sentence. Given Fact 2.4.2,

E) there will be gains from trade if Agnes specializes in the production of X and Brenda in Y.

The concept of opportunity cost

Implies that because productive resources are scarce, we must give up some of one good to acquire more of another.

Refer to the production possibilities frontier in Figure 2.1.1, which one of the following is true about point C?

It is unattainable.

Refer to the production possibilities frontier in Figure 2.1.1. Which one of the following is true about point A?

Resources are either unused or misallocated or both.

A situation in which resources are either unused or misallocated or both is represented in a production possibilities frontier diagram by

a point inside the production possibilities frontier.

If Sam is producing at a point inside his production possibilities frontier, then he

can increase production of both goods with zero opportunity cost.

If Sam is producing at a point on his production possibilities frontier, then he

can increase the production of one good only by decreasing the production of the other.

A medical clinic has 10 workers. Each worker can produce a maximum of either 2 units of medical services or 5 units of secretarial services a day. The production possibilities frontier of this firm would show

constant opportunity cost.

The existence of increasing opportunity cost

explains the bowed-out shape of the production possibilities frontier.

The fact that resources are not equally productive in all activities

implies that a production possibilities frontier will be bowed outward

A point inside a production possibilities frontier

indicates some unused or misallocated resources.

A medical clinic has 10 workers. Each worker can produce a maximum of either 2 units of medical services or 5 units of secretarial services a day. One day, the firm decides it would like to produce 16 units of medical services and 5 units of secretarial services. This output level is

inefficient.

Refer to the production possibilities frontier in Figure 2.1.2. At point A, the opportunity cost of producing 3 more units of X

is 20 units of Y.

If Harold can increase production of good X without decreasing production of any other good, then Harold

is producing inside his production possibilities frontier.

If Harold must decrease production of some other good to increase production of good X, then Harold

is producing on his production possibilities frontier.

The production possibilities frontier

is the boundary between attainable and unattainable levels of production.

If additional units of any good could be produced at a constant opportunity cost, the production possibilities frontier would be

linear.

Which one of the following concepts is not illustrated by a production possibilities frontier?

monetary exchange

A production possibilities frontier is negatively sloped because

of opportunity cost.

Ted chooses to study for his economics exam instead of going to the concert. The concert he will miss is Ted's ________ of studying for the exam.

opportunity cost

Complete the following sentence. In Figure 2.1.1,

point B is a point of production efficiency.

The bowed-out (concave) shape of a production possibilities frontier

reflects the existence of increasing opportunity cost.

A medical clinic has 10 workers. Each worker can produce a maximum of either 2 units of medical services or 5 units of secretarial services a day. One day, the firm decides it would like to produce 10 units of medical services and 30 units of secretarial services. This output level is

unattainable.

) A tradeoff exists when

we move along the PPF.

If opportunity costs are increasing, then the production possibilities frontier

will be bowed out and have a negative slope.