Basic Economic Concepts

Scarcity is when...

• we have unlimited wants and unlimited resources

• our wants are greater than available resources

• our resources are greater than our wants

• resources are employed fully to minimize waste

Answer explanation

Scarcity is when our wants are greater than the available resources.

Instead of studying for your test, you could have cooked dinner, went to the movies, or exercised. These alternatives represent your...

• scarcity

• resources

• trade-offs

• time value of money

Answer explanation

Trade-offs are the alternatives to a specific choice we make. (The next best option to the choice you make is your opportunity cost.)

A point located inside the production possibilities curve is thought of as...

• an inefficient use of resources

• an efficient use of resources

• not possible given current resources

• a better use of resources

Answer explanation

A point inside the PPC represents an inefficient use of resources, like high unemployment. (recession)

A PPC that is bowed outward represents...

• decreasing opportunity costs

• constant opportunity costs

• no opportunity costs

• increasing opportunity costs

Answer explanation

A bowed out PPC means that with each additional unit of good A that is produced, you must give up an increasing number of units of good B. This shape typically means that the resources used to produce both goods vary (for example, bicycles and tacos).

Trade helps two countries by allowing them to...

• isolate production

• make more money

• despecialize and consume within their original PPCs

• specialize and consume outside their original PPCs

Answer explanation

Trading allows two countries to specialize in the good in which they have a lower per-unit opportunity cost. When this occurs, they can focus their resources on only the production of this good and trade for other needs.

Producer A can produce either 5 units of chocolate or 10 aloe plants per day. Producer B can produce either 3 units of chocolate or 12 aloe plants per day. Based on this information, which of the following is true?

• producer A has the absolute advantage in producing aloe

• producer B has the absolute advantage in chocolate

• producer B has the comparative advantage in producing chocolate

• producer B has the comparative advantage in producing aloe

Answer explanation

Producer B's per-unit opportunity cost to produce a unit of aloe is 1/4 of a unit of chocolate, which producer A's per-unit opportunity cost of producing 1 unit of aloe is 1/2 unit of chocolate. Since producer B has the lower per-unit opportunity cost in producing aloe, it should specialize in the production of aloe and trade for chocolate.

Prices in a market economy are set by...

• the church

• the government

• market interactions between buyers and sellers

• popular vote

Answer explanation

The "invisible hand" guides prices as sellers and buyers agree on prices for goods.

Anna has two hours of free time on Friday night that can be spent studying or watching TV. Anna decides to watch TV. Studying becomes Anna's...

• calculated risk

• absolute advantage

• marginal revenue

• opportunity cost

Answer explanation

Opportunity cost: the amount of one product that must be given up in order to produce an additional unit of another product; the next best option to the choice made.

Which of the following is true if consuming one latte yields 20 utils and consuming the second latte increases satisfaction by 17 utils?

• total utility of consuming both lattes is 37

• total utility of consuming both lattes is 3

• the marginal utility for the second latte is 3

• the marginal utility for consuming the third latte is 7

Answer explanation

20 + 17 = 37

When making a rational decision, economists would point out that...

• marginal cost is of no significance

• marginal benefit is of no significance

• marginal benefit should be less than marginal cost

• marginal benefit should outweigh marginal cost

Answer explanation

In economics, we consume or do something until the marginal cost outweighs the marginal benefit.