Jeremy Desumala, ECON 130 LINDO – Quizzes Review EXAM 1
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QUIZ 1 – SCARCITY AND TRADEOFFS
Question 1 of 10
Economics is the study of
A. how people make decisions about their scarce resources.
B. how business earn profits.
C. government involvement in private business.
D. how people earn money.
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Scarcity is a permanent phenomenon that forces everyone to face tradeoffs. Economics is the
study of the choices made to to maximize wants using limited resources.
Question 2 of 10
Which of the following statements about scarcity is true?
A. Scarcity can never be eliminated or overcome.
B. Scarcity is the same as a shortage.
C. Scarcity only affects some people and some countries.
D. All of the statements above about scarcity are true.
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Unlike a shortage, which is temporary and can be resolved (by raising the price of the good,
decreasing demand or increasing production), scarcity is a permanent phenomenon that forces
everyone to face tradeoffs. Even individuals who earn very high income and own many
resources face tradeoffs because every use of a resource or their time necessarily implies a
sacrifice made.
Question 3 of 10
A rational decision involves all of the following EXCEPT
A. ensuring equity.
B. making decisions aligned with a predetermined goal in self-interest.
C. weighing costs and benefits on the margin.
D. responding to incentives.
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Economic theory is based on the assumption of rational self-interest, and there is a tradeoff
between improving efficiency (the goal of economics) and achieving a more equitable outcome.
Question 4 of 10
What is the purpose of making assumptions in economic modeling?
A. To justify the hypothesis being tested.
B. To increase the accuracy of economic models.
C. To simplify reality and isolate specific events for analysis.
D. To make the model as realistic as possible.
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Because the real world is highly complex, in order to characterize the relationship between
different economic variables, economists make simplifying assumptions in their modeling.
Assumptions are often unrealistic and models often lack significant detail, however, the lack of
these details does not affect the way in which individuals would make decisions.
Jeremy Desumala, ECON 130 LINDO – Quizzes Review EXAM 1
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Question 5 of 10
Which of the following is a normative statement?
A. The Honolulu rail project is over-budget.
B. The Honolulu rail project is a waste of taxpayer dollars.
C. Upon completion, the Honolulu rail project will reduce freeway congestion by
20% during peak traffic times.
D. All of the above statements are normative.
Feedback
Positive statements are descriptive and can tested through observation. Normative statements are
prescriptive and opinion-based. The definition of “waste” is subjective and depends on
individuals’ values and opinions.
Question 6 of 10
Opportunity cost is
A. the highest-valued forgone alternative sacrificed when a decision is made.
B. measured in terms of what is given up when a decision is made.
C. reflective of the tradeoff that necessarily results from scarcity.
D. all of the above.
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When comparing alternative uses of resources – whether economic resources or time – the
opportunity cost is the benefit that would have been perceived from the second-best option, but
which was forgone (given up) in choosing the best option. Thus, the potential benefit became a
“cost” when the first option was selected. This reinforces the fact that the first option that was
selected gives the individual relatively more benefit.
Question 7 of 10
Which of the following would be considered economic capital at an amusement park?
A. The money used to buy an entry ticket
B. A roller coaster
C. The employee at the ticket sales booth
D. The land the amusement park sits on
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Remember that the four categories of economic resources are land, labor, capital (both physical
and human) and entrepreneurial talent.
Physical capital is any equipment or machinery that is produced using other resources, but is
used as part of the production process to produce other goods and services. In this question, the
roller coaster is an example of physical capital. It is produced using a combination of land, labor,
capital and entrepreneurial talent, and is used in the amusement park’s production of
entertainment services.
Human capital is the education, experience and training acquired by individuals that enhances
the labor they provide to the production process.
Jeremy Desumala, ECON 130 LINDO – Quizzes Review EXAM 1
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Entrepreneurial talent is the risk taken by individuals who visualize a profit opportunity and
coordinate the other economic resources to produce goods and services.
In this example, the park employee is an example of labor – one of the economic resources, but
not an example of capital.
In this example, the land the park sits on is an example of the land resource – but not an example
of capital.
Money is NOT a resource – it allows for the purchase of resources to produce goods and services,
or the purchase of goods and services. Money is only a medium of exchange/tool in a
transaction.
Question 8 of 10
What does the PPC show?
A. The goods and services historically produced by an economy.
B. The combinations of goods and services that an economy should produce.
C. The maximum combinations of goods and services that an economy can produce.
D. The resources required to produce the goods and services desired by an economy.
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The production possibilities curve shows all possible points of production the economy is
currently capable of producing given two constraints: the economy’s current resource stock and
current technologies.
Question 9 of 10
Why does opportunity cost increase as more units of a good are produced?
A. Because resources are limited.
B. Because resources aren’t equally productive in all activities.
C. Because some labor slacks off at work.
D. Because the economy doesn’t have sufficient technology.
Feedback
Due to resource specialization, resources are better suited to produce some goods over others. As
such, reallocating resources to other sectors of the economy for which they are not best suited
implies that society is giving up producing increasing quantities of the goods for which the
resource is best suited. This is the law of increasing opportunity cost.
Question 10 of 10
An outward shift of an economy’s PPC indicates that
A. the economy’s unemployment rate has decreased.
B. all individuals in the economy have become richer.
C. the economy’s production capacity has increased.
D. all of the above have happened.
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If the production possibilities frontier shifts outward, this indicates that the economy now has the
capacity to produce a larger quantity of goods. This is the definition of economic growth, made
possible through either the accumulation of resources or technological advancement.
Jeremy Desumala, ECON 130 LINDO – Quizzes Review EXAM 1
QUIZ 2 – ECONOMIC SYSTEMS
Question 1 of 8
Which of the following is NOT a characteristic of a market economy?
A. Competition
B. Economic freedom
C. Resource specialization
D. Government ownership of resources
Feedback
In a market system, individuals have the economic freedom to own resources, and the freedom of
enterprise to use (or sell) those resources in ways that serve their self-interested goals. In
contrast, most productive resources in a command system are owned by the government.
Question 2 of 8
Market economies rely on ________ to direct the allocation of scarce resources.
A. the government (central planner)
B. luck
C. the invisible hand (prices and signaling)
D. economists
Feedback
In a market economy (with economic freedom and freedom of enterprise), individuals make
decisions in their own self-interest and in doing so, respond to the price. Consumers respond to
