14) A computer software program is most strongly an example of
A) real property.
B) fiat property.
C) intellectual property.
D) vicarious property.
15) A factor market is a market in which
A) households buy goods and services.
B) households sell the services of the factors of production they control.
C) firms sell the services of the factors of production.
D) firms sell goods and services.
16) In goods markets ________ and in factor markets ________.
A) households sell to firms; firms sell to households
B) firms sell to households; households sell to firms
C) households sell to firms; households sell to firms
D) firms sell to households; firms sell to households
17) Individual economic decisions are coordinated by
A) markets through adjustments in sales levels.
B) markets through adjustments in prices.
C) government through adjustments in sales taxes.
D) government through adjustments in income taxes.
18) Which of the following does NOT help organize trade?
A) property rights
B) markets
C) the production possibilities frontier
D) None of the above because all these answers given help organize trade.
19) In markets, people’s decisions are coordinated by
A) specialization according to absolute advantage.
B) changes in property rights.
C) learning-by-doing.
D) adjustments in prices.
6 News Based Questions
1) The state of Georgia offers free college tuition to high school students with a “B” average. In
2007, the state raised the requirement so that fewer students qualified for the scholarship. At the
same time, Georgia increased state spending on health care. Suppose that college education is on
the vertical axis and health care is on the horizontal axis of a PPF. These changes
A) are example of a tradeoff.
B) are an example of incentives.
C) will cause a shift out of the PPF.
D) will cause a shift in the of the PPF.
2) The state of Georgia offers free college tuition to high school students with a “B” average. In
2007, the state raised the requirement so that fewer students qualified for the scholarship. At the
same time, Georgia increased state spending on health care. Suppose that college education is on
the vertical axis and health care is on the horizontal axis of a PPF. Georgia’s change in spending
would be shown as
A) a movement up along the PPF.
B) a movement down along the PPF.
C) a shift out of the PPF.
D) a shift in of the PPF.
3) The United States uses tax funds to build and repair the interstate highway system and to
provide health care services via Medicare. Suppose Medicare services are on the horizontal axis
and highway miles are on the vertical axis of a PPF. If the government decides to reduce funding
to Medicare, this change would be shown as
A) a shift out of the PPF.
B) the PPF becoming flatter.
C) a movement down along the PPF.
D) a movement up along the PPF.
4) BAE, a British defense company, has the contract to produce Tornado aircraft for the Royal
Air Force. The BBC produces high-quality mystery shows for the British government. Both
produce at the lowest possible cost. On a PPF with aircraft and mystery shows on the axes
A) BAE and the BBC do not face increasing opportunity costs.
B) BAE and the BBC are achieving production efficiency.
C) BAE and the BBC are producing at a point outside the PPF.
D) the British government is operating outside its PPF.
5) BAE, a British defense company, has the contract to produce Tornado aircraft for the Royal
Air Force. BAE is producing the aircraft at the lowest possible cost. If the RAF orders one more
Tornado, there will be
A) a decrease in opportunity costs as average costs decrease.
B) a misallocation of resources.
C) an increase in opportunity cost for Tornados.
D) an outward shift in the PPF.
6) Employees at Bank of America are good at providing banking services and workers at Ben &
Jerry’s are good at making ice cream. If some bankers are moved to making ice cream, we get a
small increase in the amount of ice cream produced and a large decrease in the amount of
banking services provided. If the PPF has banking services on the vertical axis and ice cream on
the horizontal axis, the effect of the change reflects
A) decreasing opportunity costs.
B) a bowed out PPF for banking services and ice cream.
C) production efficiency.
D) a shift to a flatter PPF.
7) Employees at Bank of America are good at providing banking services and workers at Ben &
Jerry’s are good at making ice cream. The figure above shows the marginal cost and marginal
benefit curves for ice cream. As Ben & Jerry’s increases production from 1 to 2 million gallons
of ice cream, the
A) marginal cost curve shifts downward.
B) marginal cost curve shifts upward.
C) opportunity cost of ice cream decreases.
D) opportunity cost of ice cream increases to 2 banking services per gallon.
8) Employees at Bank of America are good at providing banking services and workers at Ben &
Jerry’s are good at making ice cream. The figure above shows the marginal cost and marginal
benefit curves for ice cream. A movement from point a to point b reflects
A) the economy must give up banking services to get extra gallons of ice cream.
B) the opportunity cost of banking services increases.
C) a decrease in the tradeoff between ice cream and banking services.
D) a leftward shift in the marginal benefit curve.
9) Employees at Bank of America are good at providing banking services and workers at Ben &
Jerry’s are good at making ice cream. The figure above shows the marginal cost and marginal
benefit curves for ice cream. Point b represents ________ of banking services and ice cream.
A) allocation efficiency and possibly production efficiency
B) neither allocative nor production efficiency
C) allocative and production efficiency in the production
D) production efficiency and possibly allocative efficiency in the production
10) Employees at Bank of America are good at providing banking services and workers at Ben &
Jerry’s are good at making ice cream. The figure above shows the marginal cost and marginal
benefit curves for ice cream. If 3 million gallons of ice cream are produced, marginal cost
________ marginal benefit and ________ produced.
A) exceeds; too much ice cream is
B) is less than; too much ice cream is
C) exceeds; not enough ice cream is
D) is less than; not enough banking services are
11) Employees at Bank of America are good at providing banking services and workers at Ben &
Jerry’s are good at making ice cream. The figure above shows the marginal cost and marginal
benefit curves for ice cream. If 1 million gallons of ice cream are being produced
A) the cost an additional gallon of ice cream is more than people think it is worth.
B) more banking services should be produced.
C) the marginal cost of an additional gallon of ice cream is greater the value people place on it.
D) people value an additional gallon of ice cream more highly than its cost of production.
12) China’s State Council has encouraged more spending to “improve transportation links and
other infrastructure….” It will also “step up its spending on vocational training and other
educational programs for adults.” www.nytimes.com, Keith Bradsher, October 19, 2008
Suppose that capital goods are on the vertical axis while consumption goods are on the
horizontal axis of China’s PPF. As a result of enacting the policies, China’s PPF will
A) shift outward.
B) shift inward.
C) rotate outward.
D) become flatter.
13) China’s State Council has encouraged more spending to “improve transportation links and
other infrastructure….” It will also “step up its spending on vocational training and other
educational programs for adults.” www.nytimes.com, Keith Bradsher, October 19, 2008
Suppose that capital goods are on the vertical axis while consumption goods are on the
horizontal axis of China’s PPF. As a result of enacting the policies, we would expect
I. an expansion of China’s production possibilities.
II. capital accumulation.
III. an increase in human capital.
A) I and II only.
B) I, II and III.
C) I and III only.
D) II and III only.
14) Suppose that when NBC produces 1 new drama series in a season it gives up the chance to
produce 3 new reality shows. This means that
A) the opportunity cost of a new drama series is 1/3 of a new reality show.
B) the opportunity cost of a 1 new reality show is 1/3 of a new drama series.
C) NBC has a comparative advantage in producing new drama series.
D) NBC has a comparative advantage in producing new reality shows.
15) In the United States, Texas ranks number one in the amount of installed megawatts for wind
power generation and Florida ranks number one in the number of beach vacations. These facts
point out that
A) Texas has a comparative advantage in wind power generation.
B) Texas definitely has an absolute advantage in wind power generation.
C) Florida should produce more wind energy.
D) Florida can produce wind energy at a lower opportunity cost than can Texas.
7 Essay Questions
1) A production point beyond the production possibilities frontier represents what?
2) Explain how the production possibilities frontier illustrates scarcity.
3) “If Mexico is currently operating at a point beyond its production possibilities frontier, then
there are unemployed resources in Mexico.” Is this statement true or false? Briefly explain your
answer.
4) “If Mexico is currently operating at a point inside its production possibilities frontier, then
there are unemployed resources in Mexico.” Is this statement true or false? Briefly explain your
answer.
5) Are all points inside the production possibilities frontier unattainable?
6) In the movie Cast Away, Tom Hanks plays a FedEx efficiency expert stranded on a deserted
island. While on the island, he divides his time between catching fish, gathering coconuts,
painting, and building a raft. Suppose that these were Mr. Hanks’ only activities. Did he face an
opportunity cost from pursuing any of these activities? Why or why not?
7) Explain the connection between opportunity cost and the PPF.
8) Explain why the production possibilities frontier bows outward.
9) What economic concepts are represented in the production possibilities model?
10) When economists state that the opportunity cost of a product increases as more of it is
produced, what do they mean? What is the opportunity cost?
11) What is the relationship between the bowed out shape of the production possibilities frontier
and the increasing opportunity cost of a good as more of it is produced?
12) Why does the marginal benefit curve have a negative slope?
13) Explain the difference between marginal cost and marginal benefit.
14) Compare and contrast production efficiency and allocative efficiency.
15) “Allocative efficiency in the production of cherries means that consumers can eat all of the
cherries they desire.” Is this statement true or false?
16) “If an economy is producing at a point on its PPF, it has achieved allocative efficiency.”
True or false? Explain.
17) “Allocative efficiency requires that the maximum number of people have access to all of the
goods and services that our economy produces.” Is this statement true or false? Explain your
answer.
18) What factors generate economic growth?
19) What is comparative advantage? Give an example.
20) Why is it likely that the United States has an absolute advantage in goods and yet it still ends
up importing them from other countries?
21) The United States has an absolute advantage in producing sugar over all of the other sugar
producing countries. Does this fact mean that we should not import any sugar from the other
countries?
22) Why does it make sense for economies to specialize according to comparative advantage and
trade?
23) “The United States is more productive in most activities than are most of other countries
because it has an absolute advantage in the production of most goods and services. Therefore we
should restrict international trade as it only benefits other countries at the expense of the United
States.” Comment on this statement.
24) How do property rights help organize production and trade?
8 Numeric and Graphing Questions
1) Draw a production possibilities frontier between beans and peas. Label the unattainable
points, the attainable points with fully employed resources, and the attainable points with
unemployed resources.
2) The figure above shows a nation’s production possibilities frontier for apples and oranges.
a) What combination of goods is represented by point A?
b) What combination of goods is represented by point B?
c) Which point represents an unattainable combination of goods?
3) Before the first Gulf War in 1991, Kuwait had the capacity to produce a certain amount of oil
from its oil wells. After the war, it found that capacity greatly diminished because the oil wells
had been set on fire. Draw Kuwait’s PPF before and after the war, assuming that the only two
goods produced are oil and food. Further assume that setting the oil wells on fire did not affect
Kuwait’s ability to produce food. Explain why the PPF before the war is different from the PPF
after the war.
Production
point
Pizza
produced
CDs
produced
A
0
and
42
B
4
and
40
C
8
and
36
D
12
and
30
E
16
and
22
F
20
and
12
G
24
and
0
4) The table above lists seven points on the production possibilities frontier for pizza and CDs.
Graph the PPF. What is the opportunity cost of producing the first four pizzas? What is the
opportunity cost of producing the 10th pizza. What is the opportunity cost of producing the first
12 CDs? What is the opportunity cost of producing the 26th CD?
Production
point
Milk
(gallons)
Shirts
(number)
A
0
and
100
B
2
and
90
C
4
and
70
D
6
and
40
E
8
and
0
5) A (very, very small) country produces milk and shirts and its production possibilities frontier
is in the table above. The nation is currently producing at point B. What is the opportunity cost of
two additional gallons of milk? At point C? At point D? What do your results show?
Production
point
Pages typed
Web pages
created
A
0
and
4
B
40
and
3
C
70
and
2
D
90
and
1
E
100
and
0
6) Jean can either type her term paper or create Web pages during the limited time she has
available. The table above shows her PPF.
a) Can Jean type 90 pages and create 2 Web pages?
b) Use the above numbers to calculate the opportunity cost of a typed page as she increases her
time typing and decreases time creating a Web page.
Movement
Increase in
Web pages
40
1
30
1
20
1
10
1