Microeconomics Chapter 2 B—Some Tools of the Economist
MULTIPLE CHOICE
Use the figure to answer the following question.
Figure 2-11
225. In Figure 2-11, which shows the production possibilities curve,
a.
A is efficient.
b.
B is inefficient.
c.
C is unattainable.
d.
all of the above are true.
226. Dr. Jones, a dentist, is choosing between driving and flying from Pittsburgh to New York City. If
Jones drove, she would have to close her office four hours earlier than if she flew by airplane. Her
expected income (after taxes) from her practice is $50 per hour. Assuming all other factors are equal, if
Jones was a rational decision maker, she would drive if the price differential (air cost minus driving)
was greater than
a.
$50.
b.
$100.
c.
$150.
d.
$200.
227. According to the law of comparative advantage,
a.
each producer should strive toward self-sufficiency in order to maximize the total
production of the economy.
b.
each product should be produced by the lowest opportunity cost producer in order to
maximize output.
c.
one should never compare one’s abilities with those of another.
d.
each product should be produced by the individual who can produce more of that product
than any other individual.
228. “The economic wealth of this country was built primarily by some individuals profiting from a
transaction, whereas others were harmed by that transaction.” This statement indicates the speaker
a.
fails to comprehend the idea that all voluntary trades benefit both parties involved.
b.
fails to comprehend the fallacy of composition.
c.
fails to understand the significance of the production possibilities curve.
d.
uses the economic way of thinking. The statement is essentially correct.
229. (I) When individuals engage in a voluntary exchange, both parties are made better off.
(II) By channeling goods and resources to those who value them most, trade creates value and
increases the wealth created by a society’s resources.
a.
I is true; II is false.
b.
I is false; II is true.
c.
Both I and II are true.
d.
Both I and II are false.
The following question(s) relate(s) to the material in the addendum to Chapter 2. Use the production
possibilities data for Lebos and Slavia below to answer the question(s).
Table 2-4
Lebos
Slavia
Food
Clothing
Food
Clothing
0
8
0
8
2
6
1
6
4
4
2
4
6
2
3
2
8
0
4
0
230. Refer to Table 2-4. Which of the following is correct?
a.
In Lebos, the opportunity cost of producing one unit of food is equal to one unit of
clothing.
b.
In Slavia, the opportunity cost of producing one unit of food is equal to two units of
clothing.
c.
The opportunity cost of producing food in Lebos is less than the opportunity cost of
producing food in Slavia.
d.
All of the above are correct.
231. Refer to Table 2-4. Which of the following is correct?
a.
Lebos has the comparative advantage in both goods.
b.
Slavia has the comparative advantage in food.
c.
Lebos has the comparative advantage in food.
d.
Lebos has the comparative advantage in clothing.
232. The process by which new products and methods of production are continuously replacing old ones is
known as:
a.
opportunity cost.
b.
the production possibilities frontier.
c.
creative destruction.
d.
the fallacy of composition.
233. Keri decided to sleep in today rather than attend her 9 a.m. economics class. According to economic
analysis, her choice was
a.
irrational, because economic analysis suggests you should always attend classes that you
have already paid for.
b.
irrational, because oversleeping is not in Keri’s self-interest.
c.
rational if Keri has not missed any other classes.
d.
rational if Keri values sleep more highly than the benefit she expects to receive from
attending the class.
234. If a motorist is stranded in front of a pay phone and has only dollar bills, and he ends up buying a
quarter from a passerby for $1,
a.
the stranded motorist must not understand that four quarters are worth $1.
b.
economic theory is unable to explain this transaction.
c.
both parties have gained from this exchange.
d.
the passerby was made better off and the motorist worse off.
235. When private ownership rights are well-defined and enforced, owners
a.
can ignore the wishes of others, without bearing the cost.
b.
have little incentive to take care of things.
c.
can do anything they want with their property.
d.
can be held accountable for damage to others through misuse of their property.
236. The production possibilities curve illustrates the basic principle that
a.
an economy’s capacity to produce increases in proportion to its population.
b.
if the resources of an economy are being used efficiently, more of one good can be
produced only if less of another is produced.
c.
an economy will automatically seek the output at which all of its resources are fully
employed.
d.
the distribution of income among households is the major determinant of the economic
welfare of a nation.
237. Which of the following attributes of trade explain why it is important for economic prosperity?
a.
Trade moves goods from people who value them less to people who value them more.
b.
Trade makes it possible to produce a larger output as a result of lower per unit costs that
often accompany large-scale production.
c.
Trade makes it possible to produce a larger output as a result of gains from division of
labor and specialization.
d.
All of the above.
238. The size of a country’s “economic pie” is thought of as the total dollar value of all goods and services
produced during some period of time. The economic pie
a.
is a fixed total waiting to be divided up among people.
b.
determines how much wealth an individual can obtain.
c.
is variable, not fixed, across time periods.
d.
depends solely upon the natural resources of a country.
239. In a market economy,
a.
a larger income for one person means a smaller one for another.
b.
the government answers all the basic economic questions.
c.
a larger income for one person means it is possible for others to earn more too.
d.
economic output shrinks as we discover better ways of doing things.
240. According to the law of comparative advantage, a particular task is performed most efficiently by the
individual with the lowest
a.
wage rate.
b.
tax liability.
c.
net worth.
d.
opportunity cost.
241. A production possibilities curve graphically represents the maximum quantities of two products
produced when all resources in the economy are being used efficiently. If an economy operates at a
point inside its production possibilities curve,
a.
it lacks the resources necessary to produce at full employment.
b.
it is utilizing some resources inefficiently.
c.
it does not confront the problem of scarce goods relative to unlimited wants.
d.
it does not exist in the real world since it is impossible for an economy to operate inside its
production possibilities curve.
242. Given freedom of movement for both goods and resources, if Florida producers specialize in oranges
and Georgia producers specialize in peaches, then it would be reasonable to conclude that
a.
the opportunity cost of growing oranges is higher in Florida than in Georgia.
b.
Georgia has a comparative advantage in producing peaches.
c.
Florida has a comparative advantage in producing peaches.
d.
total output will be expanded when Georgia allocates more resources to producing oranges
and Florida allocates more resources to producing peaches.
243. The law of comparative advantage indicates that
a.
a group of people will reduce their output when each good or service is supplied by the
low opportunity cost producer.
b.
trading partners lose when they can acquire a good through trade cheaper than they can
produce it.
c.
trade is most effective when people trade only among those in their own nation.
d.
a group of people can increase their output when each good or service is supplied by the
low opportunity cost producer.
244. Kelly is an architect and she is trying to decide whether to hire Mike, a draftsman, to assist with her
work. Kelly could hire Mike at $20 per hour but it would take him three times as long to complete a
task as it takes Kelly. Kelly is able to earn $90 per hour and has more architectural jobs than she is
able to handle. Which of the following is true?
a.
Kelly should not hire Mike because it would be faster for her to do the work herself.
b.
Kelly should do the drafting work herself because she has the lower opportunity cost.
c.
Mike should be hired at the $20 per hour wage rate.
d.
Mike should be hired, but only if he is paid more than $30 per hour.
245. An airline ticket from Baltimore to Miami costs $525. A bus ticket is $325. Traveling by plane will
take 5 hours, compared with 25 hours by bus. Thus, the plane costs $200 more but saves 20 hours of
time (Hint: Note how we are “thinking at the margin” here by looking at the changes). Other things
constant, an individual will gain by choosing air travel if, and only if, each hour of her time is valued
at more than
a.
$10 per hour.
b.
$13 per hour.
c.
$20 per hour.
d.
$105 per hour.
246. Which of the following is NOT true of opportunity cost?
a.
Opportunity costs are subjective because they depend upon how the decision-maker values
his or her options.
b.
Opportunity costs are only the monetary costs of lost options.
c.
Opportunity costs are the highest-valued alternative sacrificed in order to choose an
option.
d.
Only the decision-maker can determine his or her opportunity costs for any particular
action.
247. Middlemen, such as grocers, stockbrokers, and realtors
a.
specialize in reducing transactions costs.
b.
provide nothing of value to either the buyer or the seller.
c.
have no effect on economic output in society.
d.
do not exist in capitalist economies.
ESSAY
248. A popular video program used to teach economics to primary school children defines opportunity cost
as “what you give up to get something.” In light of your understanding of opportunity cost, how would
you modify this definition?
ANS:
249. After the terrorist attacks on September 11, 2001, the United States began devoting substantial
resources toward the War on Terrorism, homeland security, and relief efforts. Use the production
possibilities curve to demonstrate how this might affect the production of other goods in the United
States.
250. An economics professor points to a student in the front row and announces that “sitting in class is the
thing you value most during this time period.” Is the professor correct? Why or why not?
251. Explain the idea of capital investment by using the story of Robinson Crusoe. What is sacrificed, and
what is gained?
252. The president of a large public university proclaims, “If we can get the state government to fund our
new football stadium, it will not cost us anything.” Evaluate this view from an economic perspective.
253. Mark and John are 10-year-old twins who do not get along. They have opened separate lemonade
stands and are competing with each other, selling lemonade on their block. Their mother observes that
Mark is very good at making lemonade and John is an excellent young salesman. She suggests they
both could make more money if they worked together. John counters that two stands will always make
more money than one. Who is right? Why?
254. A department store buys a wool coat for $120 and sets its retail price at $300. The coat costs $85 to
produce. When the coat doesn’t sell, the store marks the price down to $200, then $100, and finally
$70. At $70, Amy buys the coat. What was the coat’s true value? Why?
255. Jim values his car at $2,000, and Kelly values it at $5,000. Can value be created in this situation?
How? Suppose Jim refuses to sell for less than $6,000. Is value destroyed? Why or why not?
256. Market economies are often criticized for how they answer the basic question, “For whom are goods
produced?” This criticism usually comes from people who believe that the distribution of income is not
“fair.” Is there some way to separate production from distribution so that we can leave production just
as it is but make the distribution of income “fairer”?
257. It can be said that, ultimately, consumers are the driving force in answering the three basic economic
questions. Explain the consumer’s role in providing these answers.