Chapter 01 – Limits, Alternatives, and Choices
Chapter 01 – Limits, Alternatives, and Choices
McConnell Brue Flynn 20e
DISCUSSION QUESTIONS
1. What is an opportunity cost? How does the idea relate to the definition of economics? Which
of the following decisions would entail the greater opportunity cost: Allocating a square block in
the heart of New York City for a surface parking lot or allocating a square block at the edge of a
typical suburb for such a lot? Explain. LO1
Answer: An opportunity cost is what was sacrificed to do or acquire something
else. The condition of scarcity creates opportunity cost. If there was no scarcity,
2. Cite three examples of recent decisions that you made in which you, at least implicitly,
weighed marginal cost and marginal benefit. LO1
Answer: Student answers will vary, but may include the decision to come to
class, to skip breakfast to get a few extra minutes of sleep, to attend college, or to
3. What is meant by the term “utility” and how does the idea relate to purposeful behavior? LO1
Answer: “Utility” refers to the pleasure, happiness, or satisfaction gained from
4. What are the key elements of the scientific method and how does this method relate to
economic principles and laws? LO2
Answer: The key elements include the gathering of data (observation), the
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Chapter 01 – Limits, Alternatives, and Choices
The scientific method is the technique used by economists to determine economic
5. State (a) a positive economic statement of your choice, and then (b) a normative economic
statement relating to your first statement. LO3
Answer: Student answers will vary. Example: (a) The unemployment rate is 4.8
percent; (b) the unemployment rate is too high. In general we treat “what is”
6. How does the slope of a budget line illustrate opportunity cost and trade-offs? How does a
budget line illustrate scarcity and the effect of limited incomes? LO4
Answer: Budget lines are always sloped downward. This downward slope shows an
inverse relationship between the two goods, meaning that as you increase one, the other
7. What are economic resources? What categories do economists use to classify them? Why are
resources also called factors of production? Why are they called inputs? LO5
Answer: Economic resources are the natural, human, and manufactured inputs
used to produce goods and services. Economic resources fall into four main
8. Why is money not considered to be a capital resource in economics? Why is entrepreneurial
ability considered a category of economic resource, distinct from labor? What are the major
functions of the entrepreneur? LO5
Answer: Money is not considered a capital resource because money is not
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Chapter 01 – Limits, Alternatives, and Choices
Entrepreneurial ability and labor are both human resources, but they perform
Entrepreneurs are risk-takers: They coordinate the activities of the other three
inputs for profit—or loss, which is why they are called risk-takers. Entrepreneurs
9. Specify and explain the typical shapes of marginal-benefit and marginal-cost curves. How are
these curves used to determine the optimal allocation of resources to a particular product? If
current output is such that marginal cost exceeds marginal benefit, should more or fewer
resources be allocated to this product? Explain. LO6
Answer: The marginal benefit curve is downward sloping, MB falls as more of a
product is consumed because additional units of a good yield less satisfaction than
10. Suppose that, on the basis of a nation’s production possibilities curve, an economy must
sacrifice 10,000 pizzas domestically to get the 1 additional industrial robot it desires but that it
can get the robot from another country in exchange for 9,000 pizzas. Relate this information to
the following statement:
“Through international specialization and trade, a nation can reduce its opportunity cost of
obtaining goods and thus ‘move outside its production possibilities curve.’” LO7
Answer: The message of the production possibilities curve is that an individual
nation is limited to the combinations of output indicated by its production
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consent of McGraw-Hill Education.
Chapter 01 – Limits, Alternatives, and Choices
11. LAST WORD Studies indicate that married men on average earn more income than
unmarried men of the same age and education level. Why must we be cautious in concluding that
marriage is the cause and higher income is the effect?
Answer: Correlation does not necessarily mean that there is causation. The
REVIEW QUESTIONS
1. Match each term with the correct definition. LO1
economics
opportunity cost
marginal analysis
utility
a. The next-best thing that must be foregone in order to product one more unit of a given
product.
b. The pleasure, happiness, or satisfaction obtained from consuming a good or service.
c. The social science concerned with how individuals, institutions, and society make optimal
(best) choices under conditions of scarcity.
d. Making choices based on comparing marginal benefits with marginal costs.
2. Indicate whether each of the following statements applies to microeconomics or
macroeconomics: LO3
a. The unemployment rate in the United States was 8.1 percent in August 2012.
b. A U.S. software firm discharged 15 workers last month and transferred the work to India.
c. An unexpected freeze in central Florida reduced the citrus crop and caused the price of oranges
to rise.
d. U.S. output, adjusted for inflation, decreased by 2.4 percent in 2009.
e. Last week Wells Fargo Bank lowered its interest rate on business loans by one-half of 1
percentage point.
f. The consumer price index rose by 3.8 percent from August 2011 to August 2012.
3. Suppose that you initially have $100 to spend on books or movie tickets. The books start off
costing $25 each and the movie tickets start off costing $10 each. For each of the following
situations, would the attainable set of combinations that you can afford increase or decrease?
LO4
a. Your budget increases from $100 to $150 while the prices stay the same.
b. Your budget remains $100, the price of books remains $25, but the price of movie tickets rises
to $20.
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consent of McGraw-Hill Education.
Chapter 01 – Limits, Alternatives, and Choices
c. Your budget remains $100, the price of movie tickets remains $10, but the price of a book falls
to $15.
Answer:
a. increase because a larger budget allows you to purchase not only the combinations that
b. decrease because certain combinations are no longer affordable (for example, you can
c. increase because the lower price allows you to purchase combinations that you could
4. Suppose that you are given a $100 budget at work that can be spent only on two items: staplers
and pens. If staplers cost $10 each and pens cost $2.50 each, then the opportunity cost of
purchasing one stapler is: LO4
a. 10 pens.
b. 5 pens.
c. zero pens.
d. 4 pens.
Answer: 4 pens. You must forego purchasing 4 pens if you are to free up enough money
5. For each of the following situations involving marginal cost (MC) and marginal benefit (MB),
indicate whether it would be best to produce more, fewer, or the current number of units. LO4
a. 3,000 units at which MC = $10 and MB = $13.
b. 11 units at which MC = $4 and MB = $3.
c. 43,277 units at which MC = $99 and MB = $99.
d. 82 units at which MC < MB.
e. 5 units at which MB < MC.
Answer:
a. more because MB > MC — the benefit of consuming one more unit exceed the
b. fewer because MC > MB — the opportunity costs (scarce resources used elsewhere) of
c. current amount because MB = MC — there is no net gain in using scarce resources in
6. Explain how (if at all) each of the following events affects the location of a country’s
production possibilities curve: LO6
a. The quality of education increases.
b. The number of unemployed workers increases.
c. A new technique improves the efficiency of extracting copper from ore.
d. A devastating earthquake destroys numerous production facilities.
Answer:
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consent of McGraw-Hill Education.
Chapter 01 – Limits, Alternatives, and Choices
a. Assuming better education translates into better work skills, then productivity should
rise and this would shift the curve outward.
7. What are the two major ways in which an economy can grow and push out its production
possibilities curve? LO7
a. Better weather and nicer cars.
b. Higher taxes and lower spending.
c. Increases in resource supplies and advances in technology.
d. Decreases in scarcity and advances in auditing.
Answer:
The economy produces output from resource inputs like land, labor, and capital. So one
major way for an economy to grow and push out its production possibilities curve is for it
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consent of McGraw-Hill Education.