Which definition matches the economic idea of opportunity cost?
The value of the next best alternative given up
✓
The total dollar price paid for a good
A cost already paid that cannot be recovered
The extra satisfaction from one more unit
Correct Answer
The value of the next best alternative given up
Opportunity cost is the value of the best alternative that must be forgone to get something, which may be time, other goods or earnings as well as money. The total dollar price paid for a good can be only part of what is given up. A cost already paid that cannot be recovered is a sunk cost. The extra satisfaction from one more unit is marginal utility.
Category: Opportunity Cost
Question 2
Maya has $24 a week to spend on sandwiches that cost $6 each and smoothies that cost $3 each. If she buys no sandwiches, what is the largest number of smoothies she can buy in a week?
4
8
✓
6
12
Correct Answer
8
Spending the entire budget on smoothies gives $24 / $3 = 8 smoothies, which is where her budget constraint meets the smoothie axis. An answer of 4 comes from dividing by the sandwich price instead ($24 / $6). An answer of 6 would cost only $18, leaving $6 of her budget unspent. An answer of 12 would cost $36, more than her budget.
Category: Budget Constraint
Question 3
Sandwiches cost $6 each and smoothies cost $3 each. Measured in smoothies, what is the opportunity cost of buying one more sandwich?
0.5 smoothies
3 smoothies
2 smoothies
✓
6 smoothies
Correct Answer
2 smoothies
Spending $6 on a sandwich means giving up $6 / $3 = 2 smoothies, so the opportunity cost is the ratio of the two prices. An answer of 0.5 smoothies inverts the ratio, which gives the cost of a smoothie in sandwiches. An answer of 3 smoothies uses the smoothie's price instead of the ratio. An answer of 6 smoothies uses the sandwich's dollar price as if it were a quantity.
Category: Opportunity Cost
Question 4
Jon has exactly $20 to spend on notebooks at $4 each and pens at $1 each. Which combination lies on his budget constraint, using the full $20?
4 notebooks and 6 pens
2 notebooks and 10 pens
5 notebooks and 2 pens
3 notebooks and 8 pens
✓
Correct Answer
3 notebooks and 8 pens
Three notebooks cost $12 and eight pens cost $8, for a total of exactly $20, so the combination lies on the budget line. Buying 4 notebooks and 6 pens costs $22, which he cannot afford. Buying 2 notebooks and 10 pens costs $18, which lies inside the line and leaves money unspent. Buying 5 notebooks and 2 pens costs $22, also beyond his budget.
Category: Budget Constraint
Question 5
Which item belongs in the opportunity cost of attending college full time?
Earnings given up by not working full time
✓
A laptop bought two years before enrolling
Meals the student would eat in any case
Rent the student would pay in any case
Correct Answer
Earnings given up by not working full time
Full-time study usually means giving up a full-time paycheck, so forgone earnings are a large part of the opportunity cost of college, along with tuition and other direct costs. A laptop bought two years before enrolling is a past expense that college does not cause. Meals the student would eat in any case are not given up because of college. Rent the student would pay in any case is likewise paid whether or not the student enrolls.
Category: Opportunity Cost
Question 6
Selena paid $12 for a nonrefundable concert ticket, but on the night of the show she feels sick and would rather rest at home. According to economic reasoning, how should the $12 affect her choice?
She should attend, because otherwise the $12 is wasted
It should not matter, since the money is gone either way
✓
She should attend only if the ticket cost more than $10
She should attend, since paying raises the value of going
Correct Answer
It should not matter, since the money is gone either way
The $12 is a sunk cost: it has been spent and cannot be recovered whether she goes or stays home, so she should compare only the future benefits and costs of each option. She should attend, because otherwise the $12 is wasted is the sunk cost fallacy. She should attend only if the ticket cost more than $10 lets the past price drive a future choice. She should attend, since paying raises the value of going confuses money already spent with the enjoyment the concert will bring.
Category: Sunk Costs and Marginal Choices
Question 7
What does marginal analysis compare?
The total benefit of every possible option at once
The average cost of every unit already bought
The extra benefit and extra cost of a small change
✓
The prices of one good in different countries
Correct Answer
The extra benefit and extra cost of a small change
Marginal analysis weighs the additional benefit of doing a little more or a little less against the additional cost of that change. The total benefit of every possible option at once describes an all-or-nothing comparison, not a marginal one. The average cost of every unit already bought looks backward at past purchases. The prices of one good in different countries has nothing to do with marginal decision making.
Category: Sunk Costs and Marginal Choices
Question 8
A hungry student eats several slices of pizza, and each extra slice brings less additional satisfaction than the slice before it. Which principle does this illustrate?
Law of increasing opportunity cost
Sunk cost principle
Comparative advantage
Law of diminishing marginal utility
✓
Correct Answer
Law of diminishing marginal utility
The law of diminishing marginal utility states that each additional unit of a good adds less satisfaction than the previous unit. The law of increasing opportunity cost describes how a society's cost of producing more of one good rises, not how satisfaction changes. The sunk cost principle concerns ignoring costs that cannot be recovered. Comparative advantage concerns producing at a lower opportunity cost than someone else.
Category: Utility
Question 9
According to the economic approach to choice, a consumer should keep buying more of a good as long as which condition holds?
The extra benefit of the next unit exceeds its extra cost
✓
Total utility from the good is still rising
Some of the budget is still left unspent
The price of each unit is falling
Correct Answer
The extra benefit of the next unit exceeds its extra cost
A rational consumer keeps buying while the extra benefit of one more unit is greater than its extra cost, measured by what must be given up for it, and stops once the two are just equal. Total utility from the good is still rising is not enough, because total utility can keep rising even after the next unit is worth less than what it costs. Some of the budget is still left unspent ignores the other goods the money could buy. The price of each unit is falling is not part of the rule, since prices are taken as fixed along a budget constraint.
Category: Utility
Question 10
What does a production possibilities frontier show?
The combinations of two goods a consumer can buy with a fixed income
The combinations of two goods a society can produce with its resources
✓
The prices at which two goods trade in world markets
The amounts of two goods that consumers want to buy
Correct Answer
The combinations of two goods a society can produce with its resources
A production possibilities frontier, or PPF, shows every combination of two goods a society can produce using its available resources and technology. The combinations of two goods a consumer can buy with a fixed income is a budget constraint. The prices at which two goods trade in world markets are not shown on a PPF. The amounts of two goods that consumers want to buy describe demand, not production capacity.
Category: Production Possibilities
Question 11
A society is producing at a point inside its production possibilities frontier. What does that point represent?
Production that is currently unattainable
Production that is allocatively efficient
Production that is not productively efficient
✓
Production at the greatest possible output
Correct Answer
Production that is not productively efficient
At a point inside the frontier, the society could produce more of at least one good without producing less of the other, so it is wasting resources. Production that is currently unattainable describes points outside the frontier. Production that is allocatively efficient must lie on the frontier. Production at the greatest possible output also lies on the frontier, not inside it.
Category: Efficiency
Question 12
Which change would shift a country's production possibilities frontier outward?
A move from inside the frontier onto it
A shift of workers from one good to the other
A decision to produce more of only one good
An improvement in production technology
✓
Correct Answer
An improvement in production technology
Better technology, or growth in resources such as labor and capital, lets the economy produce more of both goods, which shifts the whole frontier outward. A move from inside the frontier onto it is an efficiency gain, but the frontier itself stays put. A shift of workers from one good to the other is a movement along the frontier. A decision to produce more of only one good is also a movement along it.
Category: Production Possibilities
Question 13
Why is a typical production possibilities frontier bowed outward instead of being a straight line?
Resources are not equally suited to producing both goods
✓
The prices of the two goods are fixed
Society always wants equal amounts of both goods
Technology improves whenever output rises
Correct Answer
Resources are not equally suited to producing both goods
As a society moves more resources into one good, it must use resources that are less and less suited to it, so the opportunity cost of each extra unit rises and the curve bows outward. The prices of the two goods are fixed explains why a budget constraint is a straight line. Society always wants equal amounts of both goods is a claim about preferences, which do not shape the frontier. Technology improves whenever output rises would shift the frontier rather than give it a bowed shape.
Category: Production Possibilities
Question 14
An economy cannot produce more of one good without producing less of another, given its inputs and technology. Which term describes this condition?
Allocative efficiency
Productive efficiency
✓
Absolute advantage
Diminishing marginal utility
Correct Answer
Productive efficiency
Productive efficiency means no more of one good can be made without giving up some of another, which is true at every point on a production possibilities frontier. Allocative efficiency refers to choosing the point society most prefers. Absolute advantage compares how much two producers can make. Diminishing marginal utility concerns the falling satisfaction from extra units consumed.
Category: Efficiency
Question 15
Of all the points on its production possibilities frontier, a society produces the mix of goods its members most prefer. Which term describes this outcome?
Absolute advantage
Economic growth
Allocative efficiency
✓
Increasing opportunity cost
Correct Answer
Allocative efficiency
Allocative efficiency means the society has chosen the point on its frontier that best matches what its members want, which is a matter of values. Absolute advantage compares how much two producers can make with the same resources. Economic growth is an outward shift of the frontier, not a choice of point on it. Increasing opportunity cost describes the bowed shape of the frontier.
Category: Efficiency
Question 16
Using the same resources, Country A can produce either 4 tons of wheat or 2 tons of sugar, and Country B can produce either 3 tons of wheat or 3 tons of sugar. Which statement is correct?
Country B has a comparative advantage in wheat
Country A has a comparative advantage in sugar
Country B has an absolute advantage in wheat
Country A has a comparative advantage in wheat
✓
Correct Answer
Country A has a comparative advantage in wheat
In Country A one ton of wheat costs 2 / 4 = 0.5 ton of sugar, while in Country B it costs 3 / 3 = 1 ton of sugar, so A gives up less to make wheat. Country B has a comparative advantage in wheat is wrong because its opportunity cost of wheat is higher. Country A has a comparative advantage in sugar is wrong because a ton of sugar costs A 2 tons of wheat but costs B only 1 ton. Country B has an absolute advantage in wheat is wrong because A makes more wheat, 4 tons to 3.
Category: Comparative Advantage
Question 17
A country can produce a good at a lower opportunity cost than its trading partner can. What does the country have in that good?
A comparative advantage
✓
An absolute advantage
A budget surplus
Diminishing returns
Correct Answer
A comparative advantage
A comparative advantage exists when one producer gives up less of other goods to make a particular good than another producer does. An absolute advantage means producing more of the good with the same resources, which is a different comparison. A budget surplus is a government's revenue exceeding its spending. Diminishing returns describe falling extra output as more resources go into one use.
Category: Comparative Advantage
Question 18
Which term describes the ability to produce more of a good than another country using the same amount of resources?
Comparative advantage
Absolute advantage
✓
Allocative efficiency
Economies of scale
Correct Answer
Absolute advantage
Absolute advantage compares raw productivity: whoever makes more of a good from the same resources has it. Comparative advantage instead compares opportunity costs, and a country can have it even without producing more. Allocative efficiency is choosing the most preferred point on a production possibilities frontier. Economies of scale describe falling average cost as one producer's output grows.
Category: Comparative Advantage
Question 19
Which of these is a positive statement?
The city should make bus rides free
Bus fares are unfairly high for students
Raising bus fares will reduce the number of riders
✓
Cities ought to spend more on public transit
Correct Answer
Raising bus fares will reduce the number of riders
A positive statement describes how the world is or will be and can, in principle, be tested against evidence, as a prediction about fares and ridership can. The city should make bus rides free states an opinion about what ought to be done. Bus fares are unfairly high for students rests on a value judgment about fairness. Cities ought to spend more on public transit is also a claim about what should happen, which makes it normative.
Category: Positive and Normative
Question 20
Few shoppers draw a budget constraint before buying groceries. How do economists usually answer the objection that people do not reason this way?
Shoppers who skip the math are acting irrationally
Models apply only to people trained in economics
Economists assume every person computes utility exactly
People can act as a model predicts without doing the math
✓
Correct Answer
People can act as a model predicts without doing the math
Just as a skilled basketball player makes an accurate pass without calculating its physics, an experienced shopper can choose the way a model predicts without drawing any graph. Shoppers who skip the math are acting irrationally is not the economists' reply, since conscious calculation is not required. Models apply only to people trained in economics is wrong, because the models describe ordinary behavior. Economists assume every person computes utility exactly is the very claim the objection attacks, and economists do not make it.
Category: Positive and Normative