Principles of Microeconomics – Scarcity, PPF, Opportunity Cost & Trade

Households and societies face many decisions because

• goods and services are not scarce.
• incomes fluctuate with business cycles.
• people, by nature, tend to disagree.
• resources are scarce.

Because resources are scarce.

Which would cause the production possibilities frontier to shift outward from A to B?

• a technological advance in the consumer goods industries
• a technological advance in the capital goods industries
• a decrease in unemployment
• a general technological advance

A general technological advance (or equivalent growth in resources).

You decide to spend an hour watching TV rather than studying for your economics class. Your opportunity cost of watching TV is

• the value of the knowledge you would have received had you studied.
• nothing, since you valued TV more than studying.
• the value of your TV time minus the value of studying for class.
• the amount of money you could have earned if you had worked at your job for that hour.

The value of the knowledge you would have gained from studying.

You have eaten two bowls of ice cream at Sundae School Ice Cream store. You consider eating a third. As a rational consumer you should make your choice by comparing

• the benefits from eating all three bowls of ice cream to how much one more bowl of ice cream costs.
• the benefits from eating all three bowls of ice cream to how much three bowls of ice cream costs.
• None of the above.
• the benefits from eating one more bowl of ice cream to how much three bowls of ice cream costs.

By comparing the marginal benefit of that extra unit with its marginal cost.

Where can an economy not produce?

• inside its production possibilities frontier
• outside its production possibilities frontier
• on its production possibilities frontier
• anywhere not on the production possibilities frontier

At any point outside the economy’s PPF.

Any point on a country's production possibilities frontier represents a combination of two goods that an economy

• can produce using all available resources and technology.
• may be able to produce in the future with more resources and/or superior technology.
• will never be able to produce.
• can produce using some portion, but not all, of its resources and technology.

Efficient production using all available resources and current technology.

Economists are particularly adept at understanding that people respond to

• incentives.
• rewards more than punishments.
• laws.
• punishments more than rewards.

Incentives.

If you are unable to see the graph below:
Points Q and S are outside the PPF. Points R and U are on the PPF. Point T is inside the PPF.
Which points are obtainable and efficient?

• U only
• R and U
• R, T, and U
• Q and S

R and U.

If a country is producing at a point inside its production possibilities frontier,

• the country is producing an efficient combination of goods.
• the country is not using all available resources or is using inferior technology or both.
• there will be a large opportunity cost if the country tries to increase production of any good.
• the country is producing beyond its capacity.

Some resources are unemployed or technology is being used inefficiently.

In the circular-flow diagram which markets are represented?

• markets for goods and services and markets for financial assets
• markets for goods and services and markets for factors of production
• markets for factors of production and markets for financial assets
• markets for goods and services and markets for imports and exports

The market for goods and services and the market for factors of production.

Given the production capabilities:

Toothbrush	Hairbrush
Zimbabwe	3
Portugal	5
Zimbabwe has an absolute advantage in the production of

• toothbrushes only
• neither toothbrushes nor hairbrushes
• toothbrushes and hairbrushes
• hairbrushes only

hairbrushes only.

Given the production capabilities:

Bushels of Wheat	Pounds of Beef
Brad	10
Theresa	6
Brad has a comparative advantage in the production of

• beef
• both goods
• wheat
• neither good

wheat.

Suppose a gardener produces both tomatoes and squash in his garden. If the opportunity cost of one bushel of squash is 7/8 bushel of tomatoes, then the opportunity cost of 1 bushel of tomatoes is

• 8/7 bushel of squash
• 8 bushels of squash
• 7/8 bushel of squash
• 7 bushels of squash

8/7 of a bushel of squash.

Given the production capabilities:

Bushels of Wheat	Pounds of Beef
Brad	10
Theresa	6

What is Brad’s opportunity cost of producing one bushel of wheat?

• 5/3 pounds of beef
• 3/5 pound of beef
• 6/5 pounds of beef
• 5/6 pound of beef

6/5 (1.2) pounds of beef.

Suppose Paul can wash three windows per hour or he can iron six shirts per hour. Susan can wash two windows per hour or she can iron five shirts per hour.

• Paul has an absolute advantage over Susan in washing windows.
• Susan has a comparative advantage over Paul in washing windows.
• Paul has a comparative advantage over Susan in ironing shirts.
• All of the other answer choices are correct

Paul has an absolute advantage over Susan in washing windows.

Given the production capabilities:

Bushels of Wheat	Pounds of Beef
Brad	10
Theresa	6
Brad should specialize in the production of

• beef
• neither good
• both goods
• wheat

wheat.

Goods produced in a foreign country and sold domestically are called

• imports
• exports
• tariffs
• subsidies

Imports.

John and Jane both grow wheat and potatoes. If John grows less wheat and potatoes than Jane,

• then Jane can benefit from trade but John cannot.
• then John can benefit from trade but Jane cannot.
• then both John and Jane still can benefit from trade.
• then neither can benefit from trade.

Yes, as long as they trade according to comparative advantage.

Jack's opportunity cost of 1 bushel of wheat is 4 bushels of corn. Jill's opportunity cost of 1 bushel of wheat is 7 bushels of corn. Which terms of trade will allow both Jack and Jill to gain from trade?

• 8 bushels of corn for every 1 bushel of wheat
• 6 bushels of corn for every 1 bushel of wheat
• 3 bushels of corn for every 1 bushel of wheat
• 1 bushel of corn for every 1 bushel of wheat

6 bushels of corn for 1 bushel of wheat (any rate between 4 and 7 works).

You should specialize

• None of the above
• in the good you have the highest opportunity cost.
• in the good you have the absolute advantage.
• in the good you have the lowest opportunity cost.

The good for which you have the lowest opportunity cost.

What is an example of a topic covered in Macroeconomics?

• A coffee shop wants to know their profits at the end of the year
• A worker is deciding whether to work part-time or full-time
• A firm wants to know the best allocation of workers
• The United States wants to know the best way to fight the rising unemployment rate

Fighting the rising unemployment rate in the United States.

Trees can be replanted, so they are not scarce. Is this statement true or false, and what is the reasoning?

• False. Trees are scarce because only the trunk is usable
• True. Resources are only scarce if they are not renewable
• True. Only man-made resources are scarce
• False. All resources are scarce because they are limited

Yes; all resources are scarce because they are limited relative to wants.

John bought a dozen cookies and immediately started to eat them. As a rational person, when should John stop eating the cookie?

• He should only eat another cookie if the additional benefit he receives is greater than the opportunity cost of eating that cookie
• He should keep eating cookies until the total benefit he gets equals the amount he paid for them
• He should keep eating until he is full
• As long as he receives any benefit/enjoyment from eating the cookie, John should keep eating cookies

When the marginal benefit of another cookie is less than or equal to its opportunity cost.

You drive to Starbucks and buy a cappuccino. How would this transaction be explained using the circular flow diagram?

• In the labor market, you paid Starbucks for the coffee
• In the goods and services market, you paid Starbucks for the coffee AND In the labor market, Starbucks gave you the coffee
• In the labor market, Starbucks gave you the coffee
• In the goods and services market, you paid Starbucks for the coffee

The goods and services market (you pay Starbucks for the coffee).

Use the PPF graph to answer the following questions. If you can't see the graph: It is a PPF graph showing the combinations of (apples, cherries). Point A = (500, 300). Point B = (275, 550). Point C = 0 apples. On PPF: Points (420, 450), A, B, C. Point D inside, Point E outside.
For each of the following points, state whether they are "attainable but not efficient", "not attainable and not efficient", "not attainable but efficient", "attainable and efficient.”
Point A is _
Point D is _
Point E is _

Point A is attainable and efficient. Point D is attainable but not efficient. Point E is not attainable and not efficient.

Use the PPF graph to answer the following questions. If you can't see the graph: It is a PPF graph showing the combinations of (apples, cherries). Point A = (500, 300). Point B = (275, 550). Point C = 0 apples. On PPF: Points (420, 450), A, B, C. Point D inside, Point E outside.
What is the opportunity cost of going from 420 pounds of apples to 500 pounds of apples? (Just write the number. Don't include the units, for example, pounds of …)

150 pounds of cherries.

Suppose a society can produce two goods, chips or salsa. They are currently producing a combination of chips and salsa on their PPF. How are they able to produce a combination outside of their PPF?

• They can divert more of their resources from chips into the production of salsa
• A new method of producing salsa allows production of salsa to increase
• A society can never produce outside their PPF
• They can divert all available resources into the production of chips

Through technological improvement or growth that shifts the PPF outward.

Suppose Sally and Fred can produce either pears or grapes.

Pears	Grapes
Sally	80
Fred	60
Who has the absolute advantage in pears?

• Fred
• Sally
• No one
• Both Sally and Fred

Sally.

Suppose Farmer Dell and Farmer MacDonald can produce either apples or oranges.

Apples	Oranges
Dell	6
MacDonald	5
What is MacDonald’s opportunity cost for 1 apple? (in terms of oranges) (Just enter the number, not the units)

4 oranges.

Suppose Kate and Miley can produce either lemons or bananas.

Lemons	Bananas
Kate	12
Miley	10
What is Kate’s opportunity cost for 1 lemon? (in terms of bananas) (Just enter the number, not the units)

2 bananas.

Suppose Farmer Jack and Farmer Tom can produce either pumpkins or watermelons.

Pumpkin	Watermelon
Jack	80
Tom	100
Who has the comparative advantage in watermelons?

• Tom
• Both Jack and Tom
• No one
• Jack

Tom.

Suppose Alice and Mary can produce either carrots or squash.

Carrots	Squash
Alice	20
Mary	30
Mary should specialize in

• carrots
• squash
• nothing
• both carrots and squash

Squash.

In 1 hour, Luke can pick 28 apples or 50 grapes. In the same amount of time, Laura can pick 19 apples or 97 grapes.
Who has the absolute advantage in grapes?

• Luke
• Laura
• Both Luke and Laura
• no one

Laura.

In 1 hour, Sarah can pick 32 oranges or 24 limes. In the same amount of time, Elliot can pick 20 oranges or 80 limes.
Who has the comparative advantage in limes?

• Both Sarah and Elliot
• Elliot
• No one
• Sarah

Elliot.

In 1 hour, John can pick 10 strawberries or 30 blueberries. In the same amount of time, Laura can pick 20 strawberries or 100 blueberries.
What is John’s opportunity cost for 1 blueberry?

• 1/3 strawberry
• 1/5 strawberry
• None of the above
• 5 strawberries
• 3 strawberries

1/3 of a strawberry.

In 1 hour, John can pick 10 strawberries or 30 blueberries. In the same amount of time, Laura can pick 20 strawberries or 100 blueberries.
What is Laura’s opportunity cost for 1 blueberry?

• 3 strawberries
• None of the above
• 1/5 strawberry
• 1/3 strawberry
• 5 strawberries

1/5 of a strawberry.

In 1 hour, Alec can pick 50 tomatoes or 100 peppers. In the same amount of time, Nate can pick 40 tomatoes or 120 peppers.

Alec should specialize in…

• nothing

• tomatoes

• peppers

• both tomatoes and peppers

Tomatoes