Chapter 2 Production Possibilities Verified Test Bank

Chapter 2: Production Possibilities

Learning Objective Guide

(LO-1) Explain the importance of models in economics

(LO-2) Describe the production possibilities model

(LO-3) Illustrate the use of the production possibilities model

(LO-4) Calculate opportunity costs of production

(LO-5) Define the concept of comparative advantage

(LO-6) Apply the concept of comparative advantage to demonstrate the benefits of specialization and trade

(LO-7) Discuss the difference between positive and normative economics

1. An economic model is
   1. A value judgment
   2. A simplification of reality
   3. A tool to explain exceptions to a theory
   4. Eliminate differences in the variables

LO-1

Level: Easy

1. Models represent
   1. Reality
   2. Market corrections
   3. Behavior differences
   4. Exceptions to general rules

LO-1

Level: Easy

1. A production possibilities model identifies
   1. Choices available to individuals only given available resources
   2. Choices available to groups only given available resources
   3. Choices available to aggregate economies only given available resources
   4. Choices available to individuals, groups, and aggregate economies given available resources

LO-2

Level: Easy

1. A production possibilities frontier (PPF) illustrates this
   1. The maximum amount of capital that is available for production with a given set of resources and technology, ceteris paribus
   2. The maximum amount of labor available for production with a given set of resources and technology, ceteris paribus
   3. The maximum amount of output that can be produced with a given set of resources and technology, ceteris paribus
   4. The maximum amount of goods attainable if prices are fixed.

LO-2

Level: Easy

Reference:

Table 1: Production Possibilities

1. Consider the Table 1. When moving from A to F, the cost of a unit of Tractors in terms of food
   1. Increases
   2. Decreases
   3. Remains constant
   4. Fluctuates

LO-3

Level: Moderate

1. Consider Table 1. If the society would change from D to C this would mean
   1. The society would give up 1 tractor for 15 units of food
   2. The society would give up 15 units of food for 1 tractor
   3. The society would gain 2 units of tractors for 30 units of food
   4. The society would gain 3 tractors for 15 units of food

LO-3

Level: Moderate

1. According to Table 1, a combination of 4 tractors and 5 units of food is
   1. Attainable and efficient
   2. Attainable but not efficient
   3. Not attainable
   4. Insufficient information provided to determine

LO-3

Level: Easy

1. According to Table 1, a combination of 2 tractors and 20 units of food is
   1. Attainable and efficient
   2. Attainable but not efficient
   3. Not attainable
   4. Insufficient information provided to determine

LO-3

Level: Easy

1. According to Table 1, a combination of 3 tractors and 30 units of food is
   1. Attainable and efficient
   2. Attainable but not efficient
   3. Not attainable
   4. Insufficient information provided to determine

LO-3

Level: Easy

1. Points located within the production possibilities frontiers is best described as
   1. Efficient
   2. Unattainable
   3. Attainable
   4. Possible

LO-2

Level: Easy

1. Combinations of output that lie on the production possibilities frontier represent _____________ choices
   1. Efficient
   2. Unattainable
   3. Inefficient
   4. Unproductive

LO-2

Level: Easy

1. The slope of the production possibilities frontier equals the __________________ of producing one more unit of the good measured on the x-axis.
   1. Opportunity cost
   2. Marginal cost
   3. Marginal benefit
   4. Total cost

LO-2

Level: Easy

1. The __________________ is the ability to produce something with fewer resources or to produce more with the same resources as another producer.
   1. Opportunity cost
   2. Absolute advantage
   3. Comparative advantage
   4. Marginal benefit

LO-5

Level: Easy

1. The ________________________ is the ability to produce a good or service at a lower opportunity cost than another producer.
   1. Opportunity cost
   2. Absolute advantage
   3. Comparative advantage
   4. Marginal benefit

LO-5

Level: Easy

1. The choice of specialization is founded on
   1. Marginal benefit
   2. Opportunity cost
   3. Average costs of production
   4. Total costs of production

LO-4

Level: Easy

1. Which of the following is a normative statement?
   1. An output gap can be either expansionary or contractionary.
   2. Structural unemployment has increased.
   3. If the price of gasoline increases, people will probably buy less.
   4. The taxes on cigarette and alcohol should be increased.

LO-7

Level: Moderate

1. A positive statement
   1. Cannot be tested
   2. Is dependent on a person’s opinion
   3. Always has a positive value
   4. Might be right or wrong but is quantifiable

LO-5

Level: Easy

1. Which of the following is a positive statement?
   1. The average on the next class exam should be higher than average.
   2. A five per cent increase in tuition leads to a one per cent decrease in student enrollment.
   3. To increase consumer buying, taxes should be decreased.
   4. Government programs aimed at retraining should reduce structural unemployment.

LO-7

Level: Moderate

1. A blueprint of a home is an example of a model because it
   1. Provides a “picture” of the home to be built
   2. Is precise
   3. Provides layers of development
   4. Represents reality

LO-1

Level: Moderate

1. Of the following which would not contribute to economic growth?
   1. Increases in consumer spending
   2. Technology
   3. Trade
   4. Despecialization

LO-1

Level: Moderate

Reference:

Figure 1: Production Possibilities Frontier

1. Consider Figure 1. If the economy is at Point C what is the opportunity cost of one more unit of consumer goods?
   1. 2 consumer goods
   2. 2 capital goods
   3. .5 consumer goods
   4. .5 capital goods

LO-4

Level: Difficult

1. Consider Figure 1. Which of the following would not apply to the economy facing this production possibilities frontier?
   1. The opportunity cost of increasing consumer goods from four units to seven units is one unit of capital good.
   2. The economy faces a trade-off when considering how to use scarce resources between the production goods of consumer goods and capital goods.
   3. The economy faces constant opportunity costs for the trade-off between consumer goods and capital goods.
   4. The graph illustrates the detail that resources suitable for the production of consumer goods are not equally suitable for the production of capital goods.

LO-3

Level: Moderate

1. Consider Figure 1. The opportunity cost of producing more consumer goods
   1. Decreases
   2. Increases
   3. Is constant
   4. Changes after the first four units of capital goods

LO-4

Level: Moderate

1. On a production possibilities frontier economic growth is illustrated by a
   1. Shift of the PPF curve to the left.
   2. Shift of the PPF curve to the right
   3. A movement along an existing PPF
   4. A movement from on the PPF to inside the PPF

LO-2

Level: Moderate

1. The production possibilities frontier illustrates the boundary between the
   1. Goods and services an economy can and cannot produce
   2. Goods and services wanted and not wanted by an economy
   3. Attainable and unattainable combinations of goods and services
   4. Affordable and not affordable combinations of goods and services

LO-3

Level: Difficult

1. Which of the following will increase economic growth for an economy?
   1. Decrease immigration limits
   2. Increase financial aid for college students
   3. Decrease consumer consumption
   4. Increase trade tariffs

LO-3

Level: Moderate

Reference:

Figure 2: Production Possibilities Frontier

1. Suppose Figure 2 illustrates the production possibilities frontier for a country. Of the following what would explain the movement of a production possibilities frontier from PPF1 to PPF2?
   1. Research and development of new technology in the production of computers
   2. An increase in investment spending
   3. A decrease in the trade deficit
   4. An increase in consumption spending of automobiles

LO-3

Level: Difficulty

1. John can make sandwiches at a lower opportunity cost than Grace. Grace, however, can make more sandwiches in a day than John.
   1. Grace cannot benefit from trade
   2. John has absolute value in sandwich making over Grace
   3. Grace has comparative value in sandwich making over John
   4. John has comparative value in sandwich making over Grace

LO-6

Level: Easy

1. A country has a comparative advantage in the production of a good if
   1. The country can produce the good at the lowest opportunity cost
   2. The country can produce the good at the greatest opportunity cost
   3. The country can produce more of the good
   4. The country can produce a combination on its production possibilities frontier

LO-6

Level: Easy

1. You and your friend, Terri, work in a bakery. You can produce more cookies and cakes than Terri. This means that
   1. You work harder than Terri
   2. You have a comparative advantage for both cookies and cakes than Terri
   3. You have an absolute advantage for both cookies and cakes than Terri
   4. You have a comparative advantage for cookies and cakes than Terri, but Terri has an absolute advantage for cookies and cakes

LO-5

Level: Moderate

Reference:

Table 2

1. Jacob and Kade can grow tomatoes or cucumbers. Table 1 illustrates the amounts both can grow in a week. Based on the table, Jacob’s opportunity cost of producing one pound of tomatoes is
   1. 1.5 pounds of cucumbers
   2. 1.33 pounds of cucumbers
   3. .75 pounds of cucumbers
   4. .67 pounds of cucumbers

LO-5

Level: Difficult

1. How can a combination of goods be unattainable?

LO-2

Level: Moderate

1. Draw a production possibilities frontier for two goods or services. Identify ranges that are attainable, unattainable, and what would illustrate those combinations of production that are attainable and efficient.

LO-2

Level: Moderate

1. Explain why the production possibilities frontier has a bowed out shape rather than a straight line?

LO-2

Level: Moderate

1. How is economic growth illustrated in a production possibilities frontier?

LO-3

Level: Moderate

1. Highly developed countries such as the United States have the ability to produce anything it needs domestically. Because of this ability there would be go gain for the United States from trade. Would you agree or disagree to the previous statements?

LO-6

Level: Moderate

1. Explain why specialization and trade increases a country’s level of consumption.

LO-6

Level: Difficult

Reference:

Table 3

1. Table 3 above illustrates the amount of dresses and laptops two countries can produce with their given amount of resources and level of technology. Which country has the comparative advantage of producing dresses and which country has the comparative advantage of producing laptops?

Solution:

LO-6

Level: Difficult

1. Explain and provide an example of positive and normative statements.

A normative statement is one that focuses on a perspective, or opinion. It is based on a value judgment and cannot be tested. “The unemployment rate should never be greater than 8% for our economy,” is an example of a normative statement.

LO-6

Level: Moderate