Microeconomics

Sample Questions Trade and PPF

1.

Produced goods, such as machinery and tools, used as inputs for the production of other goods comprise the
resource known as
a. natural resources.
b. services.
c. capital.
d. entrepreneurship.

2.

Here are three things you could do if you do not attend your neighbor's barbecue: watch television with some
friends (you value this at $17), read a good novel (you value this at $14), or go in to work (you could earn $16
during the barbecue). The opportunity cost of going to your neighbor's barbecue is
a. $16, because this is the only alternative of the three where you actually receive a monetary
payment.
b. $14, because this is the lowest valued alternative forfeited.
c. $17, because this is the highest valued alternative forfeited.
d. $47, because this is the total dollar sum of the alternatives forfeited.

3.

It usually takes less time to buy a six-pack of 7-Up, a loaf of bread, and a half-gallon of ice cream at a small
convenience store (such as a 7-Eleven) than at a large, full-service grocery store. Which of the following persons
is most likely to buy these items at a convenience store?
a. a person with high opportunity cost of time
b. a person with low opportunity cost of time
c. a person who is out of work
d. There is not enough information to answer the question.

4.

Attempts to determine "what is" are part of __________ economics.

a. positive
b. normative
c. positive and normative
d. neither positive nor normative

5.

The condition in an economy that makes a "rationing device" a necessity is the fact that
a. the economy is organized around free markets.
b. the economy is centrally planned by the government.
c. scarcity exists.
d. there are fewer types of goods than there are people in the economy.

6.

Decision making "at the margin" means making a choice based on __________ of a decision.
a. the total benefits
b. the total costs
c. comparing the total benefits and costs
d. comparing the additional benefits to additional costs

7.

Prior to attending college, Darius is offered a lucrative four-year contract as an actor in a daytime soap opera.
Assuming that acting and attending college are Darius' preferred alternatives and that he must choose between the
two, his cost of attending college after receiving the offer
a. increases.
b. decreases.
c. stays the same.
d. increases or stays the same depending on whether he accepts the offer.

8.

In an interview an economist states, "This problem should be of greater concern to the federal government." We
can explicitly put this statement in the category of
a. microeconomics.
b. macroeconomics.
c. positive economics.
d. normative economics.

9.

The cost of building a new interstate highway system is reported to be high at $25 billion. Does it necessarily
follow that the interstate highway is not worth building?
a. Yes, because it is better to spend $25 billion on ending poverty than on building another
interstate highway system.
b. No, because building a new interstate highway system promotes economic growth, which
helps everyone.
c. No, because the benefits of building a new interstate highway system may be greater than
$25 billion.
d. Yes, because the benefits of building a new interstate highway system may be greater than
$25 billion.

Marginal Benefit,
Marginal Cost

Exhibit 1-1

MC

MB

Time Spent Studying (hours)

10.

Refer to Exhibit 1-1. The student whose study habits are illustrated here will maximize the net benefits of
studying when she has studied
a. 2 hours
b. 4 hours
c. 6 hours
d. 8 hours

11.

Refer to Exhibit 1-1. If the student whose study habits are illustrated here is currently studying for 8 hours she
should
a. cut back on the number of hours she is studying because the marginal benefit of studying
for 8 hours is less than the marginal cost of doing so.
b. cut back on the number of hours she is studying because the marginal benefit of studying
for 8 hours is greater than the marginal cost of doing so.
c. increase the number of hours she is studying because the marginal benefit of studying for
8 hours is less than the marginal cost of doing so.
d. increase the number of hours she is studying because the marginal benefit of studying for
8 hours is greater than the marginal cost of doing so.

12.

Ceteris paribus means

a. one variable too many.
b. the correct relationship specified.
c. assuming economic motives.
d. all other things held constant.

13.

Points outside (or beyond) the PPF are

a. attainable.
b. unattainable.
c. efficient.
d. inefficient.

14.

Consider two points on the PPF: point A, at which there are 10 apples and 20 pears, and point B, at which there
are 7 apples and 21 pears. If the economy is currently at point A, the opportunity cost of moving to point B is
a. 1 pear.
b. 7 apples.
c. 3 apples.
d. 21 pears.

15.

Suppose the economy goes from a point on its production possibilities frontier (PPF) to a point inside that PPF.
Assuming that the PPF has not shifted, this could be due to
a. a gain of resources.
b. a loss of resources.
c. technological improvement in the production of both goods.
d. a new law that interferes with economic efficiency.

16.

Which of the following is an illustration of the law of increasing opportunity costs?

a. As more cars are produced, the opportunity cost of each additional car is greater than for
the preceding unit.
b. As more cars are produced, the opportunity cost of each additional car is less than for the
preceding unit.
c. As more cars are produced, the opportunity cost of each additional car is the same as for
the preceding unit.
d. People pay lower prices for cars the higher the costs of producing cars.

Exhibit 2-6

17.

Refer to Exhibit 2-6. Which graph depicts a technological breakthrough in the production of good Y only?
a. (1)
b. (2)
c. (3)
d. (4)

18.

Refer to Exhibit 2-6. Which graph depicts a discovery of a new cheap source of energy that assists in the
production of both good X and good Y?
a. (1)
b. (2)
c. (3)
d. (4)
e. none of the above

19.

Refer to Exhibit 2-6. Which graph best depicts the consequence of a large-scale natural disaster?
a. (1)
b. (2)
c. (3)
d. (4)
e. none of the above

Exhibit 2-5

20. Refer to Exhibit 2-5. The economy is currently operating at point F. The opportunity cost of moving to point E is
a. 35 fax machines.
b. 55 fax machines.
c. zero. Fax machine consumption can increase without giving up TV consumption if the
inefficiency can be eliminated.
d. not possible to determine.
21. Refer to Exhibit 2-5. As more fax machines are produced, the opportunity cost of producing them
a. increases.
b. decreases.
c. remains constant.
d. first decreases and then increases.
22. Refer to Exhibit 2-5. "In order to produce one more television set, we must forfeit the production of one fax
machine." This statement describes a movement from
a. point C to point D.
b. point D to point E.
c. point E to point F.
d. point E to point D.
e. point D to point C.
23. Refer to Exhibit 2-5. Which of the following labeled points are productive efficient?
a. A, B, C, D, and E
b. B, C and D only
c. C only
d. All of the points are efficient.
e. None of the points are efficient.
24.

An economy exhibits productive efficiency if it produces

a. more than enough food to feed everyone.
b. more goods and services in each successive year.
c. maximum output with given resources and technology.
d. enough output so that no one lives in poverty.

25.

Productive efficiency implies that

a. it is impossible to obtain gains in one area without losses in another.
b. it is possible to obtain gains in one area without losses in another.
c. there are too many resources.
d. there are too few resources.
e. none of the above

Key for Word Multiple Choice Questions:

1) C
2) C
3) A
4) A
5) C
6) D
7) A
8) D
9) D
10)
11)
12)
13)
14)
15)
16)
17)
18)
19)
20)
21)
22)
23)
24)
25)

C
A
D
B
C
D
A
D
A
B
C
A
E
A
C
A

Microeconomics
Trade Problem (15 pts)No Key. See Student Instructor.
Suppose Jim is capable of painting 5 rooms per day and Carol is capable of painting 8 rooms per day.
On the other hand, Jim is capable of roofing 2 homes per day while Carol is capable of roofing 4 homes
per day.
1) Finish the following sentences: Carol has an absolute advantage in the production of
___________ good(s)

Jim has an absolute advantage in the production of ____________ good(s)

2) If Jim and Carol decide to trade with one another, Jim should specialize in the
production of roofing or painting?
3) If Jim and Carol decide to trade with one another, the most Jim will be able to trade
1 unit of his good for will be?
4) If Jim and Carol decide to trade with one another, the least Jim will be able to trade
1 unit of his good for will be?
5) Carol is capable of producing more painting and roofing. Explain why she still can
benefit by trading with Jim.

Short Answer (5 pts) No Key. See Student Instructor.

#1 a. Suppose a production possibilities curve (frontier) shows the relationship between manufacturing
goods and technological goods for Dalton Georgia. (Assume that we are currently producing on the
PPF). What does a bowed outward PPF imply if Dalton decides to increase production of manufacturing

goods? Be specific about what will happen to Daltons production of each good as more and more
manufacturing goods are produced.
#1 b. Explain what it is about the resources used to produce manufacturing goods versus technological
goods that might explain why this effect occurs.(HINT: Recall what causes the PPF to be bowed
outward)
Essay (15 pts)No Key. See Student Instructor.
The differences between capitalism and socialism can be described as:
Under capitalism, the individual says I want to be make myself better off, Go ahead answered
capitalism and you will find, to your surprise, that you have also incidentally enriched society.
Under socialism, the individual says I want to make myself better off, Devote yourself to enriching
society answered socialism and you will find, to your surprise, that this is also the surest way to enrich
yourself
In Hazlitts book Time will Run Back, the main character, Peter, describes that while the socialist view is
true mathematically-- it does not seem to work. Peter notes two problems with how WonWorlds
economy functions. 1) WonWorld has too few of some goods (grain) and yet too much of another goods
(windows). 2) Workers seem not be working to the best of their ability.
Describe how a market economy avoids the problems that Peter describes. #1) Indicate the role in a free
market of prices, profits, incentives and Adam Smiths invisible hand to describe how a free
market avoids the problem described in the book of too many of one good (windows) and too little of
another good (grain), and how people know which resources are scarce and need to be conserved and
which resources are not as scarce and should be utilized. #2) Indicate why socialism has difficulty
getting workers to work hard. In particular, why did workers not work harder when the above statement
is obviously true? (That is, if each worked harder, more would be produced, and if everyone (basically)
shares equally in this increased output, then each person will be able to consumer more. ) What keeps
this from working? #3) Why is it that free markets do not have the same problem getting workers to
work hard as the socialist economy and how does the person who is only seeking to benefit himself end
up benefiting society? (hint: how does a person in a free market earn money? What do they have to do to
earn it? And when do people trade in a free market?)

The following are the answers to the sample questions provided in the PDF Document.

1) SKIPPED
2) C
3) D
4) A
5) A
6) A
7) C
8) D
9) C
10)
C
11)
B
12)
C
13)
B
14)
B
15)
BALSO CALLED SHORTAGE
16)
D
17)
C
18)
C
19)
A
20)
A
21)
C
22)
C
23)
B
24)
C--- Because computer producers will leave computer market to enter cell
market. Supply decreases in computer market, driving up price

Short Answer 1:
1)
2)
3)
4)
5)

Follow P1 over to the demand curve and down, label this Qd

Follow P1 over to supply curve and down, (i.e. follow dotted line) label this point Qs
The short side of the market always prevails so Qd will be exchanged
Dead weight loss is AREA C + AREA F
More trades should have taken place between Qd and what would have been the
market equilibrium quantity (found by the intersection of demand and supply curves
down to the Quantity axis) because the marginal benefit (shown by the demand
curve) for these units is greater than the marginal cost of producing these units (as
shown by the supply curve. Therefore, since MB is greater than MC of producing
these units, these units should have been traded. Both sides (producer and
consumer) would have benefited from these trades. They will not occur because
firms are not allowed to raise price above P1 so even though customers value the
good (i.e. their MB) more than the MC of producing those units, this marginal cost
(for these units) is greater than what the firm is allowed to charge. Therefore, the
firm will not produce these units because for the firm the MC will exceed the price
they are allowed to charge (i.e the firm would lose money on these trades. This
means they will not be willing to produce these units.
6) Some consumers may be better off IF they got the product and IF the opportunity
cost of them likely having to wait in line is not too great. Remember when shortages
occur they are usually resolved by first come first served so everyone who wants to
consume the good has an incentive to be the first in line. However, even if they do
get the good they might not be better off because price ceilings tend to cause firms

to reduce the QUALITY of the good. Many customers may be also worse off because
they cannot buy the good because of the shortages created by the price ceiling. So
even if they value the good (MB) more than the cost for the firm to produce it for
them (MC), they might have to do without.
7) Producers are worse off. At the lower price sure more people will want to buy but
the firms will be willing to produce LESS because the lower price means some units
can no longer be profitably produced. (because the marginal cost will exceed the
price they are allowed to charge.) That is, the price ceiling caused the firm to reduce
output AND sell fewer units. The firms in general are worse off.