Answers to multiple choice questions

1. a
2. d
3. d
4. b
5. a
6. c
7. c
8. d
9. c
10. c
11. c
12. d
13. c
14. d
15. a
16. b
17. b
18. c
19. d
20. b

Q 1.

Answer:

People specialize in those activities which they can do at lower opportunity cost than others.
Specialization alone is not sufficient; rather people should engage in trade for profit. It is the
prospect of wealth increasing exchange that leads to productive specialization. That is, trade
increases wealth by allowing a person or nation to specialize in those products that it produces at
lower opportunity cost or has comparative advantage and to trade them for products that other
produce at a lower opportunity cost.(L.Sexton, 4th edition, pg. 54).

Two countries are producing two products (X and Y). With a given amount of resources:

Output of X Output of Y
Country A 180 90

Country B 200 150

In this example, country B has an absolute advantage in both products. Absolute advantage
occurs when a country or region can create more of a product with the same factor inputs. But
Country A has a comparative advantage in the production of good X. It is 9/10ths as efficient at
producing good X but it is only 3/5ths as efficient at producing good Y.

Comparative advantage exists when a country has lower opportunity cost, i.e., it gives up less of
one product to obtain more of another product. In our example above, for country A, every extra
unit of good Y produced involves an opportunity cost of 2 unit of good X. For country B, an
additional unit of good Y involves a sacrifice of only 4.3 units of good X.

Thus if country A focuses on production of X and country B on Y then both can take advantage
from comparative advantage.

Q2

Scarcity:

The point I on the production possibility frontier represent scarcity. In fact any point on the right
of PPF represents scarcity. If we have to produce the goods represented by point I, then existing
resources cannot produce it. For that we have to increase the resources. So point I is an
unattainable point.
Production inefficiency:

Any point inside the PPF represents production inefficiency. For example, point K inside the
PPF represents inefficiency in production either due to unemployment or misallocation of
resources.

Choice: All the points on the PPF like A, B, C, D, E and other all the points inside the PPF also
represent the choices that an individual, household or economy can make for the production of
combination of two goods.

Opportunity cost: Point A to F on production possibility curve represents the opportunity cost.
As we move from one point to another in production possibility frontier, we have to forego some
amount of food to get more of clothing and vice versa.

Economic growth: PPF can also be used to represent economic growth. Economic growth is
represented by shift in the PPF to the right. Economic can be seen as a rise in the number of
reasons.

1. Increase in number of factors of production in a country. These factors are land, labor,
capital and entrepreneurship.
2. Change in technology means more output from same input.
3. A countries economic growth declines due to natural disasters/ wars in the country.
4. Countries investment in capital goods or consumption goods like investment in food or
drinks or investment in factories or industries causes shift in PPF.

Q3

a. There will be no change in the total revenue when the price falls from $400 to $250 a night. It
remains same at amount $20,000.

b. If the price falls from $250 to $200 the total revenue remains the same at $20,000.

c. Total revenue is same at every point of the demand curve because the demand is unit elastic.

d. If we graph this demand curve, we find that demand is unit elastic. It means the % change in
price equals to % change in quantity.

Q 4:
When the price of a commodity increases, the quantity demanded from that commodity is
expected to decline. However, in the recent past fuel prices (say price of one liter of petrol) has
increased significantly, but the demand for fuel has not declined. This means that the demand for
petroleum is perfectly inelastic. The elasticity is zero and the demand curve is vertical.
References:

Doug Mctaggart, C. F. (2010). Economics. Australia: Pearson.

L.Sexton, R. Exploring Economics, 4th edition.

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