Department of Economics College of Business Administration Kuwait University

Econ 110: Principles of Microeconomics

Problem Set

Introduction & PPF

True or False :
1) The economizing problem arises from the conflict between having relatively unlimited resources and relatively limited wants. 2) The fundamental economic problem is that productive resources are scarce in relation to the demand for them. 3) The four factors of production are land, labor, capital, and government services. 4) Productive efficiency means that goods and services are being produced by society in the least costly way. 5) Allocative efficiency means achieving the optimal or most desired point on the production possibilities curve. 6) A point inside the production possibilities curve illustrates that resources are not being used as efficiently as possible. 7) Economic rationale for the law of increasing opportunity cost is that economic resources are not fully adaptable to alternative uses. 8) A technological advance that lowers production costs would shift the production possibilities curve to the right.

Essay Questions :
The relative scarcity of resources makes the operation of any economy a matter of choosing between alternatives. Explain. The relative scarcity of resources makes the operation of any economy a matter of choosing between alternatives. Explain. Explain how increasing opportunity costs are reflected graphically in the production possibilities curve. How would the curve appear if opportunity costs were constant? (Answer verbally or illustrate your response with diagrams.)

Multiple Choice Questions:

(1) The term scarcity in economics refers to the fact that: A) economic wants are limited and resources are abused. B) even in the richest country some people go hungry. C) no country can produce enough products to satisfy everybody's economic wants. D) it is impossible to produce too much of any particular good or service.

(2) As a student of economics, when you speak of scarcity, you are referring to the ability of society to: A) employ all of its resources. B) consume all that is produced. C) satisfy economic wants given limited resources. D) continually make technological breakthroughs and increase production. (3) As a consequence of the condition of scarcity: A) there is never enough of anything. B) production has to be centrally planned. C) things which are plentiful have relatively high prices. D) individuals and communities have to make choices from among alternatives. (4) The individual who brings together economic resources and assumes the risk in a capitalist economy is called the: A) manager. B) entrepreneur. C) stockbroker. D) banker. (5) Which is not considered to be an economic resource? A) land (or natural resources( B) money C) labor D) tools and machinery (6) If an economy is being "productively efficient," then that means the economy is: A) producing the products most wanted by society. B) fully employing all economic resources. C) maximizing the returns to factors of production. D) using the least costly production techniques. (7) With allocative efficiency: A) the state of technology, or methods used to produce output, do not change. B) the available supplies of factors of production are fixed in both quantity and quality. C) there is production of any particular mix of goods and services in the least costly way. D) there is production of that particular mix of goods and services most wanted by society.

(8) The production possibilities curve represents which of the following? A) the amount of goods attainable with variable resources B) the maximum amount of goods attainable with variable resources C) maximum combinations of goods attainable with fixed resources D) the amount of goods attainable if prices decline (9) On a production possibilities curve, the single optimal or best combination of output for any society: A) is at a point near the top of the curve. B) is at the precise midpoint of the curve. C) is at a point near the bottom of the curve. D) depends upon the preferences of society. The following economy produces two products: Product Steel Wheat A 0 100 B 1 90 C 2 75 D 3 55 E 4 30 F 5 0

(10) Refer to the above table. A change from possibility C to B means that: A) 1 unit of steel is given up to get 75 units of wheat. B) 2 units of steel are given up to get 75 units of wheat. C) 1 unit of steel is given up to get 15 more units of wheat. D) 2 units of steel are given up to get 15 more units of wheat. (11) A change from possibility B to C means that: A) 10 units of wheat are given up to get one more unit of steel. B) 15 units of wheat are given up to get one more unit of steel. C) 15 units of wheat are equal to one unit of steel. D) 75 units of wheat are equal to one unit of steel. (12) In moving from possibility A to F, the cost of a unit of steel in terms of a unit of wheat: A) increases. B) decreases. C) remains constant. D) increases from A to B, and decreases from B to F. (13) A point inside the production possibilities curve is: A) attainable and the economy is efficient. B) attainable, but the economy is inefficient. C) unattainable, but the economy is inefficient. D) unattainable and the economy is efficient.

Good Y B A E Good X C D

(14) The graph above shows the production possibilities curve for an economy producing two goods, X and Y. Which of the points on the graph indicate unemployed resources? A) D only B) E only C) E and A only D) B and C only (15) If an economy that produces capital and consumer goods is operating at a point on its production possibilities curve, this indicates that: A) it is achieving full employment but not full production. B) it is achieving full production but not full employment. C) more capital goods can be produced only at the cost of some consumer goods. D) the economy is incapable of achieving significant economic growth. (16) A reduction in the level of unemployment would have which effect with respect to the nation's production possibilities curve? A) It would shift the curve to the right. B) It would shift the curve to the left. C) It would not shift the curve; it would be represented by moving from a point inside the curve toward the curve. D) It would not shift the curve; it would be represented by moving from a point on the curve to a point to the right of the curve.
Food C D

G E

(17) Points C, D, E, and H on the above graph show: A) an inefficient allocation of society's scarce resources. B) a constant tradeoff between food and clothing. C) possible combinations of food and clothing. D) unattainable combinations of food and clothing. (18) The combination of food and clothing shown by point G on the above graph: A) is not attainable, given society's available resources and technology.

Clothing

B) C) case. D)

can be attained only if some of society's resources are unemployed. suggests that the law of increasing relative costs is not relevant in this results only because society allocates its resources inefficiently.

(19) The combination of food and clothing shown by point F on the above graph: A) is an efficient use of society's resources because it is below the production possibilities curve. B) would be a desirable combination of outputs only if there was no international trade. C) is attainable but involves the unemployment and inefficient use of some of society's resources. D) is not attainable with current resources and technology. (20) If a production possibilities boundary is a concave curve and not a straight line, then: A) resources are equally suited to producing alternative products. B) resources are not equally suited to producing alternative products. C) resources are perfectly interchangeable to alternative uses. D) there are unemployed resources. (21) If economic resources are perfectly shiftable between the two products shown on a production possibilities graph: A) the economy will always be at full employment. B) more of one product can be produced without producing less of the other product. C) the production possibilities curve would be a straight line. D) the two products are of equal value to the economy. (22) The law of increasing opportunity costs indicates that: A) resources are perfectly mobile except for transportation costs. B) the sum of all costs cannot rise above the market price of a product. C) to produce more of one good, society must sacrifice larger and larger amounts of alternative goods. D) if the prices of all the resources involved in the production of goods increase, the cost of producing those goods will increase at the same rate.

The following economy produces two products : Product A B C Tanks 0 1 2 Autos 1000 950 850

D 3 650

E 4 350

F 5 0

(23) Refer to the above table. The opportunity cost of each additional tank in terms of autos: A) remains constant. B) falls as more tanks are produced. C) increases as more tanks are produced. D) cannot be measured because there is no currency. (24) Refer to the above table. According to the production possibilities schedule, a combination of four tanks and 650 autos is: A) attainable, but involves an efficient use of society's resources. B) attainable, but would not be in the best interests of a strong national defense. C) not attainable because it is not listed in the schedule. D) not attainable because society does not have sufficient resources to produce this combination. (25) Given the production possibilities schedule above, a combination of three tanks and 350 autos: A) illustrates the tradeoff between tanks and autos. B) is attainable but involves the unemployment or inefficient use of some of society's resources. C) cannot be produced by society, given its current level of resources and production technology. D) is not attainable because this combination is not listed in the schedule. (26) The basic economic problem is the combined existence of: A) inflation and unemployment. B) economic freedom and income equality. C) scarce economic resources and unlimited economic wants. D) growing populations and the depletion of natural resources. (27) When a state government chooses to build more roads, the required resources are no longer available for spending on public education. This dilemma illustrates the concept of: A) marginal analysis. B) full employment. C) full production. D) opportunity cost. (28) All of the following would affect the position of a country's production possibilities curve, except: A) the quantity of labor. B) the level of unemployment. C) the amount of the capital stock. D) technological progress.