Question

Suppose an economy produces capital goods and consumer goods. According to the production possibilities model, which of the following statements is (are) correct?

(x)   In general, an economy will usually accelerate economic growth in the future if it chooses to produce much more consumer goods and much less capital goods in the current period.

(y)   In general, an economy chooses to produce less capital goods when it chooses to spend more on consumer goods.

(z)   A choice for less consumer goods and, therefore, more capital goods in the current period may provide increased production possibilities for all goods in future periods.

Which of the following statements is (are) correct about opportunity cost?

(x) The opportunity cost of going to college is zero for students who are fortunate enough to have all of their college expenses paid by someone else.

(y) Jane decides to spend an hour playing basketball rather than working at $12 per hour. Her opportunity cost is zero, because she enjoys playing basketball more than working.

(z) The opportunity cost of the U.S. “homeland security” program is whatever other goods and services could have been produced with the resources devoted to the homeland security program.

Select one:

A. (x), (y) and (z)

B. (x) and (y) only

C. (x) and (z) only

D. (y) and (z) only

E. (z) only

For a given production possibilities frontier, points G and K are on the PPF, while point H is inside the PPF and point F is outside the PPF. Which of the following statements is (are) correct?

(x) A reduction in unemployment would allow the economy to move from point H towards point K.

(y) Although it is not feasible for the economy to move from point G to F given the current PPF, an increase in available resources could cause an outward shift of the PPF and point F could be reached with the new PPF.

(z) A movement from point G on the PPF to point H inside the PPF could be caused by an advance in technology that affects only one of the two goods.

Select one:

A. (x), (y) and (z)

B. (x) and (y) only

C. (x) and (z) only

D. (y) and (z) only

E. (x) only

Answer 1

1) With fixed resources, a nation can produce a mix of two goods and these production possibilities cannot be increased without further increase in resources, but increasing production of one good decreases the resource availability for other good so the other good is less produced. Hence only (y) is correct.

2) Option E. This is because there is some opportunity cost when an economic activity is done which represents the lost amount of the good or service that could have been produced had resources were used in their production. Even when education is free, there is an opportunity cost of lost earnings.

3) A reduction in unemployment would increase production so the economy will come closer to the PPF. Also an increase in resources or new technology that raises productivity can make point F achievable. Production when shifted inside can be reasoned for an increased unemployment or obsolete technology. Option B is correct.