Q: If the economy moves from point C (2 million pizzas, 12 million cans of cola) to point D (3 million pizzas, 9 million cans of cola) on the PPF, what is the opportunity cost of producing the additional 1 million pizzas?

$$\frac{3\text{ million cans of cola}}{1\text{ million pizzas}} = 3$$ cans of cola per pizza

Q: If Joe can produce 6 smoothies or 30 salads per hour, what is Joe’s opportunity cost of producing 1 smoothie?

$$\frac{30\text{ salads}}{6\text{ smoothies}} = 5$$ salads

Question 1

Which of the following statements best describes the production possibilities frontier (PPF) shown in Figure 2.1?

Accepted Answer

The PPF shows the boundary between attainable and unattainable combinations of two goods, given current resources and technology.

Question 2

Suppose the economy is producing at point Z in Figure 2.1. Which of the following is true?

Accepted Answer

Resources are either unused or misallocated, and it is possible to increase production of both goods.

Question 3

If the economy moves from point C (2 million pizzas, 12 million cans of cola) to point D (3 million pizzas, 9 million cans of cola) on the PPF, what is the opportunity cost of producing the additional 1 million pizzas?

Accepted Answer

$$\frac{3	ext{ million cans of cola}}{1	ext{ million pizzas}} = 3$$ cans of cola per pizza

Question 4

Why is the PPF typically bowed outward (concave to the origin)?

Accepted Answer

Because resources are not equally productive in all activities, leading to increasing opportunity cost.

Question 5

Which of the following best describes allocative efficiency?

Accepted Answer

Producing at the point on the PPF where marginal benefit equals marginal cost.

Question 6

According to Figure 2.3 and the associated table, what happens to the marginal benefit of pizza as more pizzas are produced?

Accepted Answer

Marginal benefit decreases.

Question 7

If Joe can produce 6 smoothies or 30 salads per hour, what is Joe’s opportunity cost of producing 1 smoothie?

Accepted Answer

$$\frac{30	ext{ salads}}{6	ext{ smoothies}} = 5$$ salads

Question 8

Liz can produce 30 smoothies or 30 salads per hour. What is Liz’s opportunity cost of producing 1 salad?

Accepted Answer

$$1$$ smoothie

Question 9

Who has the comparative advantage in producing salads, and why?

Accepted Answer

Joe, because his opportunity cost of producing a salad is lower than Liz’s.

Question 10

Suppose Liz and Joe specialize according to their comparative advantage and trade at a price of 2 salads per smoothie. Which of the following is true?

Accepted Answer

Both Liz and Joe can consume at a point outside their individual PPFs.

Question 11

If the marginal cost of producing a pizza is 4 cans of cola and the marginal benefit is 2 cans of cola, what should the economy do to achieve allocative efficiency?

Accepted Answer

Produce fewer pizzas and more cola.

Question 12

Which of the following events would cause the PPF for an economy to shift outward?

Accepted Answer

A technological improvement in production.

Question 13

During a severe drought, as shown in the U.S. food PPF diagrams, what happens to the opportunity cost of producing food?

Accepted Answer

It increases because producing additional food requires giving up more of other goods and services.

Question 14

Which of the following is NOT a requirement for decentralized market coordination to work efficiently?

Accepted Answer

Central economic planning.

Question 15

If a country devotes all its resources to producing consumption goods and none to capital accumulation, what will happen to its future production possibilities?

Accepted Answer

Its PPF will remain unchanged.

Question 16

Which of the following best explains why economic growth does not eliminate scarcity?

Accepted Answer

Economic growth increases the number of goods and services, but resources are still limited and choices must be made.

Question 17

In the circular flow diagram, what do households provide to firms through the factor markets?

Accepted Answer

Labor, land, capital, and entrepreneurship.

Question 18

Which of the following is an example of a real-world opportunity cost?

Accepted Answer

A student spends an hour studying economics instead of watching a movie; the opportunity cost is the enjoyment of the movie.

Question 19

If the marginal benefit of a pizza is measured by the maximum amount of cola people are willing to give up for one more pizza, what does a downward-sloping marginal benefit curve indicate?

Accepted Answer

People are willing to give up less cola for each additional pizza.

Chapter 2: The Economic Problem – Production Possibilities, Opportunity Cost, and Economic Growth

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