Q: According to the principle of efficient resource allocation, what condition must be met for the best production plan?

$\text{Marginal Benefit} = \text{Marginal Cost}$

Question 1

Which of the following best describes the Production Possibilities Frontier (PPF)?

Accepted Answer

The PPF is the boundary between the combinations of goods and services that can be produced and those that cannot, given current resources and technology.

Question 2

If an economy is producing at a point inside its PPF, what does this indicate?

Accepted Answer

Some resources are unemployed or underutilized.

Question 3

Suppose the opportunity cost of producing 1 pizza is 3 cans of cola. If the economy moves from producing 2 pizzas to 3 pizzas, how many cans of cola must be given up?

Accepted Answer

$3$

Question 4

According to the principle of efficient resource allocation, what condition must be met for the best production plan?

Accepted Answer

$	ext{Marginal Benefit} = 	ext{Marginal Cost}$

Question 5

If the PPF for an economy is bowed outward, what does this indicate about opportunity costs?

Accepted Answer

Opportunity costs are increasing as more of one good is produced.

Question 6

Country A can produce either 10 units of good X or 20 units of good Y. Country B can produce either 5 units of good X or 5 units of good Y. Who has the comparative advantage in producing good X?

Accepted Answer

Country B, because its opportunity cost of producing good X is lower.

Question 7

Joe can make 1 smoothie or 5 salads in one hour. Liz can make 1 smoothie or 1 salad in one hour. Who has the absolute advantage in making salads, and who has the comparative advantage?

Accepted Answer

Joe has the absolute and comparative advantage in salads.

Question 8

If two countries specialize according to their comparative advantage and trade, what is the result?

Accepted Answer

Both countries can consume outside their individual PPFs.

Question 9

Suppose the opportunity cost of 1 pizza is 2 cans of cola for Country A and 4 cans of cola for Country B. What is a mutually beneficial trading price for 1 pizza?

Accepted Answer

3 cans of cola

Question 10

Which of the following statements about absolute and comparative advantage is correct?

Accepted Answer

A country can have an absolute advantage in both goods but still benefit from trade due to comparative advantage.

Question 11

If the marginal benefit of producing an additional unit of a good is less than its marginal cost, what should the economy do?

Accepted Answer

Decrease production of the good.

Question 12

Which of the following is NOT an assumption of the basic PPF model?

Accepted Answer

All resources are equally suited to producing both goods.

Question 13

If a country is producing at a point beyond its PPF, what does this imply?

Accepted Answer

The country is producing an unattainable combination of goods with current resources and technology.

Question 14

Suppose the marginal cost of producing pizza increases as more pizza is produced. What shape will the PPF take?

Accepted Answer

A bowed-outward (concave) curve

Question 15

Which of the following real-world factors is NOT accounted for in the basic PPF model discussed in class?

Accepted Answer

Unemployment

Question 16

If Liz can make 2 smoothies or 10 salads in an hour, what is her opportunity cost of making 1 smoothie?

Accepted Answer

$5$ salads

Question 17

Which of the following best explains why the opportunity cost of producing a good typically increases as more of it is produced?

Accepted Answer

Some resources are better suited to producing one good than another.

Question 18

If a country specializes in the good for which it has a comparative advantage and trades, what happens to its consumption possibilities?

Accepted Answer

They expand beyond its own PPF.

Question 19

Which of the following is a limitation of the PPF model when applied to real-world international trade?

Accepted Answer

It assumes balanced trade and no unemployment.

Question 20

Suppose the marginal benefit of producing an additional can of cola is $2$ and the marginal cost is $3$. According to the efficient allocation rule, what should the economy do?

Accepted Answer

Decrease cola production.

Chapter 2: The Economic Problem – Production Possibilities, Opportunity Cost, and Gains from Trade

Study Guide - Practice Questions

Study Guide - Flashcards