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Chapter 2—Production Possibilities Opportunity Cost

MULTIPLE CHOICE

1. Which of the following correctly lists the three fundamental economic questions?
a. If to produce? Why to produce? When to produce?
b. If to produce? What to produce? How to produce?
c. Why to produce? What to produce? How to produce?
d. What to produce? How to produce? For whom to produce?
ANS: D PTS: 1 DIF: Easy NAT: BUSPROG: Analytic
TOP: Three Fundamental Economic Questions KEY: Bloom's: Comprehension

2. Three basic decisions must be made by all economies. What are they?
a. How much will be produced, when it will be produced, and how much it will cost.
b. What the price of each good will be, who will produce each good, and who
will consume each good.
c. What will be produced, how goods will be produced, and for whom goods will
be produced.
d. How the opportunity cost principle will be applied, if and how the law of comparative
advantage will be utilized, and whether the production possibilities constraint will apply.

ANS: C PTS: 1 DIF: Easy NAT: BUSPROG: Analytic

TOP: Three Fundamental Economic Questions KEY: Bloom's: Comprehension

3. Because of the problem of scarcity, each economic system must make which of the following choices?
a. How to produce? c. For whom to produce?
b. What to produce? d. All of these.
ANS: D PTS: 1 DIF: Easy NAT: BUSPROG: Analytic
TOP: Three Fundamental Economic Questions KEY: Bloom's: Comprehension

4. Which fundamental economic question is most closely related to the issues of income distribution
and poverty?
 a. The What to Produce question. c. The How to Produce question.
b. The Why to Produce question. d. The For Whom to Produce question.
ANS: D PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic
TOP: Three Fundamental Economic Questions KEY: Bloom's: Comprehension

5. Which fundamental economic question requires society to choose the technological and
resource mix used to produce goods?
a. The What to Produce question. c. The How to Produce question.
b. The Why to Produce question. d. The For Whom to Produce question.
ANS: C PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic
TOP: Three Fundamental Economic Questions KEY: Bloom's: Comprehension

6. The opportunity cost of an action is:

a. the monetary payment the action required.
b. the total time spent by all parties in carrying out the action.
c. the value of the best opportunity that must be sacrificed in order to take the action.
d. the cost of all alternative actions that could have been taken, added together.
 ANS: C PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic
TOP: Opportunity Cost KEY: Bloom's: Comprehension

7. The highest valued alternative that must be given up in order to choose an option is called the:
a. opportunity cost. c. scarcity expense.
b. utility cost. d. disutility option.
ANS: A PTS: 1 DIF: Easy NAT: BUSPROG: Analytic
TOP: Opportunity Cost KEY: Bloom's: Knowledge

8. Which of the following sayings best reflects the concept of opportunity cost?
a. "You can't teach an old dog new tricks." c. "I have a baker's dozen."
b. "There is no such thing as a free lunch." d. "There's no business like show business."
ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic
TOP: Opportunity Cost KEY: Bloom's: Comprehension

9. The opportunity cost to a city for using local tax revenues to construct a new park is the:
a. best alternative foregone by building the park.
b. dollar cost of constructing the new park.
c. dollar cost of the old park.
d. increased taxes necessary to pay for maintenance of the new park.
ANS: A PTS: 1 DIF: Easy NAT: BUSPROG: Analytic
TOP: Opportunity Cost KEY: Bloom's: Comprehension

10. A good or service that is forgone by choosing one alternative over another is called a(n):
a. explicit cost. c. historical cost.
b. opportunity cost. d. accounting cost.
ANS: B PTS: 1 DIF: Easy NAT: BUSPROG: Analytic
TOP: Opportunity Cost KEY: Bloom's: Knowledge

11. Opportunity cost is the:

a. cost incurred when one fails to take advantage of an opportunity.
b. price paid for goods and services.
c. cost of the best option forgone as a result of choosing an alternative option.
d. undesirable aspects of an option.
ANS: C PTS: 1 DIF: Easy NAT: BUSPROG: Analytic
TOP: Opportunity Cost KEY: Bloom's: Comprehension

12. The opportunity cost of a purchase is:

a. the selling price of the good or service.
b. zero if the good or service satisfies a need.
c. greater for persons who are rich.
d. the good or service given up for the good or service purchased.
ANS: D PTS: 1 DIF: Easy NAT: BUSPROG: Analytic
TOP: Opportunity Cost KEY: Bloom's: Comprehension

13. The opportunity cost of watching television is:

a. all of the alternative programs that appear on other stations.
b. zero because there is no money expenditure involved.
c. the alternative use of the time foregone by watching the program.
d. zero if it benefits you.
 ANS: C PTS: 1 DIF: Easy NAT: BUSPROG: Analytic
TOP: Opportunity Cost KEY: Bloom's: Comprehension

14. Which of the following does not illustrate opportunity cost?

a. If I study, I must give up going to the football game.
b. If I buy a computer, I must do without a 35" television.
c. More consumer spending now means more spending in the future.
d. If I spend more on clothes, I must spend less on food.
ANS: C PTS: 1 DIF: Easy NAT: BUSPROG: Analytic
TOP: Opportunity Cost KEY: Bloom's: Comprehension

15. Which of the following does not illustrate opportunity cost?

a. If I study, I must give up going to the football game.
b. If I buy a computer, I must do without a 35" television.
c. If I spend more on clothes, I must spend less on food.
d. All of these illustrate opportunity cost.
ANS: D PTS: 1 DIF: Easy NAT: BUSPROG: Analytic
TOP: Opportunity Cost KEY: Bloom's: Comprehension

16. The opportunity cost of an economic decision is:

a. the best alternative that was sacrificed.
b. the amount of money needed to implement the decision.
c. any land, labor, and capital that are wasted.
d. all options that were lost due to scarcity.
ANS: A PTS: 1 DIF: Easy NAT: BUSPROG: Analytic
TOP: Opportunity Cost KEY: Bloom's: Comprehension

17. Bill has $10 to spend on a Superman, Batman, or an X-Men T-shirt. Bill buys the Superman T-
shirt and the Batman shirt was a close second choice. What is the opportunity cost?
a. The amount he spent, $10.
b. Nothing, since he got his preferred choice.
c. The Batman T-shirt.
d. The X-Men T-shirt.
ANS: C PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic
TOP: Opportunity Cost KEY: Bloom's: Comprehension

18. On a production possibilities curve, the opportunity cost of good X, in terms of good Y,
is represented by the:
a. distance to the curve from the vertical axis.
b. distance to the curve from the horizontal axis.
c. movement along the curve.
d. all of these.
ANS: C PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic
TOP: Opportunity Cost KEY: Bloom's: Comprehension

19. Which of the following statements is true?

a. An opportunity cost is what must be given up in order to get something else.
b. The three fundamental economic questions refer to What to produce? How to produce?
and When to produce?
c. The term "investment" refers to the purchase of stocks and bonds and other financial
 securities.
d. The law of increasing opportunity cost implies that as production of one type of good
is expanded then fewer and fewer of other goods must be given up.
ANS: A PTS: 1 DIF: Easy NAT: BUSPROG: Analytic
TOP: Opportunity Cost KEY: Bloom's: Comprehension

20. The amount of a good that must be given up to produce another good is the concept of:
a. scarcity.
b. specialization.
c. trade.
d. efficiency.
e. opportunity cost.
ANS: E PTS: 1 DIF: Easy NAT: BUSPROG: Analytic
TOP: Opportunity Cost KEY: Bloom's: Knowledge

21. The opportunity cost of an activity means the:

a. amount of money the activity costs.
b. number of hours that is required to engage in this activity.
c. expected gains by engaging in the activity.
d. amount of other things that must be sacrificed in order to engage in the activity.
e. expected gains minus the expected costs of engaging in the activity.
ANS: D PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic
TOP: Opportunity Cost KEY: Bloom's: Comprehension

22. In the context of the production possibilities curve, opportunity cost is measured in:
a. dollars paid for the goods.
b. the quantity of other goods given up.
c. the value of the resources used.
d. changing technology.
e. units of satisfaction.
ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic
TOP: Opportunity Cost KEY: Bloom's: Comprehension

23. Mikki decides to work five hours the night before her economics exam. She earns an extra $75,
but her exam score is 10 points lower than it would have been had she stayed home and studied.
Her opportunity cost is the:
a. five hours she worked.
b. $75 she earned.
c. 10 points she lost on her exam.
d. time she could have spent watching television.
e. guilt she feels about neglecting her economics studies.
ANS: C PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic
TOP: Opportunity Cost KEY: Bloom's: Comprehension

24. When the opportunity cost of producing carrots increases as more carrots are produced, then:
a. no more carrots will be produced.
b. resources are equally suited to the production of carrots and to other goods.
c. the production possibilities curve is a straight line.
d. the production possibilities curve becomes positively sloped.
e. the law of increasing costs is present.
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