Questions and Answers
What is the basic truth that underlies the study of economics?
Scarcity
How is opportunity cost best defined?
The opportunity cost of doing or getting something is best and fully defined as:
What assumption do economists make in analyzing human decision and action?
People's behavior reflects rational self-interest
What concept does the dilemma of choosing between building more roads and public education illustrate?
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What does a student's decision to go to the movies instead of studying indicate regarding marginal costs and benefits?
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What is the purpose of the ceteris paribus assumption in economic analysis?
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How do Matt's and Jean's statements differ regarding educational attainment and income?
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If a consumer has a budget of $12, with apples priced at $1.50 and bananas at $0.75, what is the slope of the budget line when apples are on the horizontal axis?
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Which of the following is not a factor of production?
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Which output-combination is unattainable if a nation can produce steel and wheat?
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What does a change from combination C to B mean in terms of steel and wheat production?
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In moving from combination E to F, what is the opportunity cost of an additional unit of steel?
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How does the opportunity cost of a unit of steel in terms of wheat change when moving stepwise from possibility A to B to C...to F?
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What does the combination of '5 drill presses and 2 bread' indicate in a production possibilities curve?
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What does the law of increasing opportunity costs state?
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Study Notes
Economic Foundations
- Scarcity is a fundamental economic principle indicating limited resources relative to unlimited wants.
- Opportunity cost represents the value of the next best alternative foregone when making a choice.
Decision-Making and Rationality
- Economists posit that rational self-interest drives human behavior, influencing decision-making processes.
- When prioritizing activities, individuals weigh marginal costs and benefits to guide choices, like opting for entertainment over study time.
Assumptions in Economic Analysis
- The ceteris paribus assumption isolates the impact of one variable, assuming other factors remain unchanged during analysis.
Positive vs. Normative Statements
- Positive statements address factual observations (e.g., correlation between education and income), while normative statements involve value judgments (e.g., all graduates should attend college).
Budget Constraints
- A consumer's budget constraint illustrates trade-offs between goods, with a calculated slope representing the rate at which one good can be substituted for another (e.g., the slope of -2.0 when measuring apples against bananas).
Factors of Production
- Factors of production include land, labor, and capital, while money is not classified as a factor.
Production Possibilities
- Production possibilities schedules indicate various output combinations for different goods; unattainable combinations (e.g., producing 4 steel and 55 wheat) exist outside the curve.
- A shift between production combinations reflects opportunity costs, such as giving up steel to increase wheat output (e.g., 1 steel for 15 wheat).
Law of Increasing Opportunity Costs
- This law states that producing additional quantities of one good results in increasing sacrifices of another good, highlighting trade-offs in resource allocation.
- Production combinations that fall inside the curve (e.g., 5 drill presses and 2 bread) indicate underutilization of resources.
Economic Graph Interpretation
- Understanding graphs, such as the production possibilities curve, helps visualize resource allocation efficiency and the effects of decision-making in economics.
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Description
Explore the fundamental principles of economics, including scarcity, opportunity cost, and rational self-interest. This quiz delves into decision-making processes, assumptions in economic analysis, and the distinction between positive and normative statements.
