Economics Foundations Quiz

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Questions and Answers

What is represented by the production possibilities frontier (PPF)?

The total quantity of resources available in an economy

The maximum possible output given infinite resources

The range of achievable production with current resources (correct)

The breakdown of labor across different industries

What does production efficiency indicate?

Producing additional units of one good requires reducing another (correct)

Production is maximized beyond the limits of the PPF

More of one good can be produced without sacrificing another

All resources are used without waste

Which of the following best defines unattainable combinations in the context of the PPF?

Combinations that utilize technological advancements

Combinations that can be produced with optimal efficiency

Combinations that are not feasible due to resource misallocation

Combinations that require more resources than are available (correct)

What does production inside the PPF indicate?

Production is inefficient. Signup and view all the answers

How does specialization relate to the production possibilities frontier?

It improves efficiency by maximizing output of specific goods Signup and view all the answers

What is a tradeoff?

The loss of one good to gain another. Signup and view all the answers

What is a tradeoff as illustrated by the PPF?

A situation where producing one good means producing less of another Signup and view all the answers

What does a point inside the PPF signify?

There are unrealized opportunities for greater output Signup and view all the answers

As more smartphones are produced, what happens to the opportunity cost?

The opportunity cost increases. Signup and view all the answers

Which of the following would cause an outward shift of the PPF?

A technological advancement in production methods Signup and view all the answers

When the PPF is bowed outward, what does it signify about opportunity cost?

The opportunity cost increases as more of a good is produced. Signup and view all the answers

How is opportunity cost of a smartphone calculated?

By dividing the decrease in bike quantity by the increase in smartphone quantity. Signup and view all the answers

What is the significance of the line formed by the PPF?

It separates efficient production from inefficient production Signup and view all the answers

What is indicated by moving from point B to point C on the PPF?

1 smartphone costs 2 bikes. Signup and view all the answers

What does the slope of the PPF represent?

The opportunity cost of producing one good over another. Signup and view all the answers

When the opportunity cost of a smartphone is represented as 3 bikes, what is the opportunity cost of a bike?

1/3 of a smartphone. Signup and view all the answers

What occurs when an economy’s resources increase?

The production possibilities frontier shifts outward. Signup and view all the answers

What is the opportunity cost for Liz when producing 1 smoothie?

1 salad. Signup and view all the answers

At which point does the economy only produce smartphone factories and no smartphones?

Point J. Signup and view all the answers

Which statement describes absolute advantage?

The ability to produce more output with the same resources. Signup and view all the answers

What is Joe's opportunity cost for producing 1 salad?

0.2 smoothies. Signup and view all the answers

What happens if the economy produces at point K after reducing smartphone production to 3 million?

The economy can produce more capital goods next year. Signup and view all the answers

When individuals or nations should focus on what they can produce at the lowest opportunity cost, this is referred to as:

Comparative advantage. Signup and view all the answers

Which describes the relationship between point L and smartphone production?

5 million smartphones are produced annually. Signup and view all the answers

Who has a comparative advantage in producing smoothies?

Liz Signup and view all the answers

How many smoothies does Liz produce after specializing?

30 smoothies Signup and view all the answers

After trade, how many smoothies does Joe have?

10 smoothies Signup and view all the answers

What is the trade ratio of salads per smoothie between Liz and Joe?

2 salads per smoothie Signup and view all the answers

If Joe specializes in salads, how many salads does he produce?

30 salads Signup and view all the answers

What are the total gains from trade for Liz each hour?

5 smoothies and 5 salads Signup and view all the answers

What point on the PPF do Liz and Joe consume after trade?

Point C Signup and view all the answers

What does the production possibility frontier (PPF) illustrate regarding Liz and Joe's specialization?

They produce inefficiently without specialization. Signup and view all the answers

What happens to the opportunity cost of producing smoothies as more are produced by Joe?

It increases dramatically after the 30th smoothie. Signup and view all the answers

What is a characteristic of wind power production mentioned in the content?

Wind turbines can produce electricity only in strong winds. Signup and view all the answers

What does operating at point Z on the PPF indicate about electricity production in the United States?

It is producing inefficiently and underutilizing resources. Signup and view all the answers

What is implied by the opportunity cost of producing wind power?

It covers the other goods and services forgone for wind energy. Signup and view all the answers

Study Notes

Essential Foundations of Economics

This book is titled Essential Foundations of Economics, ninth edition, by Bade and Parkin.

Is Wind Power Free?

Wind power is not free.
The opportunity cost includes resources used to build turbines and transmission lines.
Wind turbines only work effectively in strong winds.
Advances in technology are improving turbine performance.
Some optimal locations for wind farms are a long distance from population centers, resulting in long and costly transmission lines.

The Economic Problem

After studying this chapter, learners will be able to:
- Explain and illustrate scarcity, production efficiency, and trade-offs using the production possibilities frontier.
- Calculate opportunity costs.
- Explain the factors that expand production possibilities.
- Explain how specialization and trade benefit people.

Production Possibilities

Production Possibilities Frontier (PPF): The boundary between combinations of goods and services that can be produced and those that cannot be produced, considering available resources and technology.
The PPF illustrates the effects of scarcity and its consequences.

Production Possibilities - Smartphones and Bikes

Figure 3.1 shows the PPF for smartphones and bikes.
Each point on the graph corresponds to a row in a table.
The line connecting the points represents the PPF.

How the PPF Illustrates Scarcity

The PPF highlights three key distinctions:
- Attainable and unattainable combinations of goods.
- Efficient and inefficient production levels.
- Trade-offs and free lunches.

Attainable and Unattainable Combinations

The PPF separates attainable (producible) from unattainable combinations of goods.
Figure 3.2 illustrates attainable and unattainable combinations.

Efficient and Inefficient Production

Production efficiency: A situation where more of one good or service cannot be produced without producing less of another.
Figure 3.3 illustrates the distinction between efficient and inefficient production levels.

Tradeoffs and Free Lunches

A tradeoff is an exchange: giving up one item to get another.
A free lunch is a gift: obtaining something without sacrificing anything else.
Figure 3.3 distinguishes between tradeoffs and free lunches.

Opportunity Cost

Opportunity cost: The decrease in the quantity of one good when producing more of another, as you move along the PPF.
Calculating the opportunity cost involves comparing the decrease in one good's quantity to the increase in the other.
The opportunity cost of a smartphone increases as more smartphones are produced.
The slope of the PPF in Figure 3.4 represents the opportunity cost of a smartphone.
Opportunity cost is a ratio. The opportunity cost of a smartphone is the quantity of bikes sacrificed for each additional smartphone.

Economic Growth

Economic growth: A sustained increase in the production possibilities of an economy.
Increases in economy's resources cause expansion of possibilities and outward shifts in the PPF.
Studying economic growth entails starting with the PPF, plotting consumption and capital goods.
Output can increase at a point outside the original PPF.

Specialization and Trade

Absolute advantage: An advantage in productivity when one person can produce more efficiently or in less time when producing a certain item.
Comparative advantage: An advantage in performing an activity or producing an item at a lower opportunity cost than someone else.
People or nations gain by specializing in production based on their comparative advantages and trading afterwards.

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Description

This quiz covers key concepts from Essential Foundations of Economics, focusing on wind power, opportunity costs, and production possibilities. Test your understanding of scarcity, production efficiency, and the benefits of specialization and trade using the production possibilities frontier.