Principles of Economics 2e - Chapter 2 Quiz
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Questions and Answers

What is the term used to describe all possible combinations of goods that someone can afford, given their budget and the prices of the goods?

  • Budget constraint
  • Scarcity
  • Opportunity set (correct)
  • Production possibilities frontier

    • A budget constraint is a straight line, indicating a constant opportunity cost for the goods.

    False (B)

    What does the slope of a budget constraint represent?

    The relative price of the two goods

    The ______ is the set of all possible consumption combinations that an individual can afford, given their budget and the prices of the goods.

    <p>opportunity set</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>Budget constraint = All the possible combinations of goods that a person can afford, given their income and the prices of the goods. Opportunity set = All the possible combinations of goods that a person can afford, including those on and inside the budget constraint. Production possibilities frontier = The maximum combinations of outputs that can be produced, given a fixed amount of resources.</p> Signup and view all the answers

    What does opportunity cost represent?

    <p>The value of the next best alternative foregone (B)</p> Signup and view all the answers

    Every choice made has an associated opportunity cost.

    <p>True (A)</p> Signup and view all the answers

    What would be the opportunity cost for Alphonso if he chooses to buy a burger?

    <p>Four bus tickets</p> Signup and view all the answers

    The opportunity cost of attending college includes not only tuition but also _____ and potential earnings lost during study time.

    <p>books</p> Signup and view all the answers

    Which of the following would not be considered an opportunity cost?

    <p>Saving money in a bank account (A)</p> Signup and view all the answers

    Match the following examples with their opportunity costs:

    <p>Buying a car = Leasing a car Investing in stocks = Putting money in a savings account Going out to eat = Cooking at home Attending college = Working full-time</p> Signup and view all the answers

    What are two types of costs associated with attending college?

    <p>Out-of-pocket costs and opportunity costs</p> Signup and view all the answers

    What happens when a society wants to gain more education according to the production possibilities frontier?

    <p>It must give up some healthcare. (A)</p> Signup and view all the answers

    The production possibilities frontier indicates that resources can be devoted to both healthcare and education simultaneously without tradeoffs.

    <p>False (B)</p> Signup and view all the answers

    What does the law of diminishing returns imply in the context of the PPF?

    <p>As more resources are allocated to one sector, the additional gains from those resources eventually decrease.</p> Signup and view all the answers

    The PPF shows that resources must be __________ to achieve more of either healthcare or education.

    <p>reallocated</p> Signup and view all the answers

    Match the following points on the production possibilities frontier to their descriptions:

    <p>Point A = All resources devoted to healthcare Point B = Most resources devoted to healthcare Point D = Most resources devoted to education Point F = All resources devoted to education</p> Signup and view all the answers

    Which of the following indicates the PPF behavior when more resources are applied to education?

    <p>Diminishing returns (D)</p> Signup and view all the answers

    It is possible for a society to produce outside the production possibilities frontier with existing resources.

    <p>False (B)</p> Signup and view all the answers

    Describe what happens to original gains when additional resources are allocated to healthcare.

    <p>The original gains from allocating more resources to healthcare are initially large but then diminish.</p> Signup and view all the answers

    The curvature of the PPF can be explained by the law of __________.

    <p>diminishing returns</p> Signup and view all the answers

    What shape is the budget constraint typically represented as?

    <p>Straight line (B)</p> Signup and view all the answers

    The PPF has specific numerical values on its axes.

    <p>False (B)</p> Signup and view all the answers

    Define productive efficiency.

    <p>Productive efficiency occurs when it is impossible to produce more of one good without reducing the production of another good.</p> Signup and view all the answers

    Both the budget constraint and the PPF illustrate the tradeoff in choosing more of one good at the cost of less of the __________.

    <p>other good</p> Signup and view all the answers

    Match the terms with their definitions:

    <p>Budget Constraint = Shows the tradeoff between two goods given a consumer's income PPF = Represents the maximum output possibilities for two goods Productive Efficiency = Impossible to produce more of one good without reducing another Allocative Efficiency = The optimal mix of goods produced that reflects consumer preference</p> Signup and view all the answers

    Which of the following statements is true about the shape of the PPF?

    <p>It is curved due to diminishing returns. (C)</p> Signup and view all the answers

    Allocative efficiency is achieved when resources are allocated to produce more of a good that consumers desire.

    <p>True (A)</p> Signup and view all the answers

    What is the law of diminishing returns?

    <p>The law of diminishing returns states that as more of one input is added, the marginal gains from that input will eventually decrease.</p> Signup and view all the answers

    A choice inside the PPF is considered to be __________.

    <p>productively inefficient</p> Signup and view all the answers

    Flashcards

    Budget Constraint

    The limit on the consumption choices of an individual based on their income and the prices of goods.

    Opportunity Set

    All possible combinations of goods that a consumer can purchase within their budget constraint.

    Slope of Budget Constraint

    The rate at which one good can be substituted for another, determined by their prices.

    Trade-offs

    The choices made when selecting one good over another due to limited resources.

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    Consumption Combination

    A specific mix of goods that an individual can buy given their budget and the prices of items.

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    Opportunity Cost

    The cost of forgoing the next best alternative when making a decision.

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    Affordability

    A point within the budget where costs do not exceed available money.

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    Next Best Alternative

    The second-best choice given up when selecting an option.

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    Out-of-Pocket Costs

    Direct expenses incurred from a choice, such as tuition and books.

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    Economic Principles

    Basic guidelines that explain how economies operate, such as opportunity cost.

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    Example of Opportunity Cost

    Choosing to buy a burger means giving up four bus tickets.

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    Cost of Education

    Includes tuition, books, and the value of time spent attending classes.

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    Production Possibilities Frontier (PPF)

    A curve showing the maximum possible output combinations of two goods with available resources.

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    Difference in Shape

    The budget constraint is a straight line, whereas the PPF is curved.

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    Diminishing Returns

    The principle that adding more of one factor increases output at a decreasing rate.

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    Productive Efficiency

    Situations where it is impossible to produce more of one good without decreasing production of another.

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    Allocative Efficiency

    When resources are distributed in a way that maximizes the total benefit to society.

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    Similarities of Budget Constraint and PPF

    Both show the constraints of choices and the trade-offs involved in decisions.

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    Axes of the PPF

    The PPF's axes do not represent specific quantities of resources but rather possible outputs.

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    Downward Sloping PPF

    Indicates that to gain more of one good, resources must be shifted from another.

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    Curvature of the PPF

    Shows diminishing returns as more resources are allocated to one good.

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    Law of Diminishing Returns

    As more resources are added to a production process, the additional output gained decreases.

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    Healthcare vs Education

    A common tradeoff society faces in resource allocation illustrated on the PPF.

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    Resource Allocation

    The distribution of resources among various uses; affects PPF shape and tradeoffs.

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    Marginal Utility

    The added satisfaction gained from consuming one more unit of a good.

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    Study Notes

    Principles of Economics 2e - Chapter 2: Choice in a World of Scarcity

    • Chapter Outline: Covers how individuals make choices, the production possibilities frontier (PPF) and social choices, and objections to the economic approach

    • 2.1 Individual Choices and Budget Constraints:

      • Budget Constraint: All possible combinations of goods that one can afford given prices and income
      • Opportunity Set: All possible consumption combinations
      • Budget constraints show tradeoffs faced by individuals; with limited income, choosing one good means forgoing another.

    • 2.1 Budget Constraints:

      • Each point on the constraint represents a combination of burgers and bus tickets that use up the total budget
        • The slope of the constraint is determined by the relative price of each good
      • Giving up one burger allows the purchase of four bus tickets
      • Points outside the constraint are unattainable given the budget

    • 2.1 Opportunity Cost:

      • The cost of one item is the lost opportunity to consume something else
      • The value of the next best alternative
      • A fundamental principle of economics: every choice has an opportunity cost.
        • For Alphonso, the opportunity of a burger is forgoing four bus tickets.

    • 2.1 Identifying Opportunity Cost: In many cases, it's reasonable to refer to opportunity cost as the price.

      • A non-dollar example is attending college.
        • Costs include tuition, books, and other out-of-pocket costs
        • Opportunity cost is the value of the next best alternative—what you miss out on by attending college.

    • 2.1 Opportunity Cost Examples:

      • Buying vs. leasing a vehicle
      • Different investments (e.g., savings accounts, certificates of deposit)
      • Eating out vs. cooking at home
      • Walking vs. taking public transportation
      • Example Question: What are the opportunity costs of…

    • 2.1 Marginal Decision-Making and Diminishing Marginal Utility:

      • Marginal Analysis: Examining the benefits and costs of small choices
      • Utility: Satisfaction or value from consuming goods
      • Law of Diminishing Marginal Utility: Satisfaction decreases as more of a good is consumed (e.g., the first slice of pizza is more satisfying than the tenth).

    • 2.1 Sunk Costs:

      • Costs incurred in the past that cannot be recovered.
      • The lesson of sunk costs: ignore past errors and make decisions based on future possibilities

    • 2.2 Production Possibilities Frontier (PPF):

      • A diagram showing possible combinations of products based on available resources
      • The slope represents the opportunity cost
      • PPF shows tradeoffs that firms/societies face when making decisions about production

    • Healthcare vs. Education Production Possibilities Frontier:

      • A PPF graph plots healthcare against education, illustrating a tradeoff.
        • In the given example: 
        • Choices like A mean only healthcare; B and C mean most resources go to healthcare
        • D and F mean education; moving along the curved line demonstrates how the choice of one good depends on the other
      • Societies cannot produce outside the PPF.
      • A PPF is downward sloping, meaning obtaining more of one good requires reducing the production of another.

    • 2.2 Shape of PPF and Law of Diminishing Returns:

      • Law of Diminishing Returns: Increased inputs for one good decrease returns for the other good, thus resulting in declining slope for PPF graph over time.

    • 2.2 Productive and Allocative Efficiency:

      • Productive Efficiency: Impossible to produce more of one good without decreasing the output of another good
      • Allocative Efficiency: Producing the mix of goods that society most desires
      • At each point on the PPF, productive efficiency is achieved but allocative efficiency may not be.

    • 2.2 PPF and Comparative Advantage:

      • Countries have varying opportunity costs of producing goods.
      • Comparative Advantage: When a country can produce a good at a lower opportunity cost than another country.
        • Example: Comparing the US and Brazil—comparing their ability to produce wheat and sugar based on their PPF

    • 2.3 Confronting Objections to the Economic Approach:

      • Objections in understanding the economic approach to decision making:

        • People, firms, and societies do not always act in fundamentally rational ways.

      • Economics approach

        • Portrays people as self-interested
        • Seeks to describe economic behavior as it actually exists
        • Uses positive statements
        • Tries to avoid normative statements

    • 2.3 Objections to the Economic Approach (cont'd):

      • Invisible Hand: Suggests that individual self-interest can lead to broader social benefits.

    • Conclusion:

      • The chapter highlights the fundamental concepts of scarcity, choice, trade-offs, and opportunity cost.

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    Description

    Test your understanding of Chapter 2 from Principles of Economics 2e, which focuses on choices in a world of scarcity. Explore concepts like budget constraints, opportunity costs, and individual choices that shape economic decisions. This quiz will help solidify your grasp on the fundamental economic principles discussed in this chapter.

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