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Sample Multiple-Choice Questions

Circle the letter ofeach correct answer. 4. Which of the following is true of the concept
of increasing opportunity cost?
1. The crucial problem of economics is (A) It is unimportant in command economies
(A) establishing a fair tax system. because of central planning.
(B) providing social goods and services. (B) It suggests that the use of resources to pro
(C) developing a price mechanism that reflects duce a set of goods and services means that
the relative scarcities of products and as more of one is produced, some of the
resources. other must be sacrificed.
(D) allocating scarce productive resources to (C) It is irrelevant if the production possibili
satisfy wants. ties curve is convex to the origin.

(E) enacting a set oflaws that protects


(D) It suggests that unlimited wants can be ful
resources from overuse.
filled.
(E) It means that resources are plentiful and
2. When one decision is made, the next best alter opportunities to produce greater amounts of
native not selected is called goods and services are unlimited.
(A) economic resource.
5. To be considered scarce, an economic resource
(B) opportunity cost.
must be which of the following?
(C) scarcity. I. Limited
(D) comparative disadvantage. II. Free
(E) production. III. Desirable
(A) I only
3. Which of the following is true if the produc (B) I and II only
tion possibilities curve is a curved line concave (C) II and III only
to the origin?
(D) I and III only
(A) Resources are perfectly substitutable
(E) I, II and III
between the production of the two goods.
(B) It is possible to produce more of both 6. The basic economic problem is reflected in
products. which of the following concepts?
(C) Both products are equally capable of satis I. Opportunity cost
fying consumer wants. II. Production possibilities
(D) The prices of the two products are the same. III. The fallacy of composition
IV: Ceteris paribus
(E) As more of one good is produced, more and
more of the other good must be given up. (A) I only
(B) IV only
(C) I and II only
(D) II and III only
(E) II, III and IV only

Advanced Placement Economics Macroeconomics: Student Activities National Council on Economic Education, New York, N.Y. 39

7. Which of the following goods would be con


sidered scarce?
10. The opportunity cost of building a new high
school is
I. Education (A) the expense of hiring more teachers for the
II. Gold new high school.
III. Time
(B) the expense of new desks, chalkboards and
(A) I only books for the the new high school.
(B) II only (C) other goods and services, which must now
(C) III only be sacrificed to build the new high school.
(D) I and II only (D) overcrowded classrooms.
(E) I, II and III (E) the bond levy needed to build the new high
school.
8. The value of the best alternative forgone when
a decision is made defines 11. In which way does a straight line production
(A) economic good. possibilities curve differ from a concave pro
duction possibilities curve?
(B) opportunity cost.
(A) A straight line production possibilities
(C) scarcity.
curve has a decreasing opportunity cost.
(D) trade-off.
(B) A straight line production possibilities
(E) comparative advantage. curve has a constant opportunity cost.
(C) A straight line production possibilities
9. Which of the following problems do all
curve has an increasing opportunity cost.
economic systems face?
I. How to allocate scarce resources among (D) A straight line production possibilities
unlimited wants curve does not show opportunity cost.
II. How to distribute income equally among (E) There is no difference between the two
all the citizens production possibilities curves.
III. How to decentralize markets
IV. How to decide what to produce, how to 12. The law of increasing opportunity cost is
produce and for whom to produce reflected in the shape of the
(A) I only (A) production possibilities curve concave to
(B) I and IV only the origin.
(C) n and III only (B) production possibilities curve convex to
the origin.
(D) I, II and III only
(C) horizontal production possibilities curve.
(E) I, II, III and IV
(D) straight-line production possibilities curve.
(E) upward-sloping production possibilities
curve.

40 Advanced Placement Economics Macroeconomics: Student Activities National Council on Economic Education, New York, N.Y.


Use the figure below for questions 13 through 16. It
shows the production possibilities curve for a coun
14. Which of the following statements about the
production possibilities curve is true?
try with full employment ofa given-size labor force. (A) Point A is not attainable in a developed
B
society.
(B) Point D is not attainable given the society's
resources.
E (C) The relative position of Points C and D
(J)
I reflect production alternatives rather than
o
:::::> relative prices.
o
oa: (D) Elimination of unemployment will move
a.. the production possibilities curve to the
~
a: right, closer to Point E.
if A
(E) Point E lies outside the production possi
bilities curve because it represents'<l combi
nation of resources not desired by the citi
zens of the country.
F
COMPUTERS 15. How might Point E be attained?
(A) If the country's resources were more fully
13. If the country is currently producing at Point
employed
C, it can produce more computers by doing
which of the following? (B) If the country's resources were shifted to
encourage more efficient use of scarce
(A) Moving to Point A
resources
(B) Moving to Point B
(C) If improvements in technology occurred in
(C) Moving to Point D either the computer sector or the farm
(D) Moving to Point E products sector
(E) Remaining at Point C, since computer pro (D) If firms decreased their output of computers
duction is maximized (E) If the nation used more of its scarce
resources to produce farm products

16. Which of the following points would most


likely lead to a rightward shift of the produc
tion possibilities curve over time?
(A) Point A
(B) Point B
(C) Point C
(D) Point D
(E) Point E

Advanced Placement Economics Macroeconomics: Student Activities National Council on Economic Education, New York, N.Y. 41

17. The opportunity cost of producing an
additional unit of product A is
Use the following table for questions 20,21 and 22.
Mars Venus
(A) all of the human and capital resources used Food Clothing Food Clothing
to produce product A. 0 30 0 40
(B) the retail price paid for product A. 2 24 4 32
(C) the wholesale price of product A. 4 18 8* 24*
5* 12* 12 16
(D) the amount of product B that cannot now
8 6 16 8
be produced because of product A.
10 0 20 0
(E) the profit that was earned from producing
Two nations, Mars and Venus, each produce
productA.
food and clothing. The table above gives points
on each nation's production possibilities curve.
18. Which of the following would cause a leftward
The asterisks indicate their current point of
shift of the production possibilities curve?
production.
(A) An increase in unemployment
(B) An increase in inflation 20. In Mars, the opportunity cost of obtaining the
(C) An increase in capital equipment first two units of food is how many units of
clothing?
(D) A decrease in consumer demand
(A) 2 (B) 3
(E) A decrease in working-age population
(C)6 (D) 8

19. Which of the following would cause an (E) 12


outward or rightward shift in the production
possibilities curve? 21. In Venus, the opportunity cost of the first unit of

(A) An increase in unemployment (A) food is two units of clothing.

(B) An increase in inflation (B) food is eight units of clothing.


(C) clothing is two units offood.
(C) An increase in capital equipment
(D) clothing is four units of food.
(D) A decrease in natural resources
(E) clothing is eight units of food.
(E) A decrease in the number of workers
22. Which of the following statements is correct based
on the concept of comparative advantage?
(A) Mars and Venus should continue producing
the quantities indicated by the asterisks.
(B) Mars should specialize in the production of
food.
(C) Mars should specialize in the production of
clothing.
(D) Venus has the comparative advantage in
clothing.
(E) Mars has an absolute advantage in the pro
duction of food.

42 Advanced Placement Economics Macroeconomics: Student Activities National Council on Economic Education, New York. N. Y.

23. The table below shows the number of hours
needed to produce one bushel of soybeans and
25. If the demand for a good or service decreases,
the equilibrium price and quantity are most
one bushel of rice in each of two countries. likely to change in which of the following ways?
One bushel One bushel Price Quantity
Country of soybeans of rice (A) Increase Increase
U.S. 5 hours 7 hours
(B) Increase Decrease
Japan 15 hours 10 hours
(C) Decrease Decrease
Which of the following statements must be
(D) Decrease Increase
true?
I. The United States has an absolute advan (E) No change No change
tage in producing soybeans.
II. Japan has an absolute advantage in 26. A decrease in the price of silicon chips and
producing rice. increased production of user-friendly software
III. Japan has a comparative advantage in pro will affect the price and quantity of computers
ducing soybeans. in which of the following ways?
IV. The United States should specialize in the Price Quantity
production of soybeans and Japan should (A) Increase Increase
specialize in the production of rice.
(B) Increase Decrease
(A) I only
(C) Decrease Decrease
(B) III only
(D) Decrease May increase,
(C) I and IV only decrease or remain
(D) II and IV only the same

(E) I, II, III and IV (E) May increase, Increase

decrease or re

main the same

24. If there is an increase in demand for a good,


what will most likely happen to the price and
27. An improvement in the technology used in the
quantity of the good exchanged?
production of automobiles and an increase in the
Price Quantity need for automobile transportation will most
(A) Increase Increase likely cause the price and quantity of automobiles
(B) Increase Decrease to change in which of the following ways?
(C) Decrease Decrease Price Quantity
(D) Decrease Increase (A) Increase Increase
(E) No change No change (B) Increase Decrease
(C) May increase, Increase
decrease, or stay
the same
(D) Decrease May increase,
decrease or remain
the same
(E) Decrease Increase

Advanced Placement Economics Macroeconomics: Student Activities National Council on Economic Education, New York, N.Y. 43

28. An increase in the price of peanut butter will


cause the demand curve for jelly to shift in
31. All of the following might reasonably be ex
pected to shift the demand curve for beef to a
which of the following directions? new position except
(A) To the right, because peanut butter is a prod (A) a decrease in the price of beef.
uct that the government says is good for you (B) a change in people's tastes with respect to
(B) To the right, if jelly is purchased by people beef.
with lower incomes and peanut butter is a (C) an increase in the money incomes of beef
luxury good for them consumers.
(C) To the right, if peanut butter and jelly are (0) a widespread advertising campaign by the
complementary goods producers of a product competitive with
(0) To the left, if peanut butter and jelly are beef, such as pork.
complementary goods (E) expectations that beef prices will fall in the
(E) To the left, if peanut butter and jelly are future.
substitute goods
32. Specialization and trade will not take place in
29. According to the theory of comparative advan which of the following cases?
tage, a good should be produced at the point I. The opportunity costs of making two
where goods are the same in both countries.
(A) its explicit costs are least. II. Wartime emergencies completely cut off
(B) its opportunity costs are least. trade routes.
III. Tariff barriers increase the delivered cost of
(C) the cost of real resources used is least.
ordinary imported goods.
(0) production can occur with the greatest
(A) I only
increase in employment.
(B) II only
(E) production can occur with the lowest
increase in employment. (C) III only
(0) I and II only
30. An increase in the price of gasoline will most (E) I, II and III
likely cause the demand curve for tires to
change in which direction?
(A) To the left, because gasoline and tires are
substitutes
(B) To the left, because gasoline and tires are
complements
(C) To the right, because gasoline and tires are
substitutes
(0) To the right, because gasoline and tires are
complements
(E) To the right, because an increase in the price
of gasoline makes consumers poorer and
thus not willing to pay as much for tires
I
44 Advanced Placement Economics Macroeconomics: Student Activities National Council on Economic Education, New York, N.Y. ,
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33. The Hatfields and McCoys have been fumin',


fussin' and 'a fightin' for years. In the Hatfield
35. With a relatively elastic demand curve, if price
increases by 10 percent, the quantity will most
family, a unit of cloth is worth 0.8 units of corn. likely
At the McCoy's, a unit of cloth is worth 1.25 (A) increase by less than 10 percent.
units of corn. The Hatfields, however, produce
(B) increase by more than 10 percent.
more corn and cloth than the McCoys because
they have higher quality resources. Despite the (C) decrease by less than 10 percent.
feud, is there a basis for specialization and trade? (D) decrease by exactly 10 percent.
(A) No, the McCoys bring no net value to the (E) decrease by more than 10 percent..
community of Hatfield and McCoy.
(B) No, the opportunity costs are the same for 36. "If you want to have anything done correctly,
the Hatfields and the McCoys. you have to do it yourself:' This quote violates
the principle of which of the following
(C) Yes, the Hatfields enjoy both a compara
economic concepts?
tive and absolute advantage in cloth.
(A) Scarcity
(D) Yes, the Hatfields enjoy both a compara
tive and absolute advantage in corn. (B) Supply
(E) Yes, the Hatfields enjoy both a compara (C) Comparative advantage
tive and absolute advantage in both corn (D) Diminishing returns
and cloth. (E) Demand

$5.50 I
I
I
~ 4.50 -----------~----

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ll.

10 12
QUANTITY

34. Between a price of $5.50 and $4.50, the demand


curve in the figure above can be described as
(A) perfectly elastic.
(B) relatively elastic.
(C) unit elastic.
(D) relatively inelastic.
(E) perfectly inelastic.

Advanced Placement Economics Macroeconomics: Student Activities National Council on Economic Education, New York, N.Y. 45
\

Sample Short Free-Response Questions

1. True, false or uncertain, and explain why? "The economic concept of scarcity is not relevant to the
study of a modern economy such as that of the United States because the existence of unsold stocks
of goods (books, cars, homes) is vivid evidence that we are surrounded by plenty, not scarcity:'

2. A newspaper headline says, "The Coldest Winter in 20 Years Brings Record Prices for Heating Oil."
(A) Using a graph of home heating oil, show and explain how price changed.

(B) What other factors could cause the price of heating oil to increase?

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Advanced Placement Economics Macroeconomics: Student Activities National Council on Economic Education, New York, N.Y.
47
3. In a recent year, the price of wheat fell. For each of the following, draw a supply and demand graph
showing a decrease in prices with the stated impact on quantity.
(A) The quantity of wheat decreasing

(B) The quantity of wheat increasing

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(C) The quantity of wheat staying the same ,

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48 Advanced Placement Economics Macroeconomics: Student Activities National Council on Economic Education. New York. N. Y. t;
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4. True, false or uncertain, and explain why? "If you won $1 million in the lottery, you wouldn't have
the economic problem of scarcity."

5. Explain what would have to be true in each case for the production possibilities curves to be
shaped as they are in Graphs I, II and III.
Graph I Graph II Graph III
A

S
en en en
w w w
z z z
:sa. :sa. :sa.
E E

SUITER SUITER SUITER

Advanced Placement Economics Macroeconomics: Student Activities National Council on Economic Education, New York, N.Y. 49

(C) Suppose Hightechland is operating at Point C but would like to alter production to Point D.
What would be the per-unit opportunity cost of producing more computers?

(D) Suppose Hightechland is operating at Point C but would like to alter production to Point B.
What would be the per-unit opportunity cost of producing more movies?

(E) What will happen to Hightechland's production possibilities curve if many of its movie sets
are destroyed by fire? (Assume that the sets are not used in the production of computers.)
Using the same graph you drew for Question 2(B), draw Hightechland's new production pos
sibilities curve and label it BB.

(F) What will happen to Hightechland's production possibilities curve if all the country's
resources are reduced (perhaps by natural disaster or war)? Using the same graph as in
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Question 2(B), draw Hightechland's new production possibilities curve and label it Cc.
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j

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(G) What will happen to Hightechland's production possibilities curve if technology improves
both the production of movies and the production of computers? Using the same graph as in
tt
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i?
Question 2(B), draw Hightechland's new production possibilities curve and label it DD. !.
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ri
tt'"
Ef

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52 Advanced Placement Economics Macroeconomics: Student Activities National Council on Economic Education, New York, N.Y. ~'

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3. The market for many commodities is seasonal in nature. Their sales (equilibriumquantity)
increase dramatically during certain times of the year. Christmas cards and fresh strawberries, at
least in the North, are two examples. Christmas card sales increase during the last three months of
the year, and the sales of fresh strawberries in the North increase during the summer months. But
the (equilibrium) price movement of these two commodities is quite different during their peak
sales season: Christmas cards increase in price during the last three months of the year, whereas
strawberries decrease in price during the summer.
(A) Show on the graph below how there can be an increase in the equilibrium quantity and an
increase in the equilibrium price of Christmas cards during the last three months of the year,
and briefly explain what has happened.
Christmas Card Market
s

~P
a:0.
o
Q

QUANTITY

(B) Change the graph for fresh strawberries in the North to show how there can be an increase in
the equilibrium quantity and a decrease in the equilibrium price of strawberries in the sum
mer, and briefly explain what has happened.
Strawberry Market in the North
S

w
gp
a::
0.

Q
QUANTITY

Advanced Placement Economics Macroeconomics: Student Activities National Council on Economic Education, New York, N.Y. 53
4. Explain how each of the following may affect the production possibilities curve of the United
States or the point at which the economy is operating. Draw a production possibilities curve; put
"Capital Goods" on the vertical axis and "Consumer Goods" on the horizontal axis. Now, add a
PPC curve or point to the graph to illustrate the scenario.
(A) The Congress and the president

decide to provide more funding for

higher education with more students

attending college and graduating.

(B) New advances in medicine allow for

a healthier lifestyle.

(C) The United States agrees to be a part

of a world-trade agreement that will

foster international trade.

54 Advanced Placement Economics Macroeconomics: Student Activities National Council on Economic Education, New York. N.Y.
(D) The unemployment rate increases in
the economy from 4.2 percent to 5.1
percent of the labor force.

(E) Computer viruses are out of control,


and efficiency and output in the
economy fall.

';~l,

:~

Adwnced Placement Economics Macroeconomics: Student Activities if:) National Council on Economic Education, New York, N.. 55
..
Sample Long Free-Response Questions
1. Every society has the fundamental problem of scarcity.
(A) What is scarcity?

(B) What three questions must every society answer because of scarcity?

(C) What are the three ways societies have dealt with the scarcity problem?

(D) Give one example of how each way is used in the United States.

2. Hightechland produces two commodities: movies and computers. Hightechland's resources


include workers, factories, electricity and so on. The following schedule indicates some of the
points on Hightechland's production possibilities curve.

Commodity A B C o E
Movies 100 75 50 25 o
Computers o 30 55 70 80

(A) Does movie production exhibit increasing, decreasing or constant per-unit opportunity costs?
How do you know?

(B) Graph Hightechland's production possibilities curve, and label it AA.

Advanced Placement Economics Macroeconomics: Student Activities National Council on Economic Education, New York. N.Y. 51