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Chapter 2: Scarcity and the World of Trade-Offs

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Quiz 1

Quiz 1


This activity contains 10 questions.

	Why does the law of increasing relative costs exist?   All resources are not equally suited to producing some goods as they are for other goods. Because scarcity leads people to evaluate opportunity costs. Because wants are unlimited and scarcity exists. Because the economy is usually producing inside the production possibilities curve.

	Does the richest person in the world face scarcity?   Yes because even if you have money you will never be able to satisfy all of your wants and must therefore make choices. No because having money means that you do not have to choose between present and future consumption. Yes because if the rich were to purchase a lot of goods at one time shortages would result. No because having money means that you can buy whatever you want to buy.

	What is the difference between absolute advantage and comparative advantage?   Absolute advantage is when someone can produce more of a good using a given quantity of inputs while comparative advantage is when someone can produce a good at a lower opportunity cost. Comparative advantage applies to all of the resources while absolute advantage only applies to human capital. Absolute advantage is influenced by the law of increasing relative cost while comparative advantage is not. Comparative advantage is when someone can produce more of a good using a given quantity of inputs while absolute advantage is when someone can produce a good at a lower opportunity cost.

	Why do economists consider individuals' wants and not their needs?   Every individual has exactly the same needs so it is not necessary to consider needs. People do differ on the basis of their wants and individuals' wants must be examined. The number of things that people want is limited and so it is easier to deal with wants rather than needs. According to economists individuals do not need anything so it is necessary to only consider individuals' wants. To an economist the term need is subjective and it is difficult to distinguish between something someone wants and something they need.

	Why does scarcity lead people to evaluate opportunity costs?   For an individual, the concept of opportunity cost indicates that as the person increases their consumption of a good, the price of subsequent units increases leading to scarcity. Because of scarcity we must make choices and the best way to make choices is to consider the value of what must be sacrificed to obtain a good. When the economy is operating inside the production possibilities curve there is no scarcity and opportunity costs will equal zero. Opportunity costs provide us with a numerical measure to determine how much scarcity exists in the world.

	Why does society face a trade-off between consumption goods and capital goods?   Comparative advantage is needed to produce consumption goods while absolute advantage is needed to produce capital goods. If society wants to increase the amount of capital goods we must first consume more consumption goods. In order to alleviate scarcity we must increase consumption, in that businesses will produce more goods and services and fewer capital goods. For economic growth to occur we must forego current consumption and produce more capital goods.

	The graph shows a production possibilities curve for a student who spends 8 hours a week studying. How could the student get a B in both classes?   The student could study more than 8 hours a week. The student spends more time studying economics than marketing. The student cannot get a B in both classes. The student could spend more time studying marketing than economics.

	If all resources are equally productive in producing all goods, the production possibilities curve will be   expanding over time. concave to the origin. linear. convex to the origin.

	Given the same resources, Fred can paint 6 walls or wash down 3 walls a day and Barney can paint 4 walls or wash down 8 walls a day; thus,   Fred has a comparative advantage in painting and Barney has a comparative advantage in washing down walls. neither has a comparative advantage in either task. Fred has a comparative advantage in washing down walls and Barney has a comparative advantage in painting. there is insufficient information to determine who has the comparative advantage.

	Which statement is true about the law of increasing relative cost?   A nation will not face the law of increasing relative cost if they are operating on the production possibilities curve. A nation faces the law of increasing relative cost because it is usually producing inside the production possibilities curve rather than on the curve. A nation faces the law of increasing relative cost because some resources are better suited for producing some goods than they are for producing other goods. A nation will not face the law of increasing relative cost if it focuses on the needs of society rather than wants.

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