1. Why are production possibility curves usually bowed out from the origin
A. Resources are homogeneous and can only be substituted on a one-to-one basis
B. Resources are heterogeneous and are imperfect substitutes for each other Correct
C. Resources include capital and labor and cannot be substituted for each other
D. Resources include land and labor and are perfect substitutes for each other
Explanation
Production possibility curves (PPCs) are bowed outward (concave to the origin) due to the law of increasing opportunity cost. This occurs because resources are not equally efficient in producing all goods—they are heterogeneous and imperfect substitutes. As production shifts from one good to another, increasingly less suitable resources must be used, raising the opportunity cost and causing the curve to bow out. If resources were homogeneous and perfect substitutes (one-to-one basis), the PPC would be a straight line (constant opportunity cost), making the first and last options incorrect. The third option is wrong because capital and labor can be substituted, though imperfectly, and the issue is not absolute non-substitutability but varying efficiency.
2. What illustrates unemployment in a production possibility frontier
A. Producing at a point on the outside of the production possibility frontier
B. Producing at a point on the inside of the production possibility frontier Correct
C. Producing at a point in the exact middle of the production possibility frontier
D. Producing at a point on either end of the production possibility frontier
Explanation
Unemployment or underutilization of resources is shown by a point inside the production possibility frontier (PPF), where output is below the maximum possible with full resource employment. The PPF itself represents efficient production with full employment. Points outside are unattainable with current resources/technology. The middle point could be efficient or inefficient depending on position relative to the curve. End points represent full efficiency with specialization in one good.
3. A student is planning their weekend activities. They would like to attend a jazz festival and watch the latest blockbuster movie. They can choose one activity since the timing of the movie and the festival coincides. Which basic economic principle is best illustrated by the student’s choice
A. People respond to incentives
B. Rational people think at the margin
C. Trade benefits everybody
D. Everyone faces tradeoffs Correct
Explanation
The student must choose between two mutually exclusive activities due to time scarcity, illustrating that everyone faces tradeoffs—gaining one thing means giving up another. This is a fundamental economic principle tied to opportunity cost. No incentives (rewards/punishments) are changing behavior. Marginal thinking involves small adjustments, not all-or-nothing choices. No exchange between parties occurs.
4. What does a consumer's budget constraint identify
A. Alternative production technologies
B. Combinations of affordable goods Correct
C. Likelihood of wasted resources
D. Opportunities to earn extra income
Explanation
The budget constraint shows all combinations of two goods a consumer can afford given income and prices, forming a straight line on a graph. It defines the feasible consumption set. Alternative production technologies refer to production possibility frontiers for firms. Wasted resources relate to inefficiency inside the PPF. Opportunities to earn extra income concern income sources, not the constraint itself.
5. What will result in a decrease in the supply of motorcycles
A. An increase in the number of people aged between 18 years and 40 years riding motorcycles
B. An increase in taxes imposed on the production of motorcycles Correct
C. A decrease in the price of motorcycle tires
D. A technological improvement reducing the costs of producing motorcycles
Explanation
Higher production taxes increase costs, shifting the supply curve leftward (decrease in supply). An increase in riders affects demand, not supply. A decrease in tire prices lowers input costs, increasing supply. Technological improvement reduces production costs, increasing supply.