Exercise 1

Match each situation to the economic term below (scarcity/opportunity cost/resources)

1.) You and all of your friends want a brand new Playstation 3! You go to BestBuy, but they only
have one Playstation 3 left. There are unlimited wants (all of you) but limited resources (only 1
Playstation).
2.) You want to make a table. To make this, you need someone to do the work, a hammer, nails,
wood, a place to make it (room). These are known as materials, labor, and land.
3.) If you go home and study then you will not get to play with your friends. You want to study
but will have to lose the opportunity to play with your friends.

Multiple choice question

1. Brooke and Sandy both attend the same college and have the same expenses for tuition, books,
and supplies. However, Brooke is a famous actress who could earn $2 million per year if she
were not attending college while Sandy could earn $10,000 a year serving hamburgers if he were
not attending college. It follows that
A)
the opportunity cost of attending college is the same for both Brooke and Sandy.
B)
the opportunity cost of attending college is greater for Brooke than for Sandy.
C)
the opportunity cost of attending college is greater for Sandy than for Brooke.
D)
the opportunity costs of attending college for Brooke and Sandy cannot be
compared.
2. Your opportunity cost of taking econimic course is:
A)
B)
C)
D)

the tuition you paid for the course.

the net benefit of the activity you would have chosen if you had not taken the
course.
the net benefit of taking this course.
the cost of the activity you would have chosen if you had not taken the course

3. The opportunity cost of undertaking an activity is the benefit forgone by undertaking that
activity.
A)
True
B)
False
4. To graphically demonstrate the principle of increasing opportunity cost the production
possibility curve must be
A)

flat

B)
C)
D)

straight
bowed out
bowed in

5. Refer to the graph below. Which of the shifts explains what would happen to the production
possibility curve if a cyclone destroys five major garment factories in the Philippines?

6. Refer to the graph below. If the opportunity cost of good X in terms of good Y is 2Y, so you'll
have to give up 2Y to get one X, the production possibility curve would look like

A) a
B) b
C) c
D) a, b, and c

7. Refer to the graph above. Suppose a society is indifferent between consuming at point A and
consuming at point C. We can infer from this that the society:
A) prefers B to A .
B) prefers A to B.
C) is indifferent between A and B.
D) uses its resources efficiently.

Structured questions
1. What can cause a nation's production possibilities curve to shift out? Why do nation's try to
shift their production possibilities curves out?
2. The data below is for the small country of Murreyville.
Goods A
B
C
D
E
F
Capital 0
90
170
240
300
350
Consumer
200
180
150
110
60
0
a) draw the production possibilities curve for Murreyville, with consumer goods on the x-axis
and capital goods on the y-axis.
b) Can this economy produce 200 capital goods and 60 consumer goods and why?
c) what can you say about the economy of Murreyville if 120 capital goods and 150 consumer
goods are being produced?

Answers
Feedback: Opportunity cost is the benefit forgone by undertaking an activity. Since Brook is
forgoing a $2 million salary, and Sandy is forgoing a $10,000 salary, the opportunity cost of
attending college is greater for Brooke.
Feedback: Opportunity cost is what you must sacrifice when you choose an activity. By
taking this course, you are sacrificing the benefit you could have obtained from the activity
you would have chosen if you had not taken the course.
Feedback: When the production possibility curve is bowed out, as you increase production of one
good, the slope of the curve becomes steeper. This implies that more and more of the other good
must be given up. This follows the principle of increasing marginal opportunity cost.

Suggested Answer
Anything that increases a nation's productivity will shift the nation's production possibilities
curve out. Generally, an increase in the amount of resources the nation has to work with will
increase the nation's productivity. In particular, more natural resources, more productive workers,
more capital (plant and equipment to work with), more entrepreneurial talent, and growth in
technology will increase a nation's production possibilities and shift its production possibilities
curve out to the right. In addition, greater specialization and trade along the lines of comparative
advantage will increase a nation's production possibilities. Nation's try to shift their production
possibilities curves out because this allows for more consumption possibilities. There is simply
more goods and services to divide up. That is, the nation's economy grows and is therefore able
to experience a higher average absolute standard of living.

a.

b. Yes because the production of 200 capital goods and 60 consumer goods is inside PPC.
c.

If only 120 capital goods and 150 consumer goods are being produced then the economy is
operating inside PPC. When an economy produced inside the production possibilities curve then
that economy is inefficient.