Unit 1 · 12 to 15% of the exam

Unit 1 practice test: Basic Economic Concepts

twelve questions, every option explained

12 exam-style questions from the unit, free, with an explanation for every option. Most are multiple choice, as on the real exam; a few ask for a number or have you shift a curve on a graph, and sets share one data table, graph or scenario. Covers: Scarcity; Resource Allocation and Economic Systems; Production Possibilities Curve; Comparative Advantage and Trade; Cost-Benefit Analysis; Marginal Analysis and Consumer Choice.

Start at question 1

Data

Output tables for two workshops

The most each workshop can make in one day if it makes only that good (invented data for practice)
WorkshopChairs per dayTables per day
Fenwick126
Garnet82

1. Which workshop has the absolute advantage in making chairs?

  1. Fenwick, because it can make 12 a day to Garnet's 8
  2. Garnet, because a chair costs it just a quarter of a table
  3. Garnet, because it makes fewer tables
  4. Neither, because both can make chairs
Show the answer

Absolute advantage compares amounts made: Fenwick makes 12 chairs a day, Garnet 8.

  • Correct: Fenwick, because it can make 12 a day to Garnet's 8: Right: more output with the same day of work.
  • Garnet, because a chair costs it just a quarter of a table: A lower opportunity cost is comparative advantage, not absolute.
  • Garnet, because it makes fewer tables: Making fewer tables is not an advantage in chairs.
  • Neither, because both can make chairs: Both can make chairs, but Fenwick makes more.

2. Which workshop has the comparative advantage in tables, and why?

  1. Garnet: a table costs it 4 chairs, Fenwick 2
  2. Fenwick: it makes 6 tables to Garnet's 2
  3. Neither: Fenwick is better at both goods
  4. Fenwick: a table costs it 2 chairs, Garnet 4
Show the answer

Compare opportunity costs of a table: 2 chairs for Fenwick, 4 for Garnet. The lower cost wins.

  • Garnet: a table costs it 4 chairs, Fenwick 2: The comparative advantage goes to the LOWER cost, which is Fenwick's.
  • Fenwick: it makes 6 tables to Garnet's 2: That compares amounts, which is absolute advantage.
  • Neither: Fenwick is better at both goods: Being better at both is absolute advantage; costs still differ, so each has a comparative advantage.
  • Correct: Fenwick: a table costs it 2 chairs, Garnet 4: Right: 2 chairs is less than 4.

3. Garnet specializes in chairs and Fenwick in tables. Which price for one table, paid in chairs, would benefit both workshops?

  1. 1 chair
  2. 3 chairs
  3. 5 chairs
  4. 8 chairs
Show the answer

A table costs Fenwick 2 chairs to make and Garnet 4. At 3 chairs per table, Fenwick gets more than 2 for each table it sells and Garnet pays less than 4.

  • 1 chair: At 1 chair, Fenwick gets less than the 2 chairs a table costs it to make.
  • Correct: 3 chairs: Right: between 2 and 4.
  • 5 chairs: At 5 chairs, Garnet pays more than the 4 chairs it would give up to make a table itself.
  • 8 chairs: At 8 chairs, Garnet would pay twice its own cost.

Data

Guitar lessons: total benefit and total cost

Total benefit to Jamal (in dollars he would pay) and total cost of guitar lessons at $25 each (invented data for practice)
Lessons per monthTotal benefit ($)Cost of lessons ($)
000
15025
29050
312075
4140100
5150125

4. How many lessons a month give Jamal the largest net benefit?

  1. 5
  2. 4
  3. 1
  4. 3
Show the answer

Net benefits are 0, 25, 40, 45, 40 and 25 dollars. The largest, $45, is at 3 lessons.

  • 5: Five lessons give the most total benefit but a net benefit of only $25.
  • 4: Four lessons give $40, less than $45.
  • 1: One lesson gives $25.
  • Correct: 3: Right: $120 - $75 = $45.

5. Why is taking 5 lessons worse for Jamal than taking 3, even though 5 lessons give more total benefit?

  1. Lessons 4 and 5 add nothing to his benefit
  2. They add $30 of benefit, $50 of cost
  3. The cost of each lesson falls after the third lesson
  4. He has money for just 3 lessons a month
Show the answer

Going from 3 to 5 lessons raises total benefit by 150−120=30150 - 120 = 30 dollars but total cost by 125−75=50125 - 75 = 50 dollars, so net benefit falls.

  • Lessons 4 and 5 add nothing to his benefit: They add $20 and $10 of benefit, just less than they cost.
  • Correct: They add $30 of benefit, $50 of cost: Right: more added cost than added benefit.
  • The cost of each lesson falls after the third lesson: Each lesson still costs $25, so the total cost keeps rising by $25 a lesson.
  • He has money for just 3 lessons a month: Nothing in the table limits his money.

6. The price of a lesson falls to $15. What happens to the number of lessons with the largest net benefit?

  1. It stays at 3
  2. It rises to 4
  3. It falls to 2
  4. It rises to 5
Show the answer

At $15 a lesson the total costs are 0, 15, 30, 45, 60 and 75, so net benefits are 0, 35, 60, 75, 80 and 75 dollars: largest at 4 lessons.

  • It stays at 3: At 3 lessons the net benefit is $75, less than $80 at 4.
  • Correct: It rises to 4: Right: $140 - $60 = $80 at 4 lessons.
  • It falls to 2: A lower price makes more lessons worth taking, not fewer.
  • It rises to 5: At 5 lessons the net benefit is $75, less than $80.

7. A city spends $2 million on a new park instead of fixing roads. Which idea does this show?

  1. A trade-off: the park money cannot also fix roads
  2. Scarcity does not apply to governments
  3. The park has no opportunity cost because it is public
  4. The roads will be fixed for free
Show the answer

Governments face scarcity too. Using money for one project means it is not available for another.

  • Correct: A trade-off: the park money cannot also fix roads: Right: one use gives up the other.
  • Scarcity does not apply to governments: Governments have limited budgets, so they face scarcity.
  • The park has no opportunity cost because it is public: Public projects still give up other uses of the money.
  • The roads will be fixed for free: Fixing roads takes resources that now went to the park.

8. A country lets private firms make most goods, but its government runs public schools, builds highways and sets safety rules. Which system is this?

  1. A pure market economy
  2. A command economy
  3. A mixed economy
  4. An economy with no government
Show the answer

Markets plus a government that provides some goods and makes rules is a mixed economy.

  • A pure market economy: A pure market economy would leave schools and highways to private firms too.
  • A command economy: Most goods here come from private firms, not a central plan.
  • Correct: A mixed economy: Right: markets with a government role.
  • An economy with no government: The government plays a clear role here.

9. A tailor can make 30 shirts or 10 jackets a week, or any mix on a straight line between them. What is the opportunity cost of one jacket, in shirts?

Type a number (shirts). A four-function calculator is allowed, as on the exam.

Show the answer

Opportunity cost of a jacket =3010=3= \frac{30}{10} = 3 shirts. On a straight-line PPC it is the same for every jacket.

  • Answer: 3 shirts

10. Total utility from 1, 2 and 3 movie tickets is 40, 70 and 90 utils. What is the marginal utility of the third ticket?

Type a number. A four-function calculator is allowed, as on the exam.

Show the answer

MU of the 3rd ticket = change in total utility =90−70=20= 90 - 70 = 20 utils.

  • Answer: 20

11. A sneaker company sees its new model selling out and its price rising on resale sites. It moves workers from older models to the new one. Which idea does this show?

  1. Prices steer resources toward what buyers want
  2. A central plan tells the firm what to make
  3. The firm ignores prices when choosing what to make
  4. Workers in a firm stay on the products they started on
Show the answer

The higher price shows buyers value the new model, and making more of it is more rewarding, so the firm moves labor toward it.

  • Correct: Prices steer resources toward what buyers want: Right: prices guide where resources go.
  • A central plan tells the firm what to make: No planner is involved; the firm reacts to prices.
  • The firm ignores prices when choosing what to make: The firm reacts directly to the price signal.
  • Workers in a firm stay on the products they started on: The firm just moved workers from one model to another.

12. Lena takes a summer course that charges $600 in tuition. Taking it means giving up a summer job that pays $2,000. What is the full economic cost of the course, in dollars?

Type a number ($). A four-function calculator is allowed, as on the exam.

Show the answer

Economic cost = explicit + implicit =600+2,000=2,600= 600 + 2{,}000 = 2{,}600 dollars.

  • Answer: 2600 $