Multiple Choice Answers

1. Making “how much” decisions involve
calculating the total benefits of the activity and determining if you are satisfied with that amount.
calculating the total costs of the activity and determining if you can afford to incur that expenditure.
calculating the average benefit and the average cost of an activity to determine if it is worthwhile undertaking that activity.
determining the additional benefits and the additional costs of that activity.
2. The revenue received from the sale of an additional unit of a product
is a marginal benefit to the firm.
is called profit.
is called gross sales.
is called a net gain.
3. Cassie’s Quilts alters, reconstructs and restores heirloom quilts. Cassie has just spent $800
purchasing, cleaning and reconstructing an antique quilt which she expects to sell for $1,500 once she is finished. After having spent $800, Cassie discovers that she would need some special period fabric that would cost her $200 in material and time in order to complete the task. Alternatively, she can sell the quilt “as is” now for $900. What is the marginal cost of completing the task?
$200
$500
$1,000
$1,000 plus the value of her time
4. In Austria, per child, an Austrian woman can get up to 48 months of pension benefits and is guaranteed a maternity allowance two months before and after she gives birth. Further, the Austrian government gives monthly payouts ranging from $132 to $547, depending on the age of offspring and offers generous tax benefits for families with children. How will these benefits affect a woman’s decision to have children?
These incentives will have no effect on having children; the decision to have children is a social and psychological decision, not an economic decision.
These incentives will encourage only less educated women to have more children.
These incentives will encourage only women with high opportunity costs to have more children.
These incentives will encourage women to have children and increase the birth rate.

5. The basic economic problem of scarcity
has always existed and will continue to exist.
will eventually disappear as technology continues to advance.
is a problem only in developing economies.
does not apply to the wealthy in society.

6. German auto producer, BMW currently produces two types of automobiles sports utility vehicles (SUVs) and coupes in its US plant. Since it opened in 1994, the company had made and continues to make several strategic production decisions. Figure 2-6 shows changes to its production possibilities frontier in response to some of these production strategies.
Refer to Figure 2-6. In response to changing consumer demands, BMW has cut back on the production of coupes and increased its production of SUVs. This strategy is best represented by
movement from E to F in Graph A.
movement from G to H in Graph B.
movement from K to L in Graph C.
movement from J to H in Graph B.

7. Refer to Figure 2-9. The segment of the circular flow diagram in the Figure shows the flow of goods and services from market C to economic agents A. What is market C and who are economic agents A?
C = factor markets; A = households
C = product markets; A = households
C = factor markets; A = firms
C= product markets; A = firms

8. Table 2-3 shows the number of labor hours required to produce a digital camera and a pound of wheat in China and South Korea.
Refer to Table 2-3. China has a comparative advantage in
both products.
wheat production.
digital camera production.
neither product.

9. Cassie’s Quilts alters, reconstructs and restores heirloom quilts. Cassie has just spent $800
purchasing, cleaning and reconstructing an antique quilt which she expects to sell for $1,500 once she is finished. After having spent $800, Cassie discovers that she would need some special period fabric that would cost her $200 in material and time in order to complete the task. Alternatively, she can sell the
quilt “as is” now for $900. What should she do?
She should cut her losses and sell the quilt now.
It does not matter what she does; she is going to take a loss on her project.
She should purchase the period fabric, complete the task and then sell the quilt.
She should not do anymore work on the quilt because she has already spent too much time on it and has not been paid for that time.
10. Hurricane Katrina which hit the Gulf Coast region in August 2005, resulted in massive flooding which destroyed large sections of New Orleans. Suppose prior to this event, New Orleans was producing an output combination given by a point on its production possibilities frontier. How did the hurricane affect its production possibilities frontier?
New Orleans’ output combination moved from a point on the frontier to a point given by one of the intercepts.
The production possibilities frontier does not shift but there is a movement from a point on the frontier to a point inside the frontier.
The production possibilities frontier shifts inwards.
The production possibilities frontier no longer exists.