AP Micro Microeconomics: Basic Economic Concepts 3 — Questions and Answers
Question 1: A straight-line (linear) production possibilities curve between two goods suggests that:
- Resources are perfectly adaptable between the two goods (Correct answer)
- The economy is experiencing increasing opportunity costs
- One good is a public good and the other is private
- The economy cannot produce both goods simultaneously
Correct answer: Resources are perfectly adaptable between the two goods
A linear PPC implies constant opportunity costs, which occurs when resources are equally productive in producing both goods.
Question 2: Economic growth is best represented on a production possibilities curve by:
- A movement from a point inside the curve to a point on the curve
- A movement along the curve from one good to another
- An outward shift of the entire curve (Correct answer)
- A movement from a point on the curve to a point inside the curve
Correct answer: An outward shift of the entire curve
Economic growth means an economy can produce more of both goods, which is shown by an outward shift of the entire PPC.
Question 3: The three basic economic questions that all societies must answer are:
- Who earns income, who pays taxes, and who receives benefits?
- What to produce, how to produce it, and for whom to produce it? (Correct answer)
- When to produce, where to produce, and why to produce it?
- How much to import, how much to export, and how much to save?
Correct answer: What to produce, how to produce it, and for whom to produce it?
Every economic system must answer what goods to produce, how to produce them, and who receives the output.
Question 4: In a command economy, the basic economic questions are answered primarily by:
- Consumer preferences and market prices
- Central government planning and directives (Correct answer)
- Competition among private businesses
- Voluntary exchange between buyers and sellers
Correct answer: Central government planning and directives
In a command economy, the government centrally plans and directs what, how, and for whom goods are produced.
Question 5: Which of the following would cause the production possibilities curve to shift inward (toward the origin)?
- Discovery of new oil reserves
- Increase in the labor force due to immigration
- A destructive earthquake that destroys capital and infrastructure (Correct answer)
- Technological advancement in manufacturing
Correct answer: A destructive earthquake that destroys capital and infrastructure
An earthquake that destroys capital reduces the economy's productive capacity, shifting the PPC inward.
Question 6: If a nation has an absolute advantage in producing all goods, it should still specialize and trade because:
- Trade is only beneficial when both nations are equally productive
- Specialization based on comparative advantage increases total output (Correct answer)
- Absolute advantage guarantees higher profits in all markets
- Other nations will impose trade restrictions otherwise
Correct answer: Specialization based on comparative advantage increases total output
Even if one nation is more productive in all goods, specializing in goods with lower opportunity costs and trading increases total production for all parties.
Question 7: Which factor of production is best described as 'the ability to organize the other factors of production to create goods and services'?
- Land
- Labor
- Capital
- Entrepreneurship (Correct answer)
Correct answer: Entrepreneurship
Entrepreneurship involves organizing land, labor, and capital to produce goods and services, often accepting risk in pursuit of profit.
AP Micro Microeconomics: Basic Economic Concepts 3
A straight-line (linear) production possibilities curve between two goods suggests that: