Fundamentals of Economic Analysis Review Questions for AP Economics

The study guide for these review questions can be found at:

Fundamentals of Economic Analysis Review for AP Economics

Questions

1. Economics is best described as
   1. the study of how scarce material wants are allocated between unlimited resources.
   2. the study of how scarce labor can be replaced by unlimited capital.
   3. the study of how decision makers choose the best way to satisfy their unlimited material wants with a scarce supply of resources.
   4. the study of how unlimited material wants can best be satisfied by allocating limitless amounts of productive resources.
   5. the study of how capitalism is superior to any other economic system.
2. A student decides that, having already spent three hours studying for an exam, she should spend one more hour studying for the same exam. Which of the following is most likely true?
   1. The marginal benefit of the fourth hour is certainly less than the marginal cost of the fourth hour.
   2. The marginal benefit of the fourth hour is at least as great as the marginal cost of the fourth hour.
   3. Without knowing the student's opportunity cost of studying, we have no way of knowing whether or not her marginal benefits outweigh her marginal costs.
   4. The marginal cost of the third hour was likely greater than the marginal cost of the fourth hour.
   5. The marginal benefit of the third hour was less than the marginal cost of the third hour.

The island nation of Beckham uses economic resources to produce tea and crumpets. Use the following production possibilities frontier for questions 3–4.



3. Economic growth is best represented by a movement from
   1. A to B
   2. B to C
   3. C to D
   4. D to E
   5. E to A
4. The shape of this PPF tells us that
   1. economic resources are perfectly substitutable from production of tea to production of crumpets.
   2. citizens prefer that an equal amount of tea and crumpets be produced.
   3. the opportunity cost of producing crumpets rises as more crumpets are produced.
   4. the opportunity cost of producing crumpets is constant along the curve.
   5. the opportunity cost of producing tea falls as you produce more tea.
5. Ray and Dorothy can both cook and can both pull weeds in the garden on a Saturday afternoon. For every hour of cooking, Ray can pull 50 weeds and Dorothy can pull 100 weeds. Based on this information,
   1. Ray pulls weeds since he has absolute advantage in cooking.
   2. Dorothy pulls weeds since she has absolute advantage in cooking.
   3. Dorothy cooks since she has comparative advantage in cooking.
   4. Ray cooks since he has comparative advantage in cooking.
   5. Dorothy pulls weeds since she has comparative advantage in cooking.

Answers and Explanations

1. C—It is important to remember that society has a limitless desire for material wants, but satisfaction of these wants is limited by scarce economic resources. Economics studies how to solve this problem in the best possible way.
2. B—If we observe her studying for the fourth hour, then it must be the case that the MB ≥ MC of studying for that next hour. If we observe her putting her books away and doing something else, the opposite must be true.
3. D—Economic growth is an outward expansion of the entire PPF. A movement from the interior to the frontier (A to B) is not growth, it just tells us that some unemployed resources (A) are now being used to their full potential (B).
4. C—When the PPF is concave (or bowed outward) it is an indicator of the Law of Increasing Costs. This is a result of economic resources not being perfectly substitutable between tea and crumpets. A baking sheet used to bake crumpets might be quite useless in producing tea leaves.
5. D—For Ray, the opportunity cost of cooking is 50 weeds, while Dorothy's opportunity cost of cooking is 100 unpulled weeds. Ray does not pull weeds because he has comparative advantage in cooking. Dorothy does not cook because she has comparative advantage in weed pulling.