Module 1 - Economic Concepts, Issues and Tools

Question 1

Consider the following statements:

I. For centrally planned economies, since all members of the labour force are allocated jobs, scarcity is not a problem.

II. For capitalist economies, since workers occasionally become unemployed, scarcity is not always a problem.

III. For both centrally planned and market economies, since resources are insufficient to satisfy all wants, scarcity is a problem. Which of the following is correct?

A. I only.
B. II and III.
C. III only.
D. Not I, not II and not III.

Answer 1

The correct answer is C. For every nation in the world today, resources are insufficient to satisfy all human wants. Thus every nation faces the problem of scarcity. If human wants will always outstrip the ability to satisfy them, scarcity will
always be a problem. All labour being employed does not imply scarcity is non-existent, neither does some labour being unemployed.

Question 2

The following table shows the extra daily benefit and costs that would be derived from adding successive terminals at an airport in order to increase passenger-handling
capacity.

How large an expansion programme should the airport undertake to maximise net benefit (total benefit minus total cost) and why?

A. Build one terminal since that provides the greatest marginal benefit.

B. Build two terminals since that is the level of expansion where the difference between marginal benefit and marginal cost is greatest.

C. Build three terminals since that is the largest number of new terminals for which marginal benefit exceeds marginal cost.

D. Build four terminals since the programme

Answer 2

The correct answer is C. An economic activity will increase society’s welfare if the marginal benefits exceed the marginal costs. Each of the first additional three terminals meets this criterion. The fourth terminal should not be built because marginal costs exceed marginal benefits after three terminals. The fact that the total benefits from four terminals exceed total costs is irrelevant.

Question 3

Each person has an equal say in how goods and services are distributed.

The statement applies to
I. traditional economies
II. command economies
III. market economies

Which of the following is correct?

A. I only
B. II only
C. III only
D. Not I, not II, not III

Answer 3

The correct answer is D.

In traditional economies the distribution issue is determined by birthright and other social factors. In command economies, the state determines both wages/salaries and the price of goods and services. In market economies it is the forces of demand for and supply of factor inputs which determine wages, salaries, rent interest and dividends, i.e. the returns to factor inputs and as a consequence determine income distributions and subsequently how goods and services are distributed. Thus I, II and III are wrong.

Question 3

Economics is concerned with
I. how societies can satisfy their wants as fully as possible
II. the reasons societies prefer one good over another
III. only the basic wants of goods and services necessary for survival

Which of the following is correct?
A. I only
B. II and III only
C. III only
D. I, II and III

Answer 3

The correct answer is A.

Economists concerned with the efficient allocation of resources, take human wants as given and do not pass value judgements as to why people want specific goods and services. The main focus of economics is how societies, given scarce resources, satisfy their wants as fully as possible. Thus I is true and II and III are false.

Question 4

A given quantity of goods can be produced in a variety of ways using different amounts
of two resources, A and B.

Which of the following statements is correct regarding engineering efficiency?

 Method 1 uses 5 units of A and 10 units of B.
 Method 2 uses 10 units of A and 4 units of B.
 Method 3 uses 6 units of A and 4 units of B.

A. Method 2 is more efficient than method 1.
B. Method 3 is more efficient than method 2.
C. Method 3 is more efficient than method 2 and method 1.
D. Insufficient information exists to determine whether one method is more efficient than any other.

Answer 4

The correct answer is B. Since Method 3 requires the same amount of resource B and less of A than Method 2, Method 3 is more technically efficient than Method 2.
No conclusion can be made about the relative engineering efficiency of Method 1 compared to the other two methods because it uses less of A but more of B. Units of A and B are not additive; A could be very expensive machine tools and B could be man-days, or vice versa.

Question 5

Describe Tradional economic system:

Answer 5

• common in underdeveloped nations
• most economic activities focused on eating, clothing and housing
• Reliance on nature and the weather
• distribution of output based on birthright and social factors

Question 5

Examples of free goods are

I. a free tyre with every four purchased.

II. a crystal drinking glass with every 20 litres of petrol.

III. fresh air in an air-conditioned building in Oxford Street.

Which of the following is correct?

A. II only.
B. II and III only.
C. I, II and III.
D. Not I, not II and not III.

Answer 5

The correct answer is D. Although it appears in each of the examples that a good, namely a tyre, stamps, an air-conditioned atmosphere, is available at zero cost to a
potential consumer, each of the goods in question has utilised society’s scarce resource and consequently is not a free good.

Question 5

Which of the following identifies how the distribution problem is solved theoretically in command economies?

A. The market determines prices of goods and services and wages and salaries
B. The market determines prices of goods and services and the state sets wages and salaries
C. The state determines prices of goods and services and the market determines wages and salaries
D. The state determines prices of goods and services and sets wages and salaries

Answer 5

The correct answer is D.

In command economies the state sets wage and salary levels for different types of workers and by setting also the prices of goods and services determines the distribution of income theoretically. Black markets are rife however in many command or ex command economies indicating the role of market forces – albeit many are illegal – in determining real income. Since the question stated ‘theoretically’ the correct response is D.

Question 6

An increase in utility means…

Answer 6

that marginal benefit > marginal cost

Question 7

Imagine two societies A and B with the same production possibility curves as shown above. In year t Society A produces only capital goods and Society B only butter.
In year t + 1 they both produce only butter.

Which of the following describes both societies in year t + 1?

A. A has a larger capital stock but B produces more butter
B. A has a larger capital stock and A produces more butter
C. Both have the same capital stock but A produces more butter
D. Both have the same capital stock and both produce the same amount of butter.

Answer 7

The correct answer is B.

During any production process some resources depreciate and if not replaced will cause potential output to be lower than it would have been had they been replaced. Thus society B in year t + 1 will have reduced capacity, i.e. the production possibility curve will move towards the origin because those capital goods which depreciated will not have been replaced since none were produced in year t. Since A produced only capital goods in year t, A will have a larger capital stock than B in year t + 1 and consequently will be able to produce more butter.

Question 8

An economically efficient society that is capable of producing more goods and services in year 2 than in year 1 must

I. have access to superior productive techniques in year 2.
II. have more resources available in year 2. Which of the following is correct?

A. I only.
B. II only.
C. I or II or both I and II.
D. Neither I nor II.

Answer 8

The correct answer is C. In an economically efficient society, producing more of any one good by definition means producing less of some other good. In comparing
two time periods, assuming economic efficiency in both, a higher output in one time period means an increase in resources and/or superior production techniques using reduced, the same or more resources.

Question 9

The economic decisions to be made involving choices are:

Answer 9

• which goods and services to produce
• how to produce them
• how to allocate them to individuals or households

Question 10

Consider the following statements:

I. The opportunity cost of a unit of land is the value it would create when put to its best alternative use.

II. The opportunity cost of a good is the value of all other goods that must be forgone in order to produce it.

Which of the following is correct?

A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.

Answer 10

The correct answer is A. Statement I is a correct definition of the opportunity cost of a unit of land, i.e. the best alternative forgone. Statement II is false because it does not stipulate the best alternative forgone. If, to use an extreme example, the resources used to produce the good in question could have been used to produce goods no one wanted, e.g. wheelbarrows with square wheels having zero value, the opportunity cost of the good in question would be zero.

Question 11

‘The problem facing the government is whether to build a new motorway system or to improve public transport throughout the country during the next three years. Re-
sources for both projects are not available. It must be one or the other.’ Which of the following is correct? The opportunity cost of the new motorway system mentioned in the preceding paragraph is:

A. greater than the economy can afford.
B. an improved public transport system.
C. the money required to pay for it.
D. the resources required to build it.

Answer 11

The correct answer is B. If the government were to build the new highway system, it would have to raise the money to pay for it and resources would be required to
build it. But neither of these costs is the opportunity cost of the highway system. The opportunity cost of any good is the best alternative forgone to obtain that good. Whether the opportunity cost of the new highway system is greater than the economy can afford depends on whether it will yield lower benefits than an im-proved public transportation system throughout the country.

Question 11

What economists call ‘the fundamental fact of scarcity’ is produced by

I. insatiable wants
II. limited resources
III. excess world population

Which of the following is correct?

A. I and II only
B. II only
C. II and III only
D. I, II and III

Answer 11

The correct answer is A.

While each of I) and II) is a necessary element, it is the dual existence of limited resources and insatiable wants which produces what economists define as the fundamental fact of scarcity. A large world population implies only many wants; excess world population is meaningless in the context of the question. Thus III is wrong.

Question 12

In modern market economies the top 10% of the richest families earn sufficient income
I. to satisfy their wants
II. to avoid scarcity
Which of the following is correct?

A. I only
B. II only
C. Both I and II
D. Neither I nor II

Answer 12

The correct answer is D.

The richest families in the world today face scarcity – there are, for instance, only 24 hours in a day to spend money and enjoy goods and services. As a consequence, choices have to be made and thus all wants cannot be satisfied.

Question 13

If the opportunity cost of capital goods in terms of butter were constant at all levels of output which of the following production possibility curves would reflect this fact?

Answer 13

The correct answer is C.

For the opportunity cost of capital goods in terms of butter to be constant, no matter the point of production of the production possibility curve, the production possibility curve has to be a straight line. Since the production possibility curve passes through the points 175,0 and 0,210 the slope of the straight line production possibility curve would be – 175/210. Thus at any point other than 0,210 to acquire an additional unit of capital goods necessitates giving up 1.2 tons of butter (210/175).

Question 14

Which of the following is correct?

I. The opportunity cost of cheese when production is taking place at point L in Figure 1.3 is W1W2 of wine.
II. At point M in Figure 1.3 a bottle of wine is of equal value to 1lb of cheese.

A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.

Answer 14

The correct answer is D. When production is being carried out at point L, i.e. 0W1 of wine and 0C2 of cheese is produced, the opportunity cost of cheese is the best
alternative forgone. Since there is only one alternative to cheese in the example, i.e. wine, the opportunity cost of cheese therefore at point L is the wine forgone when producing 0C2 of cheese, i.e. W1W3 of wine. Thus statement I is incorrect. The information given in Figure 1.3 concerns production possibilities; no information is given on how society values wine and cheese. Therefore statement II is not neces-sarily true.

Question 15

Definition of engineering (technical) efficiency

Answer 15

The engineering (technical) efficiency describes a situation where a good of stated quality is being produced using the fewest possible resources – this then leads to greater utility for society as more resources are available for other societies

Question 16

If, next year, the production possibilities curve passes through point W on which point on this year’s production possibility curve (PPC) is it not possible for the economy to be operating?

A. 175,0
B. 100,144
C. 80,144
D. 0,210

Answer 16

The correct answer is D.

For the production possibility curve to shift to the right additional resources are required, i.e. capital goods have to be produced this year. The only output combination at which no capital goods are produced this year is 0,210, i.e. all butter.

Question 17

If the economy were operating at point Z this would indicate that

I. not all resources were fully employed
II. the scarcity–choice problem had been resolved.
Which of the following is correct?

A. I only
B. II only
C. Both I and II
D. Neither I nor II

Answer 17

The correct answer is A.

The production possibilities curve traces the maximum outputs possible for both goods. Any point within the frontier indicates inefficient resources utilisation/unemployed resources. Thus I is true. No matter the resources owned by society, choices always have to be made; resources deployed in one activity are not available for another. The fact that some resources may be unemployed or under employed does not indicate the scarcity–choice problem has been resolved. Thus II is wrong.

Question 19

Definition of Opportunity Cost

Answer 19

The real cost to society of an activity is the best alternative forgone – this is called the opportunity cost

Question 20

A government has completed a cost–benefit study showing that the annual value of the services from an additional 100 miles of motorway would be £4 million and the annual
value of the services from an additional airport would be £3 million. To achieve the most efficient use of resources, what should the government do?

A. Construct only 75 miles of motorway (that is three-quarters of 100).

B. Construct only the 100 miles of motorway.

C. Construct both the 100 miles of motorway and the airport.

D. Not necessarily construct either any additional motorway or the airport.

Answer 20

The correct answer is D. To maximise society’s welfare, the government should allocate expenditures so that the marginal benefit from the last dollar spent on each good equals the marginal cost. If this condition did not hold, the government could increase welfare by reallocating its expenditure. Because no information is given about the costs of constructing highways or airports, it is impossible to tell whether carrying out either project or both projects would achieve an efficient use of resources.

Question 21

Which of the following is correct? To satisfy wants as fully as possible, a society must

A. choose the best set of goods and services from all feasible sets.

B. produce various sets of goods and services then choose one set.

C. ensure that free goods are available to all members of society.

D. ensure that luxury goods are produced only when necessities are freely
available to all.

Answer 21

The correct answer is A. A society’s resources are capable of producing an infinite number of alternative sets of goods and services. The best set to produce is that which maximises society’s welfare, i.e. satisfies wants as fully as possible. Producing various goods at random will not guarantee the best use of resources; ensuring free goods are available to all may require many resources (e.g. taking everyone to Loch Lomond to watch a sunset), and may not be what all the people want. There is no operational distinction in economics between necessities and luxuries.

Question 22

Two individuals who both had baskets containing oranges and apples were observed exchanging voluntarily three apples for two oranges. Which of the following are
correct?

A. There were more apples than oranges before the exchange in one individual’s
basket.

B. Both individuals benefited from the exchange.

C. One individual benefited more than the other from the exchange.

D. One individual prefers oranges to apples and the other prefers apples to
oranges.

Answer 22

The correct answer is B. Free exchange of goods permits higher levels of satisfaction (utility) without an increase in the amount of goods. Both individuals gain by each exchanging a good with a low marginal utility for one with a high marginal utility. Marginal utilities are determined by tastes and preferences and the quantity of a good already consumed (or in this case, in one’s possession to be consumed). Both individuals could have had identical amounts of apples and oranges in their baskets, but different preferences, and both could have benefited equally. Also, both could have preferred oranges to apples but one was willing to give up, say, one orange for two apples, because he had no apples in his basket and plenty of oranges.

Question 23

Which of the following is correct?

I. Some wants in society can be satisfied without the need for choice
II. By definition, all goods and services which satisfy human wants require scarce resources to produce them

A. I only
B. II only
C. Both I and II
D. Neither I nor II

Answer 23

The correct answer is A.

The bounty of nature supplies many goods and services at zero cost; sunshine, fresh air, beautiful views are freely available to many societies throughout the world continuously. To enjoy some of them e.g. air does not involve choice in most locations throughout the world. To be available continuously does not imply that scarce resources are involved in their production.

Question 25

Descibe command model

Answer 25

• the set of goods and services to be produced is decided by a central ruling body
• complicated because all the resources for these goods have to be planned for
• an error can produce domino effect: not enough tractors means not enough food
• the distribution of goods/services is solved by setting the wage levels for different workers, price fixing and income allowances for those not in the labor force
• problems: goods may be produced that no-one wants or not enough goods produced that people want => black markets spring up
• some economic activity (especially in agriculture) is conducted through free markets

Question 26

The society, operating at point x, prepares for growth allocating all of its resources to capital goods production. What is the increase in capital goods production and what is its opportunity cost?

A. 1.75 and 66 tons of butter
B. 75 and 144 tons of butter
C. 100 and 66 tons of butter
D. 175 and 144 tons of butter

Answer 26

The correct answer is B.

In moving from point x (100, 144) to all capital goods production (175, 0), capital goods production increases by 75, the cost being 144 tons of butter.

Question 26

A society is operating at point Z in year t.

Which of the following is correct?

A society can
A. increase capital goods production and achieve point W in year t

B. only achieve point W in year t if it abandons butter production

C. increase both capital goods and butter production in year t without reaching the production possibility curve

D. can increase the production of either capital goods or butter in year t but not both.

Answer 26

The correct answer is C.

The production possibility curve specifies the maximum possible combination of output of capital goods and butter with the available resources in some given time period. Point W, therefore, is unattainable in year t and attainable in year t + 1 only if sufficient resources are allocated to capital goods production in year t. Thus A and B are wrong.

If the society were to move from point Z to a point on the production possibility curve between points X and Y this would reflect an increase in output of both capital goods and butter. Thus D is wrong. It would be possible for the society to move from point Z towards a point in the production possibility curve between X and Y without actually reaching the production possibility curve and produce more capital goods and butter than produced at point Z.

Question 27

In the local municipal elections citizens were asked to vote for each/any of the items listed below and implicitly tax themselves for the good/service if sufficient votes were registered. User prices where appropriate were stated also.

The swimming pool and improved street lighting attracted sufficient votes.

It can be concluded that the opportunity cost of
I. improved street lighting was an increase in the size of the police force
II. the swimming pool was the library
Which of the following is correct?

A. I only
B. II only
C. Both I and II
D. Neither I nor II

Answer 27

The correct answer is D.

The opportunity cost to any society of an activity undertaken is the best alternative foregone – the best, not ‘any other’ option. In the above item list we know only the items proposed and the two rejections. Increased size of the police force and the library could have been in the ‘any other’ category. Thus I and II are wrong.

Question 29

Which of the following is correct? An economy is operating in an economically efficient manner when

I. goods and services are being produced using the least amount of resources.
II. no individual’s utility could be increased. III. society’s wants are being satisfied as fully as possible.

A. I and II only.
B. I and III only.
C. II and III only.
D. I, II and III.

Answer 29

The correct answer is B. When an economy is operating in an economically efficient manner, engineering efficiency prevails in the production of goods and services, and each is being produced using the least amount of resources. Further, the set of goods and services being produced is that which makes society as well off as possible. However, any one individual’s utility could be increased by giving him/her more goods and services – although they would have to be taken from someone else, making that person worse off.

Question 30

It has been said that the fundamental fact of scarcity is no longer applicable to the US economy. Which of the following is correct?

This statement is:

A. true, because the US is one of the richest countries in the world.

B. true, because the resources that are scarce in the US can be imported from abroad.

C. false, because not all the wants of all US citizens are fully satisfied.

D. false, because a significant number of families in the US have incomes below what is known as the poverty level.

Answer 30

The correct answer is C. It is true that the US is one of the richest countries in the world and also true that the US imports many items from other countries. Neither of these facts, however, implies that the fundamental fact of scarcity no longer applies to the US. Scarcity would not exist in the US only if all wants of all US citizens were fully satisfied. Even if no family in the US were below the poverty level, scarcity would still exist.

Question 31

Describe the Market/Capitalist/Free-Enterprise model:

Answer 31

• which goods are produced is set by the interaction between consumers and producers
• consumers attempting to maximize welfare bid for goods while producers attempting to do the same produce the goods they believe consumers want
• competition for resources to produce goods and services determines the price of those resources and also the distribution of income among the resource owners
• those with resources in demand get more, buy more and so have more of a say in what gets produced
• it rewards not according to need but according to the contribution of their resources to production
• still relies on government to produce certain common goods like defence

Question 32

Which of the following is correct? The concept of scarcity means that resources:

A. are not available in sufficient quantities to satisfy any individual’s wants.

B. are not available in sufficient quantities to satisfy all wants for them.

C. cannot be increased in quantity to any significant extent.

D. are of primary importance in satisfying the wants of society.

Answer 32

The correct answer is B. A resource is scarce whenever having more of it would make someone better off. The fact that one individual’s wants for a resource, e.g. a
television set or an automobile, can be fully satisfied does not imply that all individ-uals’ wants are fully satisfied. A resource that cannot be increased in quantity may be
scarce; so may resources that can be. Resources, by definition, are important in satisfying the wants of society, e.g. air, water and sunshine, but their ability to satisfy wants does not imply scarcity. Whenever there are unsatisfied wants, resources are scarce.

Question 33

Of the outputs K, L and N in Figure 1.3, which of the following statements is correct?

A. Only L is attainable.
B. K and L are attainable.
C. Only K is attainable.
D. K, L and N are attainable.

Answer 33

The correct answer is B. Any output combination on or within the production possibilities curve or frontier is attainable, e.g. points 0, W1, W2, C1, C2, K, L, M.
With existing resources and technology, all points outside the frontier, e.g. N, are unattainable.

Question 34

The ‘what’, ‘how’ and ‘for whom’ problems in economics concern decisions which have to be made about choices among
I. different goods and services
II. alternative uses of resources
III. methods of distributing a nation’s output of goods and services

Which of the following is correct?

A. I and II only
B. II only
C. I, II and III
D. Not I, not II, not III

Answer 34

The correct answer is C.

To maximise society’s welfare, given limited resources, the choice all nations face is common: which goods and services to produce, how to produce them and how to allocate them among the population. Thus I and II and III are true.

Question 34

A production possibilities curve for any two goods indicates which of the following?

A. To which combination of the two goods society should allocate its resources
B. Economic efficiency
C. The opportunity cost of each good at any point of the curve
D. That corner points, i.e. all of one good and none of the other, are the least desirable combination of outputs

Answer 34

The correct answer is C.

A production possibilities curve for two goods indicates the maximum possible combinations of outputs of the two goods for a given resource endowment. It does not indicate at which point on the curve society would achieve maximum satisfaction. Thus A B and D are wrong. A movement along the curve indicates how much of one good must be sacrificed for an additional unit of the other good, i.e. a movement along the curve indicates opportunity cost at each point on the curve.

Question 35

There were angry exchanges today in parliament when the Health Minister announced that the national health service budget would be increased by only $20m because of the opportunity costs of any additional funds over and above the $20m.

Which of the following is correct?

The Health Minister’s statement implied that any additional expenditure in the health services beyond the extra $20m

A. would produce insignificant health benefits
B. could be used more beneficially in non health services activities
C. was greater than the economy could afford
D. would require medical personnel and equipment not currently available

Answer 35

The correct answer is B.

The Health Minister in negotiating the budget figure of $20m has accepted the argument that services more valuable than additional health services would have to be sacrificed if the health services budget were increased beyond $20m, e.g. police, fire services, education. Thus B is therefore correct. Expenditure on health over and above the $20m would still provide benefits but not as great as the benefits such expenditure could provide in other areas. Thus A is wrong. Every economy ‘can afford’ to increase any area of economic activity in the sense that not all its resources are employed in that area but to satisfy society’s wants as fully as possible means allocating resources among different activities. Thus C and D are wrong.

Question 36

In the present programme of a National Health Service (medical services provided by the government at zero cost to patients), the total benefits exceed total cost. The government’s goal is efficient allocation of resources. Which of the following is correct? It should undertake an increase in expenditure on medical services only if:

A. the total benefit derived from all medical services would still exceed the total cost.

B. the total benefit derived from all medical services would exceed that of any other good.

C. the benefit from the extra medical services would outweigh the cost of doing with less of other goods.

D. such expenditures improve people’s health independently of the costs.

Answer 36

The correct answer is C. Given the government’s goal is efficient allocation of resources, it should increase expenditure on medical services only if the marginal
benefits exceed the marginal costs. The marginal benefits are those attributable to the extra medical services; the marginal costs are the goods forgone to produce
those additional medical services.

Question 37

Which of the following statements is correct?

I. What, how and for whom goods and services are produced are problems common
to traditional, command and market economies.

II. In traditional, command and market economies all land is owned privately but other resources may be privately and/or collectively owned.

III. In traditional and command economies each individual receives the same amount of goods and services, whereas in market economies individuals receive an amount of goods and services equivalent to the resources each owns.

A. I only.
B. I and II only.
C. I and III only.
D. I, II and III.

Answer 37

The correct answer is A. No matter how a society is organised for economic decision making, each must decide what set of goods and services to produce, how to produce them and how to allocate them among the members of that society. Not all land in command economies is owned privately, and income is not shared equally in non-market economies. Thus statements II and III are incorrect.

Question 39

Definition of Economic Efficiency

Answer 39

Economic Efficiency is engineering efficiency + the set of goods and services produced must be the set that satisfies wants as fully as possible e.g a country could build 100 bridges that were efficient from an engineering point of view but not from an economic point of view because they yielded less satisfaction than other goods which could have been produced with the same resources

Question 41

Nations have the choice among three methods of solving the scarcity–choice problem; by tradition, by command and by markets.

Which of the following is correct?

The major capitalist nations of the world today use
A. tradition only
B. markets and traditional only
C. markets and command only
D. markets, command and tradition

Answer 41

The correct answer is D.

While the capitalist nations use markets to solve the bulk of the scarcity–choice problem a significant element of command exists (government purchase of goods and services averages around 20% of total output for the ‘big 7’). In addition many household tasks in all nations today involving scarcity and choice are resolved according to tradition.

Question 42

The local government concluded that the leisure centre it had commissioned for $10m had been constructed in an engineering efficient fashion but was not economically efficient. This means that in the opinion of the local government

I. the $10 million should have been spent on a different project
II. the leisure centre could have been built using fewer resources

Which of the following is correct?

A. I only
B. II only
C. Both I and II
D. Neither I nor II

Answer 42

The correct answer is A.

Engineering efficiency describes a situation in which a good of given quality is produced using fewest resources. Thus II is wrong. Economic efficiency subsumes engineering efficiency but requires that the good produced using the specified resources did not have a superior alternative. Thus I is true.

Question 43

Explain Scarcity, Free Goods, Choice

Answer 43

• The main focus of economics is how societies can satisfy their wants (also called welfare or utility), given their limited resources for providing the items which satisfy such wants
• Free goods are items that are provided by nature without human effort and which satisfy some human wants (air, rain)
• A resource is defined as anything that helps produce the goods and services people want
• The dual existence of insatiable wants and limited resources produces the fundamental fact of scarcity
• The need for choice arises because resources allocated to the satisfaction of one want cannot be allocated to the satisfy others

Question 44

To solve the scarcity choice problem, all societies use a combination of:

Answer 44

• Traditional methods
• Command
• Market

Question 45

Which of the following is correct? The fact that individuals’ tastes and preferences differ implies that:

A. no two individuals ever buy the same quantities of any given good in a given time period.

B. free exchange of goods and services can increase society’s welfare without an increase in the quantities of goods and services available.

C. an individual’s wants can never be fully satisfied until all of a nation’s resources are efficiently utilised.

D. a nation’s wants can never be fully satisfied.

Answer 45

The correct answer is B. The fact that many people buy and eat hamburgers at the same time implies that these people enjoy hamburgers, not that they have identical
tastes and preferences. Even if a nation’s resources were fully and efficiently utilised, all wants would not be fully satisfied even if all people had similar tastes and preferences. In addition, there is no guarantee that any individual’s wants would be satiated. What differing tastes and preferences imply is that free exchange of goods having a low utility for goods with a high utility can increase the level of well-being of those individuals involved in such an exchange without an actual increase in the amount of goods available.

Question 47

Which of the following is a free good?
A. Anything which helps produce goods and services people do not buy
B. A second hand car
C. Anything which satisfies wants but requires no human effort
D. The items children purchase with their allowances/pocket money

Answer 47

The correct answer is C.

Some wants are provided by nature without human effort, e.g. floating in the sea off Bermuda’s south coast and drying off on the silver sand. These are free goods if you are in Bermuda. Any good or service the production of which requires scarce resources is, by definition, not a free good.

Question 48

Introduction scarcity, wants, economies.

Answer 48

• Scarcity exists for both individuals and societies
• All living creatures have wants they attempt to satisfy but limited means of satisfying these wants, so choices have to be made
• Different societies have chosen different methods of tacking scarcity-choice problem:
  
  • centrally planned economies where small number of people make the economic decisions
  • market system, where demand and supply resolve the problem
  • traditional economies, where a person’s position determines what work he’ll do and his rewards
• All countries have a mix of these type of economies

Question 49

What is the name of the technique for analysing incremental changes in resource allocation and evaluating the marginal benefits and marginal costs?

A. Constrained maximisation
B. Marginal analysis
C. Opportunity cost
D. Technical/Engineering efficiency

Answer 49

The correct answer is B.

This is a definitional question.