(E100) INTRODUCTION TO ECONOMICS Practice Exam
Question 1: What is the fundamental economic problem that arises due to limited resources?
A) Abundance
B) Scarcity
C) Equality
D) Efficiency
Answer: B
Explanation: Scarcity is the fundamental problem in economics because resources are limited while
human wants are unlimited.
Question 2: Which concept explains the trade-off involved when choosing one option over another?
A) Opportunity cost
B) Comparative advantage
C) Supply
D) Demand
Answer: A
Explanation: Opportunity cost represents the value of the next best alternative that is forgone when a
decision is made.
Question 3: The Production Possibilities Curve (PPC) illustrates which of the following?
A) Relationship between supply and demand
B) Trade-offs and opportunity costs
C) Market equilibrium
D) Inflation trends
Answer: B
Explanation: The PPC shows the trade-offs an economy faces and the opportunity costs associated with
allocating resources between different goods.
Question 4: Which term best describes the decision-making process in a world of limited resources?
A) Allocation
B) Scarcity
C) Choice
D) Trade-off
Answer: C
Explanation: Choice is the process by which individuals and societies decide how to allocate scarce
resources among competing uses.
Question 5: Opportunity cost can be best defined as:
A) The cost of all resources used
B) The value of the next best alternative foregone
C) The market price of a good
D) The explicit cost of production
Answer: B
Explanation: Opportunity cost is the benefit that is sacrificed by not choosing the next best alternative.
,Question 6: What does a point inside the Production Possibilities Curve (PPC) indicate?
A) Full efficiency
B) Underutilization of resources
C) Economic growth
D) Maximum production
Answer: B
Explanation: A point inside the PPC indicates that an economy is not using all its resources efficiently.
Question 7: What does an outward shift of the PPC represent?
A) Economic decline
B) Economic growth
C) Inefficient production
D) A decrease in available resources
Answer: B
Explanation: An outward shift indicates that an economy can produce more goods, reflecting
improvements such as technological advancements or increased resources.
Question 8: Comparative advantage refers to:
A) Producing more than others
B) Producing at a lower opportunity cost
C) Absolute production differences
D) Trade restrictions
Answer: B
Explanation: Comparative advantage means being able to produce a good at a lower opportunity cost
relative to others, even if one party does not have an absolute advantage.
Question 9: Absolute advantage differs from comparative advantage in that it measures:
A) Cost efficiency
B) Total production ability
C) Opportunity cost
D) Market share
Answer: B
Explanation: Absolute advantage looks at who can produce more with the same resources, while
comparative advantage focuses on relative opportunity costs.
Question 10: Scarcity forces individuals and societies to make choices because:
A) Resources are unlimited
B) Wants exceed resources
C) Preferences are fixed
D) Markets are perfectly competitive
Answer: B
Explanation: Since resources are limited and wants are unlimited, choices must be made regarding their
allocation.
Question 11: In decision-making, the alternative that is given up is known as the:
A) Trade-off
B) Opportunity cost
,C) Sunk cost
D) Fixed cost
Answer: B
Explanation: The opportunity cost is what is foregone when choosing one alternative over another.
Question 12: Which of the following is a real-world example of opportunity cost?
A) Paying a fixed rent
B) Choosing to attend college instead of working full-time
C) Purchasing a necessary good
D) Saving money in a bank
Answer: B
Explanation: Attending college may mean forgoing the salary from full-time work, illustrating
opportunity cost.
Question 13: When a society produces at a point on the Production Possibilities Curve, it is
considered:
A) Inefficient
B) Efficient
C) Underutilizing resources
D) Overproducing
Answer: B
Explanation: Operating on the PPC means that resources are fully and efficiently used.
Question 14: A movement from one point on the PPC to another involves which economic concept?
A) Inflation
B) Trade-off
C) Equilibrium
D) Subsidy
Answer: B
Explanation: Moving along the PPC represents a trade-off between the production of different goods.
Question 15: Economic growth can be achieved by:
A) Increasing resource scarcity
B) Advancements in technology
C) Reducing production
D) Increasing opportunity cost
Answer: B
Explanation: Technological advancements can expand an economy’s capacity, shifting the PPC outward.
Question 16: The concept of scarcity implies that:
A) All resources are abundant
B) Choices must be made
C) There is no need for trade-offs
D) Opportunity cost is irrelevant
Answer: B
Explanation: Scarcity necessitates making choices because not all wants can be satisfied.
, Question 17: Which scenario best illustrates the concept of trade-offs?
A) A consumer buys both a laptop and a smartphone
B) A government allocates more funds to healthcare at the expense of education
C) A company increases production without any cost
D) An individual saves money and invests simultaneously
Answer: B
Explanation: Allocating more funds to healthcare reduces the amount available for education,
demonstrating a trade-off.
Question 18: A country experiencing a technological improvement will most likely:
A) Shift its PPC inward
B) Have higher opportunity costs
C) Shift its PPC outward
D) Face increased scarcity
Answer: C
Explanation: Technological improvements expand production capabilities, shifting the PPC outward.
Question 19: The concept of opportunity cost is central to which of the following economic analyses?
A) Profit maximization
B) Cost-benefit analysis
C) Price determination
D) Monetary policy
Answer: B
Explanation: Opportunity cost is essential in cost-benefit analysis, as it weighs the benefits of one
alternative against the next best alternative.
Question 20: When resources are fully and efficiently utilized, production is said to be:
A) Inefficient
B) At a point inside the PPC
C) At a point on the PPC
D) Below potential
Answer: C
Explanation: Full, efficient utilization of resources is represented by points on the PPC.
Question 21: In the context of economics, what does "trade-off" mean?
A) Exchange of goods
B) Giving up one benefit to gain another
C) Maximizing profits
D) Minimizing costs
Answer: B
Explanation: Trade-offs involve sacrificing one benefit in order to obtain another.
Question 22: Why does scarcity lead to the necessity of choice?
A) Because resources are infinite
B) Because desires are limited
C) Because resources are limited
D) Because all choices are equally beneficial
Question 1: What is the fundamental economic problem that arises due to limited resources?
A) Abundance
B) Scarcity
C) Equality
D) Efficiency
Answer: B
Explanation: Scarcity is the fundamental problem in economics because resources are limited while
human wants are unlimited.
Question 2: Which concept explains the trade-off involved when choosing one option over another?
A) Opportunity cost
B) Comparative advantage
C) Supply
D) Demand
Answer: A
Explanation: Opportunity cost represents the value of the next best alternative that is forgone when a
decision is made.
Question 3: The Production Possibilities Curve (PPC) illustrates which of the following?
A) Relationship between supply and demand
B) Trade-offs and opportunity costs
C) Market equilibrium
D) Inflation trends
Answer: B
Explanation: The PPC shows the trade-offs an economy faces and the opportunity costs associated with
allocating resources between different goods.
Question 4: Which term best describes the decision-making process in a world of limited resources?
A) Allocation
B) Scarcity
C) Choice
D) Trade-off
Answer: C
Explanation: Choice is the process by which individuals and societies decide how to allocate scarce
resources among competing uses.
Question 5: Opportunity cost can be best defined as:
A) The cost of all resources used
B) The value of the next best alternative foregone
C) The market price of a good
D) The explicit cost of production
Answer: B
Explanation: Opportunity cost is the benefit that is sacrificed by not choosing the next best alternative.
,Question 6: What does a point inside the Production Possibilities Curve (PPC) indicate?
A) Full efficiency
B) Underutilization of resources
C) Economic growth
D) Maximum production
Answer: B
Explanation: A point inside the PPC indicates that an economy is not using all its resources efficiently.
Question 7: What does an outward shift of the PPC represent?
A) Economic decline
B) Economic growth
C) Inefficient production
D) A decrease in available resources
Answer: B
Explanation: An outward shift indicates that an economy can produce more goods, reflecting
improvements such as technological advancements or increased resources.
Question 8: Comparative advantage refers to:
A) Producing more than others
B) Producing at a lower opportunity cost
C) Absolute production differences
D) Trade restrictions
Answer: B
Explanation: Comparative advantage means being able to produce a good at a lower opportunity cost
relative to others, even if one party does not have an absolute advantage.
Question 9: Absolute advantage differs from comparative advantage in that it measures:
A) Cost efficiency
B) Total production ability
C) Opportunity cost
D) Market share
Answer: B
Explanation: Absolute advantage looks at who can produce more with the same resources, while
comparative advantage focuses on relative opportunity costs.
Question 10: Scarcity forces individuals and societies to make choices because:
A) Resources are unlimited
B) Wants exceed resources
C) Preferences are fixed
D) Markets are perfectly competitive
Answer: B
Explanation: Since resources are limited and wants are unlimited, choices must be made regarding their
allocation.
Question 11: In decision-making, the alternative that is given up is known as the:
A) Trade-off
B) Opportunity cost
,C) Sunk cost
D) Fixed cost
Answer: B
Explanation: The opportunity cost is what is foregone when choosing one alternative over another.
Question 12: Which of the following is a real-world example of opportunity cost?
A) Paying a fixed rent
B) Choosing to attend college instead of working full-time
C) Purchasing a necessary good
D) Saving money in a bank
Answer: B
Explanation: Attending college may mean forgoing the salary from full-time work, illustrating
opportunity cost.
Question 13: When a society produces at a point on the Production Possibilities Curve, it is
considered:
A) Inefficient
B) Efficient
C) Underutilizing resources
D) Overproducing
Answer: B
Explanation: Operating on the PPC means that resources are fully and efficiently used.
Question 14: A movement from one point on the PPC to another involves which economic concept?
A) Inflation
B) Trade-off
C) Equilibrium
D) Subsidy
Answer: B
Explanation: Moving along the PPC represents a trade-off between the production of different goods.
Question 15: Economic growth can be achieved by:
A) Increasing resource scarcity
B) Advancements in technology
C) Reducing production
D) Increasing opportunity cost
Answer: B
Explanation: Technological advancements can expand an economy’s capacity, shifting the PPC outward.
Question 16: The concept of scarcity implies that:
A) All resources are abundant
B) Choices must be made
C) There is no need for trade-offs
D) Opportunity cost is irrelevant
Answer: B
Explanation: Scarcity necessitates making choices because not all wants can be satisfied.
, Question 17: Which scenario best illustrates the concept of trade-offs?
A) A consumer buys both a laptop and a smartphone
B) A government allocates more funds to healthcare at the expense of education
C) A company increases production without any cost
D) An individual saves money and invests simultaneously
Answer: B
Explanation: Allocating more funds to healthcare reduces the amount available for education,
demonstrating a trade-off.
Question 18: A country experiencing a technological improvement will most likely:
A) Shift its PPC inward
B) Have higher opportunity costs
C) Shift its PPC outward
D) Face increased scarcity
Answer: C
Explanation: Technological improvements expand production capabilities, shifting the PPC outward.
Question 19: The concept of opportunity cost is central to which of the following economic analyses?
A) Profit maximization
B) Cost-benefit analysis
C) Price determination
D) Monetary policy
Answer: B
Explanation: Opportunity cost is essential in cost-benefit analysis, as it weighs the benefits of one
alternative against the next best alternative.
Question 20: When resources are fully and efficiently utilized, production is said to be:
A) Inefficient
B) At a point inside the PPC
C) At a point on the PPC
D) Below potential
Answer: C
Explanation: Full, efficient utilization of resources is represented by points on the PPC.
Question 21: In the context of economics, what does "trade-off" mean?
A) Exchange of goods
B) Giving up one benefit to gain another
C) Maximizing profits
D) Minimizing costs
Answer: B
Explanation: Trade-offs involve sacrificing one benefit in order to obtain another.
Question 22: Why does scarcity lead to the necessity of choice?
A) Because resources are infinite
B) Because desires are limited
C) Because resources are limited
D) Because all choices are equally beneficial
