Solution Manual f
Foundations of Business 7th Edition
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by William M. Pride, All chapter 1 - 47
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,Chapter 1 f
End of Chapter Questions
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Quiz Yourself
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1. Scarcity implies that the allocation decision chosen by society can
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a) not make more of any one good. f f f f f f
b) always make more of any good. f f f f f
c) typically make more of one good but at the expense of making less of f f f f f f f f f f f f f
another. f
d) always make more of all goods simultaneously. f f f f f f
Explanation: Scarcity implies that choices involve trade-offs.
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AACSB: Reflective Thinking f f
Accessibility: Keyboard Navigation
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Blooms: Understand
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Difficulty: 02 Medium f f
Gradeable: automatic
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Learning Objective: 01-01
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Topic: Economics and Opportunity Cost
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2. A production possibilities frontier is a simple model of
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a) allocating scarce inputs to the production of alternative outputs. f f f f f f f f
a) price and production/consumption in a market.
f f f f f
b) the cost of producing goods. f f f f
c) the number of inputs required to produce varying levels of output. Explanation:
f f f f f f f f f f f
The production possibilities frontier shows the quantity of two goods that can be
f f f f f f f f f f f f f
produced. It implies that scarcity requires that choices be made as to how to use
f f f f f f f f f f f f f f f
resources.
f
AACSB: Reflective Thinking f f
Accessibility: Keyboard Navigation
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Blooms: Understand
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Difficulty: 02 Medium f f
Gradeable: automatic
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Learning Objective: 01-01
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Topic: Modeling Opportunity Cost Using the Production Possibilities Frontier
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,3. The underlying reason that there are unattainable points on a production possibilities
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frontier is that there
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a. is government. f
b. are always choices that must be made. f f f f f f
c. are scarce resources within a fixed level of technology.
f f f f f f f f
d. is unemployment of resources. f f f
Explanation: The points outside the production possibilities frontier are unattainable. This
f f f f f f f f f f
means that currently available resources and technology are insufficient to produce
f f f f f f f f f f f
amounts greater than those illustrated on the frontier. On a graph, everything beyond the
f f f f f f f f f f f f f f
frontier is unattainable.
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AACSB: Reflective Thinking f f
Accessibility: Keyboard Navigation
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Blooms: Remember
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Difficulty: 01 Easy f f
Gradeable: automatic
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Learning Objective: 01-01
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Topic: Modeling Opportunity Cost Using the Production Possibilities Frontier
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4. The underlying reason production possibilities frontiers are likely to be bowed out
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(rather than linear) is because
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a. choices have consequences. f f
b. there are always opportunity costs. f f f f
c. some resources and people can be better used producing one good rather
f f f f f f f f f f f
than another. f f
d. there is always some level of unemployment. f f f f f f
Explanation: If the production possibilities frontier is not a line but is bowed out away from
f f f f f f f f f f f f f f f
the origin, then opportunity cost is increasing. The reason for this is that as we add more
f f f f f f f f f f f f f f f f f
resources to the production of, for example, pizza, we are using fewer resources to produce
f f f f f f f f f f f f f f f
soda. Compounding that problem, at each stage as we take the resources away from soda
f f f f f f f f f f f f f f f
and put them into pizza, we are moving workers who are worse at pizza production and
f f f f f f f f f f f f f f f f
better at soda production than those moved in the previous stage. This means that the
f f f f f f f f f f f f f f f
increase in pizza production is diminishing and the loss in soda production is increasing. An
f f f f f f f f f f f f f f f
economist would call this an example of increasing opportunity cost. If the production
f f f f f f f f f f f f f
possibilities frontier is a straight line that is not bowed out away from the origin, then
f f f f f f f f f f f f f f f f
opportunity cost is constant.
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AACSB: Knowledge Application f f
Accessibility: Keyboard Navigation
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Blooms: Remember
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Difficulty: 01 Easy f f
Gradeable: automatic
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Learning Objective: 01-02
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Topic: Attributes of the Production Possibilities Frontier
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, 5. Suppose you were modeling the impact of the introduction of computer automation
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into manufacturing on a production possibilities frontier (PPF) with two manufactured
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goods on their respective axes. It would be more likely that the result would be
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a) generalized growth with the PPF moving both up and to the right. f f f f f f f f f f f
b) specialized growth with the PPF moving both up and to the right. f f f f f f f f f f f
c) generalized growth with the PPF just moving up and not to the right. f f f f f f f f f f f f
d) specialized growth with the PPF just moving up and not to the right. f f f f f f f f f f f f
Explanation: Computer automation is a general improvement in technology so it would
f f f f f f f f f f f f
improve all manufacturing. As a result, it would result in generalized growth and move
f f f f f f f f f f f f f f
the PPF both up and to the right.
f f f f f f f f
AACSB: Knowledge Application f f
Accessibility: Keyboard Navigation
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Blooms: Remember
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Difficulty: 01 Easy f f
Gradeable: automatic
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Learning Objective: 01-03
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Topic: Economic Growth
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6. The optimization assumption suggests that people make
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a. irrational decisions. f
b. unpredictable decisions. f
c. decisions to make themselves as well off as possible. f f f f f f f f
d. decisions without thinking very hard. f f f f
Explanation: The optimization assumption suggests that the person in question is trying to
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maximize some objective. Consumers are assumed to be making decisions that maximize
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their happiness subject to a scarce amount of money.
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AACSB: Reflective Thinking f f
Accessibility: Keyboard Navigation
f f f
Blooms: Remember
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Difficulty: 01 Easy f f
Gradeable: automatic
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Learning Objective: 01-01
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Topic: Thinking Economically
f f
Foundations of Business 7th Edition
f f f f f
by William M. Pride, All chapter 1 - 47
f f f f f f f f f
,Chapter 1 f
End of Chapter Questions
f f f
Quiz Yourself
f
1. Scarcity implies that the allocation decision chosen by society can
f f f f f f f f f
a) not make more of any one good. f f f f f f
b) always make more of any good. f f f f f
c) typically make more of one good but at the expense of making less of f f f f f f f f f f f f f
another. f
d) always make more of all goods simultaneously. f f f f f f
Explanation: Scarcity implies that choices involve trade-offs.
f f f f f f f
AACSB: Reflective Thinking f f
Accessibility: Keyboard Navigation
f f f
Blooms: Understand
f f
Difficulty: 02 Medium f f
Gradeable: automatic
f f
Learning Objective: 01-01
f f f
Topic: Economics and Opportunity Cost
f f f f
2. A production possibilities frontier is a simple model of
f f f f f f f f
a) allocating scarce inputs to the production of alternative outputs. f f f f f f f f
a) price and production/consumption in a market.
f f f f f
b) the cost of producing goods. f f f f
c) the number of inputs required to produce varying levels of output. Explanation:
f f f f f f f f f f f
The production possibilities frontier shows the quantity of two goods that can be
f f f f f f f f f f f f f
produced. It implies that scarcity requires that choices be made as to how to use
f f f f f f f f f f f f f f f
resources.
f
AACSB: Reflective Thinking f f
Accessibility: Keyboard Navigation
f f f
Blooms: Understand
f f
Difficulty: 02 Medium f f
Gradeable: automatic
f f
Learning Objective: 01-01
f f f
Topic: Modeling Opportunity Cost Using the Production Possibilities Frontier
f f f f f f f f
,3. The underlying reason that there are unattainable points on a production possibilities
f f f f f f f f f f f
frontier is that there
f f f f
a. is government. f
b. are always choices that must be made. f f f f f f
c. are scarce resources within a fixed level of technology.
f f f f f f f f
d. is unemployment of resources. f f f
Explanation: The points outside the production possibilities frontier are unattainable. This
f f f f f f f f f f
means that currently available resources and technology are insufficient to produce
f f f f f f f f f f f
amounts greater than those illustrated on the frontier. On a graph, everything beyond the
f f f f f f f f f f f f f f
frontier is unattainable.
f f f
AACSB: Reflective Thinking f f
Accessibility: Keyboard Navigation
f f f
Blooms: Remember
f f
Difficulty: 01 Easy f f
Gradeable: automatic
f f
Learning Objective: 01-01
f f f
Topic: Modeling Opportunity Cost Using the Production Possibilities Frontier
f f f f f f f f
4. The underlying reason production possibilities frontiers are likely to be bowed out
f f f f f f f f f f f
(rather than linear) is because
f f f f f
a. choices have consequences. f f
b. there are always opportunity costs. f f f f
c. some resources and people can be better used producing one good rather
f f f f f f f f f f f
than another. f f
d. there is always some level of unemployment. f f f f f f
Explanation: If the production possibilities frontier is not a line but is bowed out away from
f f f f f f f f f f f f f f f
the origin, then opportunity cost is increasing. The reason for this is that as we add more
f f f f f f f f f f f f f f f f f
resources to the production of, for example, pizza, we are using fewer resources to produce
f f f f f f f f f f f f f f f
soda. Compounding that problem, at each stage as we take the resources away from soda
f f f f f f f f f f f f f f f
and put them into pizza, we are moving workers who are worse at pizza production and
f f f f f f f f f f f f f f f f
better at soda production than those moved in the previous stage. This means that the
f f f f f f f f f f f f f f f
increase in pizza production is diminishing and the loss in soda production is increasing. An
f f f f f f f f f f f f f f f
economist would call this an example of increasing opportunity cost. If the production
f f f f f f f f f f f f f
possibilities frontier is a straight line that is not bowed out away from the origin, then
f f f f f f f f f f f f f f f f
opportunity cost is constant.
f f f f
AACSB: Knowledge Application f f
Accessibility: Keyboard Navigation
f f f
Blooms: Remember
f f
Difficulty: 01 Easy f f
Gradeable: automatic
f f
Learning Objective: 01-02
f f f
Topic: Attributes of the Production Possibilities Frontier
f f f f f f
, 5. Suppose you were modeling the impact of the introduction of computer automation
f f f f f f f f f f f
into manufacturing on a production possibilities frontier (PPF) with two manufactured
f f f f f f f f f f f
goods on their respective axes. It would be more likely that the result would be
f f f f . f f f f f f f f f f f f
a) generalized growth with the PPF moving both up and to the right. f f f f f f f f f f f
b) specialized growth with the PPF moving both up and to the right. f f f f f f f f f f f
c) generalized growth with the PPF just moving up and not to the right. f f f f f f f f f f f f
d) specialized growth with the PPF just moving up and not to the right. f f f f f f f f f f f f
Explanation: Computer automation is a general improvement in technology so it would
f f f f f f f f f f f f
improve all manufacturing. As a result, it would result in generalized growth and move
f f f f f f f f f f f f f f
the PPF both up and to the right.
f f f f f f f f
AACSB: Knowledge Application f f
Accessibility: Keyboard Navigation
f f f
Blooms: Remember
f f
Difficulty: 01 Easy f f
Gradeable: automatic
f f
Learning Objective: 01-03
f f f
Topic: Economic Growth
f f f
6. The optimization assumption suggests that people make
f f f f f f
a. irrational decisions. f
b. unpredictable decisions. f
c. decisions to make themselves as well off as possible. f f f f f f f f
d. decisions without thinking very hard. f f f f
Explanation: The optimization assumption suggests that the person in question is trying to
f f f f f f f f f f f f
maximize some objective. Consumers are assumed to be making decisions that maximize
f f f f f f f f f f f f
their happiness subject to a scarce amount of money.
f f f f f f f f f
AACSB: Reflective Thinking f f
Accessibility: Keyboard Navigation
f f f
Blooms: Remember
f f
Difficulty: 01 Easy f f
Gradeable: automatic
f f
Learning Objective: 01-01
f f f
Topic: Thinking Economically
f f
