d089 practice questions WITH CORRECT ANSWERS.

d089 practice questions WITH |\ |\ |\ |\




CORRECT ANSWERS |\




1. What are the three fundamental questions every economy
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must answer? |\




Give an example of a "What" question. 1. What to produce? Ex:
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One business wants to drill for oil, the other want to raise cattle.
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2. How to produce it? Ex: Company needs to decide to use a
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current factory or find a new location. 3. From who to produce?
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10 Principles of economics?
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1. People face trade-offs
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2. The cost of something is what you give up to get it
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3. Rational people think at the margin
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4. People respond to incentives
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5. Trade can make everyone better off
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6. Markets are usually a good way to organize economic activity
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7. Governments can sometimes improve market outcomes
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8. A country's standard of living depends on its ability to produce
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goods and services
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9. Prices rise when the government prints too much money
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10. Society faces a short-run trade-off between inflation and
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unemployment

,11. Identify the payment that goes to each of the four factors of
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production?
1. Natural resources: rent for land and buildings. 2. Labor: wages
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3.Capital: interest and dividends 4. Entrepreneur: profit
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12. What does the circular flow diagram depict?
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The circular flow model demonstrates how money moves through
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society. Money flows from producers to workers as wages and
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flows back to producers as payment for products. In short, an
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economy is an endless circular flow of money. |\ |\ |\ |\ |\ |\ |\




1. Why is the concept of scarcity so important in economics?
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Because the number of goods and services that can be produced
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with them can be limited and there will never be enough
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resources to meet everyone's needs. |\ |\ |\ |\




2. What does an individual's budget constraint identify?
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all the possible combinations that you can afford within their
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given income. |\

, 3. Identify two ways in which the budget constraint and the PPF
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are similar and two ways in which they are different.
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They are similar because they both assume resource and
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technology are fixed and they both use two goods to simplify
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assumptions. They are different because the budget constraint is |\ |\ |\ |\ |\ |\ |\ |\ |\


used by individuals and PPF is used by firms.
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7. What does the PPF look like when resources are
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homogeneous?
It is a straight line.
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8. How does an increase in labor productivity change the PPF?
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It moves to the right.
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9. Define the term Opportunity Cost.
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It is what is given up when making a decision.
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10. What causes increasing opportunity costs?
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Opportunity cost increases as production increases. |\ |\ |\ |\ |\