Opportunity Cost & PPF

What assumption is made when constructing a PPF?

• Resources are limited and fully utilised

• Resources are unlimited

• Consumer preferences are constant

• Market prices are fixed

Answer explanation

The correct assumption when constructing a PPF is that resources are limited and fully utilized. This means that the economy is operating at maximum efficiency, using all available resources to produce goods.

What does the slope of the PPF represent?

• Opportunity cost

• Market demand

• Consumer preferences

• Supply chain efficiency

Answer explanation

The slope of the Production Possibility Frontier (PPF) represents the opportunity cost of producing one good over another. It indicates how much of one good must be sacrificed to produce more of the other good.

How is opportunity cost illustrated?

• By the slope of the PPF

• By the height of a demand curve

• By the width of a supply curve

• By the area under a cost curve

Answer explanation

Opportunity cost is illustrated by the slope of the Production Possibility Frontier (PPF), which shows the trade-off between two goods. A steeper slope indicates a higher opportunity cost for producing one good over another.

What does "opportunity cost" refer to?

• The total cost of all alternatives

• The value or benefits of the next best alternative foregone

• The monetary cost of a decision

• The time spent on making a decision

Answer explanation

Opportunity cost refers to the value or benefits of the next best alternative foregone when making a decision. It highlights what is sacrificed in choosing one option over another.

Which of the following is NOT an example of opportunity cost?

• Choosing to study instead of going to a movie

• Buying a book instead of a magazine

• Spending time with friends instead of working

• Eating both a burger and a milkshake

Answer explanation

Eating both a burger and a milkshake does not involve a trade-off, as you can consume both. Opportunity cost arises when you must choose one option over another, which is not the case here.

Which scenario best illustrates opportunity cost?

• Buying a car with a loan

• Choosing between two job offers

• Saving money in a bank account

• Investing in the stock market

Answer explanation

Choosing between two job offers best illustrates opportunity cost, as it involves weighing the benefits of one job against the other, highlighting what you give up when selecting one option over another.

What is the opportunity cost of choosing to travel instead of saving money?

• The experiences gained from travelling

• The money saved for future use

• The time spent planning the trip

• The cost of travel insurance

Answer explanation

The opportunity cost of traveling is the money you could have saved for future use. By choosing to travel, you forgo the chance to accumulate savings, which represents a significant trade-off.

How does opportunity cost relate to scarcity?

• Opportunity cost arises because resources are scarce

• Opportunity cost is irrelevant to scarcity

• Scarcity eliminates opportunity cost

• Scarcity increases the availability of resources

Answer explanation

Opportunity cost is the value of the next best alternative forgone when a choice is made. It arises from scarcity, as limited resources force individuals to make choices, leading to opportunity costs.

What does a point inside the PPF indicate?

• Overutilisation of resources

• Underutilisation of resources

• Efficient use of resources

• Optimal production

Answer explanation

A point inside the PPF indicates that resources are not being used to their full potential, leading to underutilisation. This means that more output could be produced without increasing resource input.

What does a point on the PPF curve represent?

• Overutilisation of resources

• Scarcity of resources

• Underutilisation of resources

• Efficient use of resources

Answer explanation

A point on the PPF curve indicates efficient use of resources, meaning that the economy is producing at its maximum potential without wasting any resources.