what is economics about? 1

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11What isEconomics About?

Multiple ChoiceSelect the alternative A, B, C or D that best answers the question. Write your answer in the box provided.

1 Assume that an economy produces only two goods – almond milk and rice milk. If this economy is producing on its production possibility frontier, which of the following is most likely to be true for that economy?

(A) There is an ineffi cient allocation of resources within the economy

(B) There are resources which are not being utilised within the economy

(C) Unemployment will rise if there is less production of almond milk, with no change in the production of rice milk

(D) It is possible to increase the production of both almond and rice milk, even if there is no increase in the availability of almonds or rice

2 What of the following is an example of reduced government intervention in an economy?

(A) Introducing a scheme for cigarettes to be sold in plain packages, without branding

(B) Lowering the tax rebate for private health insurance, from 30 per cent to 20 per cent

(C) Car manufacturers shutting down after a Government decision to abolish tariffs

(D) Increasing the minimum wage, to improve living standards in the economy

3 Which of the following is a major goal of businesses?

(A) To minimise business costs

(B) To maximise spending in the economy

(C) To minimise tax payments

(D) To maximise prices paid for raw materials

TME2013_wkbk_Ch1-3.indd 3 19/10/12 4:07 PM

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Chapter 1: What is Economics About?

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The Market Economy 5th Edition Workbook

4 What could have caused a movement in the production possibility frontier below?

Dancing lessons

Cooking classes

150

0 250200

(A) Fewer people qualifi ed as chefs

(B) Creation of cooking class booking websites, which increase capacity

(C) Rising unemployment amongst dance instructors

(D) Reduced supply of woks and frying pans in the economy

5 Question 5 relates to the information in the table below.

Episodes of Jersey Shore 90 60 30 0

Episodes of Farmer Wants a Wife 0 60 120 180

What is the opportunity cost of producing one episode of Farmer Wants a Wife?

(A) 5 episodes of Jersey Shore

(B) 0.5 episodes of Jersey Shore

(C) 2 episodes of Jersey Shore

(D) One season of Game of Thrones

6 Why are production possibility frontiers generally not straight lines?

(A) As production of one good increases, production becomes less effi cient which increases the opportunity cost of production

(B) As the production of one good increases, improved technology allows the economy to produce more of that good

(C) The opportunity cost is constant at all points on the production possibility frontier

(D) There is usually some level of unemployment in the economy

7 Which of the following best explains the economic principle of opportunity cost?

(A) An individual gives up the opportunity to study, because he/she does not enjoy it

(B) A new construction machine costs a business $5,000 to run their operations

(C) The government builds a new hospital, but there are not enough ill people in the country to fi ll all the beds

(D) An entrepreneur has to choose between setting up his/her own restaurant, or ecologically-friendly greenhouse


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8 The following diagram is for a hypothetical economy.What would cause the production possibility frontier to shift outward?

Developing smartphones

Producing laptops

150

100

50

0

200

40 80 120

250

160 200

(A) Reduced unemployment of IT engineers

(B) Increased government taxes on electronics and internet usage

(C) Increased government revenue from electronics and internet usage

(D) An improvement in technology for electronics manufacturing

9 Which of the following best describes collective wants?

(A) Benefi ts provided by the government to help the unemployed

(B) Goods and services demanded by a community

(C) Desires for the basic necessities needed for survival

(D) Desires of individuals to collect non-essential goods

10 Which of the following best describes the opportunity cost of the government building a new hospital?

(A) The $100 million spent on construction

(B) The cancelling of plans to build a new road because resources were allocated to hospital’s construction

(C) The increased noise pollution during construction of the hospital

(D) Better health care provided to society


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Use the diagram below to answer questions 11, 12 and 13 below.

Consumer goods

Capital goods0

A

B

11 What is happening in the economy shown in the diagram as it moves from point B to point A?

(A) Increased production of capital goods, reduced production of consumer goods

(B) Increased production of consumer goods, reduced production of capital goods

(C) Reduced production of both consumer goods and capital goods

(D) Increased production of both consumer goods and capital goods

12 What is the most likely consequence of the movement from point B to point A shown in the diagram?

(A) Inward shift of production possibility frontier in the long-term

(B) Inward shift of production possibility frontier in the short-term

(C) Outward shift of production possibility frontier in the long-term

(D) Rising unemployment in the short term

13 What is a possible cause of the movement from point B to point A shown in the diagram?

(A) Greater demand for consumer goods

(B) An improvement in technology for capital goods production

(C) Reduced immigration into the economy

(D) Increased taxes on consumer goods

14 Which of the following are best described as complementary goods?

(A) Fanta and Pepsi

(B) Smartphones and laptops

(C) Coffee and Red Bull

(D) Bed base and mattress

15 Which of the following is the cause of the economic problem?

(A) Our wants are limited, while resources are unlimited

(B) Our wants and resources are both unlimited

(C) Our wants are unlimited, while resources are limited

(D) Our wants and resources are both limited


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Short Answer QuestionsWrite your answer in the space provided.

Question 1 (10 marks)

“We are making vital new investments right across the health system and right across the country … This Budget delivers 76 new health infrastructure projects to upgrade regional hospitals and support training where doctors are needed most, costing $475 million. This is part of $5 billion from the Health and Hospitals Fund with new hospitals and clinics creating better services in regions where previously they had little coverage.”

Wayne Swan, Deputy Prime Minister of Australia Budget Speech 2012-13, 8 May 2012

(a) Identify TWO examples of government intervention in the economy. (2 marks)

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(b) Outline TWO factors which firms will consider in deciding their business operations. (2 marks)

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(c) Describe how a government may face opportunity costs and provide an example. (2 marks)

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(d) Explain how the choices of businesses infl uence how an economy produces goods (4 marks)and services.

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McDonald’s cheeseburgers (‘000s)

Subway sandwiches (’000s)

150

100

50

0

200

40 80 120 160 200

250

• A

(a) Calculate the opportunity cost of producing one Subway sandwich. (1 mark)

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(b) Describe the consequences of producing at point A in the diagram. (2 marks)

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(c) Explain how an economy will decide what combination of Subway sandwiches and McDonald’s cheeseburgers to produce. (2 marks)

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(d) Outline why an economy might see its production possibility frontier shift outwards. (2 marks)

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(e) Outline what would happen to the production possibility frontier if available cheese quantities fell sharply, and how this will affect the opportunity cost of cheeseburger production. (3 marks)

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Mining equipment 30 60 90 120

Macaroons 0 120 240 360

(a) Calculate the opportunity cost of producing one piece of mining equipment. (1 mark)

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(b) Using the data above, construct a production possibility frontier. Place macaroons on the horizontal axis. (2 marks)

(c) Describe the impact of technological advancements in the economy on the production possibility frontier. (2 marks)

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(d) Discuss the consequences of a shift from producing consumer goods to capital goods. (2 marks)

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(e) Explain how the production possibility frontier in part b differs from the production possibility frontier of a real economy, and the reasons for this. (3 marks)

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1 Identify the factors which businesses and individuals take into account in deciding what to produce and consume. Explain how government intervention can influence their decision-making.

2 Describe the four key economic questions and explain how the choices of individuals, businesses and governments can influence these economic issues.

3 Outline how the production possibility frontier can be used to demonstrate opportunity cost and examine the effects of unemployment and technological change on production in the economy.

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Economic TermsMatch the terms below to the correct definition and where possible, provide three examples of each term. If you want to make this activity more difficult, try to write in the term without looking at the list below.

■ Capital goods, ■ Collective wants, ■ Economic problem, ■ Needs, ■ Opportunity cost,

■ Production, ■ Recurrent wants, ■ Tax, ■ Unemployment, ■ Utility

Economic Term Definition Examples

Goodsandservicesrequiredto • satisfythebasicnecessitiesoflife • •

Asituationwhereresourcesintheir • economyarenotbeingusedtotheir • fullpotential •

Wantsthataregenerallyofbenefitto • thecommunityasawhole,notjust • toanindividualperson •

Howasocietyisabletosatisfyits • unlimitedwantswithalimitedquantity • ofresources •

Wantswhichmustbesatisfiedover • andoveragain • •

Theprocessbywhichfirmsuse • resourcestomakegoodsandservices • •

Awantwhichisforegoneinorderto • satisfyanotherwant • •

Acompulsorypaymentofmoney • whichthegovernmentimposesonfirms • orindividuals •

Thesatisfactionorpleasurean • individualreceivesfromconsuming • goodsandservices •

Goodswhichareusedinthe • productionprocesstoproducemore • goodsandservices •

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Below there are four common situations illustrated on production possibilities frontiers. Explain what is happening in the economy in each situation and give an example of what may have caused it.

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Commercial property (units)

Residential property (units)0

1.

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Solar panels (units)

Thermal coal (units)0

3.

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Electricity generation (units)

Transport services (units)0

• A

2.

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Public schools (buildings)

Public hospitals (buildings)0

A

B

4.

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