Economic Models and Production Possibility Frontiers

Fundamentals of Economic Modeling

1. When building a model, economists:

A) Simplify reality to highlight what really matters.

2. The models used in economics:

D) Emphasize basic relationships by abstracting from complexities in the everyday world.

The Impact of Economic Models

3. The financial meltdown of 2008–2009:

D) Resulted partially from a faulty economic model.

The Production Possibility Frontier (PPF)

4. The production possibility frontier illustrates that:

C) If all resources of an economy are being used efficiently, more of one good can be produced only if less of another good is produced.

Analyzing Production Possibilities Schedule I

5. (Table: Production Possibilities Schedule I) Look at the table Production Possibilities Schedule I. If the economy produces 10 units of capital goods per period, it also can produce at most ____ units of consumer goods per period.

Answer: B) 4

6. (Table: Production Possibilities Schedule I) Look at the table Production Possibilities Schedule I. If the economy produces two units of consumer goods per period, it also can produce at most ____ units of capital goods per period.

Answer: C) 24

7. (Table: Production Possibilities Schedule I) Look at the table Production Possibilities Schedule I. The opportunity cost of producing the fourth unit of consumer goods is ____ units of capital goods.

Answer: D) 8

Visualizing Efficiency: Guns and Butter

8. (Figure: Guns and Butter) Look at the figure Guns and Butter. On this figure, points A, B, E, and F:

A) Indicate combinations of guns and butter that society can produce using all of its factors efficiently.

Opportunity Cost and PPF Slope

9. If an economy has to sacrifice only one unit of good X for each unit of good Y produced throughout the relevant range, then its production possibility frontier has:

B) A constant negative slope.

10. (Figure: Guns and Butter) Look at the figure Guns and Butter. This production possibility frontier is:

A) Bowed out because of increasing opportunity costs.

11. A production possibility frontier that is a straight line sloping down from left to right suggests that:

C) The opportunity costs of the products are constant.

Analyzing Production Possibilities Schedule II

12. (Table: Production Possibilities Schedule II) Look at the table Production Possibilities Schedule II. If the economy is producing at alternative X, the opportunity cost of producing at Y instead of X is ____ units of consumer goods per period.

Answer: B) 6

13. (Table: Production Possibilities Schedule II) Look at the table Production Possibilities Schedule II. If an economy is producing at alternative W, the opportunity cost of producing at X is ____ unit(s) of consumer goods per period.

Answer: C) 4

Efficiency and Resource Allocation

14. If an economy is producing a level of output that is on its production possibility frontier, the economy has:

D) No idle resources and is using resources efficiently.

15. Suppose Oklahoma decides to produce only two goods: oil and football helmets.

If Oklahoma is producing on its production possibility frontier, as oil production increases, the production of football helmets will:

Answer: D) Decrease.