Test Questions with Answers
Chapter 2. The Subject of Economics I.
Scientific Status. Subjects. Subdivisions. Models
Chapter 2 ― Question 1
The statement "The number of obese people has declined over the last two years" is
- a normative statement
- a positive statement
- a negative statement
- an obviously wrong and hence irrelevant statement
*B. It is positive because it can be verified or falsified by compiling and comparing data.
Chapter 2 ― Question 2
The statement "Man is a selfish maximiser of utility" is
- testable
- normative
- wrong
- tautological
*D. It is obviously not normative. It is not testable either because it cannot be falsified. It applies to everybody in the world, which is why it is tautological. The most altruistic individual can be described as equating the pursuit of his self-interest with altruistic behaviour.
Chapter 2 ― Question 3
Explain
- why the PPF illustrates the notion of opportunity costs
- why an outward-bowed PPF illustrates diminishing returns
- why a linear PPF illustrates constant opportunity costs
- how the PPF illustrates growth.
*1) The PPF shows what you must give up on the x-axis to receive more on the y-axis and vice versa.
*2) The PPF is normally outward-bowed because of the law of diminishing returns. You must give up ever more on the x-axis and receive ever smaller increases on the y-axis and vice versa.
*3) If the PPF is linear, the number of units you give up on the x-axis equals the number of units you receive on the y-axis and vice versa.
*4) Growth is illustrated by a shift of the PPF to the right.
Chapter 2 ― Question 4
Which of the following developments is most likely to cause an inward shift of the PPF:
- a natural disaster
- a decline in capital
- competition from abroad
- an improved technology
*B. The quantity of resources devoted to the production of the two goods declines.
C is correct only if it leads to a decline in the resources devoted to the two goods.
A could be correct if the PPF illustrates a trade-off involving one or two agricultural commodities. D causes an outward shift.
Chapter 2 ― Question 5
If it is possible to increase the output of both butter and guns, which of the following statements about the economy is true
- the economy is inefficient and inside the PPF
- the economy is efficient and outside the PPF
- the economy is efficient and on the PPF
- the economy is inefficient and on the PPF
*A. Answers B and D are by definition impossible. Efficiency and being on the PPF are synonymous.
Chapter 2 ― Question 6
A PPF can illustrate the trade-off between leisure and grades. If you put leisure on the x-axis and grades on the y-axis, in how far does the PPF resemble the butter-gun PPF? Where is it different?
* The similarity is that you must sacrifice ever more leisure to improve your grades. This is so because your concentration declines as you increase hours of studying.
The difference is on the y-axis. While the distance between 3m and 4m pounds of butter is the same as the difference between 4m and 5m, the distances between grades are usually not identical. For an excellent grade, instructors want to see excellence. This makes the shape of the grade-leisure PPF different from the gun-butter PPF and is another reason why you must sacrifice ever more leisure to improve your grade.
Chapter 2― Question 7
Draw the circular-flow diagram with one flow for money and another one for commodities.
The inner set
of arrows
shows the
flow of money
The outer set
of arrows
shows the flow
of commodities
Chapter 2― Question 8
The circular-flow diagram ignores three important economic facts. Can you identify them?
*(1) It ignores that the economy is an open rather than a closed system. Exports leave the economy, imports enter it. (2) It ignores that there is a leakage in the flow of money. Some money is saved without being borrowed by firms for investment. Likewise, there can be an injection. Money can be borrowed from abroad. (3) It ignores the government which absorbs money from the flow of money and channels it back into the same flow (salaries for civil servants, welfare benefits and subsidies) or adds goods and services (roads and teachers) to the flow of goods.
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