Foundations: Scarcity, Opportunity Cost, and Choice — High School Economics practice questions

Entrepreneurs are important because they:

1. combine resources and take on risk
2. set prices for the whole economy
3. provide the natural resources
4. guarantee that businesses earn profits

Answer: A — combine resources and take on risk

A) Correct — They start businesses and bring new products to market. B) Markets set prices. C) Natural resources are land. D) Profits are never guaranteed.

Which topic belongs to macroeconomics?

1. The national unemployment rate
2. The price of one brand of sneakers
3. A family's budget decisions
4. How one firm sets its wages

Answer: A — The national unemployment rate

A) Correct — Macroeconomics studies the whole economy. B) Is microeconomics. C) Is microeconomics. D) Is microeconomics.

In a command economy:

1. prices are set by supply and demand
2. customs guide production
3. private firms own most resources
4. the government makes the major decisions

Answer: D — the government makes the major decisions

D) Correct — Planners decide what is produced and at what price. A) Describes a market economy. B) Describes a traditional economy. C) Resources are mostly state-owned.

In a market economy, the main decisions are made by:

1. a central government planning agency
2. tradition and custom
3. individuals and businesses through prices
4. a single ruler

Answer: C — individuals and businesses through prices

C) Correct — Supply and demand coordinate choices. A) Describes a command economy. B) Describes a traditional economy. D) Is not how market economies work.

Which would shift a country's PPF outward?

1. A new technology that raises productivity
2. A rise in unemployment
3. A shift from making cars to making wheat
4. A natural disaster that destroys factories

Answer: A — A new technology that raises productivity

A) Correct — More or better resources expand what can be produced. B) Moves production inside the curve. C) Is a movement along the curve. D) Shifts the curve inward.

You paid $20 for a nonrefundable concert ticket but now feel sick. When deciding whether to go, the $20 should:

1. not affect your decision
2. make you go so the money isn't wasted
3. be doubled to count lost enjoyment
4. be added to the cost of staying home

Answer: A — not affect your decision

A) Correct — It is a sunk cost: gone whether you go or not. B) Is the sunk-cost fallacy. C) Past costs do not change future benefits. D) The $20 is spent either way.

Opportunity cost is:

1. the combined value of all alternatives given up
2. the value of the next-best alternative given up
3. the money price of the item chosen
4. the cost of correcting a bad decision

Answer: B — the value of the next-best alternative given up

B) Correct — Every choice means giving something else up. A) Only the single best alternative counts. C) Ignores what else you could have done. D) Is not how opportunity cost is defined.

A city offers "free" bus rides. Economists say the rides are not truly free because:

1. riders must still buy tickets
2. resources have other uses
3. buses always lose money
4. free things have no value

Answer: B — resources have other uses

B) Correct — Taxes, fuel, and drivers' time all have opportunity costs. A) The rides are free to riders. C) Is not the point about cost. D) Free things can have great value.

Which statement is normative?

1. The minimum wage should be raised
2. The unemployment rate is 4%
3. Higher prices reduce quantity demanded
4. Gas prices rose 10% last year

Answer: A — The minimum wage should be raised

A) Correct — Normative statements say what ought to be. B) Is a positive, testable fact. C) Is a positive claim. D) Is a positive, testable fact.

A point inside a country's production possibilities frontier (PPF) shows:

1. the most efficient output
2. unemployed or wasted resources
3. output that cannot be reached
4. economic growth

Answer: B — unemployed or wasted resources

B) Correct — More of both goods could be made. A) Efficient points lie on the curve. C) Describes points outside the curve. D) Growth shifts the curve outward.

What is economics?

The study of how people, businesses, and governments allocate scarce resources to satisfy unlimited wants and needs.

What is a traditional economy?

An economic system based on customs, traditions, and beliefs (e.g., subsistence farming, hunter-gatherer).

What does the term 'ceteris paribus' mean?

'All else equal' — used to isolate the effect of one variable in economic analysis.

Worked example: You can spend Saturday either working a shift that pays $80 OR studying for an exam that you value at $50 of expected grade benefit. What is the opportunity cost of choosing to study?

Step 1 — Identify the two mutually exclusive choices: (a) work for $80, (b) study (value = $50). Step 2 — Opportunity cost = value of the next-best alternative GIVEN UP. Step 3 — If you choose to study, the alternative you give up is working, valued at $80. Step 4 — Therefore opportunity cost of studying = $80. Note: the $50 value of studying is the benefit you receive, not the opportunity cost. A rational decision compares benefit ($50) to opportunity cost ($80); here, working has the higher payoff unless you weigh non-monetary factors.