Basic Economic Concepts worksheet
The answer key prints on its own page, so hand out everything before it.
Basic Economic Concepts: practice worksheet
1. Which of the following best describes the fundamental economic problem?
- (A) Poverty prevents people from buying what they need
- (B) Resources are scarce relative to unlimited wants
- (C) Governments fail to distribute goods fairly
- (D) Markets do not always reach equilibrium
2. You skip a $12/hour work shift to study for your economics exam. Your roommate offers you a free concert ticket (worth $20 to you) for the same time slot, but you decline. What is your opportunity cost of studying?
- (A) $12 (the wages you gave up)
- (B) $20 (the concert you gave up)
- (C) $32 (wages plus the concert)
- (D) $0 (studying is an investment, not a cost)
3. A point inside the production possibilities curve represents:
- (A) An efficient allocation of resources
- (B) An unattainable combination of goods
- (C) An attainable but inefficient use of resources
- (D) Economic growth
4. The production possibilities curve bows outward because of:
- (A) Constant opportunity costs across all production levels
- (B) Decreasing opportunity costs as more of a good is produced
- (C) Increasing opportunity costs as more of a good is produced
- (D) Economies of scale in production
5. Country X can produce 200 tons of rice or 100 tons of cloth. Country Y can produce 150 tons of rice or 150 tons of cloth. Which country has a comparative advantage in cloth?
- (A) Country X, because it can produce more rice
- (B) Country Y, because its opportunity cost of cloth is lower
- (C) Country X, because it has higher total production capacity
- (D) Neither, because they have equal opportunity costs
6. Which of the following would shift the PPC outward?
- (A) A decrease in unemployment from 8% to 4%
- (B) A shift in production from consumer goods to capital goods
- (C) A technological improvement that increases productivity
- (D) Moving from a point inside the PPC to a point on the PPC
7. If two countries each specialize according to comparative advantage and then trade, which of the following is true?
- (A) Only the less productive country benefits from trade
- (B) Both countries can consume beyond their individual PPCs
- (C) The country with absolute advantage in both goods does not benefit
- (D) Total world production of both goods decreases
8. A straight-line PPC implies which of the following about opportunity costs?
- (A) Opportunity costs increase as more of a good is produced
- (B) Opportunity costs decrease as more of a good is produced
- (C) Opportunity costs are constant regardless of the production mix
- (D) There are no opportunity costs because resources are unlimited
9. Country A can produce 80 units of food or 40 units of clothing. Country B can produce 30 units of food or 30 units of clothing. Country A has:
- (A) Absolute advantage in both goods and comparative advantage in both goods
- (B) Absolute advantage in both goods and comparative advantage in food
- (C) Absolute advantage in food only and comparative advantage in clothing
- (D) Absolute advantage in both goods and comparative advantage in clothing
10. An economy produces only two goods: tractors and wheat. Currently it produces 10 tractors and 200 tons of wheat. If it increases tractor production to 12, it must reduce wheat output to 150 tons. The opportunity cost of the 11th and 12th tractors combined is:
- (A) 25 tons of wheat per tractor
- (B) 50 tons of wheat total
- (C) 150 tons of wheat total
- (D) 200 tons of wheat total
Basic Economic Concepts: answer key
1. (B) Scarcity, meaning limited resources set against unlimited wants, is the foundational reason economics exists as a discipline. Every allocation decision involves a tradeoff because of it. Option A conflates scarcity with poverty; even Rockefeller in the 1890s faced scarcity of time and political capital. Option C identifies a distribution problem, and Option D identifies market failure. Both are real, but neither is THE fundamental economic problem that drives the entire field.
2. (B) The concert ($20) beats the shift ($12), making it the next-best alternative. Opportunity cost = $20. Option C adds both forgone options together, which is a classic error on AP exams, since opportunity cost only counts the single best alternative not taken. Option A picks the inferior alternative. Option D is wishful thinking; studying absolutely carries an opportunity cost.
3. (C) Inside the curve means reachable but wasteful. Think of the U.S. economy during the Great Depression, when a quarter of the workforce sat idle. The country could have produced more of both goods simply by employing those workers. Option A describes points ON the curve. Option B describes points OUTSIDE the curve. Option D confuses a location on the graph with a shift of the graph itself.
4. (C) Resources are specialized. Farmland makes a poor factory floor, and machinists make poor farmers. As production of one good expands, the economy must pull in resources increasingly ill-suited to making it, so each additional unit costs more of the other good. That increasing opportunity cost creates the bowed-out shape. Option A would produce a straight line. Option B would produce an inward-bowing curve, which is not the standard shape. Option D describes a firm-level cost phenomenon unrelated to the PPC's geometry.
5. (B) Country X gives up 2 tons of rice per ton of cloth (200/100). Country Y gives up 1 ton of rice per ton of cloth (150/150). Since 1 < 2, Country Y sacrifices less rice and holds the comparative advantage in cloth. Option A confuses absolute advantage in rice with comparative advantage in cloth, which are two entirely different concepts, as Ricardo showed in 1817. Option C makes the same error using total output. Option D is arithmetically wrong.
6. (C) New technology raises the ceiling on what the economy can produce, pushing the entire frontier outward, similar to how transistor technology expanded American productive capacity in the 1950s and 1960s. Option A is the trap: cutting unemployment moves the economy from a point inside the PPC toward the existing curve, but the curve itself stays put. The PPC represents maximum potential, and reducing unemployment means approaching that potential, not raising it. Option B changes the production mix (movement along the curve). Option D restates Option A in different words.
7. (B) Specialization based on comparative advantage raises total world output. Both countries trade and end up consuming combinations beyond their own individual PPCs, something neither could reach alone. This was the core of Ricardo's 1817 argument, and it holds up two centuries later. Option A gets it half right but misses that the more productive country also gains. Option C is a widespread misconception; even a country better at everything still benefits. Option D is the opposite of what happens.
8. (C) Straight line means constant slope, meaning the tradeoff ratio never changes. Produce the 1st unit of X or the 100th, and you surrender the same amount of Y each time. That scenario only arises when every resource is equally suited to producing both goods. Option A describes a bowed-out (concave) PPC. Option B would produce an inward-bowing curve. Option D is nonsensical because the slope itself IS the opportunity cost, and it exists at every point.
9. (B) Country A produces more of both goods (80 > 30 food, 40 > 30 clothing), so it holds absolute advantage in both. For comparative advantage: Country A's cost of 1 food = 40/80 = 0.5 clothing; Country B's cost of 1 food = 30/30 = 1 clothing. Since 0.5 < 1, Country A has comparative advantage in food. Country B has comparative advantage in clothing (1 food per clothing vs. 2 for A). Option A is impossible because no country can hold comparative advantage in both goods, since comparative advantage is inherently relative. Option C is wrong because Country A's clothing output (40) exceeds Country B's (30). Option D reverses the comparative advantage calculation.
10. (B) Wheat drops from 200 to 150 tons when tractor production rises from 10 to 12. That is a loss of 50 tons for 2 additional tractors, so 50 tons combined. Option A gives the per-unit cost (25 tons each), not the combined figure the question asks for. Option C confuses the remaining wheat output with the wheat sacrificed. Option D uses the original wheat level rather than the amount forgone.