Download Solutions to Chapter 1

Solutions to Chapter 1 True or False
Question
1. Scarcity of resources means that available resources are insufficient to satisfy all
True/False
TRUE
wants and needs.
2. Wants are satisfied by the production of goods and services.
TRUE
3. A good which can produce further goods or services is a capital good.
TRUE
4. The economic problem has been solved in developed economies.
FALSE
5. Positive economics describes “what ought to be”.
FALSE
6. Production is the conversion of inputs into outputs.
TRUE
7. Opportunity cost measures the next best use of an available resource.
TRUE
8. In a command economy the means of production are privately owned.
FALSE
9. The good feeling we get out of doing something for somebody else is not an
FALSE
incentive to do it.
10. Economic assumptions are always realistic.
FALSE
11. Economics is the study of the allocation of scarce resources.
TRUE
12. Australia uses a market economic system.
FALSE
Solutions to Chapter 1 Review Questions
1.
( a ) Who will produce.
2.
( d ) Normative economics.
3.
( c ) Positive economics.
4.
( c ) Mixed economy.
5.
1. Scarce resource
something that is limited and can be used up
2. Opportunity cost
the trade off when one alternative is chosen over another
3. Mixed economy
An economy that takes advantage of the benefits of both
free trade and some government intervention
4. Free market economy
An economy where there is minimal government
intervention or regulation
5. Positive economics
6.
When economists state a fact
Economics is the study of the allocation of scarce resources among unlimited wants.
It is also a study of human behaviour, that is, how people choose to allocate these
scarce resources to maximise satisfaction and minimise opportunity cost.
7.
A resource is anything that can be consumed that is limited in nature. Resources are
limited because they can be used up, that is, they are finite. Resources are also
known as factors of production. Examples include water, oil and iron ore.
8.
Bill will not be completely satisfied with either purchase because by purchasing one
of the two goods he is giving up consuming the other good. Therefore, either way,
Bill will have an unsatisfied want.
9.
What to produce? – This involves deciding which goods and services will satisfy the
most wants.
How much to produce? - What relative amounts of each good and service produced
will satisfy the most wants?
How to produce? – What is the most efficient way of using the factors of production
to produce these goods and services?
Who consumes? – This affects how total production is distributed amongst the
members of society.
10.
(a)
(b)
(c)
The trade-off the Government is facing is between building the rail line and
the national broadband network. The government cannot produce both with
the same resources.
The opportunity cost of the National Broadband Network (NBN) is the next
best alternative, in this case building the new rail line.
The opportunity cost of the new rail link is the next best alternative choice, in
this case it is building the National Broadband Network.
11.
The unemployment rate in Australia is expected to reach 5%
The clearance in the Sydney property market is 68%
The RBA cash rate of 3.75% is too high and must be raised
The spot copper price is too high and is set for a correction
People respond to incentives
Australians do not eat enough fruit
Positive
Positive
Normative
Normative
Positive
Normative
12.
(a)
(b)
(c)
The parking ticket (fine) if you are caught not putting money in the meter.
The good feeling you get from providing the community with the service.
Higher income.
13.
The production possibility frontier is a graph that shows the set of all feasible
production combinations of producing two alternate goods. This includes the highest
possible amount of production possible which is the outer edge of the frontier. It is a
good example of the trade-off that an economy faces because on the edge of the
frontier an increase in the production of one good can only be achieved by reducing
the production of another good.
14.
Households provide the factors of production; land, labour and capital, to firms in
the circular flow of funds. The factors of production are bought and sold in the factor
market.
15.
A command economy in one where a central authority of government controls every
aspect of the economy. Cuba and North Korea are two examples of current
economies that still have some elements of command economies. In these countries
the government plans levels of production and owns most industries.
16.
A mixed economy is one that contains elements of a free market economy but also
has some government intervention. Australia and New Zealand are two examples of
mixed economies as they both have free market elements and some government
intervention such as taxes, and public goods such as hospitals, parks, roads etc.