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Exam (elaborations) ECS 1501 (ecs)
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ECS1501 TEST BANKQuestion 1
As an economic concept, scarcity applies to
[1] neither the poor nor the rich.
[2] the poor but not the rich.
[3] the rich but not the poor.
[4] both the poor and the rich. THE CORRECT OPTION IS 4
Explanation
Scarcity is an economic concept that applies to all individuals rich or poor and to all countries
regardless of level of development. Generally resources accessible to individuals and other
economic agents are limited and insufficient to meet the agents‟ unlimited desires. No
individual has enough resources to do everything that he/she desires and because of that
we say resources are scarce. Scarcity must not be confused with poverty; it affects
everyone, rich or poor.
Question 2
Due to scarcity of resource,
[1] the government must decide how to allocate available resources.
[2] some members of the society must live in poverty.
[3] every society must choose among competing uses of available resources. THE
CORRECT OPTION IS 3.
[4] every society must undertake central planning.
Explanation
Due to scarcity of resources, economic agents or society must choose amongst competing
uses of available resources. Given that factors of production required to produce all goods
and services desired by the society are limited, society has to decide on the best way of
allocating these limited resources. It has to choose which goods and services should be
produced and which needs or wants should be left unsatisfied. The issue of making choices
in the context of scarcity is something that is done by everyone, not only the government. All
individuals confronted with the problem of scarce resources should make choices.
Question 3
Microeconomics focuses on all of the following EXCEPT the
[1] purchasing decisions made by an individual consumer.
[2] relationship between inflation and unemployment rates. THE CORRECT OPTION IS 2.
[3] employment decision made by a business.
[4] decision by a firm to expand its output due to an increase in demand.
Explanation
In microeconomics the focus is on individual parts of the economy i.e. the behaviour of
consumers, firms, etc. Microeconomics studies the price of an individual commodity, the
number of people employed in a particular firm or industry, the output produced by firms in a
particular sector or industry etc. Microeconomics deals with disaggregated data or individual
components of the economy. Inflation and unemployment are macroeconomic issues
because they relate to the economy as a whole. Thus macroeconomics is the study of broad
economic aggregates like inflation, employment, GDP, etc.
Question 4
Macroeconomics focuses on all of the following EXCEPT
[1] the measurement of a nation‟s inflation rate.
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,[2] how producers and consumers interact in individual markets. THE CORRECT OPTION
IS 2.
[3] how tax policies influence economic growth.
[4] the total output of the economy.
Explanation
Macroeconomics is concerned with the economy as a whole. It is a study of broad economic
aggregates like inflation, economic growth, government tax policies, total output etc. The
interaction of producers and consumers in individual markets relates to microeconomics. In
this case we are studying individual components of the economy, not the whole economy
and that is why we only look at individual markets.
Question 5
Which one of the following is a positive economic statement?
[1] Government should not redistribute income.
[2] Businesses ought to contribute more to charities.
[3] Households are the primary source of saving. THE CORRECT OPTION IS 3.
[4] The foreign sector should be more tightly controlled.
Explanation
A positive economic statement is an objective statement of fact that can also be proven by
referring to factual information. Positive statements are usually not characterised by phrases
like “should”, “ought to” etc. Normative statements are value laden or subjective statements
that reflect individual opinion and cannot be verified by referring to facts. Thus the statement
that households are the primary source of saving can be proven by looking at the savings
pattern in the country. There are statistics gathered by Statistics SA on the savings pattern
of businesses, individuals and government in the country. We can use these statistics to see
whether a large percentage of national savings is done by households (individuals) or not.
Question 6
“Senior citizens deserve an income that will allow them to live in comfort for the remaining
years.”
This is
[1] neither a normative nor a positive statement.
[2] both a positive and a normative statement.
[3] a positive statement.
[4] a normative statement. THE CORRECT OPTION IS 4.
Explanation
“Senior citizens deserve an income that will allow them to live in comfort for their remaining
years” is a normative statement because it reflects an individual‟s opinion and it is difficult to
prove the validity of this statement. For example, it is difficult to explicitly and objectively
define the meaning of the word “comfort”. Being “comfortable” varies from individual to
individual and therefore makes this statement normative in nature.
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,Question 7, 8 and 9 are based on the following production possibilities.
Table 1
Point Production of grain (tons) Production of LCD
televisions (units)
A 0 420
B 10 400
C 20 360
D 30 300
E 40 200
F 50 0
Question 7
Which of the following combinations is unattainable?
[1] 18 tons of grain and 360 LCD televisions
[2] 40 tons of grain and 200 LCD televisions
[3] 32 tons of grain and 300 LCD televisions THE CORRECT OPTION IS 3.
[4] 10 tons of grain and 390 LCD televisions
Explanation
A production possibility curve shows all the maximum combinations of two goods that can be
produced by efficiently utilising all available resources.
Option 1 is attainable It is possible to produce 18 tonnes of grain and 360 LCDs, even
though production would be inefficient. If we are producing 360 LCDs, we need to also
produce a maximum of 20 tonnes of grain if resources are used efficiently.
Option 2 is attainable 40 tonnes of grain and 200 LCDs is an attainable combination, as it
lies on the production possibility curve, and is also an efficient point because resources are
fully utilised in this case.
Option 3 is unattainable The combination of 32 tonnes of maize (grain) and 300 LCDs is
not attainable. If we are producing 300 LCDs, we can only produce a maximum of 30 tonnes
of grain.
Option [4] is attainable If we are producing 10 tonnes of grain, we can also produce a
maximum of 400 LCDs. Thus, producing 390 LCDs means we are not fully utilising our
resources - this is inefficient production and this point lies inside the production possibility
curve.
Therefore only option 3 is correct.
Question 8
Production is inefficient if this economy produces
[1] 18 tons of grain and 360 LCD televisions. THE CORRECT OPTION IS 1.
[2] 40 tons of grain and 200 LCD televisions.
[3] 32 tons of grain and 300 LCD televisions.
[4] 10 tons of grain and 400 LCD televisions.
Explanation
Production is inefficient if this economy produces inside its production possibility curve or
boundary. Thus 18 tonnes of grain and 360 LCDs represents a point that lies inside the
PPC. If the economy is utilising its resources efficiently, the maximum amount of grain that
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, can be produced when 360 LCDs are produced is 20 tonnes, not 18 tonnes. As explained
above, option 3 represents an unattainable, not inefficient, production combination.
Question 9
What is the opportunity cost of increasing the production of grain from 20 to 40 tons of grain?
[1] 80 LCD televisions
[2] 100 LCD televisions
[3] 120 LCD televisions
[4] 160 LCD televisions THE CORRECT OPTION IS 4.
Explanation
The opportunity cost of increasing the production of grain from 20 to 40 tonnes is the number
of LCDs foregone (sacrificed to free up resources for the additional grain production). Thus
20 tonnes of grain are associated with 360 LCDs and 40 tonnes of grain are also associated
with 200 LCDs. Increasing grain production from 20 to 40 tonnes results in the production of
LCDs falling from 360 to 200. Therefore the opportunity cost is 360-200 = 160 LCDs.
Question 10
Which of the following options is NOT correct?
[1] Consumer goods can be classified as non-durable, durable and semi-durable goods.
[2] Intermediate goods are goods that are purchased to be used as inputs in producing other
goods.
[3] Private good is characterised by non-excludability. THE CORRECT OPTION IS 3.
[4] The value of capital goods depreciates over time.
Explanation
A private good is characterised by excludability in consumption, which means that
individuals who are not willing to pay to consume the good have no access to the good.
Goods that are non-excludable in nature are called public goods. It is impossible to exclude
those people who are not willing to pay from the consumption of public goods. Once street
lights have been erected, whether an individual has paid for it or not, he/she is still able to
„consume‟ the light. This is a case of non-excludability.
Question 11
When a textile company keeps track of its inventory using a computer, while its competitor
uses a spread sheet and pencil, they are both answering the ______________ question.
[1] “what”
[2] “how” THE CORRECT OPTION IS 2.
[3] “for whom”
[4] “where”
Explanation
Keeping track of inventory using a computer or using a spread sheet and pencil are all input
issues related to the method of production. Thus they relate to the “how to produce” aspect
of economic questions.
Question 12
When firms in an economy start producing more computers and fewer televisions, they are
answering the _______ question.
[1] “what” THE CORRECT OPTION IS 1.
[2] “how”
[3] “for whom”
[4] “where”
Explanation
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