1. The correct answer is (A). Economics is defined as the study of scarcity, the situation in which resources are limited and wants are unlimited.
2. The correct answer is (D). It is true that scarcity causes producers (and other people) to make choices. Producers must choose what to produce with limited resources. It is also true that the choices a producer makes when faced with scarcity come with trade-offs. There are advantages and disadvantages to different production decisions. And, finally, calculating the opportunity cost of a choice provides a manner with which to measure the consequence of a choice and compare that against the consequence of other choices.
3. The correct answer is (E). The opportunity cost of a producer’s choice to produce one good is the loss of the ability to use the same resources to produce another good.
4. The correct answer is (D). Miguel has a comparative advantage in writing text because he can create 10 pages of text for an opportunity cost of only 1 graphic for a ratio of 10-1, whereas Huan creates 20 pages of text at an opportunity cost of 3 graphics for a ratio of 20-3 or 10-1.5. Miguel’s opportunity cost of 1 graphic per 10 pages of text is less than Huan’s opportunity cost of 1.5 graphics per 10 pages of text.
5. The correct answer is (C). The marginal cost of each pizza is the cost to make that one additional pizza. In this case, the sixth pizza adds only $4 to the total cost, the lowest of all production levels given.
6. The correct answer is (C). The production possibilities frontier, or PPF, represents all the possible production combinations of two goods, not all goods. Points inside the frontier are inefficient because they do not fully utilize all available resources. Points on the frontier are efficient because they maximize the usage of all available resources. Points beyond the frontier are unattainable because they offer combinations of goods that are unavailable due to resource and production limitations.
7. The correct answer is (D). An economic system must decide what goods and services are produced, how they are produced, and who gets them. The economic system will not set supply or demand.
8. The correct answer is (C). Because the PPF shows all the combinations of goods that can be produced with a given set of resources, it is bowed, signifying that some combinations of the two goods have different opportunity costs.
9. The correct answer is (B). A basic element of Adam Smith’s thought is that, since economies have access to limited resources with which to produce services, they should specialize in producing those goods and services they can produce most efficiently.
10. The correct answer is (D). When making an economic decision, the opportunity cost is the lost opportunity to do the next best alternative. Therefore, options (A) and (C) are incorrect because they define the opportunity cost as the lost option to do two other things. Option (B) is incorrect because giving money to charity has an opportunity cost just like spending money does. Option (D) is correct because it says the opportunity cost is either purchasing music or donating to charity – whichever is preferred would be correct but from the question we do not know which is preferred so “or” is appropriate.