ECON 110: EXAM 1 QUESTIONS WITH
CORRECT ANSWERS 2026/2027
Circular Flow Diagram - CORRECT ANSWER -A visual model of the economy that shows how
dollars flow through markets among households and firms
Factors of Production - CORRECT ANSWER -land, labor, and capital; the three groups of
resources that are used to make all goods and services
Markets for goods and services - CORRECT ANSWER -Households are buyers (of the output firms
produce); Firms are sellers
Markets for factors of production - CORRECT ANSWER -households are sellers, and firms are
buyers
* Households provide the inputs that firms use to produce goods and services.
Firms - CORRECT ANSWER -* Produce and sell goods and services
* Hire and use factors of production
Households - CORRECT ANSWER -* Buy and consume goods and services
* Own and sell factors of production
Production possibilities frontier - CORRECT ANSWER -a graph that shows the combinations of
output that the economy can possibly produce given the available factors of production and the
available production technology
Opportunity Cost - CORRECT ANSWER -What you give up to get something
, Positive statement - CORRECT ANSWER -claims that attempt to describe the world as it is
* can be proven or refuted by observation of evidence
Normative statement - CORRECT ANSWER -Prescriptive; claims about how the world ought to
be
* Policy advisers use these
Macroeconomics - CORRECT ANSWER -The study of economy-wide phenomena, including
inflation, unemployment, and economic growth
Microeconomics - CORRECT ANSWER -the study of how households and firms make decisions
and how they interact in markets
Absolute advantage - CORRECT ANSWER -the ability to produce a good using fewer inputs
(resources) than another producer
Comparative Advantage - CORRECT ANSWER -the ability to produce a good at a lower
opportunity cost than another producer
* reflects the RELATIVE opportunity cost
Price of trade (general rule) - CORRECT ANSWER -For both parties to gain from trade, the price
at which they trade must lie between the two opportunity costs
Budget constraint - CORRECT ANSWER -The limit on the consumption bundles that a consumer
can afford
Indifference Curve - CORRECT ANSWER -A curve that shows consumption bundles that give the
consumer the same level of satisfaction
CORRECT ANSWERS 2026/2027
Circular Flow Diagram - CORRECT ANSWER -A visual model of the economy that shows how
dollars flow through markets among households and firms
Factors of Production - CORRECT ANSWER -land, labor, and capital; the three groups of
resources that are used to make all goods and services
Markets for goods and services - CORRECT ANSWER -Households are buyers (of the output firms
produce); Firms are sellers
Markets for factors of production - CORRECT ANSWER -households are sellers, and firms are
buyers
* Households provide the inputs that firms use to produce goods and services.
Firms - CORRECT ANSWER -* Produce and sell goods and services
* Hire and use factors of production
Households - CORRECT ANSWER -* Buy and consume goods and services
* Own and sell factors of production
Production possibilities frontier - CORRECT ANSWER -a graph that shows the combinations of
output that the economy can possibly produce given the available factors of production and the
available production technology
Opportunity Cost - CORRECT ANSWER -What you give up to get something
, Positive statement - CORRECT ANSWER -claims that attempt to describe the world as it is
* can be proven or refuted by observation of evidence
Normative statement - CORRECT ANSWER -Prescriptive; claims about how the world ought to
be
* Policy advisers use these
Macroeconomics - CORRECT ANSWER -The study of economy-wide phenomena, including
inflation, unemployment, and economic growth
Microeconomics - CORRECT ANSWER -the study of how households and firms make decisions
and how they interact in markets
Absolute advantage - CORRECT ANSWER -the ability to produce a good using fewer inputs
(resources) than another producer
Comparative Advantage - CORRECT ANSWER -the ability to produce a good at a lower
opportunity cost than another producer
* reflects the RELATIVE opportunity cost
Price of trade (general rule) - CORRECT ANSWER -For both parties to gain from trade, the price
at which they trade must lie between the two opportunity costs
Budget constraint - CORRECT ANSWER -The limit on the consumption bundles that a consumer
can afford
Indifference Curve - CORRECT ANSWER -A curve that shows consumption bundles that give the
consumer the same level of satisfaction
