ECS1501 TESTS BANK exam prep

ECS1501 TEST BANK Question 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 2 / / 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. [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 3 / / 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. 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.