Solution Manual for
Foundations of Business 7e William M. Pride;
Chapter 1-47
Chapter 1
End of Chapter Questions
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Quiz Yourself
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1. Scarcity implies that the allocation decision chosen by society can
a) not make more of any one good.
b) always make more of any good.
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c) typically make more of one good but at the expense of making less of
another.
d) always make more of all goods simultaneously.
Explanation: Scarcity implies that choices involve trade-offs.
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AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 02 Medium
Gradeable: automatic
D
Learning Objective: 01-01
Topic: Economics and Opportunity Cost
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2. A production possibilities frontier is a simple model of
a) allocating scarce inputs to the production of alternative outputs.
a) price and production/consumption in a market.
b) the cost of producing goods.
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c) the number of inputs required to produce varying levels of output.
Explanation: The production possibilities frontier shows the quantity of two goods that
can be produced. It implies that scarcity requires that choices be made as to how to use
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resources.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 02 Medium
Gradeable: automatic
Learning Objective: 01-01
Topic: Modeling Opportunity Cost Using the Production Possibilities Frontier
,3. The underlying reason that there are unattainable points on a production possibilities
frontier is that there
a. is government.
b. are always choices that must be made.
c. are scarce resources within a fixed level of technology.
d. is unemployment of resources.
Explanation: The points outside the production possibilities frontier are unattainable. This
means that currently available resources and technology are insufficient to produce
amounts greater than those illustrated on the frontier. On a graph, everything beyond the
frontier is unattainable.
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AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
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Difficulty: 01 Easy
Gradeable: automatic
Learning Objective: 01-01
Topic: Modeling Opportunity Cost Using the Production Possibilities Frontier
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4. The underlying reason production possibilities frontiers are likely to be bowed out
(rather than linear) is because
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a. choices have consequences.
b. there are always opportunity costs.
c. some resources and people can be better used producing one good rather
than another.
d. there is always some level of unemployment.
Explanation: If the production possibilities frontier is not a line but is bowed out away
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from the origin, then opportunity cost is increasing. The reason for this is that as we add
more resources to the production of, for example, pizza, we are using fewer resources to
produce soda. Compounding that problem, at each stage as we take the resources away
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from soda and put them into pizza, we are moving workers who are worse at pizza
production and better at soda production than those moved in the previous stage. This
means that the increase in pizza production is diminishing and the loss in soda production
is increasing. An economist would call this an example of increasing opportunity cost. If
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the production possibilities frontier is a straight line that is not bowed out away from the
origin, then opportunity cost is constant.
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AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 01 Easy
Gradeable: automatic
Learning Objective: 01-02
Topic: Attributes of the Production Possibilities Frontier
,5. Suppose you were modeling the impact of the introduction of computer automation
into manufacturing on a production possibilities frontier (PPF) with two manufactured
goods on their respective axes. It would be more likely that the result would be ______.
a) generalized growth with the PPF moving both up and to the right.
b) specialized growth with the PPF moving both up and to the right.
c) generalized growth with the PPF just moving up and not to the right.
d) specialized growth with the PPF just moving up and not to the right.
Explanation: Computer automation is a general improvement in technology so it would
improve all manufacturing. As a result, it would result in generalized growth and move
the PPF both up and to the right.
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AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Remember
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Difficulty: 01 Easy
Gradeable: automatic
Learning Objective: 01-03
Topic: Economic Growth
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6. The optimization assumption suggests that people make
a. irrational decisions.
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b. unpredictable decisions.
c. decisions to make themselves as well off as possible.
d. decisions without thinking very hard.
Explanation: The optimization assumption suggests that the person in question is trying
to maximize some objective. Consumers are assumed to be making decisions that
maximize their happiness subject to a scarce amount of money.
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AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
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Difficulty: 01 Easy
Gradeable: automatic
Learning Objective: 01-01
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Topic: Thinking Economically
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, 7. Imagine an economist ordering donuts one-by-one. When deciding how many donuts
to order they would pick that number where the enjoyment of the _____ equals the
enjoyment they could get from using the money on another good.
a. first donut
b. last/marginal donut
c. average/typical donut
d. total number of donuts
Explanation: The enjoyment of the last slice is the marginal benefit of that slice. If this
enjoyment is more than the enjoyment from some alternative, more will be consumed.
AACSB: Reflective Thinking
N
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 02 Medium
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Gradeable: automatic
Learning Objective: 01-04
Topic: Thinking Economically
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8. Of course, all individual students are better off if they earn better grades. If you were
to conclude that all students would be better off if everyone received an A, you would
a. have fallen victim to the fallacy of scarcity.
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b. be right.
c. have fallen victim to the fallacy of composition.
d. be mistaking correlation with causation.
Explanation: The fallacy of composition is the mistake in logic that suggests that the total
economic impact of something is always and simply equal to the sum of the individual
parts.
D
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
O
Difficulty: 02 Medium
Gradeable: automatic
Learning Objective: 01-04
C
Topic: Thinking Economically
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