Introduction to economics practice questions.

Which of the following is NOT a factor of production?

• land
• labour
• money
• capital

Answer: money

The four factors are land, labour, capital and enterprise. Money is a medium of exchange, not a productive resource.

In a command (centrally planned) economy, resource allocation is primarily determined by

• the free price mechanism
• government central planners
• the profit motive of private firms
• foreign investors

Answer: government central planners

In a command economy the state owns resources and decides allocation; in a free market the price mechanism decides. Most real economies are mixed.

An outward (rightward) shift of the whole production possibilities curve best represents

• a movement from an inefficient to an efficient point
• actual economic growth from more or better resources
• a fall in consumer demand
• a reallocation between two goods

Answer: actual economic growth from more or better resources

Growth in the quantity/quality of resources (or better technology) shifts the PPC outward, expanding potential output.

Which of the following is a normative economic statement?

• Unemployment rose to 6 % last year.
• A rise in the minimum wage increased firms' labour costs.
• The government ought to reduce income inequality.
• Higher interest rates reduced consumer borrowing.

Answer: The government ought to reduce income inequality.

A normative statement is a value judgement about what should be. 'Ought to' signals an opinion, whereas the other statements are positive claims that can be tested against evidence.

Which of the following best describes the concept of opportunity cost?

• The total money spent on a good or service
• The value of the next best alternative forgone when a choice is made
• The combined value of all alternatives given up when a choice is made
• The cost of producing one additional unit of output

Answer: The value of the next best alternative forgone when a choice is made

Opportunity cost is the value of the single next best alternative sacrificed, not the money price and not the sum of all alternatives forgone.

Which of the following is an example of a free good?

• Bottled mineral water
• Public education funded by taxes
• Sunlight
• A promotional sample handed out by a firm

Answer: Sunlight

A free good has no opportunity cost because it is not scarce, like sunlight. Public education and free samples still use scarce resources — someone pays for them.