Posted by Anjali Kaur on Nov 12, 2021

Practice Test 3 on Production Possibility Curve

Practice Test 3 on Production Possibility Curve, contains questions related to the introduction of microeconomics, opportunity cost, and production possibility curve. You can also download a PDF at the end of this post for self-practice.

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1. Vaani is a school teacher and gets Rs 30000 per month as salary, if she leaves the job and starts tution work, she is expected to earn Rs 300000 per year. What would be the opportunity cost of her school job?

30000
25000
5000
10000

Solution. In the given question, we have Vaani’s monthly salary. In order to make a comparison with the tuition work, we either need to get their annual salary from teaching job or we can convert the tuition work pay as monthly.

Let’s see how much Vaani gets annually from school jobs, 30000 x 12 = 3,60,000 (There are 12 months in a year).

Now, we can compare,

Her annual pay from school is more than what she is getting from annual tuition.

So, the opportunity cost of her school job is 3,00,000 / 12 = 25,000 (Why, in the options, they are comparing for school job, which was given monthly)

2. What is the slope of a straight line PPC?

Solution. The slope of PPC is Marginal Opportunity cost, the straight line PPC has constant slope equals 1.

3. Define opportunity cost with the help of an example.

Solution. Opportunity cost is the cost of the next best alternative. For example,

If Dilarmaan has 3 job opportunities:

TCS is offering him 4,00,000

HCL is offering him 5,00,000

City Bank is offering him 6,00,000

So, if he chooses a City Bank job, then his opportunity cost is 5,00,000 from HCL.

4. What is planned economy?

Solution. When the decisions regarding production, consumption, investment, and distribution of goods and services are taken by the government only. No private sector or market forces are involved, this is known as a planned economy.

5. What is microeconomics? Give an example.

Solution.

It is that part of the economic theory that deals with individual units of an economy.
Microeconomics variables are demand, supply, the income of a consumer, etc.
Microeconomics deals with the central problems of the allocation of resources.
For example, a firm, a household, etc.

6. What will be the likely impact of large scale outflow of foreign capital on PPC of the economy and why?

Solution. With the large-scale outflow of foreign capital, the PPC of the economy will shift inwards because available resources are reduced.

7. Giving reason, comment on the shape of PPC based on the following schedule:

Solution:

Marginal Opportunity Cost = Change in Y/ Change in X

MOC = 2/1

MOC = 2 which is constant throughout the PPC, hence we have straight-line PPC.

8. Why is PPC concave? Explain.

Solution. PPC is concave to the origin because, in order to increase the production of 1 commodity, we have to sacrifice the production of another commodity. Assuming, resources and technology are fixed in any given economy.

9. Why does an economic problem arise? Explain.

Solution. An economic problem arises because:

Human wants are unlimited.
Resources to satisfy those wants are limited.
Resources have alternative uses.

10. Mention central problems of an economy. Why do central problems arise in an economy?

Solution: Central problems are faced by every economy. It includes:

What to produce?
How to produce?
For whom to produce?

Again, resources are limited, and wants are unlimited. Every economy faces a central problem.

11. What causes rotation of PPC?

Solution: PPC means production possibility curve and it is a combination of two commodities that an economy can produce given the resources and technique of production.

A PPC rotates either when the resources increase in the favour of 1 commodity or technology improvements in the favour of 1 commodity.