Scarcity and Opportunity Cost: practice questions

Question 1

Farida is deciding how to spend her Saturday. She has three options:

Work a shift at a plant nursery, earning $40.
Work a shift at a print shop, earning $55.
Attend a free community gardening workshop, which pays her nothing.

She decides to work at the print shop.

What is Farida's opportunity cost of choosing to work at the print shop?

Accepted Answer

C

Question 2

Oakmere Furniture is a small workshop with one workshop building, a fixed team of five carpenters, and a limited delivery of timber each month. Even though the workshop works at full capacity every month, its customers place far more orders for tables, chairs and cabinets than O…

Accepted Answer

((a)) Oakmere Furniture's resources, one workshop, five carpenters and a limited monthly timber delivery, are finite, while the orders customers place for tables, chairs and cabinets are, in effect, unlimited, since they always exceed what the workshop can produce. This mismatch betwe…  ((b)) What to produce; how to produce it; for whom to produce it. Example: this month Oakmere Furniture answers the 'what to produce' question by choosing to make cabinets rather than tables with its limited timber.  ((c)) The opportunity cost is the tables that Oakmere Furniture could have made instead, using the same timber and the same workshop time, but now cannot make this month because that timber has gone into cabinets.

Question 3

Opportunity cost applies to every decision-maker in an economy. Read the three situations below. Situation 1 (consumer): Devan has $60 of birthday money. He can afford to buy either a skateboard or a video game console accessory, both priced at $60, but not both. He buys the ska…

Accepted Answer

((a)) The video game console accessory that Devan could have bought instead of the skateboard.  ((b)) The $45 fee Wheelworks could have earned by repairing the customer's bicycle instead of servicing the delivery van.  ((c)) By choosing to renovate the hospital wing, Velora's government gives up the 25 km of rural road that the same $5 million grant could otherwise have built; this road, not a sum of money, is the real opportunity cost of the decision. Simply restating the opportunity cost as $5 mil…

Question 4

A tropical island has abundant sunshine, far more than any resident or visitor could ever want to use, but only a limited number of hotel rooms, which are fully booked every single night of the year.

Which good on this island best illustrates scarcity, in the way economists use the term?

Accepted Answer

C

Question 5

Greenfield Community Farm has a fixed area of land, a small team of workers and one tractor. Because these resources are limited, the farm's managers must make several decisions each season: Decision 1: whether to use this season's land to grow vegetables or to keep dairy cattle…

Accepted Answer

((a)) Greenfield Community Farm's land, workers and tractor are finite: there is only so much land, so many working hours and one tractor available each season. Because these resources are limited, the farm cannot grow every crop, use every method and supply every customer at once, so…  ((b)) Decision 1 is what to produce; Decision 3 is for whom to produce it.  ((c)) The opportunity cost is the dairy cattle that Greenfield Community Farm could have kept instead, using the same land, this season, because the land cannot be used for vegetables and cattle at the same time.

Question 6

Katya has just saved up and bought a new bicycle, the one thing she wanted more than anything else. Within a week of owning it, she decides she now wants a bicycle helmet to go with it, and soon after that she wants a bike lock as well, to keep it secure.

Which statement best explains why economists describe human wants as unlimited, based on Katya's experience?

Accepted Answer

B

Question 7

Every month, the Hassan household must pay rent and buy groceries before it can spend on anything else. This month, after paying the rent and buying groceries, the household has $150 of income left over. It is deciding what to do with this $150: it could put it towards a family…

Accepted Answer

((a)) A need is one of the limited number of things essential for survival, such as the rent (shelter) and groceries (food) the Hassan household pays for first. A want is anything beyond this that the household would simply like to have, such as the games console; wants are far broade…  ((b)) The $150 left over is still a finite amount of money, while the household could use it for several different things it wants, the games console, the holiday fund, or other purchases, that together are worth more to the household than $150 can cover. Because this finite sum canno…  ((c)) The opportunity cost is the contribution to the family holiday fund that the $150 could have made instead, since that was the next best alternative use of the same money once the games console was chosen.

Question 8

Tomas is a freelance graphic designer with one free afternoon this Saturday. He has three possible ways to use it: - Take on a paid design job for a local bakery, which would pay him $70 for the afternoon. - Design a free flyer for an animal-shelter charity he volunteers for, wh…

Accepted Answer

((a)) Tomas's afternoon consists of a fixed number of hours, and however he spends them, that same time cannot be used for the bakery job, the charity flyer and resting all at once. Because the total time available is limited while he has several different things he could do with it,…  ((b)) The opportunity cost is the $70 Tomas could have earned designing for the bakery. Of the two alternatives he gives up, the bakery job and resting, the bakery job is the more valuable one, so it is his true next best alternative; resting has no monetary value and is not paid work…  ((c)) In part (b) the opportunity cost was $70. The second time, the next best paid alternative is the new $120 offer rather than the bakery's $70, so the opportunity cost of choosing the flyer has risen to $120. This shows that opportunity cost is not a fixed feature of a particular…

Question 9

A furniture factory currently makes chairs largely by hand, using a large team of skilled workers and only a few basic tools. The factory's owners are now deciding whether to invest in automated cutting machines, so that a much smaller number of workers can produce the same chairs.

Which of the three basic economic questions does this decision by the factory's owners best illustrate?

Accepted Answer

B

Question 10

The country of Meridia has a fixed, limited number of farm workers and a fixed area of farmland. Meridia's government decides that a larger share of this workforce and farmland should now be used to grow cotton for export, rather than to grow the wheat and vegetables that feed M…

Accepted Answer

((a)) The basic economic problem exists whenever finite resources are insufficient to satisfy unlimited wants. Meridia's farm workers and farmland are finite at the level of the whole economy in exactly the same way that an individual's income or a firm's factory space is finite at a…  ((b)) What to produce, because Meridia's government is choosing which output, cotton for export rather than wheat and vegetables, its scarce workers and farmland should be used to grow.  ((c)) By using more of its workers and farmland to grow cotton for export, Meridia gives up the wheat and vegetables that this same land and labour could otherwise have grown for its own population; this forgone food output is the real opportunity cost of the decision. Measuring the o…

Scarcity and Opportunity Cost: Economics 0455 (Cambridge O Level / IGCSE)

Syllabus coverage

Question 1

Question 2

Question 3

Question 4

Question 5

Question 6

Question 7

Question 8

Question 9

Question 10