Chapter 2

Question 1

What is an opportunity cost?

Answer 1

What you sacrifice to get something

Question 2

What is the principle of opportunity cost?

Answer 2

The opportunity cost of something is what you sacrifice to get

Question 3

Production possibilities curve

Answer 3

Curve that shows all possible combinations of two products that an economy can produce, given that its resources are fully employed and efficiently used.

Question 4

What is marginal benefit? Marginal cost?

Answer 4

• Marginal benefit is the additional benefit from one unit more of some activity.
• Marginal cost is the additional cost from one unit in some activity.

Question 5

What is the marginal principle?

Answer 5

• Increase the level of an activity as long as the marginal benefit exceeds marginal cost.
• Choose level at which marginal benefit equals the marginal cost.

Question 6

What is the principle of voluntary exchange?

Answer 6

A voluntary exchange between two people makes both people better off.

Question 7

What is the opposite of voluntary exchange?

Answer 7

• Self-sufficiency where no one relies on anyone else.

Question 8

What is the principle of diminishing returns?

Answer 8

• Suppose two or more inputs -> output; hold all other inputs fixed while increasing just one input.
• At some point, the point of diminishing returns, output will increase at a decreasing rate.

Question 9

What is the real-nominal principle?

Answer 9

What matters to people is the real value of money or income—its purchasing power—not its “face” value.