Practice Worksheet

Chapter 2 — Thinking Like an Economist

Part 1

Scenario — PPF for Country X

Given Country X produces only two goods, cars and computers, using all of its labor, capital, and land. When all resources are fully employed and efficiently allocated, the production possibilities are:

Point	Cars (thousands)	Computers (thousands)
A	100	0
B	80	30
C	60	50
D	40	65
E	20	75
F	0	80

Two additional points are plotted: G (50 cars, 30 computers) and H (70 cars, 60 computers). They are not on the curve.

Question 1a

Moving from point B to C, what is the opportunity cost of producing one additional computer, measured in cars?

Cars per computer

Hint Compare B and C. Cars fall from 80 to 60 (20 cars lost). Computers rise from 30 to 50 (20 gained). Opportunity cost of 1 computer = cars lost ÷ computers gained.

Explanation From B (80 cars, 30 computers) to C (60 cars, 50 computers): Country X gives up 20 cars to gain 20 computers.
Opportunity cost of 1 computer = 20 cars ÷ 20 computers = 1 car per computer.

Question 1b

Moving from point D to E, what is the opportunity cost of producing one additional computer, measured in cars?

Cars per computer

Hint From D to E: cars fall from 40 to 20 (lose 20), computers rise from 65 to 75 (gain 10). Divide cars lost by computers gained.

Explanation From D (40, 65) to E (20, 75): 20 cars given up for 10 computers gained.
Opportunity cost of 1 computer = 20 ÷ 10 = 2 cars per computer.

Notice that opportunity cost is higher than in Q1a — this is the bowed-out PPF in action. As Country X makes more computers, it must pull resources that are better suited to car production, so the trade-off worsens.

Question 1c

Classify each of the two off-curve points on the diagram.

Point G (50 cars, 30 computers)

Point H (70 cars, 60 computers)

Hint Check each point against the PPF. Is it on the curve, inside the curve (below the frontier), or outside (above the frontier)? At 50 cars, the max computers is between 50 and 65 (between C and D). At 70 cars, the max computers is between 30 and 50.

Explanation G (50 cars, 30 computers) = inefficient. At 50 cars, Country X is capable of producing more than 50 computers (between C's 50 and D's 65). Producing only 30 means resources are idle or misallocated.

H (70 cars, 60 computers) = infeasible. At 70 cars, the maximum is between B's 30 and C's 50 computers. Sixty computers exceeds what the economy can produce with current resources and technology.

Question 1d

A new technology improves only computer manufacturing (car-making is unchanged). Which of the following best describes the effect on Country X's PPF?

The entire PPF shifts outward equally on both axes. The car-axis intercept moves outward; the computer-axis intercept stays the same. The computer-axis intercept moves outward; the car-axis intercept stays the same. The PPF shifts inward because new technology wastes resources.

Hint If only computer tech improves, then the maximum number of cars (when all resources go to cars) is unchanged. But the maximum number of computers rises. Which intercept moves?

Explanation If Country X devotes all resources to cars, it still makes 100 thousand (no change — the car technology wasn't improved). So the car-axis intercept is unchanged.

If it devotes all resources to computers, it now makes more than 80 thousand (because computer technology improved). So the computer-axis intercept shifts outward. The PPF rotates/pivots outward along the computer axis. Answer: C.

Part 2

Positive or Normative?

Instructions Classify each statement as Positive (a testable claim about how the world is) or Normative (a value judgment about how the world ought to be). Each statement counts as one question.

Question 2a

"An increase in the minimum wage reduces employment among low-skill workers."

Hint Does this statement make a factual prediction that could be tested with data, or does it express what someone thinks should happen?

Explanation Positive. This is a cause-and-effect claim: "if X, then Y." It can be (and has been) tested empirically with employment data. Whether economists agree on the exact size of the effect is a separate matter — the claim itself is factual in form.

Question 2b

"The federal minimum wage should be raised to $15 per hour."

Hint Notice the word "should." Is this a description of what is or a prescription for what ought to be?

Explanation Normative. The word "should" signals a value judgment. Reasonable people with the same data can disagree about whether the minimum wage ought to be raised, depending on how they weight workers' incomes against employment effects.

Question 2c

"The U.S. unemployment rate in January was 3.7%."

Hint This is a simple factual statement. Could you look it up?

Explanation Positive. A direct statement of fact, verifiable against published data from the Bureau of Labor Statistics.

Question 2d

"The government ought to prioritize reducing inequality, even at the cost of some economic growth."

Hint The word "ought" is a giveaway. The statement is also about ranking priorities — a classic values question.

Explanation Normative. "Ought to prioritize" expresses a value — how should society trade off equity against efficiency? Different people give different answers.

Question 2e

"A 10% tariff on imported steel raises domestic steel prices by about 6%."

Hint This is a quantitative, cause-and-effect claim.

Explanation Positive. A specific empirical prediction about the effect of a tariff. It can be tested against observed price data.

Question 2f

"Free trade agreements are good for the country and should be expanded."

Hint "Good" and "should" are both value-laden words.

Explanation Normative. Even if most economists agree free trade raises total welfare (a positive claim), the words "good" and "should be expanded" depend on how you weigh the winners against the losers — a normative judgment.

Question 2g

"When the Fed lowers interest rates, consumer borrowing tends to increase."

Hint Is this a cause-effect prediction that could be checked against data?

Explanation Positive. A descriptive statement about the relationship between two macro variables. Verifiable with borrowing and interest-rate data.

Part 3

Multiple Choice

Question 3

In the circular-flow diagram, in the market for factors of production:

firms are sellers and households are buyers. households are sellers and firms are buyers. both households and firms are sellers. the government is the buyer.

HintWho owns labor? Labor is a factor of production. Who hires it?

ExplanationB. Households own labor, land, and capital (factors of production) and sell them; firms buy factors to produce goods and services. This is reversed in the goods-and-services market, where firms sell and households buy.

Question 4

Which of the following is a macroeconomic question?

How does a rent control law affect the market for apartments? Why does the overall price level rise in some years and fall in others? How does a firm decide how many workers to hire? Why do some monopolies charge higher prices than competitive firms?

HintMacro studies the economy as a whole — inflation, unemployment, growth. Which option is about an economy-wide variable?

ExplanationB. The overall price level is an economy-wide (macro) variable. A, C, and D are all about specific markets or firm decisions — microeconomics.

Question 5

A point inside the production possibilities frontier represents:

an efficient use of resources. a combination that is not attainable with current resources. an outcome with unemployment or misallocated resources. economic growth has occurred.

Hint"Inside" means the economy could produce more of both goods but isn't. What causes that?

ExplanationC. Points inside the PPF are inefficient — resources sit idle or are used in the wrong places. Unemployment and misallocation both produce outcomes inside the frontier.

Question 6

A production possibilities frontier is bowed outward (concave to the origin) because:

opportunity cost is constant for all reallocations. resources are not equally well-suited to producing both goods. the economy has too much unemployment. technology improves over time.

HintIf all workers were equally skilled at both goods, reallocating them would cost the same each time — a straight-line PPF. What breaks that symmetry?

ExplanationB. When resources have different comparative advantages, reallocating the first workers is cheap (they weren't good at the other good anyway), but each additional reallocation costs more. That rising opportunity cost makes the PPF bow outward.

Question 7

Which of the following would shift a country's PPF outward?

An increase in unemployment. A decision to produce more of one good and less of another. A technological improvement or an increase in the labor force. A recession.

HintShifting the PPF outward means the economy can produce more of both goods — i.e., economic growth. What causes growth?

ExplanationC. Better technology or more resources (labor, capital) raises the maximum output of both goods — the PPF shifts outward. Option B is a movement along the PPF, not a shift. A and D move the economy to a point inside the existing PPF.

Question 8

Which statement is positive rather than normative?

The poverty rate in the U.S. is too high. Social Security benefits should be increased. A higher sales tax reduces consumer spending. The government ought to balance its budget.

HintPositive claims describe how the world is. Look for cause-effect statements, not "should"/"ought to"/"too high".

ExplanationC. "A higher sales tax reduces consumer spending" is a testable cause-and-effect claim. A ("too high"), B ("should"), and D ("ought to") all express values — they are normative.

Question 9

When economists disagree about policy, it is usually because they have:

been trained in different schools of thought that deny scientific methods. different scientific (positive) judgments or different values (normative judgments). motives tied to political parties that pay them directly. access to completely different data sets that no one else can see.

HintMankiw gives two reasons. One is about how the world works; the other is about what is good.

ExplanationB. Two economists can disagree because they have different positive views (e.g., different estimates of how much a tax cut boosts growth) and/or different normative values (e.g., they weight equity vs. efficiency differently).

Question 10

The assumptions in an economic model:

must be literally true for the model to be useful. are meant to simplify reality so we can focus on the force being studied. are only used by macroeconomists, never microeconomists. invalidate the model as a scientific tool.

HintThink of Mankiw's analogy to a physicist assuming no air resistance, or a subway map leaving out streets.

ExplanationB. Assumptions are simplifications chosen for the question at hand. They aren't literal claims about reality — they're tools for isolating one force. Good models use assumptions that don't distort the answer to the question being asked.

Part 4

True or False

Question 11

In the circular-flow diagram, money flows and real flows (goods and labor) travel in opposite directions.

HintWhen a household buys a burrito, which direction does the burrito go? Which direction does the dollar go?

ExplanationTrue. Every transaction is a trade: money goes one way, the good (or service, or labor) goes the other. In the lesson's diagram, the money loop runs clockwise and the real (goods/labor) loop runs counter-clockwise.

Question 12

If an economy is operating at a point on its PPF, it cannot produce more of one good without producing less of the other.

HintA point on the PPF is efficient — all resources are fully used. What does that imply about trade-offs?

ExplanationTrue. On the curve, there are no idle resources. To make more of one good, the economy must reallocate resources away from the other — so one must rise and the other must fall. This is exactly what the curve's downward slope represents: opportunity cost.

Question 13

Microeconomics studies the economy as a whole, including inflation, unemployment, and growth.

HintMicro = small (individual markets). Macro = big (whole economy). Which level does inflation live at?

ExplanationFalse. That describes macroeconomics. Microeconomics studies individual households and firms and how they interact in specific markets.

Question 14

A positive statement can, in principle, be evaluated by looking at evidence; a normative statement cannot be, because it expresses a value judgment.

HintMankiw's core distinction: descriptive vs. prescriptive.

ExplanationTrue. Positive statements describe cause-and-effect relationships that can be tested against data. Normative statements express what ought to be — they depend on values and cannot be settled by evidence alone.

Question 15

An outward shift of the production possibilities frontier represents economic growth.

HintMore of both goods becomes possible when the curve moves outward. What economic concept is that?

ExplanationTrue. A PPF shift outward means the economy can now produce more of every good than before — more capital, more labor, or better technology. That's the definition of economic growth.

Question 16

Because economic models rely on simplifying assumptions, they cannot be considered scientific.

HintPhysicists use the assumption of no air resistance. Does that make physics non-scientific?

ExplanationFalse. All sciences use simplifying assumptions. The test of a model isn't whether its assumptions are literally true, but whether its predictions are useful and match observation. Good assumptions pick out the force being studied while leaving the answer to the question undistorted.

Part 5

Concept Short Answer

Question 17

Explain why the PPF is typically bowed outward rather than a straight line. Reference opportunity cost and the nature of resources.

Sample Answer The PPF bows outward because resources (labor, capital, land) are not equally well-suited to producing both goods. Each worker or machine has a comparative advantage in one good or the other.

When the economy produces only one good (say, only cars), every resource is stuck making cars — including workers who would be much better at making computers. Reallocating those first few computer-specialist workers to computer production is cheap: they weren't productive car-makers anyway, so few cars are lost per computer gained. Opportunity cost is low.

As the economy keeps moving toward more computers, it starts pulling resources that are actually good at car-making. Each additional unit of computers now costs many more cars given up. The result is a rising opportunity cost along the PPF — and a curve that bows outward from the origin.

A straight-line PPF would imply constant opportunity cost — realistic only if resources were perfectly interchangeable between the two goods.

Question 18

For each statement below, identify whether it is positive or normative and briefly justify your answer in one sentence.

(a) "A gasoline tax of $1 per gallon would reduce gasoline consumption by roughly 5%."
(b) "The U.S. should impose a $1 gasoline tax to fight climate change."

Sample Answer (a) Positive. This is a cause-and-effect prediction about how consumption responds to a tax. It gives a testable quantitative estimate (5%) that can be checked against data from past tax changes or from similar countries.

(b) Normative. The word "should" signals a value judgment. Even if we accept the positive claim in (a) — and even if we agree that climate change is a problem — whether to impose the tax depends on how heavily one weighs future environmental costs against present-day costs to drivers. That weighting is a matter of values, not facts.

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