INO1 Principles of Economics Exam Version 3
Practice exam for Western Governors University WGU Exams under Western Governors University Exams (College Exams). 5 sample questions.
Sample Questions
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Question 1
Why are production possibility curves usually bowed out from the origin
Correct Answer: B
Rationale: Production possibility curves (PPCs) are bowed outward (concave to the origin) due to the law of increasing opportunity cost. This occurs because resources are not equally efficient in producing all goods—they are heterogeneous and imperfect substitutes. As production shifts from one good to another, increasingly less suitable resources must be used, raising the opportunity cost and causing the curve to bow out. If resources were homogeneous and perfect substitutes (one-to-one basis), the PPC would be a straight line (constant opportunity cost), making the first and last options incorrect. The third option is wrong because capital and labor can be substituted, though imperfectly, and the issue is not absolute non-substitutability but varying efficiency.
Rationale: Production possibility curves (PPCs) are bowed outward (concave to the origin) due to the law of increasing opportunity cost. This occurs because resources are not equally efficient in producing all goods—they are heterogeneous and imperfect substitutes. As production shifts from one good to another, increasingly less suitable resources must be used, raising the opportunity cost and causing the curve to bow out. If resources were homogeneous and perfect substitutes (one-to-one basis), the PPC would be a straight line (constant opportunity cost), making the first and last options incorrect. The third option is wrong because capital and labor can be substituted, though imperfectly, and the issue is not absolute non-substitutability but varying efficiency.
Question 2
What illustrates unemployment in a production possibility frontier
Correct Answer: B
Rationale: Unemployment or underutilization of resources is shown by a point inside the production possibility frontier (PPF), where output is below the maximum possible with full resource employment. The PPF itself represents efficient production with full employment. Points outside are unattainable with current resources/technology. The middle point could be efficient or inefficient depending on position relative to the curve. End points represent full efficiency with specialization in one good.
Rationale: Unemployment or underutilization of resources is shown by a point inside the production possibility frontier (PPF), where output is below the maximum possible with full resource employment. The PPF itself represents efficient production with full employment. Points outside are unattainable with current resources/technology. The middle point could be efficient or inefficient depending on position relative to the curve. End points represent full efficiency with specialization in one good.
Question 3
A student is planning their weekend activities. They would like to attend a jazz festival and watch the latest blockbuster movie. They can choose one activity since the timing of the movie and the festival coincides. Which basic economic principle is best illustrated by the student’s choice
Correct Answer: D
Rationale: The student must choose between two mutually exclusive activities due to time scarcity, illustrating that everyone faces tradeoffs—gaining one thing means giving up another. This is a fundamental economic principle tied to opportunity cost. No incentives (rewards/punishments) are changing behavior. Marginal thinking involves small adjustments, not all-or-nothing choices. No exchange between parties occurs.
Rationale: The student must choose between two mutually exclusive activities due to time scarcity, illustrating that everyone faces tradeoffs—gaining one thing means giving up another. This is a fundamental economic principle tied to opportunity cost. No incentives (rewards/punishments) are changing behavior. Marginal thinking involves small adjustments, not all-or-nothing choices. No exchange between parties occurs.
Question 4
What does a consumer's budget constraint identify
Correct Answer: B
Rationale: The budget constraint shows all combinations of two goods a consumer can afford given income and prices, forming a straight line on a graph. It defines the feasible consumption set. Alternative production technologies refer to production possibility frontiers for firms. Wasted resources relate to inefficiency inside the PPF. Opportunities to earn extra income concern income sources, not the constraint itself.
Rationale: The budget constraint shows all combinations of two goods a consumer can afford given income and prices, forming a straight line on a graph. It defines the feasible consumption set. Alternative production technologies refer to production possibility frontiers for firms. Wasted resources relate to inefficiency inside the PPF. Opportunities to earn extra income concern income sources, not the constraint itself.
Question 5
What will result in a decrease in the supply of motorcycles
Correct Answer: B
Rationale: Higher production taxes increase costs, shifting the supply curve leftward (decrease in supply). An increase in riders affects demand, not supply. A decrease in tire prices lowers input costs, increasing supply. Technological improvement reduces production costs, increasing supply.
Rationale: Higher production taxes increase costs, shifting the supply curve leftward (decrease in supply). An increase in riders affects demand, not supply. A decrease in tire prices lowers input costs, increasing supply. Technological improvement reduces production costs, increasing supply.