Use this review after studying all six topics or taking the Unit 1 diagnostic. Then try the seven questions without notes.
Big ideas of the unit
- Scarcity is the starting point. Resources are limited and have other uses, while wants keep growing. Established knowledge is the exception: it is non-rival. (Topic 1.1)
- Every society answers three questions: what, how and for whom to produce. Command economies use a central plan, market economies use prices, mixed economies use both. The system changes who chooses, not the need to choose. (Topic 1.2)
- The PPC is scarcity drawn as a graph. The curve is the limit, points inside waste resources, and points outside are unattainable. Its slope is the opportunity cost of the horizontal-axis good. (Topic 1.3)
- Shape and position differ. Bowed out means increasing opportunity cost; only resources or technology move the curve.
- Opportunity cost decides who makes what. Absolute advantage is who makes more; comparative advantage is who gives up less. Specialisation follows comparative advantage. (Topic 1.4)
- Trade changes consumption, not production possibilities. With terms between the two opportunity costs, both sides consume beyond their own PPC.
- A rational choice counts every cost, including implicit costs, and picks the largest net benefit. (Topic 1.5)
- “How much” decisions are made at the margin. Do more while MB > MC; stop where MB = MC. Sunk costs never change the best quantity. (Topic 1.6)
- A limited budget is a scarcity problem too. Spend all income and equalize MU per dollar. The same rule works for a budget of time.
Key relationships and methods
| Idea | Rule or method | Topic |
|---|---|---|
| Opportunity cost on a PPC | Y given up ÷ extra X gained | 1.3 |
| PPC points | on = efficient; inside = inefficient; outside = unattainable | 1.3 |
| PPC moves | new choice or re-employment = movement; more or better resources or technology = shift (pivot if one good only) | 1.3 |
| Comparative advantage | lower opportunity cost. Output data: Y ÷ X. Input data: hours per X ÷ hours per Y | 1.4 |
| Terms of trade | strictly between the two opportunity costs | 1.4 |
| Total economic cost | explicit + implicit; sunk costs left out | 1.5 |
| Best choice | largest net benefit = total benefit − total cost | 1.5 |
| Optimal quantity | MB = MC | 1.6 |
| Utility maximization | all income spent and equal MU ÷ P for the last unit of each good | 1.6 |
These are original Marlbridge practice questions, not past exam questions. The rubrics are a suggested Marlbridge rubric, not official scoring. All people, countries and data are fictional; a four-function calculator is enough.
Question 1 (multiple choice · mixed)
Which statement correctly links scarcity and efficiency to a production possibilities curve?
- (A) Points outside the curve cannot be reached with current resources, which shows scarcity; points inside show unemployed or misused resources.
- (B) Points inside the curve show scarcity, because the economy produces less than it could.
- (C) The downward slope of the curve shows a shortage in the market for each good.
- (D) A bowed-out curve shows that resources are not scarce for the first units of each good.
Answer and explanation
Answer: (A). The curve is the limit set by scarce resources. A point inside is reachable but wasteful.
- (B) confuses scarcity with inefficiency. Scarcity exists even on the curve.
- (C) confuses scarcity with a shortage, a temporary gap in one market. The slope shows a trade-off.
- (D) A low opportunity cost is still a cost, so the resources are still scarce.
Question 2 (multiple choice · mixed)
Two countries specialise according to comparative advantage and trade at terms between their opportunity costs. Neither gains new resources or technology. Which statement is correct?
- (A) Both countries’ PPCs shift outward, because trade is a form of economic growth.
- (B) Each country can consume a combination outside its own PPC, while its PPC stays where it was.
- (C) Only the country with the absolute advantage in both goods gains.
- (D) The country with no absolute advantage ends up consuming inside its PPC.
Answer and explanation
Answer: (B). Specialisation raises total output, and trade shares the extra, so each country consumes beyond its own PPC. Production possibilities are unchanged.
- (A) Consumption beyond the PPC looks like growth, but a PPC shifts only when resources or technology change.
- (C) and (D) confuse absolute with comparative advantage. A country with no absolute advantage still gains at terms between the two opportunity costs.
Question 3 (multiple choice · mixed)
Farida runs a food stall. For each hour open she pays a helper $12, and she gives up $14 she could earn per hour tutoring. This morning she paid a non-refundable $60 for a one-day permit. Her marginal benefit per hour is:
| Hour | 1st | 2nd | 3rd | 4th | 5th | 6th |
|---|---|---|---|---|---|---|
| MB ($) | 40 | 34 | 28 | 22 | 13 | 8 |
How many hours should Farida stay open?
- (A) 0
- (B) 3
- (C) 5
- (D) 6
Answer and explanation
Answer: (B). MC = $12 explicit + $14 implicit = $26 per hour. Hours 1 to 3 have MB above $26; the 4th ($22) would lower net benefit by $4. Net benefit at 3 hours = 102 − 78 = $24.
- (A) lets the sunk permit decide. Her day ends at $24 − $60 = −$36, but closing gives −$60.
- (C) ignores the implicit cost (MC = $12).
- (D) keeps going while MB is positive, which is right only if hours cost nothing.
Question 4 (constructed response · mixed)
Varenna and Kilmore are fictional countries with equal resources. The table shows the most each can produce per year using all its resources on one good. Both PPCs are straight lines.
| Country | Solar panels (thousands) | Maize (thousand tonnes) |
|---|---|---|
| Varenna | 50 | 100 |
| Kilmore | 30 | 120 |
(a) Draw both PPCs on one correctly labelled graph, with panels on the horizontal axis. (b) Identify who has the absolute and the comparative advantage in each good, with calculations. (c) Before trade, Varenna makes 30 thousand panels and Kilmore 15 thousand. Find each country’s maize output, total output of each good, and total output after complete specialisation. (d) State the range of mutually beneficial terms of trade, in tonnes of maize per panel. (e) Varenna exports 18 thousand panels at 1 panel for 3 tonnes of maize. Find what each country consumes, and show that both consume outside their own PPCs.
Worked solution and suggested Marlbridge rubric
(a) Axes: “Solar panels (thousands per year)” and “Maize (thousand tonnes per year)”. Varenna: straight line from 100 (maize) to 50 (panels). Kilmore: straight line from 120 (maize) to 30 (panels).
(b) Absolute advantage: panels, Varenna (50 > 30); maize, Kilmore (120 > 100).
| Country | 1 panel costs | 1 tonne of maize costs |
|---|---|---|
| Varenna | 100 ÷ 50 = 2 t maize | 50 ÷ 100 = 1/2 panel |
| Kilmore | 120 ÷ 30 = 4 t maize | 30 ÷ 120 = 1/4 panel |
Comparative advantage: panels, Varenna (2 < 4); maize, Kilmore (1/4 < 1/2). Varenna’s flatter line shows this.
(c) Varenna: 100 − 2 × 30 = 40; Kilmore: 120 − 4 × 15 = 60 thousand tonnes. Before trade: 45 thousand panels, 100 thousand tonnes. Specialised: 50 thousand panels, 120 thousand tonnes, a gain of 5 and 20 from the same resources.
(d) More than 2 and fewer than 4 tonnes of maize per panel.
(e) Varenna receives 18 × 3 = 54 thousand tonnes. Varenna consumes 32 thousand panels and 54 thousand tonnes (before: 30, 40). Kilmore consumes 18 thousand panels and 66 thousand tonnes (before: 15, 60). Check: 50 panels, 120 tonnes.
At 32 thousand panels, Varenna’s PPC allows only 100 − 64 = 36 thousand tonnes; at 18 thousand panels, Kilmore’s allows 120 − 72 = 48. Both points are outside the PPCs, yet neither PPC has moved.
| Point | What earns it |
|---|---|
| 1 | Axes labelled with good and units; both lines with correct intercepts and labels |
| 1 | Absolute advantage: panels Varenna, maize Kilmore |
| 1 | Four opportunity costs with units |
| 1 | Comparative advantage: panels Varenna, maize Kilmore |
| 1 | Maize 40 and 60; totals (45, 100) before and (50, 120) after |
| 1 | Terms strictly between 2 and 4 |
| 1 | Consumption: Varenna (32, 54), Kilmore (18, 66) |
| 1 | Both points shown outside the PPCs by calculation |
Total: 8 points.
Question 5 (constructed response · mixed)
Quenmark is a fictional command economy. Using all its resources, it can make 400 tractors or 1,200 thousand garments per year, along a straight-line PPC. Planners set a target of 250 tractors. Because planners have poor information about clothing factories, many clothing workers lack materials, and Quenmark makes only 300 thousand garments.
(a) Which basic question does the tractor target answer, and what is the coordinating mechanism? (b) Calculate the opportunity cost of one tractor, and show that Quenmark is inside its PPC. (c) Quenmark lets private clothing firms buy materials and sell at market prices. Explain how prices could help employ the idle workers, and state whether this is a movement or a shift. (d) New textile machines then double the most clothing Quenmark can make; tractor technology is unchanged. Describe the new PPC and calculate the new opportunity cost of a tractor. (e) A minister says: “On our new PPC, Quenmark will no longer face scarcity.” Explain why this is wrong.
Worked solution and suggested Marlbridge rubric
(a) What to produce, through a central plan (output targets, not prices).
(b) 1 tractor costs 1,200 ÷ 400 = 3 thousand garments. At 250 tractors the PPC allows 1,200 − 750 = 450 thousand garments; Quenmark makes 300, so it is inside.
(c) Scarce materials and garments rise in price, so clothing becomes more profitable and firms have an incentive to buy materials and hire idle workers. Prices carry the information planners lacked. This is a movement towards the curve, not a shift: no new resources.
(d) The PPC pivots outward on the clothing axis (to 2,400 thousand); the tractor intercept stays at 400. A tractor now costs 2,400 ÷ 400 = 6 thousand garments.
(e) Resources are still limited, so more tractors still mean fewer garments, and wants keep growing beyond the new limit. Growth moves the limit; it does not remove scarcity.
| Point | What earns it |
|---|---|
| 1 | “What to produce” and central plan |
| 1 | 3 thousand garments per tractor |
| 1 | 450 possible against 300 made, so inside |
| 1 | Prices signal scarcity and profit gives an incentive to employ idle workers |
| 1 | Movement towards the curve, not a shift, with reason |
| 1 | Pivot on the clothing axis and 6 thousand garments |
| 1 | Scarcity remains: limited resources or growing wants, with trade-offs |
Total: 7 points.
Question 6 (constructed response · mixed)
Sami has 6 hours on Sunday to revise for two tests. The extra marks each hour adds are:
| Hour on the subject | 1st | 2nd | 3rd | 4th | 5th | 6th |
|---|---|---|---|---|---|---|
| Economics (marks) | 10 | 8 | 6 | 4 | 2 | 1 |
| Chemistry (marks) | 12 | 9 | 6 | 3 | 2 | 1 |
(a) Explain why Sami faces scarcity, and state the opportunity cost of spending his first hour on economics. (b) Use marginal analysis to find the split of 6 hours that gains the most marks, and the total. (c) A friend says: “Chemistry gives most for the first hour, so spend all 6 hours on it.” Evaluate this with numbers. (d) Sami has already paid $25 for a chemistry guide he cannot return. Should this change his split?
Worked solution and suggested Marlbridge rubric
(a) His time is limited and has two uses: an hour on one subject cannot go to the other. The next-best use of the first hour is chemistry’s first hour, so the opportunity cost is 12 chemistry marks.
(b) Every hour “costs” the same, so give each hour to the larger next gain, as a consumer compares MU per dollar: chemistry 12, economics 10, chemistry 9, economics 8, then economics 6 and chemistry 6. That is 3 hours each, with equal last gains (6 = 6) and smaller next gains (4 and 3). Total = 24 + 27 = 51 marks.
(c) Wrong. All chemistry gives 12 + 9 + 6 + 3 + 2 + 1 = 33 marks, 18 fewer. Its 4th to 6th hours add 3, 2 and 1, while those hours on economics would add 10, 8 and 6. The friend judges by the first hour, not the marginal gain.
(d) No. The $25 is sunk: it does not change the marks from any hour.
| Point | What earns it |
|---|---|
| 1 | Time limited with alternative uses |
| 1 | Opportunity cost of 12 chemistry marks |
| 1 | 3 hours each, using marginal gains |
| 1 | 51 marks |
| 1 | 33 marks for all chemistry, with the marginal reason |
| 1 | Sunk cost leaves marginal gains unchanged, so no change |
Total: 6 points.
Question 7 (constructed response · mixed)
In the fictional mixed economy of Ardane, a city council can build one sports hall, giving residents benefits worth $5.0 million. Materials and contractors cost $3.2 million. The council would also use its own construction crew for a year; a private developer has offered to hire that crew for the year for $1.4 million. It has already paid a non-refundable $0.3 million for the hall’s design.
(a) Calculate the total economic cost and the net benefit, and state whether the council should build the hall. (b) Explain why this decision must be judged by totals rather than at the margin. (c) Once the hall exists, the council chooses how many evenings a week to open it. Explain how marginal analysis guides this, and why the building cost is ignored. (d) The council and a private developer compete for the same crew. What does this show about Ardane’s economic system?
Worked solution and suggested Marlbridge rubric
(a) Explicit $3.2 million + implicit $1.4 million (the developer’s payment given up) = $4.6 million; the sunk $0.3 million design fee is left out. Net benefit = 5.0 − 4.6 = +$0.4 million: build.
(b) A hall cannot be added in small steps: the choice is all or nothing, so total benefit must be compared with total cost.
(c) Evenings can be added one at a time. Compare each extra evening’s MB (value to residents) with its MC (staff, power): open while MB > MC, stop where MB = MC. The building cost is sunk, the same for any number of evenings, so it changes no MB or MC.
(d) Ardane is a mixed economy: prices guide private choices (the developer’s offer), while the government also answers part of “what to produce” by providing a public facility.
| Point | What earns it |
|---|---|
| 1 | Crew’s forgone earnings counted, sunk design fee excluded: total economic cost $4.6 million |
| 1 | +$0.4 million and the decision to build |
| 1 | All-or-nothing, so compare totals |
| 1 | Evenings where MB = MC, adding while MB > MC |
| 1 | Building cost sunk, so no effect on MB or MC |
| 1 | Mixed economy, naming prices and government decisions |
Total: 6 points.
How did you do?
Questions 1 to 3 are worth 1 point each and Questions 4 to 7 are worth 8, 7, 6 and 6: 30 in all. Check which ideas cost you points.
- PPC and opportunity cost (Q1, Q4, Q5): the Topic 1.3 checklist.
- Advantage and terms of trade (Q2, Q4): the Topic 1.4 checklist.
- Implicit costs and totals (Q3, Q7): the Topic 1.5 checklist.
- Marginal analysis, sunk costs and budgets (Q3, Q6, Q7): the Topic 1.6 checklist.
- Scarcity and economic systems (Q5, Q6, Q7): the Topic 1.1 checklist and the Topic 1.2 checklist.
Not taken the Unit 1 diagnostic yet? It shows which single topic to revisit first.