practice questions

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Practice questions for Chapters 1,2 & 3 TEST
Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.
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1. The overriding reason as to why households and societies face many decisions is that
a. resources are scarce.
b. goods and services are not scarce.
c. incomes fluctuate with business cycles.
d. people, by nature, tend to disagree.
2. Economics is the study of
a. how society manages its scarce resources.
b. the government's role in society.
c. how a market system functions.
d. how to increase production.
3. When society requires that firms reduce pollution, there is
a. a tradeoff because of reduced incomes to the firms' owners and workers.
b. a tradeoff only if some firms are forced to close.
c. no tradeoff, since the cost of reducing pollution falls only on the firms affected by the
requirements.
d. no tradeoff, since everyone benefits from reduced pollution.
4. A rational decisionmaker
a. ignores marginal changes and focuses instead on “the big picture.”
b. ignores the likely effects of government policies when he or she makes choices.
c. takes an action only if the marginal benefit of that action exceeds the marginal cost of that
action.
d. takes an action only if the combined benefits of that action and previous actions exceed the
combined costs of that action and previous actions.
5. A marginal change is a
a. change that involves little, if anything, that is important.
b. large, significant adjustment.
c. change for the worse, and so it is usually a short-term change.
d. small, incremental adjustment.
6. Which of the following is the best example of a marginal change?
a. The price of housing in Denver increased by 6 percent last year.
b. Kim gets a big promotion at work. She also gets a raise from $35,000 per year to $55,000
per year.
c. Mark graduates from college and takes a job. His income increases from $10,000 per year
to $35,000 per year.
d. A drought hits the upper Midwest and the price of wheat increases from $4.00 per bushel
to $6.50 per bushel.
7. A marginal change is best illustrated by which of the following?
a. Nancy retires and takes a part-time job. She was working 40 hours per week and now
works 15 hours per week.
b. A large, state-supported university has announced that due to state budget deficits, tuition
must rise by 20 percent next year.
c. Ryan moved to a new apartment and now pays 40 percent more rent than before.
d. Arizona, which usually receives 10 inches of rain per year, received 11 inches last year.
8. People are willing to pay more for a diamond than for a bottle of water because
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9.
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____ 15.
____ 16.
a. the marginal cost of producing an extra diamond far exceeds the marginal cost of
producing an extra bottle of water.
b. the marginal benefit of an extra diamond far exceeds the marginal benefit of an extra
bottle of water.
c. producers of diamonds have a much greater ability to manipulate diamond prices than
producers of water have to manipulate water prices.
d. water prices are held artificially low by governments, since water is necessary for life.
Based on what we know about the effects of mandatory seat belt laws, which of the following groups would
be most likely to mount a campaign to repeal those laws?
a. Owners of collision-repair shops.
b. People who walk rather than drive.
c. Policemen who have better things to do than investigate collisions.
d. All of the above are correct.
Which of the following is a principle concerning how people interact?
a. Markets are usually a good way to organize economic activity.
b. Rational people think at the margin.
c. People respond to incentives.
d. All of the above are correct.
Which of the following statements does not apply to a market economy?
a. Firms decide whom to hire and what to produce.
b. No one is looking out for the economic well-being of society as a whole.
c. Households decide which firms to work for and what to buy with their incomes.
d. Government policies are the primary forces that guide the decisions of firms and
households.
The term used to describe a situation in which markets fail to allocate resources efficiently is called
a. economic meltdown.
b. market failure.
c. disequilibrium.
d. the effect of the invisible hand.
Prior to the collapse of communism, communist countries worked on the premise that economic well-being
could be best attained by
a. a market economy.
b. a strong reliance on prices and individuals’ self-interests.
c. a system of large, government-operated, privately-owned firms.
d. the actions of government central planners.
The basic principles of economics suggest that
a. markets are seldom, if ever, a good way to organize economic activity.
b. government should become involved in markets when trade between countries is involved.
c. government should become involved in markets when those markets fail to produce
efficient or equitable outcomes.
d. All of the above are correct.
Causes of market failure include
a. externalities and market power.
b. market power and incorrect forecasts of consumer demand.
c. externalities and foreign competition.
d. incorrect forecasts of consumer demand and foreign competition.
Which of these consumption activities will most likely impose an external cost?
a. An executive plays a vigorous game of golf.
b. A student in a dorm plays her CDs at 120 decibels late at night.
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c. A young mother exercises to an aerobics video.
d. A construction worker eats a sandwich during his lunch break.
In the early 1920s,
a. Germany experienced a very high rate of inflation.
b. the quantity of German money was declining rapidly.
c. the value of German money remained almost constant.
d. All of the above are correct.
Which of the following is most likely to raise the average material standard of living in the United States?
a. an increase in investment in new capital
b. a continuation of the economic problems experienced by China, with whom the United
States competes in world markets
c. an increase in the minimum legal wage
d. a shortening of the average work week
During the 1990s, the United Kingdom experienced low levels of inflation while Turkey experienced high
levels of inflation. A likely explanation of these facts is that
a. the United Kingdom is more industrialized than Turkey.
b. the rate of growth of the quantity of money was slower in the United Kingdom than in
Turkey.
c. workers in the United Kingdom are less productive than workers in Turkey.
d. there were more cases of market failure in Turkey than in the United Kingdom.
To promote good economic outcomes, policymakers should strive to enact policies that
a. enhance productivity.
b. enhance individuals' market power.
c. result in a rapidly-growing quantity of money.
d. All of the above are correct.
Albert Einstein once made the following observation about science:
a. "The whole of science is nothing more than the refinement of everyday thinking."
b. "The whole of science is nothing more than an interesting intellectual exercise."
c. "In order to understand science, one must rely solely on abstraction."
d. "In order to understand science, one must transcend everyday thinking."
Which of the following statements applies to economics, as well as to other sciences such as physics?
a. Experiments are considered valid only when they are conducted in a laboratory.
b. Good theories do not need to be tested.
c. Real-world observations often lead to theories.
d. Economics, as well as other sciences, are concerned primarily with abstract concepts.
Economists make assumptions in order to
a. mimic the methodologies employed by other scientists.
b. minimize the number of experiments that yield no useful data.
c. minimize the likelihood that some aspect of the problem at hand is being overlooked.
d. focus their thinking on the essence of the problem at hand.
An economic theory about international trade that is based on the assumption that there are only two countries
and two goods
a. can be useful in helping economists understand the complex world of international trade
involving many countries and many goods.
b. is useless, since the real world has many countries trading many goods.
c. can be useful only in situations involving two countries and two goods.
d. can be useful in the classroom, but is useless in the real world.
For an economist, the idea of making assumptions is regarded generally as a
a. bad idea, since doing so leads to the omission of important ideas and variables from
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economic models.
b. bad idea, since doing so invariably leads to data-collection problems.
c. good idea, since doing so helps to simplify the complex world and make it easier to
understand.
d. good idea, since economic analysis without assumptions leads to complicated results that
the general public finds hard to understand.
Economists make use of assumptions, some of which are unrealistic, for the purpose of
a. teaching economics to people who have never before studied economics.
b. advancing their political agendas.
c. developing models when the scientific method cannot be used.
d. focusing their thinking.
Economic models
a. cannot be useful if they are based on false assumptions.
b. were once thought to be useful, but that is no longer true.
c. must incorporate all aspects of the economy if those models are to be useful.
d. can be useful, even if they are not particularly realistic.
In a circular-flow diagram,
a. taxes flow from households to firms, and transfer payments flow from firms to
households.
b. income payments flow from firms to households, and sales revenue flows from
households to firms.
c. resources flow from firms to households, and goods and services flow from households to
firms.
d. inputs and outputs flow in the same direction as the flow of dollars, from firms to
households.
Factors of production are
a. used to produce goods and services.
b. also called output.
c. abundant in most economies.
d. assumed to be owned by firms in the circular-flow diagram.
Which of these terms are used interchangeably?
a. "goods and services" and "inputs"
b. "goods and services" and "factors of production"
c. "inputs" and "factors of production"
d. "land, labor and capital" and "goods and services"
Which of the following statements about the circular-flow diagram is correct?
a. One must imagine that the economy operates without money in order to make sense of the
diagram.
b. The diagram leaves out details that are not essential for understanding the economic
transactions that occur between households and firms.
c. In the diagram, households use the factors of production to produce goods and services.
d. All of the above are correct.
In the markets for the factors of production,
a. households are sellers and firms are buyers.
b. households are buyers and firms are sellers.
c. households and firms are both buyers.
d. households and firms are both sellers.
Figure 2-1
____ 33. Refer to Figure 2-1. Which arrow represents the flow of goods and services?
a. A
b. B
c. C
d. D
____ 34. Refer to Figure 2-1. Which arrow represents the flow of spending by households?
a. A
b. B
c. C
d. D
____ 35. Refer to Figure 2-1. Which arrow shows the flow of land, labor, and capital?
a. A
b. B
c. C
d. D
____ 36. Refer to Figure 2-1. Which arrow shows the flow of income payments?
a. A
b. B
c. C
d. D
____ 37. Refer to Figure 2-1. Juan buys a new pair of shoes at a shoe store. To which of the arrows does this purchase
directly contribute?
a. A only
b. A and B
c. C only
d. C and D
____ 38. Refer to Figure 2-1. Michelle completes her first week of employment working as a hairdresser at a salon.
On Friday of that week she receives her first paycheck. To which of the arrows does this activity contribute
directly?
a. B only
b. A and B
c. C only
d. C and D
____ 39. If an economy is producing efficiently, then
a. there is no way to produce more of one good without producing less of another good.
b. it is possible to produce more of both goods without increasing the quantities of inputs that
are being used.
c. it is possible to produce more of one good without producing less of the other.
d. it is not possible to produce more of any good at any cost.
Figure 2-4
____ 40. Refer to Figure 2-4. The opportunity cost of obtaining 10 additional toasters by moving from point B to
point A is
a. 10 toothbrushes.
b. 20 toothbrushes.
c. 30 toothbrushes.
d. zero, since the economy has the additional resources to produce 10 additional toasters.
____ 41. Refer to Figure 2-4. If the economy moves from point A to point D, the opportunity cost is
a. 10 toasters.
b. 20 toasters.
c. 30 toasters.
d. 30 toothbrushes.
____ 42. Refer to Figure 2-4. The opportunity cost of obtaining 15 additional toasters by moving from point D to
point C is
a. 10 toothbrushes.
b. 20 toothbrushes.
c. 30 toothbrushes.
d. none of the above; the economy cannot move from point D to point C.
____ 43. Refer to Figure 2-4. Suppose the economy is producing at point B. Which of the following statements would
best explain this situation?
a. The economy lacks the resources to produce at a more desirable point.
b. The economy’s available technology prevents it from producing at a more desirable point.
c. There is widespread unemployment in the economy.
d. Any of the above statements would be a legitimate explanation for this situation.
____ 44. A production possibilities frontier shifts outward when
a. the economy experiences economic growth.
b. the desires of the economy’s citizens change.
c. at least one of the basic principles of economics is violated.
d. opportunity costs are lessened.
Table 2-1. Production Possibilities for Toyland
Dolls
400
300
200
100
0
Fire Trucks
0
200
350
450
500
____ 45. Refer to Table 2-1. What is the opportunity cost to Toyland of increasing the production of dolls from 200 to
300?
a. 200 fire trucks
b. 150 fire trucks
c. 100 fire trucks
d. It is impossible to tell what the opportunity cost is since in this example costs are not
constant.
____ 46. Refer to Table 2-1. Which of the following statements accurately describes the production possibilities for
Toyland?
a. The opportunity cost of an additional 100 dolls is 50 fire trucks.
b. The opportunity cost of an additional 100 dolls is 100 fire trucks.
c. Toyland’s production possibilities frontier is a straight, downward-sloping line.
d. The opportunity cost of an additional 100 dolls increases as more dolls are produced.
____ 47. Which of the following statements best captures the relationship between microeconomics and
macroeconomics?
a. For the most part, microeconomists are unconcerned with macroeconomics, and
macroeconomists are unconcerned with microeconomics.
b. Microeconomists study markets for small products, whereas macroeconomists study
markets for large products.
c. Microeconomics and macroeconomics are distinct from one another, yet they are closely
related.
d. Microeconomics is oriented toward policy studies, whereas macroeconomics is oriented
toward theoretical studies.
____ 48. When economists are trying to help improve the world they are
a. concerned with positive economics rather than normative economics.
b. concerned with macroeconomics rather than microeconomics.
c. scientists.
d. policy advisers.
____ 49. Which of the following is an example of a normative statement?
a. If the price of a product decreases, people’s willingness to buy that product will increase.
b. Reducing tax rates on the wealthy would benefit the nation.
c. If the national saving rate were to increase, so would the rate of economic growth.
d. All of the above are correct.
____ 50. In order to provide information on two variables, an economist must use
a. a bar graph.
b. pie chart.
c. the coordinate system.
d. a time-series graph.
____ 51. A demand curve shows the relationship
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a. between income and quantity demanded.
b. between price and income.
c. between price and quantity demanded.
d. among income, price, and quantity demanded.
When an economist points out that you and millions of other people are interdependent, he or she is referring
to the fact that we all
a. rely upon government to provide us with the basic necessities of life.
b. rely upon one another for the goods and services we all consume.
c. have similar tastes and abilities.
d. are concerned about one another’s well-being.
People generally choose to depend upon others for goods and services. Economists view this interdependence
as
a. a good thing, since it fosters friendships and bonds that otherwise would never develop.
b. a good thing, since it allows people to consume more goods and services than they would
otherwise be able to consume.
c. a bad thing, since self-sufficiency may become necessary in the future.
d. a bad thing, since interdependence reduces people’s self-esteem and causes various social
problems.
Shannon bakes cookies and Justin grows vegetables. In which of the following cases is it impossible for both
Shannon and Justin to benefit from trade?
a. Shannon does not like vegetables and Justin does not like cookies.
b. Shannon is better than Justin at baking cookies and Justin is better than Shannon at
growing vegetables.
c. Justin is better than Shannon at baking cookies and at growing vegetables.
d. All of the above are correct.
Without trade,
a. a country is better off because it will have to learn to be self-sufficient without trade.
b. a country's production possibilities frontier is also its consumption possibilities frontier.
c. a country can still benefit from international specialization.
d. interdependence is more extensive than it would be with trade.
Table 3-1
Farmer
Rancher
Labor Hours Needed to Make 1
Pound of:
Meat
Potatoes
8
2
4
5
Pounds produced in 40 hours:
Meat
Potatoes
5
20
10
8
____ 56. Refer to Table 3-1. The opportunity cost of 1 pound of potatoes for the rancher is
a. 5 hours of labor.
b. 4 hours of labor.
c. 5/4 pounds of meat.
d. 4/5 pound of meat.
____ 57. Refer to Table 3-1. The opportunity cost of 1 pound of meat for the farmer is
a. 1/4 hour of labor.
b. 4 hours of labor.
c. 4 pounds of potatoes.
d. 1/4 pound of potatoes.
____ 58. Refer to Table 3-1. The opportunity cost of 1 pound of meat for the rancher is
____ 59.
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a. 4 hours of labor.
b. 5 hours of labor.
c. 4/5 pounds of potatoes.
d. 5/4 pounds of potatoes.
Refer to Table 3-1. The opportunity cost of 1 pound of potatoes for the farmer is
a. 8 hours of labor.
b. 2 hours of labor.
c. 4 pounds of meat.
d. 1/4 pound of meat.
Refer to Table 3-1. The farmer has an absolute advantage in
a. meat, and the rancher has an absolute advantage in potatoes.
b. potatoes, and the rancher has an absolute advantage in meat.
c. meat, and the rancher has an absolute advantage in meat.
d. neither good, and the rancher has an absolute advantage in both goods.
Refer to Table 3-1. The rancher has an absolute advantage in
a. both goods, and the farmer has a comparative advantage in meat.
b. both goods, and the farmer has a comparative advantage in potatoes.
c. meat, and the farmer has a comparative advantage in potatoes.
d. meat, and the farmer has a comparative advantage in neither good.
Refer to Table 3-1. The farmer has an absolute advantage in
a. potatoes, and the rancher has a comparative advantage in meat.
b. meat, and the rancher has a comparative advantage in potatoes.
c. neither good, and the rancher has a comparative advantage in potatoes.
d. neither good, and the rancher has a comparative advantage in meat.
Refer to Table 3-1. The rancher has a comparative advantage in
a. neither good, and the farmer has a comparative advantage in both goods.
b. both goods, and the farmer has a comparative advantage in neither good.
c. potatoes, and the farmer has a comparative advantage in meat.
d. meat, and the farmer has a comparative advantage in potatoes.
Refer to Table 3-1. The farmer and the rancher both could benefit if the farmer were to specialize in
a. meat and the rancher were to specialize in potatoes.
b. potatoes and the rancher were to specialize in meat.
c. neither good and the rancher were to specialize in both goods.
d. none of the above; they cannot both benefit by specialization and trade.
Figure 3-1
____ 65. Refer to Figure 3-1. Which of the following statements is correct?
a. Paul has an absolute advantage in both wheat and corn.
b. Paul has an absolute advantage in wheat and Cliff has an absolute advantage in corn.
c. Cliff has an absolute advantage in wheat and Paul has an absolute advantage in corn.
d. Cliff has an absolute advantage in both wheat and corn.
____ 66. Refer to Figure 3-1. Suppose Paul must work 2 hours to produce each bushel of corn. Then Paul’s
production possibilities frontier is based on how many hours of work?
a. 0.2 hours
b. 5 hours
c. 10 hours
d. 20 hours
Figure 3-2
____ 67. Refer to Figure 3-2. Suppose Ben and Jerry have both decided to produce at point A on their respective
production possibilities frontiers. We know that
a. neither Ben’s well-being nor Jerry’s well-being could be improved as a result of trade
between the two.
b. trade between the two could benefit Ben but not Jerry.
c. trade between the two could benefit Jerry but not Ben.
d. Ben and Jerry are both allocating 1/2 of their time to the production of each good.
____ 68. Refer to Figure 3-2. Suppose Ben’s production possibilities frontier is based on 4 hours of work. How much
time does Ben require to produce 1 pound of ice cream?
a. 1/2 hour
b. 1 hour
c. 2 hours
d. The answer cannot be determined from the given information.
For the following question(s), use the accompanying table.
Table 3-2
Labor Hours needed to make one
Quilt
Helen
50
Carolyn
90
Dress
10
45
Amount produced in 90 hours:
Quilts
Dresses
1.8
9
1
2
____ 69. Refer to Table 3-2. Helen has a comparative advantage in
a. dresses and Carolyn has a comparative advantage in quilts.
b. quilts and Carolyn has a comparative advantage in dresses.
c. neither good and Carolyn has a comparative advantage in both goods.
d. both goods and Carolyn has a comparative advantage in neither good.
____ 70. Refer to Table 3-2. For Helen, the opportunity cost of 1 quilt is
a. 0.2 dresses.
b. 2 dresses.
c. 3.5 dresses.
d. 5 dresses.
____ 71. Refer to Table 3-2. For Carolyn, the opportunity cost of 1 quilt is
a. 0.5 dresses.
b. 1 dress.
c. 2 dresses.
d. 3 dresses.
____ 72. Refer to Table 3-2. For Helen, the opportunity cost of 1 dress is
a. 1/5 quilt.
b. 1/4 quilt.
c. 2 quilts.
d. 5 quilts.
____ 73. Refer to Table 3-2. For Carolyn, the opportunity cost of 1 dress is
a. 5 quilts.
b. 4 quilts.
c. 1/2 quilt.
d. 1/10 quilt.
____ 74. Refer to Table 3-2. Helen has a comparative advantage in
a. quilts and Carolyn has an absolute advantage in neither good.
b. dresses and Carolyn has an absolute advantage in quilts.
c. quilts and Carolyn has an absolute advantage in dresses.
d. dresses and Carolyn has an absolute advantage in neither good.
____ 75. Refer to Table 3-2. Helen has an absolute advantage in
a. dresses and Carolyn has an absolute advantage in quilts.
b. quilts and Carolyn has a comparative advantage in dresses.
c. both goods and Carolyn has a comparative advantage in quilts.
d. neither good and Carolyn has a comparative advantage in dresses.
____ 76. Refer to Table 3-2. We could use the information in the table to draw a production possibilities frontier for
Helen and a second production possibilities frontier for Carolyn. If we were to do this, measuring quilts along
the horizontal axis, then
a. the slope of Helen’s production possibilities frontier would be -0.2 and the slope of
Carolyn’s production possibilities frontier would be -0.5.
b. the slope of Helen’s production possibilities frontier would be -5 and the slope of
Carolyn’s production possibilities frontier would be -2.
c. the slope of Helen’s production possibilities frontier would be 0.2 and the slope of
Carolyn’s production possibilities frontier would be 0.5.
d. the slope of Helen’s production possibilities frontier would be 5 and the slope of Carolyn’s
production possibilities frontier would be 2.
____ 77. Refer to Table 3-2. We could use the information in the table to draw a production possibilities frontier for
Helen and a second production possibilities frontier for Carolyn. If we were to do this, measuring dresses
along the horizontal axis, then
a. the slope of Helen’s production possibilities frontier would be -0.2 and the slope of
Carolyn’s production possibilities frontier would be -0.5.
b. the slope of Helen’s production possibilities frontier would be -5 and the slope of
Carolyn’s production possibilities frontier would be -2.
c. the slope of Helen’s production possibilities frontier would be 0.2 and the slope of
Carolyn’s production possibilities frontier would be 0.5.
d. the slope of Helen’s production possibilities frontier would be 5 and the slope of Carolyn’s
production possibilities frontier would be 2.
These graphs illustrate the production possibilities available to Fred and Ginger with each person working 40
hours.
Figure 3-3
____ 78. Refer to Figure 3-3. Which of the following statements is correct?
a. Fred sacrifices 1 2/3 ballet slippers to produce 1 tap shoe; Ginger sacrifices 3/4 of a ballet
slipper to produce 1 tap shoe; therefore, Fred has a comparative advantage in producing
tap shoes.
b. Fred sacrifices 3/5 of a ballet slipper to produce 1 tap shoe; Ginger sacrifices 1 1/3 ballet
slippers to produce 1 tap shoe; therefore, Fred has an absolute advantage in producing tap
shoes.
c. Fred requires 4 hours to produce a tap shoe; Ginger requires 6 2/3 hours to produce a tap
shoe; therefore, Fred has a comparative advantage in producing tap shoes.
d. Fred requires 4 hours to produce a tap shoe; Ginger requires 6 2/3 hours to produce a tap
shoe; therefore, Fred has an absolute advantage in producing tap shoes.
Table 3-3
Montana
Missouri
Labor Hours Needed to Make
One:
Basket
Birdhouse
6
2
3
1.5
Amount Produced in 24 Hours:
Baskets
Birdhouses
4
12
8
16
____ 79. Refer to Table 3-3. If Montana and Missouri were to specialize and engage in trade that would benefit both
states, they would most likely base their decisions on the principle of
a. absolute advantage.
b. comparative advantage.
c. maximum opportunity cost.
d. zero-sum trade.
____ 80. The producer that requires a smaller quantity of inputs to produce a certain amount of a good, relative to the
quantities of inputs required by other producers to produce the same amount of that good,
a. has a low opportunity cost of producing that good, relative to the opportunity costs of
other producers.
b. has a comparative advantage in the production of that good.
c. has an absolute advantage in the production of that good.
d. has an artificial advantage in the production of that good.
____ 81. The gains from trade are
a. evident in economic models, but seldom observed in the real world.
b. evident in the real world, but impossible to capture in economic models.
c. a result of more efficient resource allocation than would be observed in the absence of
trade.
d. based on the principle of absolute advantage.
____ 82. Mike and Sandy are two woodworkers who both make tables and chairs. In one month, Mike can make 4
tables or 20 chairs, while Sandy can make 6 tables or 18 chairs. Given this, we know that
a. Mike has an absolute advantage in chairs.
b. Mike has a comparative advantage in tables.
c. Sandy has an absolute advantage in chairs.
d. Sandy has a comparative advantage in chairs.
____ 83. The principle of comparative advantage as we know it today was developed by
a. Aristotle.
b. David Ricardo.
c. John Maynard Keynes.
d. Adam Smith.
____ 84. When a country has a comparative advantage in producing a certain good,
a. the country should import that good.
b. the country should produce just enough of that good for its own consumption.
c. the country’s opportunity cost of that good is high relative to other countries’ opportunity
costs of that same good.
d. None of the above is correct.
____ 85. Trade can make everybody better off because it
a. increases cooperation among nations.
b. allows people to specialize according to comparative advantage.
c. requires some workers in an economy to be retrained.
d. reduces competition among domestic companies.
____ 86. Suppose that a worker in Cornland can grow either 40 bushels of corn or 10 bushels of oats per year, and a
worker in Oatland can grow either 20 bushels of corn or 5 bushels of oats per year. There are 20 workers in
Cornland and 20 workers in Oatland. Which of the following statements is true?
a. Both countries could gain from trade with each other.
b. Neither country could gain from trade with each other because Cornland has an absolute
advantage in both goods.
c. Neither country could gain from trade with each other because neither one has a
comparative advantage.
d. Oatland could gain from trade between the two countries, but Cornland definitively would
lose.
Figure 2-3
____ 87. Refer to Figure 2-3. The economy has the ability to produce at which point or points?
a. B, D, E
b. A, B, D, E
c. D, C
d. D
____ 88. Refer to Figure 2-3. Which point represents the situation in which the economy is producing its maximum
possible quantity of tubas?
a. A
b. B
c. D
d. E
____ 89. Refer to Figure 2-3. At which point or points can the economy not currently produce?
a. A
b. C
c. A, C
d. A, C, D
____ 90. Refer to Figure 2-3. Efficient production is represented by which point or points?
a. B, E
b. A, B, E
c. D
d. C
____ 91. Refer to Figure 2-3. Inefficient production is represented by which point or points?
a. D
b. D, E
c. A, C
d. A, B
Figure 2-5
____ 92. Refer to Figure 2-5. Which of the following events would explain the shift of the production possibilities
frontier from A to B?
a. The economy experienced a technological advance in the production of batteries.
b. The economy’s citizens developed an enhanced taste for batteries.
c. More capital became available in the economy.
d. More labor became available in the economy.
____ 93. Refer to Figure 2-5. The shift of the production possibilities frontier from A to B illustrates
a. simultaneous technological advances in the battery and bagel industries.
b. a reallocation of resources away from the production of bagels and toward the production
of batteries.
c. economic growth.
d. All of the above are correct.
Short Answer
94. How does the study of economics depend upon the phenomenon of scarcity?
95. One tradeoff society faces is between efficiency and equity. Define each term. If the U.S. government
redistributes income from the rich to the poor, explain how this action affects equity as well as efficiency in
the economy.
96. Define opportunity cost. What is the opportunity cost to you of attending college? What was your opportunity
cost of coming to class today?
97. With the understanding that people respond to incentives, outline the possible outcome for teachers if the K12 school year is extended to 11 months per year instead of the existing 9 months per year.
98. Using this outline, draw a circular-flow diagram representing the interactions between households and firms
in a simple economy. Explain briefly the various parts of the diagram.
99. The prairie dog has always been considered a problem for American cattle ranchers. They dig holes that cattle
and horses can step in and they eat grass necessary for cattle. Recently, ranchers have discovered that there is
a demand for prairie dogs as pets. In some areas prairie dogs can sell for as high as $150. Cattlemen are now
fencing off prairie dog towns on their land so these towns will not be disturbed by their cattle.
Draw a production possibilities frontier showing a rancher's production option between cattle production and
prairie dog production showing increasing opportunity cost and show what would happen in each of the
following situations. (Use a separate graph for each situation.)
a. The outcome is efficient, with ranchers choosing to produce equal numbers of cattle and
prairie dogs.
b. As a protest against the government introducing the gray wolf back into the wild in their
state, ranchers decide to withhold 25 percent of the available grassland for grazing.
c. The price of prairie dogs increases to $200 each, so ranchers decide to allot additional
land for prairie dogs.
d. The government grants new leases to ranchers, giving them 10,000 new acres of
grassland each for grazing.
e. A drought destroys most of the available grass for grazing of cattle, but not for prairie
dogs since they also eat plant roots.
100. Identify each of the following topics as being part of microeconomics or macroeconomics:
a. the impact of a change in consumer income on the purchase of luxury automobiles
b. the effect of a change in the price of Coke on the purchase of Pepsi
c. the impact of a war in the Middle East on the rate of inflation in the United States
d. factors influencing the rate of economic growth
e. factors influencing the demand for tractors
f. the impact of tax policy on national saving
g. the effect of pollution taxes on the U.S. copper industry
h. the degree of competition in the cable television industry
i. the effect of a balanced-budget amendment on economic stability
j. the impact of deregulation on the savings and loan industry
101. Explain the difference between absolute advantage and comparative advantage. Which is more important in
determining trade patterns, absolute advantage or comparative advantage? Why?
102. The only two countries in the world, Alpha and Omega, face the following production possibilities frontiers.
a.
b.
c.
d.
Assume that each country decides to use half of its resources in the production of each
good. Show these points on the graphs for each country as point A.
If these countries choose not to trade, what would be the total world production of
popcorn and peanuts?
Now suppose that each country decides to specialize in the good in which each has a
comparative advantage. By specializing, what is the total world production of each
product now?
If each country decides to trade 100 units of popcorn for 100 units of peanuts, show on
the graphs the gain each country would receive from trade. Label these points B.
103. Julia can fix a meal in 1 hour, and her opportunity cost of one hour is $50. Jacque can fix the same kind of
meal in 2 hours, and his opportunity cost of one hour is $20. Will both Julia and Jacque be better off if she
pays him $45 per meal to fix her meals? Explain.
104. Gary and Diane must prepare a presentation for their marketing class. As part of their presentation, they must
do a series of calculations and prepare 50 PowerPoint slides. It would take Gary 10 hours to do the required
calculation and 10 hours to prepare the slides. It would take Diane 12 hours to do the calculations and 20
hours to prepare the slides.
a. How much time would it take the two to complete the project if they divide the calculations
equally and the slides equally?
b. How much time would it take the two to complete the project if they use comparative
advantage and specialize in calculating or preparing slides?
c. If Diane and Gary have the same opportunity cost of $5 per hour, is there a better solution than
for each to specialize in calculating or preparing slides?
Practice questions for Chapters 1,2 & 3 TEST
Answer Section
MULTIPLE CHOICE
1. ANS:
MSC:
2. ANS:
MSC:
3. ANS:
MSC:
4. ANS:
MSC:
5. ANS:
MSC:
6. ANS:
MSC:
7. ANS:
MSC:
8. ANS:
MSC:
9. ANS:
MSC:
10. ANS:
MSC:
11. ANS:
MSC:
12. ANS:
MSC:
13. ANS:
MSC:
14. ANS:
MSC:
15. ANS:
MSC:
16. ANS:
MSC:
17. ANS:
MSC:
18. ANS:
MSC:
19. ANS:
MSC:
20. ANS:
TOP:
21. ANS:
MSC:
22. ANS:
A
DIF: 2
REF:
Interpretive
A
DIF: 1
REF:
Definitional
A
DIF: 3
REF:
Applicative
C
DIF: 2
REF:
Interpretive
D
DIF: 1
REF:
Definitional
A
DIF: 2
REF:
Applicative
D
DIF: 2
REF:
Interpretive
B
DIF: 2
REF:
Interpretive
B
DIF: 3
REF:
Analytical
A
DIF: 2
REF:
Interpretive
D
DIF: 2
REF:
Interpretive
B
DIF: 1
REF:
Definitional
D
DIF: 2
REF:
Interpretive
C
DIF: 1
REF:
Interpretive
A
DIF: 2
REF:
Interpretive
B
DIF: 2
REF:
Interpretive
A
DIF: 2
REF:
Interpretive
A
DIF: 2
REF:
Applicative
B
DIF: 2
REF:
Interpretive
A
DIF: 2
REF:
Productivity, Market power, Inflation
A
DIF: 1
REF:
Definitional
C
DIF: 2
REF:
1-0
TOP: Scarcity
1-0
TOP: Economies, Scarcity
1-1
TOP: Tradeoffs
1-1
TOP: Marginal changes
1-1
TOP: Marginal changes
1-1
TOP: Marginal changes
1-1
TOP: Marginal changes
1-1
TOP: Marginal changes
1-1
TOP: Incentives
1-1, 1-2
TOP: Markets
1-2
TOP: Market economy
1-2
TOP: Market failure
1-2
TOP: Communism
1-2
TOP: Markets, Government, Trade
1-2
TOP: Market failure
1-2
TOP: Externalities
1-3
TOP: Inflation, Money
1-3
TOP: Standard of living
1-3
TOP: Inflation, Money
1-2, 1-3
2-1
MSC: Applicative
TOP: Scientific method
2-1
TOP: Scientific method
MSC:
23. ANS:
MSC:
24. ANS:
MSC:
25. ANS:
MSC:
26. ANS:
MSC:
27. ANS:
MSC:
28. ANS:
MSC:
29. ANS:
MSC:
30. ANS:
TOP:
MSC:
31. ANS:
MSC:
32. ANS:
MSC:
33. ANS:
MSC:
34. ANS:
MSC:
35. ANS:
MSC:
36. ANS:
MSC:
37. ANS:
MSC:
38. ANS:
MSC:
39. ANS:
MSC:
40. ANS:
TOP:
41. ANS:
TOP:
42. ANS:
TOP:
43. ANS:
MSC:
44. ANS:
MSC:
45. ANS:
MSC:
Interpretive
D
DIF: 2
REF: 2-1
TOP:
Interpretive
A
DIF: 2
REF: 2-1
TOP:
Interpretive
C
DIF: 2
REF: 2-1
TOP:
Interpretive
D
DIF: 2
REF: 2-1
TOP:
Interpretive
D
DIF: 3
REF: 2-1
TOP:
Applicative
B
DIF: 3
REF: 2-1
TOP:
Applicative
A
DIF: 2
REF: 2-1
TOP:
Interpretive
C
DIF: 1
REF: 2-1
Factors of production, Goods and services, Circular-flow diagram
Definitional
B
DIF: 2
REF: 2-1
TOP:
Interpretive
A
DIF: 2
REF: 2-1
TOP:
Interpretive
B
DIF: 2
REF: 2-1
TOP:
Interpretive
A
DIF: 2
REF: 2-1
TOP:
Interpretive
C
DIF: 2
REF: 2-1
TOP:
Interpretive
D
DIF: 2
REF: 2-1
TOP:
Interpretive
B
DIF: 2
REF: 2-1
TOP:
Applicative
D
DIF: 2
REF: 2-1
TOP:
Applicative
A
DIF: 2
REF: 2-1
TOP:
Interpretive
D
DIF: 2
REF: 2-1
Production possibilities frontier, Opportunity cost
MSC:
B
DIF: 2
REF: 2-1
Production possibilities frontier, Opportunity cost
MSC:
D
DIF: 2
REF: 2-1
Production possibilities frontier, Opportunity cost
MSC:
C
DIF: 3
REF: 2-1
TOP:
Analytical
A
DIF: 2
REF: 2-1
TOP:
Interpretive
B
DIF: 2
REF: 2-1
TOP:
Interpretive
Assumptions
Assumptions
Assumptions
Assumptions
Economic models
Circular-flow diagram
Factors of production
Circular-flow diagram
Circular-flow diagram
Circular-flow diagram
Circular-flow diagram
Circular-flow diagram
Circular-flow diagram
Circular-flow diagram
Circular-flow diagram
Efficiency
Interpretive
Interpretive
Interpretive
Production possibilities frontier
Production possibilities frontier
Opportunity cost
46. ANS:
TOP:
47. ANS:
MSC:
48. ANS:
MSC:
49. ANS:
MSC:
50. ANS:
MSC:
51. ANS:
MSC:
52. ANS:
MSC:
53. ANS:
MSC:
54. ANS:
MSC:
55. ANS:
MSC:
56. ANS:
MSC:
57. ANS:
MSC:
58. ANS:
MSC:
59. ANS:
MSC:
60. ANS:
MSC:
61. ANS:
TOP:
62. ANS:
TOP:
63. ANS:
MSC:
64. ANS:
MSC:
65. ANS:
MSC:
66. ANS:
MSC:
67. ANS:
MSC:
68. ANS:
MSC:
69. ANS:
MSC:
D
DIF: 2
REF: 2-1
Opportunity cost, Production possibilities frontier
C
DIF: 1
REF: 2-1
Definitional
D
DIF: 1
REF: 2-2
Interpretive
B
DIF: 2
REF: 2-2
Applicative
C
DIF: 1
REF: 2-5
Interpretive
C
DIF: 2
REF: 2-5
Interpretive
B
DIF: 1
REF: 3-0
Interpretive
B
DIF: 1
REF: 3-1
Interpretive
A
DIF: 2
REF: 3-1
Applicative
B
DIF: 2
REF: 3-1
Interpretive
C
DIF: 2
REF: 3-2
Applicative
C
DIF: 2
REF: 3-2
Applicative
C
DIF: 2
REF: 3-2
Applicative
D
DIF: 2
REF: 3-2
Applicative
B
DIF: 2
REF: 3-2
Applicative
C
DIF: 3
REF: 3-2
Absolute advantage, Comparative advantage
A
DIF: 3
REF: 3-2
Absolute advantage, Comparative advantage
D
DIF: 2
REF: 3-2
Applicative
B
DIF: 2
REF: 3-2
Applicative
A
DIF: 2
REF: 3-2
Applicative
D
DIF: 2
REF: 3-2
Applicative
D
DIF: 2
REF: 3-2
Applicative
C
DIF: 2
REF: 3-2
Applicative
A
DIF: 2
REF: 3-2
Applicative
MSC: Applicative
TOP: Microeconomics, Macroeconomics
TOP: Economists
TOP: Normative statements
TOP: Graphs
TOP: Graphs
TOP: Trade
TOP: Trade
TOP: Trade
TOP: Trade
TOP: Opportunity cost
TOP: Opportunity cost
TOP: Opportunity cost
TOP: Opportunity cost
TOP: Absolute advantage
MSC: Applicative
MSC: Applicative
TOP: Comparative advantage
TOP: Specialization, Trade
TOP: Absolute advantage
TOP: Production possibilities frontier
TOP: Production possibilities frontier
TOP: Production possibilities frontier
TOP: Comparative advantage
70. ANS:
MSC:
71. ANS:
MSC:
72. ANS:
MSC:
73. ANS:
MSC:
74. ANS:
TOP:
75. ANS:
TOP:
76. ANS:
MSC:
77. ANS:
MSC:
78. ANS:
TOP:
79. ANS:
MSC:
80. ANS:
MSC:
81. ANS:
MSC:
82. ANS:
TOP:
83. ANS:
MSC:
84. ANS:
MSC:
85. ANS:
MSC:
86. ANS:
MSC:
87. ANS:
MSC:
88. ANS:
MSC:
89. ANS:
MSC:
90. ANS:
MSC:
91. ANS:
MSC:
92. ANS:
MSC:
93. ANS:
MSC:
D
DIF: 2
REF: 3-2
Applicative
C
DIF: 2
REF: 3-2
Applicative
A
DIF: 2
REF: 3-2
Applicative
C
DIF: 2
REF: 3-2
Applicative
D
DIF: 3
REF: 3-2
Absolute advantage, Comparative advantage
C
DIF: 3
REF: 3-2
Absolute advantage, Comparative advantage
B
DIF: 3
REF: 3-2
Applicative
A
DIF: 3
REF: 3-2
Applicative
D
DIF: 3
REF: 3-2
Absolute advantage, Comparative advantage
B
DIF: 1
REF: 3-2
Interpretive
C
DIF: 1
REF: 3-2
Definitional
C
DIF: 2
REF: 3-2
Interpretive
A
DIF: 3
REF: 3-2
Absolute advantage, Comparative advantage
B
DIF: 1
REF: 3-2
Definitional
D
DIF: 2
REF: 3-3
Interpretive
B
DIF: 2
REF: 3-3
Interpretive
C
DIF: 3
REF: 3-3
Applicative
A
DIF: 2
REF: 2-1
Interpretive
D
DIF: 1
REF: 2-1
Interpretive
C
DIF: 2
REF: 2-1
Interpretive
A
DIF: 2
REF: 2-1
Interpretive
A
DIF: 2
REF: 2-1
Interpretive
A
DIF: 2
REF: 2-1
Interpretive
C
DIF: 3
REF: 2-1
Applicative
TOP: Opportunity cost
TOP: Opportunity cost
TOP: Opportunity cost
TOP: Opportunity cost
MSC: Applicative
MSC: Applicative
TOP: Production possibilities frontier
TOP: Production possibilities frontier
MSC: Applicative
TOP: Comparative advantage, Trade
TOP: Absolute advantage
TOP: Gains from trade
MSC: Applicative
TOP: Economists
TOP: Comparative advantage
TOP: Gains from trade
TOP: Comparative advantage, Trade
TOP: Production possibilities frontier
TOP: Production possibilities frontier
TOP: Production possibilities frontier
TOP: Production possibilities frontier
TOP: Production possibilities frontier
TOP: Production possibilities frontier
TOP: Production possibilities frontier
SHORT ANSWER
94. ANS:
Since economics is the study of how society allocates its scarce resources, if there were no scarcity, there
would be no need for economics. Everyone could have all the goods and services they wanted. No one would
have to make decisions based on tradeoffs, because there would be no opportunity cost associated with the
decision. (It is difficult to conceive of a situation where time is not scarce, however).
DIF: 2
REF: 1-1
TOP: Economics, Scarcity
MSC: Applicative
95. ANS:
Efficiency is the property of society getting the most it can from its scarce resources. Equity is defined as the
property of distributing economic prosperity fairly among the members of society. Often, these two goals
conflict. When the government redistributes income from the rich to the poor, it reduces the reward for
working hard. Fewer goods and services are produced and the economic pie gets smaller. When the
government tries to cut the economic pie into more equal slices, the pie gets smaller. Policies aimed at
achieving a more equal distribution of economic well-being, such as the welfare system, try to help those
members of society who are most in need. The individual income tax asks the financially successful to
contribute more than others to support the government.
DIF: 2
REF: 1-1
TOP: Tradeoffs, Efficiency, Equity
MSC: Interpretive
96. ANS:
Whatever must be given up to obtain some item it its opportunity cost. Basically, this would be a person's
second choice. The opportunity cost of a person attending college is the value of the best alternative use of
that person's time. For most students this would be the income the student gives up by not working. A
student's opportunity cost of coming to class was the value of the best opportunity the student gave up. (For
most students, that seems to be sleep.)
DIF: 2
REF: 1-1
TOP: Opportunity cost
MSC: Interpretive
97. ANS:
The concept of working longer per year would be perceived by many teachers as a definite increase in the cost
of teaching. Even with additional compensation, many teachers look at summers off as a major benefit of the
education profession. If this benefit were eliminated or diminished, some teachers may perceive that the
marginal cost of teaching would now be greater than the marginal benefit and would choose to leave teaching.
DIF: 3
98. ANS:
REF: 1-1
TOP: Incentives
MSC: Analytical
This diagram should duplicate the essential characteristics of the diagram in the text, with an explanation of
the meaning of each flow and each market. It is important that the student understands that the inner loop
represents the flow of real goods and services and that the outer loop represents the corresponding flow of
payments.
DIF: 2
MSC: Interpretive
99. ANS:
REF: 2-1
TOP: Circular-flow diagram
DIF: 3
REF: 2-1
TOP: Production possibilities frontier
MSC: Analytical
100. ANS:
a, b, e, g, h, and j are microeconomic topics. c, d, f, and i are macroeconomic topics.
DIF: 2
REF: 2-1
TOP: Microeconomics, Macroeconomics
MSC: Applicative
101. ANS:
Absolute advantage refers to productivity, as in the producer who can produce a product at a lower cost in
terms of the resources used in production. Comparative advantage refers to the producer who can produce a
product at a lower opportunity cost. Comparative advantage is the principle upon which trade patterns are
based. Comparative advantage is based on opportunity cost, and opportunity cost measures the real cost to an
individual or country of producing a particular product. Opportunity cost is therefore the information
necessary for an individual or nation to determine whether to produce a good or buy it from someone else.
DIF: 2
MSC: Applicative
102. ANS:
REF: 3-2
TOP: Absolute advantage, Comparative advantage, Trade
a.
b.
c.
d.
Alpha would be producing 125 units of peanuts and 75 units of popcorn (point A on its
production possibilities frontier) and Omega would be producing 50 units of peanuts and
150 units of popcorn (point A on its production possibilities frontier).
The total world production of peanuts would be 175 units and the total world production of
popcorn would be 225 units.
The total world production of peanuts would now be 250 units and the total world
production of popcorn would now be 300 units.
Alpha would be producing 250 units of peanuts and would trade 100 of them to Omega,
leaving Alpha with 150 units of peanuts. Alpha would then receive 100 units of popcorn
from Omega. Omega would be producing 300 units of popcorn and would trade 100 of
them to Alpha, leaving Omega with 200 units of popcorn. Omega would then receive 100
units of peanuts from Alpha.
DIF: 2
REF: 3-2
TOP: Production possibilities frontier, Trade
MSC: Applicative
103. ANS:
Since Julia's opportunity cost of preparing a meal is $50, and Jacque's opportunity cost of preparing a meal is
$40, each of them will be better off by $5 per meal if this arrangement is made.
DIF: 2
REF: 3-2
TOP: Opportunity cost
MSC: Applicative
104. ANS:
a. If both tasks are divided equally, it will take 11 hours for the calculations and 15 hours for the
writing, for a total of 26 hours.
b. If Diane specializes in calculating and Gary specializes in preparing slides, it will take 22 hours
to complete the project.
c. If Diane specializes in calculating, her opportunity cost will be $60; hence, Diane would be
better off if she paid Gary any amount less than $60 to do the calculating. Since Gary's
opportunity cost of doing the calculations is only $50, he would be better off if Diane paid him
between $50 and $60 dollars to do the calculations. In this case, the total time spent on the
project would be 20 hours.
DIF: 2
MSC: Applicative
REF: 3-2
TOP: Opportunity cost, Comparative advantage
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