Test 1

Economics deals primarily with the concept of

a. scarcity.

b. poverty.

c. change.

d. power.

The adage, There is no such thing as a free lunch

a. even people on welfare have to pay for food.

b. the cost of living is always increasing.

c. to get something we like, we usually have to give up another thing we like.

d. all costs are included in the price of a product.

Guns and butter are used to represent the classic societal tradeoff between spending on

a. durable and nondurable goods.

b. imports and exports.

c. national defense and consumer goods.

d. law enforcement and agriculture.

Efficiency means that

a. society is conserving resources in order to save them for the future.

b. society's goods and services are distributed equally among society's members.

c. society's goods and services are distributed fairly, though not necessarily equally, among society's members.

d. society is getting the maximum benefits from its scarce resources.

The word margin" means"

a. space.

b. measure.

c. edge.

d. distance.

In a market economy, who makes the decisions that guide most economic activity?

a. firms and households

b. households only

c. government

d. firms only

The term invisible hand" was coined by"

a. Adam Smith.

b. David Ricardo.

c. Benjamin Franklin.

d. Karl Marx.

The term market failure refers to

a. a situation in which the market on its own fails to allocate resources efficiently.

b. an unsuccessful advertising campaign which reduces demand for a product.

c. a situation in which competition among firms becomes ruthless.

d. a firm which is forced out of business because of losses.

Market power refers to the

a. power of the government to regulate a market.

b. ability of a person or small group to successfully market new products.

c. importance of a certain market in relation to the overall economy.

d. power of a single person or small group to influence market prices.

The term productivity""

d. refers to the variety of goods and services from which households can choose when they shop.

c. refers to the quantity of goods and services produced from each hour of a worker's time.

b. is seldom used by economists, as its meaning is not precise.

a. means the same thing as efficiency.""

An increase in the overall level of prices in an economy is referred to as

a. economic growth.

c. the price effect.

d. the demand effect.

b. inflation.

The business cycle is the

a. relationship between unemployment and inflation.

d. predictable changes in economic activity due to changes in government spending and taxes.

c. positive relationship between the quantity of money in an economy and inflation.

b. irregular fluctuations in economic activity.

Economists use the word equity to describe a situation in which

a. society is getting the maximum benefits from its scarce resources.

b.each member of society has access to abundant quantities of goods and services, regardless of his or her income.

c.the benefits of society's resources are distributed fairly among society's members.

d, each member of society has the same income.

Maurice receives $100 as a birthday gift. In deciding how to spend the money, he narrows his options down to four choices: Option A, Option B, Option C, and Option D. Each option costs $100. Finally he decides on Option B. The opportunity cost of this decision is

a. $300. b.the value to Maurice of Options A, C and D combined. c. $100.

d.the value to Maurice of the option he would have chosen had Option B not been available.

U.S. laws requiring that drivers wear seat belts have resulted in

a. fewer accidents and fewer deaths per accident.

b. a reduction in both driver deaths and pedestrian deaths.

c.fewer driver deaths, fewer accidents and fewer pedestrian deaths.

d.little change in the number of driver deaths, but more accidents and more pedestrian deaths.

Your professor loves her work, teaching economics. She has been offered other positions in the corporate world that would increase her income by 25 percent, but she has decided to continue working as a professor. Her decision would not change unless the marginal

a.cost of teaching decreased.

b.cost of teaching increased.

c.benefit of teaching increased.

d.cost of a corporate job increased.

Trade between the United States and India

a. is a losing proposition for India because U.S. workers are more productive.

b.benefits both the United States and India.

c.is a losing proposition for the United States because India has cheaper labor.

d.is a losing proposition for India because capital is much more abundant in the U.S. than in India.

Prices direct economic activity in a market economy by

a. influencing the actions of buyers and sellers.

b. allocating goods and services in the most equitable way.

c. reducing scarcity of the goods and services produced.

d. eliminating the need for government intervention.

Which is the most correct statement about the invisible hand?

a. Market power is the instrument with which the invisible hand directs economic activity.

b. The invisible hand is more effective at ensuring efficiency than it is at ensuring equity.

c. The invisible hand always ensures both equity and efficiency.

d. The invisible hand is more effective at ensuring equity than it is at ensuring efficiency.

Mallory decides to spend three hours working overtime rather than watching a video with her friends. She earns $8 an hour. Her opportunity cost of working is a. the enjoyment she would have received had she watched the video. b. the $24 minus the enjoyment she would have received from watching the video.

c. the $24 she earns working. d. nothing, since she would have received less than $24 of enjoyment from the video.

Russell spends an hour studying instead of playing tennis. The opportunity cost to him of studying is

a. zero. Since Russell chose to study rather than to play tennis, the value of studying must have been greater than the value of playing tennis.

b.the improvement in his grades from studying for the hour.

c. the improvement in his grades from studying minus the enjoyment of playing tennis.

d. the enjoyment and exercise he would have received had he played tennis.

After much consideration, you have chosen Cancun over Ft. Lauderdale as your Spring Break destination this year. However, Spring Break is still months away, and you may reverse this decision. Which of the following events would prompt you to reverse this decision?

a. The marginal benefit of going to Cancun increases.

b. The marginal benefit of going to Ft. Lauderdale decreases.

c. The marginal cost of going to Ft. Lauderdale decreases.

d. The marginal cost of going to Cancun decreases.

A typical worker in Italy can produce 24 units of product in an eight-hour day, while a typical worker in Poland can produce 25 units of product in a 10-hour day. We can conclude that

a. there will be no difference between the standard of living in Italy and Poland.

b. worker productivity in Poland is higher than in Italy.

c. the standard of living will likely be higher in Italy than in Poland.

d. productivity is 3 units per hour for the Polish worker and 21/2 units per hour for the Italian worker.

In the imaginary country of Countriana, in 1996, the average worker had to work 10 hours to produce 20 units of output. In that same country in 2006, the average worker needed to work 18 hours to produce 36 units of output. In that country, the productivity of the average worker

a. increased by 2 percent between 1996 and 2006.

b. remained unchanged between 1996 and 2006.

c. increased by 5 percent between 1996 and 2006.

d. decreased by 3 percent between 1996 and 2006.

Refer to Figure 2-2. The figure represents a circular-flow diagram. If households are buyers in the markets represented by Box C, then

a. Box C must represent the markets for the factors of production.

b. Box D must represent the markets for goods and services.

c. firms are sellers in the markets represented by Box C.

d. All of the above are correct.

Refer to Figure 2-2. The figure represents a circular-flow diagram. If the owners of land, labor, and capital are represented by Box B, then

a. the government is represented by Box A.

b. firms are represented by Box C.

c. firms are represented by Box A.

d. firms are sellers in Box B.

In the markets for goods and services,

a. households provide firms with savings for investment.

b. households provide firms with labor, land, and capital.

c. firms provide households with output.

d. the government provides firms with inputs for the production process.

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 economic models.

a. 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.

Refer to Figure 2-2. The figure represents a circular-flow diagram. Boxes A and B represent

a. firms and households.

b. households and government.

c. the markets for goods and services and the financial markets.

d. the markets for goods and the markets for services.

In the circular-flow diagram,

a. factors of production flow from government to firms.

b. goods and services flow from households to firms.

c. income paid to the factors of production flows from firms to households.

d.spending on goods and services flows from firms to households.

Refer to Figure 2-8. If this economy puts all of its resources into the production of bathtubs it could produce

a. 20 barrels and 12 bathtubs.

b. no barrels and 14 bathtubs.

c. no barrels and 16 bathtubs.

d. More information is required in order to make this determination.

Refer to Figure 2-2. The figure represents a circular-flow diagram. If the flow of goods and services is part of what is represented by the inner loop, then

a. the flow of factors of production is also part of what is represented by the inner loop.

b. the flow of income paid to households is also part of what is represented by the inner loop.

c. Box C must represent households and Box D must represent firms.

d. households must be sellers of output.

Bill has noticed that increases in unemployment insurance claims are associated with recessions, and therefore he advocates limits on unemployment insurance so as to prevent recessions. Martha has noticed that most drug addicts once attended schools, and therefore she advocates getting rid of schools so as to prevent drug addiction.

a. The reasoning of both Bill and Martha suffers from the omitted variable problem.

b. The reasoning of both Bill and Martha suffers from the reverse causality problem.

c. Bill's reasoning suffers from the reverse causality problem and Martha's reasoning suffers from the omitted variable problem.

d. Martha's reasoning suffers from the reverse causality problem and Bill's reasoning suffers from the omitted variable problem.

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.

Microeconomics is the study of

a.the behavior of consumers.

b. how individual households and firms make decisions.

c. how government affects the economy.

d. how the economy as a whole works.

Refer to Figure 2-6. If the economy moves from point C to point B, then which of the following statements is correct?

a. The economy benefited from a technological advance in the production of baseballs.

b. The opportunity cost of each additional baseball is 2 bananas.

c. The opportunity cost of each additional banana is 2 baseballs.

d. The move involves no opportunity cost; it simply reflects the desires of the economy’s citizens.

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.

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.

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

Refer to Figure 2-1. Which arrow shows the flow of income payments?

a. A

b. B

c. C

d. D

In building economic models, economists often omit

a. assumptions.

b. theories.

c. details.

d. equations.

Refer to Figure 2-2. The figure represents a circular-flow diagram. If Box A represents firms, then which box represents households?

a. Box B

b. Box C

c. Box D

d. Any one of the other boxes (B, C, or D) could represent households.

A circular-flow diagram is a model that

a. helps to explain how participants in the economy interact with one another.

b. helps to explain how the economy is organized.

c. incorporates the markets for the factors of production.

d. All of the above are correct.

In the markets for factors of production,

a.households provide firms with labor, land, and capital.

b.households provide firms with savings for investment.

c.firms provide households with goods and services.

d.the government provides firms with inputs for the production process.

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

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

Which of the following is not true about most economic models?

a.They are composed of equations and diagrams.

b.They contribute very little to economists’ understanding of the real world.

c.They omit many features of the real-world economy.

d.In constructing models, economists make assumptions.

Refer to Figure 2-1. Which arrow shows the flow of land, labor, and capital?

a. A

b. B

c. C

d. D

The opportunity cost of an item is

a. the number of hours that one must work in order to buy one unit of the item.

b. what you give up to get that item.

c. always less than the dollar value of the item.

d. always greater than the cost of producing the item.

Refer to Figure 3-2. For Ben, the opportunity cost of 1 pound of ice cream is

a. 1/14 pound of cones.

b. 1/2 pound of cones.

c. 2 pounds of cones.

d. 4 pound of cones.

Refer to Figure 3-1. The opportunity cost of 2 bushels of corn for Cliff is

a. 2 bushels of wheat.

b. 3 bushels of wheat.

c. 6 bushels of wheat.

d. 12 bushels of wheat.

Refer to Table 3-5. If the United States and Japan trade based on the principle of comparative advantage, the United States will

a. export cars (but not airplanes) to Japan.

b. export airplanes (but not cars) to Japan.

c. export cars and airplanes to Japan.

d. import cars and airplanes from Japan.

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

Refer to Figure 3-5. The graph that is shown is called a

a. supply line.

b. opportunity line.

c. production possibilities frontier.

d. consumption possibilities frontier.

Refer to Figure 3-2. For Jerry, the opportunity cost of 1 pound of cones is

a. 1/3 pound of ice cream.

b. 2/3 pound of ice cream.

c. 3/2 pounds of ice cream.

d. 2 pounds of ice cream.

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.

Refer to Figure 3-2. Ben has an absolute advantage in

a. ice cream and Jerry has an absolute advantage in cones.

b. cones and Jerry has an absolute advantage in ice cream.

c. neither good and Jerry has an absolute advantage in both goods.

d. both goods and Jerry has an absolute advantage in neither good.

Refer to Figure 3-5. Which of the following combinations of cars and corn could Country A produce in a given month?

a. 7 cars and 40 bushels of corn

b. 5 cars and 92 bushels of corn

c. 3 cars and 165 bushels of corn

d. 2 cars and 180 bushels of corn

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.

Specialization and trade are closely linked to

a. absolute advantage.

b. comparative advantage.

c. gains to some traders that exactly offset losses to other traders.

d. shrinkage of the economic pie.

Refer to Table 3-5. The United States has an absolute advantage in

a. airplanes and Japan has an absolute advantage in cars.

b. cars and Japan has an absolute advantage in airplanes.

c. both cars and airplanes.

d. neither cars nor airplanes.

Refer to Figure 3-1. The opportunity cost of 1 bushel of wheat for Cliff is

a. 1/3 bushel of corn.

b. 2/3 bushel of corn.

c. 1 bushel of corn.

d. 3/2 bushels of corn.

Refer to Figure 3-1. Suppose Cliff must work 5 hours to produce each bushel of corn. Then Cliff’s production possibilities frontier is based on how many hours of work?

a. 0.2 hours

b. 2.5 hours

c. 15 hours

d. 20 hours

Refer to Figure 3-2. For Jerry, the opportunity cost of 1 pound of ice cream is

a. 1/3 pound of cones.

b. 2/3 pound of cones.

c. 3/2 pounds of cones.

d. 2 pounds of cones.

Refer to Figure 3-2. For Ben, the opportunity cost of 1 pound of cones is

a. 1/4 pound of ice cream.

b. 1/2 pound of ice cream.

c. 2 pounds of ice cream.

d. 4 pounds of ice cream.

Refer to Figure 3-3. Ginger has a comparative advantage in

a. tap shoes and Fred has a comparative advantage in ballet slippers.

b. both goods and Fred has a comparative advantage in neither good.

c. ballet slippers and Fred has a comparative advantage in tap shoes.

d. neither good and Fred has a comparative advantage in both goods.

Refer to Figure 3-1. Which of the following statements is correct?

a. Paul has a comparative advantage in both wheat and corn.

b. Paul has a comparative advantage in wheat and Cliff has a comparative advantage in corn.

c. Cliff has a comparative advantage in wheat and Paul has a comparative advantage in corn.

d. Cliff has a comparative advantage in both wheat and corn.

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.

Refer to Figure 3-5. For Country A, what is the opportunity cost of each additional car that it decides to produce?

a. 25 bushels of corn

b. 30 bushels of corn

c. 35 bushels of corn

d. 40 bushels of corn

Refer to Figure 3-2. Ben has a comparative advantage in

a. cones and Jerry has a comparative advantage in ice cream.

b. ice cream and Jerry has a comparative advantage in cones.

c. neither good and Jerry has a comparative advantage in both goods.

d. both goods and Jerry has a comparative advantage in neither good.

Refer to Figure 3-1. Assume both Paul and Cliff divide their time equally between the production of corn and wheat, and they do not trade. If they are the only producers of wheat and corn, then total production of wheat and corn is

a. 8 bushels of wheat and 7 bushels of corn.

b. 7 bushels of wheat and 6 bushels of corn.

c. 6 bushels of wheat and 8 bushels of corn.

d. 7 bushels of wheat and 7 bushels of corn.

Refer to Figure 3-2. Suppose Jerry’s production possibilities frontier is based on 4 hours of work. Jerry requires

a. 1/4 hour to produce 1 pound of ice cream and 3/8 hour to produce 1 pound of cones.

b. 1/2 hour to produce 1 pound of ice cream and 3/4 hour to produce 1 pound of cones.

c. 1 hour to produce 1 pound of ice cream and 2/3 hour to produce 1 pound of cones.

d. 1 hour to produce 1 pound of ice cream and 3/2 hours to produce 1 pound of cones.

Refer to Figure 3-3. Ginger has an absolute advantage in

a. ballet slippers and Fred has an absolute advantage in tap shoes.

b. tap shoes and Fred has an absolute advantage in ballet slippers.

c. neither good and Fred has an absolute advantage in both goods.

d. both goods and Fred has an absolute advantage in neither good.