TEST ITEM FILE - testbankonly.comtestbankonly.com/pdf/Essentials-of-Economics-3rd-Edition-Hubbard... · vi Hubbard/O’Brien – Economics, Fourth Edition ... 2 Hubbard/OʹBrien Essentials

Boston Columbus Indianapolis New York San Francisco Upper Saddle River

Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto

Delhi Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo

TEST ITEM FILEfor

Randy MenthenitisRichland College

826941_Essen_TIF_HO_ttl.indd 1 4/23/12 10:45 AM

AVP/Executive Editor: David AlexanderExecutive Development Editor: Lena BuonannoEditorial Project Manager: Lindsey SloanAssociate Production Project Manager: Alison EusdenSenior Manufacturing Buyer: Carol Melville

Copyright © 2013, 2009, 2007 Pearson Education, Inc., publishing as Prentice Hall. All rights reserved. Manufactured in the United States of America. This publication is protected by Copyright, and permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. To obtain permission(s) to use material from this work, please submit a written request to Pearson Education, Inc., Permissions Department, One Lake Street, Upper Saddle River, New Jersey 07458, or you may fax your request to 201-236-3290.

10 9 8 7 6 5 4 3 2 1

ISBN-10: 0-13-282694-1 ISBN-13: 978-0-13-282694-5

www.pearsonhighered.com

826941_Essen_TIF_HO_ttl.indd 2 4/23/12 10:45 AM

Contents Chapter 1 Economics: Foundations and Models ........................................................................... 1

Chapter 2 Trade‐offs, Comparative Advantage, and the Market System ................................ 39

Chapter 3 Where Prices Come From: The Interaction of Demand and Supply ....................... 87

Chapter 4 Market Efficiency, and Market Failure ..................................................................... 130

Chapter 5 The Economics of Health Care ................................................................................... 182

Chapter 6 Firms, the Stock Market, and Corporate Governance ............................................. 212

Chapter 7 Consumer Choice and Elasticity ................................................................................ 240

Chapter 8 Technology, Production, and Costs ........................................................................... 298

Chapter 9 Firms in Perfectly Competitive Markets ................................................................... 343

Chapter 10 Monopoly and Antitrust Policy ................................................................................. 394

Chapter 11 Monopolistic Competition and Oligopoly................................................................ 441

Chapter 12 GDP: Measuring Total Production and Income ...................................................... 506

Chapter 13 Unemployment and Inflation ..................................................................................... 539

Chapter 14 Economic Growth, the Financial System, and Business Cycles ............................. 579

Chapter 15 Aggregate Demand and Aggregate Supply Analysis ............................................. 615

Chapter 16 Money, Banks, and the Federal Reserve System ..................................................... 655

Chapter 17 Monetary Policy ........................................................................................................... 692

Chapter 18 Fiscal Policy .................................................................................................................. 741

Chapter 19 Comparative Advantage, International Trade, and Exchange Rates .................... 780

Copyright © 2013 Pearson Education, Inc.

Test Item File This Test Item File (TIF) was prepared by Randy Methenitis of Richland College. The TIF includes multiple-choice questions, true/false, short-answer, and graphing questions that are annotated with the following information:

• Difficulty: 1 for straight recall; 2 for some analysis; 3 for complex analysis

• Type: multiple-choice, true/false, short-answer, essay

• Topic: the term or concept the question supports

• Learning outcome

• AACSB (see description that follows)

• Page number

• Special feature in the main book: chapter-opening business example, Economics in Your Life, Solved Problem, Making the Connection, Don’t Let this Happen to You! and An Inside Look. Note: This descriptor will appear if you use the electronic TestGen file or Word document file. The descriptor does not appear in the printed volume due to page constraints.

The Association to Advance Collegiate Schools of Business (AACSB) The test bank author has connected select test bank questions to the general knowledge and skill guidelines found in the AACSB standards. What is the AACSB? AACSB is a not-for-profit corporation of educational institutions, corporations, and other organizations devoted to the promotion and improvement of higher education in business administration and accounting. A collegiate institution offering degrees in business administration or accounting may volunteer for AACSB accreditation review. The AACSB makes initial accreditation decisions and conducts periodic reviews to promote continuous quality improvement in management education. Pearson Education is a proud member of the AACSB and is pleased to provide advice to help you apply AACSB Learning Standards. What are AACSB Learning Standards? One of the criteria for AACSB accreditation is the quality of the curricula. Although no specific courses are required, the AACSB expects a curriculum to include learning experiences in such areas as: communication; ethical reasoning; analytic skills; use of information technology; multicultural and diversity; and reflective thinking. These six categories are AACSB Learning Standards. Questions that test skills relevant to these standards are tagged with the appropriate standard. For example, a question testing the moral questions associated with externalities would receive the Ethical Reasoning tag. How Can Instructors Use the AACSB Tags? Tagged questions help you measure whether students are grasping the course content that aligns with the AACSB guidelines noted above. In addition, the tagged questions may help instructors identify potential applications of these skills. This in turn may suggest enrichment activities or other educational experiences to help students achieve these skills.

vi Hubbard/O’Brien – Economics, Fourth Edition


TestGen The computerized TestGen package allows instructors to customize, save, and generate classroom tests. The test program permits instructors to edit, add, or delete questions from the test banks; edit existing graphics and create new graphics; analyze test results; and organize a database of tests and student results. This software allows for extensive flexibility and ease of use. It provides many options for organizing and displaying tests, along with search and sort features. The software and the test banks can be downloaded from the Instructor’s Resource Center www.pearsonhighered.com/irc. Other Supplements Available to You MyEconLab is a unique online course management, testing, and tutorial resource. Visit www.myeconlab.com for more information. The Instructor’s Manual includes chapter-by-chapter summaries, new examples, teaching outlines and tips, and solutions. Download this supplement from the Instructor’s Resource Center (www.pearsonhighered.com/hubbard). Three Sets of PowerPoint® Slides 1. A comprehensive set of PowerPoint® slides can be used by instructors for class presentations

or by students for lecture preview or review.

2. A comprehensive set of PowerPoint® slides has Classroom Response Systems (CRS) questions built in so that instructors can incorporate CRS “clickers” into their classroom lectures.

3. A student version of the PowerPoint® slides is available as .pdf files. Classroom Response Systems (CRS) is a wireless polling technology that enables instructors to pose questions to their students, record results, and display the results instantly. Learn more from your Pearson sales representative. The Instructor’s Resource Disk contains the Test Item Files, TestGen files, Instructor’s Manual, and PowerPoint presentations. Blackboard and WebCT Course Management Systems allow you to fully customize your course content. CourseSmart goes beyond traditional expectations providing instant, online access to the textbooks and course materials you need at a lower cost to students. Learn more at www.coursesmart.com.

Chapter 1Economics: Foundations and Models

1.1 Three Key Economic Ideas

1) Recent changes occurring within the U.S. health care system, including lower insurance

reimbursement rates, have resulted in

A) a growing number of doctorʹs choosing to open private practices.

B) more medical practices being owned by hospitals than by individual doctors.

C) a majority of hospitals closing routine medical practices in order to focus only on

emergency care facilities.

D) a majority of doctors working directly for insurance companies.

Answer: BDiff: 2 Page Ref: 3Topic: ScarcityLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

2) In economics, choices must be made because we live in a world of

A) unemployment. B) scarcity.

C) greed. D) unlimited resources.

Answer: BDiff: 1 Page Ref: 4Topic: ScarcityLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

3) Which of the following statements is true about scarcity?

A) Scarcity refers to the situation in which unlimited wants exceed limited resources.

B) Scarcity is not a problem for the wealthy.

C) Scarcity is only a problem when a country has too large a population.

D) Scarcity arises when there is a wide disparity in income distribution.

Answer: ADiff: 1 Page Ref: 4Topic: ScarcityLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

4) The basic economic problem of ________ has always existed and will continue to exist.

A) scarcity B) efficiency C) inflation D) recession



2 Hubbard/OʹBrien Essentials of Economics, Third Edition

5) By definition, economics is the study of

A) how to make money in the stock market.

B) how to make money in a market economy.

C) the choices people make to attain their goals, given their scarce resources.

D) supply and demand.

Answer: CDiff: 1 Page Ref: 4Topic: ScarcityLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking, Communication

6) An economic ________ is a simplified version of some aspect of economic life used to analyze an

economic issue.

A) market B) trade-off C) variable D) model

Answer: DDiff: 1 Page Ref: 4Topic: Economic ModelsLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

7) Where do economic agents such as individuals, firms and nations, interact with each other?

A) in public locations monitored by the government

B) in any arena that brings together buyers and sellers

C) in any physical location people where people can physically get together for selling goods,

such as shopping malls

D) in any location where transactions can be monitored by consumer groups and taxed by the

government

Answer: BDiff: 1 Page Ref: 4Topic: MarketsLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

8) The term ________ in economics refers to a group of buyers and sellers of a product and the

arrangement by which they come together to trade.

A) collective B) cooperative C) market D) trade-off

Answer: CDiff: 1 Page Ref: 4Topic: MarketsLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking


Chapter 1 Economics: Foundations and Models 3

9) Economists assume that individuals

A) behave in unpredictable ways.

B) will never take actions to help others.

C) prefer to live in a society that values fairness above all else.

D) are rational and respond to incentives.

Answer: DDiff: 1 Page Ref: 5Topic: People Are RationalLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

10) Economists assume that rational behavior is useful in explaining choices people make

A) because irrational people do not make economic choices.

B) even though people may not behave rationally all the time.

C) because individuals act rationally all the time in all circumstances.

D) even though people rarely, if ever, behave in a rational manner.

Answer: BDiff: 2 Page Ref: 5Topic: People Are RationalLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

11) Economists assume that rational people do all of the following except

A) use all available information as they act to achieve their goals.

B) undertake activities that benefit others and hurt themselves.

C) weigh the benefits and costs of all possible alternative actions.

D) respond to economic incentives.


12) Economics does not study correct or incorrect behaviors but rather it assumes that economic

agents behave ________, meaning they make the best decisions given their knowledge of the

costs and benefits.

A) equitably B) rationally C) emotionally D) selfishly




13) Consider the following statements:

a. Car owners purchase more gasoline from a gas station that sells gasoline at a lower price

than other rival gas stations in the area.

b. Banks do not take steps to increase security since they believe it is less costly to allow some

bank robberies than to install expensive security monitoring equipment.

c. Firms produce more of a particular DVD when its selling price rises.

Which of the above statements demonstrates that economic agents respond to incentives?

A) a only.

B) b only.

C) c only.

D) a and b.

E) a, b, and c.

Answer: EDiff: 3 Page Ref: 5Topic: People Respond to Economic IncentivesLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Analytic Skills

14) Suppose that some teachers have decided that economic and financial uncertainty have made

the prospect of retiring more risky, and therefore carry a higher cost than not retiring. By using

all available information as they act to achieve their goals, these teachers are exemplifying the

economic idea that

A) people are rational.

B) people respond to economic incentives.

C) optimal decisions are made at the margin.

D) equity is more important than efficiency.

Answer: ADiff: 2 Page Ref: 5Topic: People Are RationalLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

15) Suppose the U.S. government encouraged new medical school graduates to take over existing

practices from doctors wishing to retire by paying both the new and retiring doctors $100,000.

These doctors would be exemplifying the economic idea that

A) people are rational.

B) people respond to economic incentives.

C) optimal decisions are made at the margin.

D) equity is more important than efficiency.

Answer: BDiff: 2 Page Ref: 5Topic: People Respond to Economic IncentivesLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking



16) Holding all other personal characteristics-such as age, gender, and income-constant,

economists would expect that

A) people with health insurance will be less likely to be overweight than people without

health insurance.

B) people with health insurance will be more likely to be overweight than people without

health insurance.

C) people with health insurance will be equally likely to be overweight as people without

health insurance.

D) there is no correlation between having health insurance and being overweight.

Answer: BDiff: 2 Page Ref: 5-7Topic: People Respond to Economic IncentivesLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

17) Since 1994, obesity rates in the United States

A) have been on a slow and steady decline.

B) have increased in all 50 states.

C) have primarily increased in the Southeast and remained constant or slightly decreased in

the remainder of the country.

D) have remained fairly constant throughout the country.

Answer: BDiff: 1 Page Ref: 5-7Topic: People Respond to Economic IncentivesLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economist

18) In economics, the term ________ means ʺadditionalʺ or ʺextra.ʺ

A) allocative B) marginal C) equity D) optimal

Answer: BDiff: 1 Page Ref: 7Topic: Optimal Decisions Are Made at the MarginLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

19) A grocery store sells a bag of potatoes at a fixed price of $2.30. Which of the following is a term

used by economists to describe the money received from the sale of an additional bag of

potatoes?

A) marginal revenue

B) gross earnings

C) pure profit

D) marginal costs

E) net benefit

Answer: ADiff: 1 Page Ref: 7Topic: Optimal Decisions Are Made at the MarginLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking



20) Economists reason that the optimal decision is to continue any activity up to the point where the

A) marginal benefit is zero.

B) marginal benefit is greater than the marginal cost.

C) marginal cost is zero.

D) marginal benefit equals the marginal cost.

Answer: DDiff: 2 Page Ref: 7Topic: Optimal Decisions Are Made at the MarginLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

21) Marginal analysis involves undertaking an activity

A) until its marginal costs start declining.

B) only when its marginal benefits are positive.

C) until its marginal benefits equal marginal costs.

D) only if its marginal costs are greater than its marginal benefits.

Answer: CDiff: 1 Page Ref: 7Topic: Optimal Decisions Are Made at the MarginLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

22) The revenue received from the sale of ________ of a product is a marginal benefit to the firm.

A) an additional unit B) the total number of units

C) no units D) only profitable units


23) Making optimal decisions ʺat the marginʺ requires

A) making decisions according to oneʹs whims and fancies.

B) making consistently irrational decisions.

C) weighing the costs and benefits of a decision before deciding if it should be pursued.

D) making borderline decisions.

Answer: CDiff: 1 Page Ref: 7Topic: Optimal Decisions Are Made at the MarginLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking



24) Making ʺhow muchʺ decisions involve

A) calculating the total benefits of the activity and determining if you are satisfied with that

amount.

B) calculating the total costs of the activity and determining if you can afford to incur that

expenditure.

C) calculating the average benefit and the average cost of an activity to determine if it is

worthwhile undertaking that activity.

D) determining the additional benefits and the additional costs of that activity.

Answer: DDiff: 2 Page Ref: 7Topic: Optimal Decisions Are Made at the MarginLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

25) The extra cost associated with undertaking an activity is called

A) net loss. B) marginal cost.

C) opportunity cost. D) foregone cost.


26) DeShawnʹs Detailing is a service that details cars at the customersʹ homes or places of work.

DeShawnʹs cost for a basic detailing package is $40, and he charges $75 for this service. For a

total price of $90, DeShawn will also detail the carʹs engine, a service that adds an additional $20

to the total cost of the package. What is DeShawnʹs marginal benefit if he sells a basic detailing

package?

A) $35

B) $75

C) He makes a marginal loss of $15, not a marginal benefit.

D) The marginal benefit cannot be determined.

Answer: BDiff: 2 Page Ref: 7Topic: Optimal Decisions Are Made at the MarginLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Analytic Skills




to the total cost of the package. What is the marginal cost of adding the engine detailing to the

basic detailing package?

A) $20 B) $30

C) $60 D) $60 plus the value of his time

Answer: ADiff: 2 Page Ref: 7Topic: Optimal Decisions Are Made at the MarginLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Analytic Skills






to the total cost of the package. Should DeShawn continue to offer the engine detailing service?

A) yes, he still makes a profit by selling the engine detailing service with the basic detailing

package

B) yes, but only if he raises the price of the basic detailing package

C) no, his marginal benefit is less than his marginal cost

D) More information is needed for DeShawn to make this decision.

Answer: CDiff: 3 Page Ref: 7Topic: Optimal Decisions Are Made at the MarginLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Analytic Skills

Scenario 1-1

Suppose a cell phone manufacturer currently sells 20,000 cell phones per week and makes a profit of $5,000

per week. A manager at the plant observes, ʺAlthough the last 3,000 cell phones we produced and sold

increased our revenue by $6,000 and our costs by $6,700, we are still making an overall profit of $5,000 per

week so I think weʹre on the right track. We are producing the optimal number of cell phones.ʺ

29) Refer to Scenario 1-1. Using marginal analysis terminology, what is another economic term for

the incremental revenue received from the sale of the last 3,000 cell phones?

A) gross earnings B) marginal revenue

C) sales revenue D) gross profit


30) Refer to Scenario 1-1. Using marginal analysis terminology, what is another economic term for

the incremental cost of producing the last 3,000 cell phones?

A) marginal cost B) operating cost

C) explicit cost D) Any of the above terms are correct.


31) Refer to Scenario 1-1. Had the firm not produced and sold the last 3,000 cell phones, would its

profit be higher or lower, and if so by how much?

A) Its profit will be $6,700 higher. B) Its profit will be $700 higher.

C) Its profit will be $700 lower. D) Its profit will be $6,000 lower.




Table 1-1

Hours

Open

Total

Revenue

(dollars)

1 $50

2 75

3 95

4 110

5 120

6 125

Lydia runs a small nail salon in the town of New Hope. She is debating whether she should extend her hours

of operation. Lydia figures that her sales revenue will depend on the number of hours the nail salon is open

as shown in the table above. She would have to hire a worker for those hours at a wage rate of $10 per hour.

32) Refer to Table 1-1. Using marginal analysis, determine how many hours should Lydia extend

her nail salonʹs hours of operations?

A) 2 hours B) 3 hours C) 4 hours D) 5 hours E) 6 hours

Answer: DDiff: 3 Page Ref: 7Topic: Optimal Decisions Are Made at the MarginLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Analytic Skills

33) Refer to Table 1-1. What is Lydiaʹs marginal benefit if she decides to stay open for two hours

instead of one hour?

A) $25 B) $50 C) $75 D) $125


34) Refer to Table 1-1. What is Lydiaʹs marginal cost if she decides to stay open for two hours

instead of one hour?

A) $10 B) $20 C) $25 D) $40




35) Soo Jin shares a one-bedroom apartment with her classmate. Her share of the rent is $700 per

month. She is considering moving to a studio apartment which she will not have to share with

anyone. The studio apartment rents for $950 per month. Recently, you ran into Soo Jin on

campus and she tells you that she has moved into the studio apartment. Soo Jin is as rational as

any other person. As an economics major, you rightly conclude that

A) Soo Jin did not have a choice; her roommate was a slob.

B) Soo Jin figures that the additional benefit of having her own place (as opposed to sharing)

is at least $250.

C) Soo Jin figures that the benefit of having her own place (as opposed to sharing) is at least

$950.

D) the cost of having oneʹs own space outweighs the benefits.


36) If the marginal cost of keeping a doctorʹs office open one additional hour per day is $200, then

the doctor should keep the office open for one extra hour

A) only if the marginal benefit she receives is greater than $200 plus an acceptable profit

margin.

B) as long as the marginal benefit she receives is just equal to or greater than $200.

C) as long as the marginal cost does not rise.

D) until the marginal benefit she receives reaches zero.


37) Scarcity refers to a situation in which unlimited wants exceed the limited resources available to

fulfill those wants.

Answer: TRUEDiff: 1 Page Ref: 4Topic: ScarcityLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

38) Scarcity is a problem that will eventually disappear as technology advances.

Answer: FALSEDiff: 1 Page Ref: 4Topic: ScarcityLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking



39) An economic model is a simplified version of reality used to analyze real-world economic

situations.

Answer: TRUEDiff: 1 Page Ref: 4Topic: Economic ModelsLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

40) The sales revenue a seller receives from the sale of an additional unit of goods is called the

marginal benefit.

Answer: TRUEDiff: 1 Page Ref: 7Topic: Optimal Decisions Are Made at the MarginLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

41) Optimal decisions are made at the point where marginal cost equals zero.

Answer: FALSEDiff: 1 Page Ref: 7Topic: Optimal Decisions Are Made at the MarginLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

42) If it costs Sinclair $300 to produce 3 suede jackets and $420 to produce 4 suede jackets, then the

difference of $120 is the marginal cost of producing the 4th suede jacket.

Answer: TRUEDiff: 1 Page Ref: 7Topic: Optimal Decisions Are Made at the MarginLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

43) Suppose the extra cost for a doctor to keep his office open for one extra hour is $200. Then, the

doctor should stay open for the extra hour even if he can generate additional revenue of $200 for

that hour.

Answer: TRUEDiff: 2 Page Ref: 8Topic: Optimal Decisions Are Made at the MarginLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Analytic Skills

44) Explain the economic assumption that ʺpeople are rational.ʺ

Answer: ʺPeople are rationalʺ means that economists assume consumers and firms will use all

available information as they act to achieve their goals. Rational individuals weigh the

benefits and costs of each action, and they choose an action only if the benefits exceed the

costs.Diff: 2 Page Ref: 5Topic: People Are RationalLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking



45) Explain the economic idea that ʺpeople respond to incentives.ʺ

Answer: Human beings act from a variety of motives, including religious belief, envy, and

compassion. ʺPeople respond to incentivesʺ means that people will act if they feel it is in

their best economic interest to do so.Diff: 2 Page Ref: 5Topic: People Respond to Economic IncentivesLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

46) What is meant by the statement that ʺoptimal decisions are made at the marginʺ?

Answer: In economics, the word ʺmarginalʺ means ʺextraʺ or ʺadditional.ʺ Economists reason that

the optimal decision is to continue any activity up to the point where the marginal benefit

equals the marginal cost, so optimal decisions are made at the point where the extra

benefit received from an activity is equal to the extra cost associated with that activity.Diff: 2 Page Ref: 7Topic: Optimal Decisions Are Made at the MarginLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

47) Assume that a doctor can earn an additional $20,000 of revenue each year from keeping his

office open for one additional hour per week. What must the additional cost of keeping the

office open this additional hour per week be to make staying open for the extra hour

economically rational?

Answer: The additional cost of staying open for one additional hour per week must be no more

than $20,000 for the year to make staying open for the extra hour economically rational.Diff: 2 Page Ref: 8Topic: People Are RationalLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Analytic Skills

1.2 The Economic Problem That Every Society Must Solve

1) The three fundamental questions that any economy must address are:

A) What will be the prices of goods and services; how will these goods and services be

produced; and who will receive them?

B) What goods and services to produce; how will these goods and services be produced; and

who receives them?

C) Who gets jobs; what wages do workers earn; and who owns what property?

D) How much will be saved; what will be produced; and how can these goods and services be

fairly distributed?

Answer: BDiff: 1 Page Ref: 8Topic: Trade-offs

Learning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking



2) The idea that because of scarcity, producing more of one good or service means producing less

of another good or service refers to the economic concept of

A) optimization. B) efficiency. C) trade-off. D) equity.

Answer: CDiff: 1 Page Ref: 8Topic: Trade-offs


3) Society faces a trade-off in all of the following situations except

A) when deciding who will receive the goods and services produced.

B) when deciding what goods and services will be produced.

C) when deciding how goods and services will be produced.

D) when some previously unemployed workers find jobs.

Answer: DDiff: 2 Page Ref: 8Topic: Trade-offs


4) Which of the following statements is true?

A) Anytime you have to decide which action to take you are experiencing economic equity.

B) Trade-offs do not apply when the consumers purchase a product for which there is excess

supply, such as a stock clearance sale.

C) Every individual, no matter how rich or poor, is faced with making trade-offs.

D) Economics is a social science that studies the trade-offs we are forced to make because

resources are unlimited.



5) Which of the following is not an example of an economic trade-off that a firm has to make?

A) whether it is cheaper to produce with more machines or with more workers

B) whether it is to outsource the production of a good or service

C) whether or not consumers will buy its products

D) whether it should produce more of its product





6) The highest valued alternative that must be given up to engage in an activity is the definition of

A) economic equity. B) marginal benefit.

C) opportunity cost. D) marginal cost.

Answer: CDiff: 1 Page Ref: 9Topic: Opportunity CostLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

7) The Coffee Nook, a small cafe near campus, sells cappuccinos for $2.50 and Russian tea cakes

for $1.00 each. What is the opportunity cost of buying a cappuccino?

A) 2 1/2 Russian tea cakes B) 2/5 of a Russian tea cake

C) $2.50 D) $1.00

Answer: ADiff: 1 Page Ref: 9Topic: Opportunity CostLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Analytic Skills

8) Arlene quits her $125,000-a-year job to take care of her ailing parents. What is the opportunity

cost of her decision?

A) zero, since she will no longer be earning a salary

B) It depends on the ʺgoing rateʺ for home-care providers.

C) at least $125,000

D) the value she attributes to the satisfaction she receives from taking care of her parents

Answer: CDiff: 1 Page Ref: 9Topic: Opportunity CostLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Analytic Skills

9) The distribution of income primarily determines which of the fundamental economic questions?

A) What goods and services are to be produced?

B) How the goods and services are to be produced?

C) Who will receive the goods and services produced?

D) How to plan the economy?

Answer: CDiff: 2 Page Ref: 9Topic: Who Will Receive the Goods and Services Produced?Learning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking



10) Automobile manufacturers produce a range of automobiles such as sports utility vehicles,

luxury sedans, pickup trucks and compact cars. What fundamental economic question are they

addressing by making this range of products?

A) How to produce goods that consumers want?

B) Why produce a variety of automobiles?

C) What to produce?

D) Who to produce automobiles for?

Answer: CDiff: 1 Page Ref: 9Topic: What Goods and Services Will Be Produced?Learning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

11) Consider the following economic agents:

a. the government

b. consumers

c. producers

Who, in a centrally planned economy, decides what goods and services will be produced with

the scarce resources available in that economy?

A) the government

B) producers

C) consumers

D) consumers and producers

E) the government, consumers and producers

Answer: ADiff: 1 Page Ref: 9Topic: What Goods and Services Will Be Produced?Learning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

12) The decision about what goods and services will be produced made in a market economy is

made by

A) lawmakers in the government voting on what will be produced.

B) workers deciding to produce only what the boss says must be produced.

C) producers deciding what society wants most.

D) consumers and firms choosing which goods and services to buy or produce.

E) consumers dictating to firms what they need most.

Answer: DDiff: 1 Page Ref: 9Topic: What Goods and Services Will Be Produced?Learning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking



13) Which of the following statements about the economic decisions consumers, firms, and the

government have to make is false?

A) Governments face the problem of scarcity in making economic decisions.

B) Only individuals face scarcity; firms and the government do not.

C) Both firms and individuals face scarcity.

D) Each faces the problem of scarcity which necessitates trade-offs in making economic

decisions.

Answer: BDiff: 1 Page Ref: 9Topic: What Goods and Services Will Be Produced?Learning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

14) Why is it necessary for all economic systems to not only provide people with goods and

services, but also restrict them from getting as much of these goods and services as they wish?

A) Failure to do this could reduce the efficiency of the system by producing some goods and

services that are not as highly valued as others.

B) Failure to do this could lead to an inequitable allocation of goods and services produced.

C) Failure to do this could lead to drastic shortages of good and services.

D) Failure to do this could reduces efficiency and leads to an inequitable allocation of output.

Answer: ADiff: 3 Page Ref: 9Topic: Who Will Receive the Goods and Services Produced?Learning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Analytic Skills

15) Who receives the most of what is produced in a market economy?

A) lawmakers and other politically favored groups

B) those who are willing and able to buy them

C) everyone receives an equal amount

D) people who earn the highest incomes

Answer: BDiff: 1 Page Ref: 9Topic: Who Will Receive the Goods and Services Produced?Learning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

16) How are the fundamental economic decisions determined in North Korea?

A) Individuals, firms, and the government interact in a market to make these economic

decisions.

B) These decisions are made by the countryʹs elders who have had much experience in

answering these questions.

C) The government decides because North Korea is a centrally planned economy.

D) The United Nations decides because North Korea is a developing economy.

Answer: CDiff: 1 Page Ref: 10Topic: Centrally Planned EconomiesLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking



17) How are the fundamental economic questions answered in a market economy?

A) The government alone decides the answers.

B) Individuals, firms, and the government interact in markets to decide the answers to these

questions.

C) Households and firms interact in markets to decide the answers to these questions.

D) Large corporations alone decide the answers.

Answer: CDiff: 2 Page Ref: 10Topic: Market EconomiesLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

18) Which of the following is a problem inherent in centrally planned economies?

A) Households and firms make poor decisions in choosing how resources are allocated.

B) There is too little production of low-cost, high-quality goods and services.

C) Production managers are more concerned with satisfying consumer wants than with

satisfying governmentʹs orders .

D) Exports tend to exceed imports.

Answer: BDiff: 2 Page Ref: 10Topic: Centrally Planned EconomiesLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

19) All of the following contributed to the downfall of the Soviet Union in 1991 except

A) public dissatisfaction with low living standards and political repression.

B) an inability to produce low-cost consumer goods that households wanted.

C) lack of high-quality goods and services.

D) lack of a strong dictator who can coordinate economic activities.

Answer: DDiff: 2 Page Ref: 10Topic: Centrally Planned EconomiesLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

20) ________ is a situation in which a good or service is produced at the lowest possible cost.

A) Allocative efficiency B) Productive efficiency

C) Equity D) Optimal marginalism

Answer: BDiff: 1 Page Ref: 11Topic: EfficiencyLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking



21) Productive efficiency is achieved when

A) firms add a low profit margin to the goods and services they produce.

B) firms produce the goods and services that consumers value most.

C) firms produce goods and services at the lowest cost.

D) there are no shortages or surpluses in the market.

Answer: CDiff: 1 Page Ref: 11Topic: EfficiencyLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

22) When production reflects consumer preferences, ________ occurs.

A) allocative efficiency B) productive efficiency

C) equity D) efficient central planning

Answer: ADiff: 1 Page Ref: 11Topic: EfficiencyLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

23) Allocative efficiency is achieved when firms produce goods and services

A) at the lowest possible cost. B) that consumers value most.

C) at the lowest opportunity cost. D) at a marginal cost of zero.


24) Markets promote

A) equity and competition. B) voluntary exchange and equality.

C) equity and equality. D) competition and voluntary exchange.

Answer: DDiff: 2 Page Ref: 10Topic: Market EconomiesLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

25) Which of the following statements is true about competition in a market?

A) Competition forces firms to outsource the production of their labor-intensive products.

B) Competition forces firms to undercut their selling price, thus benefiting consumers who

will be able to purchase products at the lowest price possible.

C) Competition forces firms to produce and sell products as long as the marginal benefit to

consumers exceeds the marginal cost of production.

D) Competition forces firms to add only low profit margins to their costs of production.

Answer: CDiff: 2 Page Ref: 10Topic: Market EconomiesLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking



26) ________ increases economic efficiency because it forces firms to produce and sell goods and

services as long as the additional benefit to consumers is greater than the additional cost of

production.

A) Competition B) Voluntary exchange

C) Equity D) A centrally planned economy

Answer: ADiff: 1 Page Ref: 10Topic: Market EconomiesLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

27) Which of the following generates productive efficiency?

A) competition among sellers

B) competition among buyers

C) government inspectors

D) government production rules and regulations

Answer: ADiff: 1 Page Ref: 11Topic: EfficiencyLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

28) Voluntary exchange between buyers and sellers generates ________ in a market economy.

A) scarcity B) allocative efficiency

C) productive efficiency D) equity


29) Which of the following is a result of a market economy?

A) environmental protection B) an equal income distribution

C) agreement on equity D) voluntary exchange

Answer: DDiff: 1 Page Ref: 10Topic: Market EconomiesLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking



30) Political candidates often hold fund raisers by charging ʺper plateʺ for dinner. Wendy

purchased four tickets to a $1,000 per plate dinner for a local city council candidate. Is this

transaction economically efficient?

A) No, political candidates should never be allowed to overcharge for a fund raising dinner.

B) Yes, it was a voluntary exchange that benefited both parties.

C) No, Wendy paid too much for four dinners.

D) Yes, it is efficient only from the perspective of the candidate but not from the perspective

of Wendy.

Answer: BDiff: 2 Page Ref: 10Topic: Market EconomiesLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Analytic Skills

31) In economics, the term ʺequityʺ means

A) everyone has an equal standard of living.

B) the hardest working individuals consume all they want.

C) only elected officials have high standards of living.

D) economic benefits are distributed fairly.

Answer: DDiff: 1 Page Ref: 11Topic: EquityLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

32) Which of the following is motivated by an equity concern?

A) Some states have transferred funds to food bank programs in order to increase benefits to

lower-income families.

B) Following the implementation of subsidies for energy conservation, household demand

for rooftop solar panels increased quite significantly in California.

C) The United Network for Organ Sharing advocates a system of rationing scarce kidneys

that would favor young patients over old in an effort to wring more life out of donated

organs.

D) The United States offers patent protection to pharmaceutical manufacturers to prevent

others from duplicating their products.

Answer: ADiff: 3 Page Ref: 11Topic: EquityLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking, Ethical Reasoning



33) Which of the following is motivated by an efficiency concern?

A) In December 2006, the Bush administration restarted a short-term housing assistance

program for victims of Hurricane Katrina.

B) Each year, the University of Notre Dame conducts a lottery to parcel out the 30,000 seats

available to contributors, former athletes and parents in the 80,000-seat stadium.

C) The United Network for Organ Sharing advocates a system of rationing scarce kidneys

that would favor young patients over old in an effort to wring more life out of donated

organs.

D) The federal governmentʹs housing choice voucher program assists very low-income

families, the elderly, and the disabled to afford decent, safe, and sanitary housing in the

private market.

Answer: CDiff: 3 Page Ref: 11Topic: EfficiencyLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking, Ethical Reasoning

34) Which of the following is an example of an efficiency-equity trade-off faced by economic

agents?

A) According to an article by in the American Journal of Public Health by Edward Kaplan

and Michael Merson of Yale University School of Medicine, the federal governmentʹs

current method of allocating HIV-prevention resources is not cost-effective. Instead of

allocating resources to states in proportion to reported AIDS cases, resources should flow

first to those activities that prevent more infections per dollar and then to less and less

effective combinations of programs and populations until funds are exhausted, even if it

means that some populations would be left without any prevention services.

B) Concerned about the falling birth rate, the French government has pledged more money

for families with three children, in an effort to encourage working women to have more

babies.

C) Some U.S. colleges are actively recruiting foreign students for their technology-based

programs.

D) All New York City art museums are considering adopting a free-admission policy for

local residents one weekend per month.

Answer: ADiff: 3 Page Ref: 11Topic: EfficiencyLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Analytic Skills, Ethical Reasoning

35) Which of the following correctly describes the relationship between economic efficiency and

economic equity?

A) They are both automatically achieved in a free market economy.

B) They always call for opposite outcomes.

C) There is no conflict between the two goals.

D) There is often a trade-off between the two.

Answer: DDiff: 2 Page Ref: 11Topic: EfficiencyLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking



36) Allocative efficiency best explains ________, and productive efficiency best explains ________.

A) how something will be produced; when something will be produced

B) when something will be produced; why something will be produced

C) why something will be produced; what will be produced

D) what will be produced; how something will be produced

Answer: DDiff: 2 Page Ref: 11Topic: EfficiencyLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

37) The government makes all economic decisions in a mixed economy.

Answer: FALSEDiff: 1 Page Ref: 10Topic: Mixed EconomiesLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

38) When voluntary exchange takes place, both parties gain from the exchange.

Answer: TRUEDiff: 1 Page Ref: 10Topic: Market EconomiesLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

39) A college must decide if it wants to offer more Internet-based classes. This decision involves

answering the economic question of ʺwhat to produce.ʺ

Answer: TRUEDiff: 1 Page Ref: 9Topic: What Goods and Services Will Be Produced?Learning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

40) One desirable outcome of a market economy is that it leads to a more equitable distribution of

income.

Answer: FALSEDiff: 1 Page Ref: 10Topic: Market EconomiesLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

41) What is equity, and how does it differ from efficiency?

Answer: Equity refers to the fair distribution of economic benefits. In economics, efficiency refers

to least cost production (productive efficiency) and producing according to human

preferences (allocative efficiency).Diff: 2 Page Ref: 11Topic: EquityLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking



42) What is opportunity cost?

Answer: Opportunity cost refers to the highest-valued alternative that must be given up to engage

in an activity. For example, the opportunity cost of taking this economics class is what

you are giving up to take the class, which may be taking another class such as accounting

or psychology, working extra hours at your job, or extra sleep (whichever is your

highest-valued alternative).Diff: 2 Page Ref: 9Topic: Opportunity CostLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

43) Define productive efficiency. Does productive efficiency imply allocative efficiency? Explain.

Answer: Productive efficiency is an efficiency criterion that describes a situation in which goods

and services are produced at the lowest possible cost. It does not imply allocative

efficiency which is a criterion associated with producing goods and services that

consumers value most. For example, a manufacturer may be able to produce typewriters

at the lowest possible cost of say, $200 but this does not necessarily mean that consumers

are willing to pay $200 for a typewriter.Diff: 3 Page Ref: 11Topic: EfficiencyLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Analytic Skills

44) What is a centrally planned economy?

Answer: A centrally planned economy is an economy in which the government decides how

economic resources will be allocated.Diff: 3 Page Ref: 10Topic: Centrally Planned EconomiesLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

1.3 Economic Models

1) Economic models do all of the following except

A) answer economic questions.

B) portray reality in all its minute details.

C) make economic ideas explicit and concrete for use by decision makers.

D) simplify some aspect of economic life.

Answer: BDiff: 1 Page Ref: 12Topic: Economic ModelsLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

2) All of the following are part of an economic model except

A) assumptions. B) hypotheses. C) data. D) opinions.

Answer: DDiff: 1 Page Ref: 12Topic: Economic ModelsLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking



3) Which of the following statements about positive economic analysis is false?

A) Positive analysis uses an economic model to estimate the costs and benefits of different

course of actions.

B) There is much more disagreement among economists over normative economic analysis

than over positive economic analysis.

C) There is much more disagreement among economists over positive economic analysis than

over normative economic analysis.

D) Unlike normative economic analysis, positive economic analysis can be tested.

Answer: CDiff: 2 Page Ref: 14Topic: Normative and Positive AnalysisLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

4) Which of the following is a positive economic statement?

A) The standard of living in the United States should be higher.

B) If the price of iPhones falls, a larger quantity of iPhones will be purchased.

C) The government should revamp the health care system.

D) The U.S. government should not have bailed out U.S. auto manufacturers.

Answer: BDiff: 2 Page Ref: 14Topic: Normative and Positive AnalysisLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

5) Which of the following is a positive economic statement?

A) People should not buy SUVs.

B) The government should mandate electric automobiles.

C) Scarcity necessitates that people make trade-offs.

D) Foreign workers should not be allowed to work for lower wages than the citizens of a

country.

Answer: CDiff: 2 Page Ref: 14Topic: Normative and Positive AnalysisLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

6) Which of the following is a normative economic statement?

A) Rising global demand for coal has led to increases in the price of coal.

B) With rising mortgage rates and rising unemployment rates, the number of unsold homes

has increased.

C) The state of Texas is considering increasing funds for light-rail development to promote

the use of public transportation.

D) Pharmaceutical manufacturers should not be allowed to patent their products so

prescription drugs would be more affordable.

Answer: DDiff: 2 Page Ref: 14Topic: Normative and Positive AnalysisLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking



7) Which of the following is a normative economic statement?

A) The price of gasoline is too high.

B) The current high price of gasoline is the result of strong worldwide demand.

C) When the price of gasoline rises, the quantity of gasoline purchased falls.

D) When the price of gasoline rises, transportation costs rise.

Answer: ADiff: 2 Page Ref: 14Topic: Normative and Positive AnalysisLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

8) Which of the following questions or statements regarding medical school is normative?

A) How do changes in expected future incomes affect the decisions of medical students about

which specialty to choose?

B) Medical students who enter specialized fields make a larger contribution to society than

do student who enter primary care.

C) What role does tuition play in a studentʹs decision about whether to attend medical

school?

D) Have tuition increases had a large effect or a small effect on the number of applications to

medical school?

Answer: BDiff: 2 Page Ref: 15-16Topic: Normative and Positive AnalysisLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

9) The economic analysis of minimum wage involves both normative and positive analysis.

Consider the following consequences of a minimum wage:

a. The minimum wage law causes unemployment.

b. A minimum wage law benefits some groups and hurts others.

c. In some cities such as San Francisco and New York, it would be impossible for low-skilled

workers to live in the city without minimum wage laws.

d. The gains to winners of a minimum wage law should be valued more highly than the losses

to losers because the latter primarily comprises businesses.

Which of the consequences above are positive statements and which are normative statements?

A) a, b, and c are positive statements and d is a normative statement.

B) a and b are positive statements, c and d are normative statement.

C) Only a is a positive statement, b, c and d are normative statements.

D) a and c are positive statements, b and d are normative statements.

Answer: BDiff: 2 Page Ref: 15Topic: Normative and Positive AnalysisLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Analytic Skills



10) ʺAn increase in the price of gasoline will increase the demand for hybrid vehicles.ʺ This

statement is an example of a positive economic statement.

Answer: TRUEDiff: 1 Page Ref: 14Topic: Normative and Positive AnalysisLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

11) ʺThe distribution of income should be left to the marketʺ is an example of a positive economic

statement.

Answer: FALSEDiff: 1 Page Ref: 14Topic: Normative and Positive AnalysisLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

12) Positive analysis is concerned with ʺwhat ought to beʺ, while normative analysis is concerned

with ʺwhat is.ʺ

Answer: FALSEDiff: 2 Page Ref: 14Topic: Normative and Positive AnalysisLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

13) What is the difference between positive economic analysis and normative economic analysis?

Give one example each of a positive and normative economic issue or question or statement.

Answer: Positive economic analysis is concerned with what is. Positive economic analysis reaches

conclusions based on verifiable statements. Normative economic analysis, on the other

hand, is concerned with what ought to be. Normative analysis reaches conclusions based

on opinions. (Students will give many different examples.)Diff: 2 Page Ref: 14Topic: Normative and Positive AnalysisLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

14) Explain why economics is considered a social science.

Answer: Economics is a social science because it studies the actions of individuals. As a social

science, economics considers human behavior, particularly decision-making behavior, in

every context.Diff: 2 Page Ref: 14Topic: Economics as a Social ScienceLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking



1.4 Microeconomics and Macroeconomics

1) Which of the following is a microeconomics question?

A) How much will be saved and how much will be produced in the entire economy?

B) What will the level of economic growth be in the entire economy?

C) What factors determine the price of carrots?

D) What determines the average price level and inflation?

Answer: CDiff: 2 Page Ref: 17Topic: MicroeconomicsLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

2) Microeconomics is the study of

A) how households and firms make choices.

B) the economy as a whole.

C) the global economy.

D) topics such as unemployment, inflation, and economic growth.

Answer: ADiff: 1 Page Ref: 17Topic: MicroeconomicsLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

3) Which of the following is a macroeconomics question?

A) What determines the inflation rate?

B) What determines the production of DVDs?

C) What factors determine the price of carrots?

D) What determines the wage of auto workers?

Answer: ADiff: 2 Page Ref: 17Topic: MacroeconomicsLearning Outcome: Macro 1: Define macroeconomics and identify its basic concernsAACSB: Reflective Thinking

4) Macroeconomics is the study of

A) how households make choices.

B) how firms make choices.

C) how households and firms make choices.

D) the economy as a whole.

Answer: DDiff: 1 Page Ref: 17Topic: MacroeconomicsLearning Outcome: Macro 1: Define macroeconomics and identify its basic concernsAACSB: Reflective Thinking



5) Examining the conditions that could lead to a recession in an economy is an example of

macroeconomics topic.

Answer: TRUEDiff: 1 Page Ref: 17Topic: MacroeconomicsLearning Outcome: Macro 1: Define macroeconomics and identify its basic concernsAACSB: Reflective Thinking

6) The decisions Apple makes in determining production levels for its iPhone is an example of a

microeconomics topic.

Answer: TRUEDiff: 1 Page Ref: 17Topic: MicroeconomicsLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

7) Which of the following are primarily macroeconomic topics and which are primarily

microeconomic topics?

a. gasoline prices

b.unemployment

c. inflation

d. health care costs

e. air pollution

f. economic growth

Answer: b, c, and f are primarily macroeconomic topics.

a, d, and e are primarily microeconomic topics.Diff: 2 Page Ref: 17Topic: MicroeconomicsLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

1.5 A Preview of Important Economic Terms

1) Which of the following statements is true about profit?

A) Profit refers to the revenue received from the sale of a quantity of goods.

B) Profit is calculated by multiplying price and quantity sold.

C) The terms ʺaccounting profitʺ and ʺeconomic profitʺ can be used interchangeably.

D) Profit is the difference between revenue and cost.

Answer: DDiff: 2 Page Ref: 18Topic: ProfitLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking



2) In economics, the accumulated skills and training that workers have is known as

A) human capital. B) entrepreneurship.

C) physical capital. D) innovation.

Answer: ADiff: 1 Page Ref: 18Topic: Human CapitalLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

3) Which of the following is an example of an activity undertaken by an entrepreneur?

A) designing your landscaping for your new home

B) holding a position as the president of a liberal arts college

C) running for the president of the United States

D) starting your own pet sitting business

Answer: DDiff: 1 Page Ref: 17Topic: EntrepreneurLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

4) The machines workers have to work with are considered

A) human capital. B) physical capital.

C) entrepreneurship. D) financial capital.

Answer: BDiff: 2 Page Ref: 18Topic: CapitalLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

5) Technology is defined as

A) the process of developing and revising models.

B) new innovations and creations.

C) the processes used to produce goods and services.

D) the process of recycling products.

Answer: CDiff: 1 Page Ref: 17Topic: TechnologyLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

6) Which of the following statements about economic resources is true?

A) Economic resources include financial capital and money.

B) Economic resources are also called factors of production.

C) Economic resources are used only by businesses.

D) All economic resources are man-made.

Answer: BDiff: 1 Page Ref: 18Topic: ResourcesLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking



7) The U.S. Health Resources and Services Administration (HRSA) forecasts that in 2020

A) there will be a shortage of doctors in the United States.

B) the number of doctors in the United States will decrease and the number of doctors needed

will increase.

C) the number of doctors in the United States will increase and the number of doctors needed

will decrease.

D) there will be a surplus of doctors in the United States.

Answer: ADiff: 1 Page Ref: 18Topic: Human CapitalLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economist

8) According to census figures, between 1970 and 2007 the number of doctors who described

themselves as self-employed

A) fell by more than 50 percent.

B) more than doubled.

C) has remained fairly constant.

D) fell to almost zero before rising back to its original level.

Answer: ADiff: 2 Page Ref: 20-21Topic: Human CapitalLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economist

9) In the market for factors of production, firms earn income by selling goods and services to

households.

Answer: FALSEDiff: 1 Page Ref: 18Topic: ResourcesLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

10) One example of human capital is the amount of skills that you have.

Answer: TRUEDiff: 1 Page Ref: 18Topic: Human CapitalLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

11) List the five main factors of production.

Answer: The five main factors of production are labor, capital, human capital, natural resources,

and entrepreneurial ability.Diff: 1 Page Ref: 18Topic: ResourcesLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking



12) What is the difference between an invention and an innovation?

Answer: An invention is the development of a new good or a new process for making a good. An

innovation is the practical application of an invention. Innovation could also refer to any

significant improvement in a good or in the means of producing a good.Diff: 1 Page Ref: 17Topic: InnovationLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

13) Explain the difference between a firmʹs revenue and its profit.

Answer: A firmʹs revenue is the total amount received for selling a good or service. It is calculated

by multiplying the price per unit by the number of units sold. A firmʹs profit is the

difference between its revenue and its costs.Diff: 1 Page Ref: 18Topic: RevenueLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

14) What are some of the reasons given for the the decline in the number of physicians choosing to

enter private practices?

Answer: The reasons include lower insurance reimbursement rates, inflexible schedules, lower

incomes, high medical school debt loads, longer work hours, and provisions of the new

health care law.Diff: 2 Page Ref: 20-21Topic: Human CapitalLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

1.6 Appendix: Using Graphs and Formulas

1) If a graph has a line that shows the amount of outsourcing in the last ten years, it is known as

A) a pie chart. B) a time-series graph.

C) a demand curve for outsourcing. D) a supply curve of outsourcing.

Answer: BDiff: 1 Page Ref: 27Topic: GraphsLearning Outcome: Micro 2: Interpret and analyze information presented in different types of graphsAACSB: Reflective Thinking

2) ________ have a horizontal and a vertical axis and are used in economics to illustrate

relationships between two economic variables.

A) Two-dimensional graphs B) One-dimensional graphs

C) Pie Charts D) Bar graphs

Answer: ADiff: 1 Page Ref: 28Topic: GraphsLearning Outcome: Micro 2: Interpret and analyze information presented in different types of graphsAACSB: Reflective Thinking



3) If a straight line passes through the point x = 14 and y = 3 and also through the point x = 4 and y

= 10, the slope of this line is

A) negative 11 divided by 6. B) seven tenths.

C) negative seven tenths. D) 6 divided by 11.

Answer: CDiff: 2 Page Ref: 29Topic: SlopeLearning Outcome: Micro 2: Interpret and analyze information presented in different types of graphsAACSB: Analytic Skills

4) On a two-dimensional graph, ________ allows for the effects of additional variables.

A) moving along a curve B) shifting curves

C) eliminating a curve D) adding an additional curve

Answer: BDiff: 3 Page Ref: 30Topic: GraphsLearning Outcome: Micro 2: Interpret and analyze information presented in different types of graphsAACSB: Analytic Skills

5) Which of the following statements is false?

A) An inverse relationship has a negative slope value.

B) A direct relationship has a positive slope value.

C) A curved line has slope values that change at every point.

D) A straight line has a slope of zero.

Answer: DDiff: 2 Page Ref: 30Topic: SlopeLearning Outcome: Micro 2: Interpret and analyze information presented in different types of graphsAACSB: Reflective Thinking

6) The relationship between consumer spending and disposable personal income is

A) an inverse relationship. B) a direct relationship.

C) a negative relationship. D) independent.

Answer: BDiff: 1 Page Ref: 30Topic: Positive and Negative RelationshipsLearning Outcome: Micro 2: Interpret and analyze information presented in different types of graphsAACSB: Reflective Thinking



7) Suppose when the price of laptops fall, college students buy more laptops. This implies that

A) there is a positive relationship between laptop prices and quantities purchased by college

students.

B) there is a negative relationship between laptop prices and quantities purchased by college

students.

C) there is a direct relationship between laptop prices and quantities purchased by college

students.

D) there is a one-to-one relationship between laptop prices and quantities purchased by

college students.

Answer: BDiff: 1 Page Ref: 30Topic: Positive and Negative RelationshipsLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

8) If the price of milk was $2.50 a gallon and it is now $3.25 a gallon, what is the percentage change

in price?

A) 13 percent B) 30 percent C) 75 percent D) 77 percent

Answer: BDiff: 2 Page Ref: 32Topic: FormulasLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Analytic Skills

9) In 2010, Hooverville consumed 205,000 tons of sugar. In 2011, sugar consumption rose to

245,000 tons. Calculate the percentage change in sugar consumption.

A) 8.37% B) 11.95% C) 19.51% D) 26.33%

Answer: CDiff: 2 Page Ref: 34Topic: FormulasLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Analytic Skills

10) At a recent faculty meeting, Lorraine Waverly, president of Skywalker College, announced that

enrollment is up by 12 percent over the previous semester. If enrollment the previous semester

was 3,250 students, what is the student enrollment this semester?

A) 390 B) 2,860 C) 3,640 D) 4,030

Answer: CDiff: 2 Page Ref: 34Topic: FormulasLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Analytic Skills



Figure 1-1

11) Refer to Figure 1-1. Using the information in the figure above, calculate the percentage change

in sales of alcoholic beverages between 2008 and 2011.

A) 23.1% B) 23.8% C) 30% D) 42.9%

Answer: DDiff: 1 Page Ref: 34Topic: FormulasLearning Outcome: Micro 2: Interpret and analyze information presented in different types of graphsAACSB: Analytic Skills



Figure 1-2

12) Refer to Figure 1-2. Calculate the area of the triangle A.

A) $1.3 million B) $2.6 million C) $3.4 million D) $5.2 million

Answer: BDiff: 1 Page Ref: 35Topic: FormulasLearning Outcome: Micro 2: Interpret and analyze information presented in different types of graphsAACSB: Analytic Skills

Figure 1-3

13) Refer to Figure 1-3. Calculate the area of the trapezoid X.

A) $270 B) $720 C) $810 D) $2,520

Answer: CDiff: 2 Page Ref: 35Topic: FormulasLearning Outcome: Micro 2: Interpret and analyze information presented in different types of graphsAACSB: Analytic Skills



Figure 1-4

14) Refer to Figure 1-4. Which of the following statements is false?

A) The slope of the tangent at E is positive.

B) The slope of the tangent at F is negative.

C) The slope of the tangent at E and the slope of the tangent at F are equal.

D) Neither the slope of the tangent at E nor the slope of the tangent at F are equal to zero.

Answer: CDiff: 1 Page Ref: 34Topic: SlopeLearning Outcome: Micro 2: Interpret and analyze information presented in different types of graphsAACSB: Analytic Skills

15) What is the ʺomitted variableʺ problem in determining cause and effect?

A) It is a problem that arises when an insignificant variable is given too much weight in an

economic analysis leading to skewed conclusions about cause and effect.

B) It is a problem that arises when a significant variable is not given enough weight in an

economic experiment leading to skewed conclusions about cause and effect.

C) It is a problem that arises when an insignificant economic variable that should have been

omitted is included in an economic experiment leading to false conclusions about cause

and effect.

D) It is a problem that arises when an economic variable that affects other variables is omitted

from an analysis and its omission leads to false conclusions about cause and effect.

Answer: DDiff: 1 Page Ref: 31Topic: Cause and EffectLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking



16) ________ is a problem that occurs when one concludes that a change in variable X caused a

change in variable Y when in actual fact, it is a change in variable Y that caused a change in

variable X.

A) The omitted variable B) The positive-to-negative relationship

C) Reverse causality D) Nonlinear slope

Answer: CDiff: 1 Page Ref: 31Topic: Cause and EffectLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

17) The prevalence of Alzheimerʹs dementia is very high among residents living in nursing homes.

A student concludes that it is likely that living in nursing home causes Alzheimerʹs dementia.

What is the flaw in the studentʹs reasoning?

A) The student has failed to take into account other causes of Alzheimerʹs disease.

B) The student is drawing a false conclusion; he is confusing cause and effect.

C) The student is using an inadequate sample size.

D) The student is drawing a false conclusion by making the mistake of omitting critical

variables such as the age and gender of the residents.

Answer: BDiff: 2 Page Ref: 31Topic: Cause and EffectLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Analytic Skills

18) You explain to your roommate Surya, who makes beaded headbands, about an economic theory

which asserts that consumers will purchase more of a product at lower prices than they will at

higher prices. She contends that the theory is incorrect because over the past two years she has

lowered the price of her headbands and yet has seen a decrease in sales. How would you

respond to Surya?

A) Surya is right; she has evidence to back her claim. The theory must be erroneous.

B) Surya is making the mistake of assuming that correlation implies causation.

C) I will explain to her that she is making the error of reverse causality: it is the decrease in

demand that has caused her to lower her prices.

D) I will explain to her that there are some omitted variables that have contributed to a

decrease in her sales such as changes in income.

Answer: DDiff: 2 Page Ref: 31Topic: Cause and EffectLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking



Table 1-2

Year

DVD

Recorders

(millions)

2007 12.5

2008 14.0

2009 17.2

2010 20.0

2011 21.7

19) Refer to Table 1-2. The table above shows the sales of DVD recorders in North America. Present

the information using a bar graph.

Answer:

Diff: 1 Page Ref: 27Topic: GraphsLearning Outcome: Micro 2: Interpret and analyze information presented in different types of graphsAACSB: Analytic Skills


Chapter 2Trade-offs, Comparative Advantage, and the Market System

2.1 Production Possibilities Frontiers and Opportunity Costs

1) Scarcity

A) stems from the incompatibility between limited resources and unlimited wants.

B) can be overcome by discovering new resources.

C) can be eliminated by rationing products.

D) is a bigger problem in market economies than in socialist economies.


2) BMW recently decided to build a manufacturing plant in Shenyang, China. At this plant, BMW

is able to take advantage of paying lower wages to its Chinese workers than it pays its German

workers, but it also sacrifices the high levels of technical training possessed by its German

workers. In deciding to open the Shenyang plant, BMW

A) faced no trade-offs because employing lower-wage workers increased efficiency.

B) faced a trade-off between higher cost and lower precision.

C) adopted a negative technological change because it replaced high-skilled workers with

low-skilled workers.

D) eroded some of its competitiveness in the luxury car market because of its decreased cost

of production.

Answer: BDiff: 2 Page Ref: 39Topic: Opportunity CostLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Analytic Skills

3) The principle of opportunity cost is that

A) in a market economy, taking advantage of profitable opportunities involves some money

cost.

B) the economic cost of using a factor of production is the alternative use of that factor that is

given up.

C) taking advantage of investment opportunities involves costs.

D) the cost of production varies depending on the opportunity for technological application.

Answer: BDiff: 3 Page Ref: 41Topic: Opportunity CostLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking



4) The production possibilities frontier shows the ________ combinations of two products that may

be produced in a particular time period with available resources.

A) minimum attainable B) maximum attainable

C) only D) equitable

Answer: BDiff: 2 Page Ref: 40Topic: Production Possibilities FrontiersLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

5) The production possibilities frontier model shows that

A) if consumers decide to buy more of a product its price will increase.

B) a market economy is more efficient in producing goods and services than is a centrally

planned economy.

C) economic growth can only be achieved by free market economies.

D) if all resources are fully and efficiently utilized, more of one good can be produced only by

producing less of another good.

Answer: DDiff: 2 Page Ref: 40Topic: Production Possibilities FrontiersLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Analytic Skills

6) The production possibilities frontier model assumes which of the following?

A) labor, capital, land and natural resources are unlimited in quantity.

B) the economy produces only two products.

C) any level of the two products that the economy produces is currently possible.

D) the level of technology is variable.


7) The attainable production points on a production possibility curve are

A) the horizontal and vertical intercepts.

B) the points along the production possibilities frontier.

C) the points outside the area enclosed by the production possibilities frontier.

D) the points along and inside the production possibility frontier.

Answer: DDiff: 2 Page Ref: 40Topic: Production Possibilities FrontiersLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking


Chapter 2 Trade-offs, Comparative Advantage, and the Market System 41

8) The points outside the production possibilities frontier are

A) efficient. B) attainable. C) inefficient. D) unattainable.

Answer: DDiff: 2 Page Ref: 41Topic: Production Possibilities FrontiersLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

Figure 2-1

9) Refer to Figure 2-1. Point A is

A) technically efficient.

B) unattainable with current resources.

C) inefficient in that not all resources are being used.

D) the equilibrium output combination.

Answer: CDiff: 1 Page Ref: 41Topic: Production Possibilities FrontiersLearning Outcome: Micro 2: Interpret and analyze information presented in different types of graphsAACSB: Reflective Thinking

10) Refer to Figure 2-1. Point B is




D) the equilibrium output combination.

Answer: ADiff: 1 Page Ref: 41Topic: Production Possibilities FrontiersLearning Outcome: Micro 2: Interpret and analyze information presented in different types of graphsAACSB: Reflective Thinking



11) Refer to Figure 2-1. Point C is




D) is the equilibrium output combination.

Answer: BDiff: 1 Page Ref: 41Topic: Production Possibilities FrontiersLearning Outcome: Micro 2: Interpret and analyze information presented in different types of graphsAACSB: Reflective Thinking

12) In a production possibilities frontier model, a point ________ the frontier is productively

inefficient.

A) along B) inside

C) outside D) at either intercept of


13) Bella can produce either a combination of 60 silk roses and 80 silk leaves or a combination of 70

silk roses and 55 silk leaves. If she now produces 60 silk roses and 80 silk leaves, what is the

opportunity cost of producing an additional 10 silk roses?

A) 2.5 silk leaves B) 10 silk leaves C) 25 silk leaves D) 55 silk leaves

Answer: CDiff: 2 Page Ref: 41Topic: Opportunity CostLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Analytic Skills

14) If the production possibilities frontier is ________, then opportunity costs are constant as more

of one good is produced.

A) bowed out B) bowed in C) non-linear D) linear

Answer: DDiff: 2 Page Ref: 41Topic: Opportunity CostLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking



Figure 2-2

Figure 2-2 above shows the production possibilities frontier for Mendonca, an agrarian nation that produces

two goods, meat and vegetables.

15) Refer to Figure 2-2. What is the opportunity cost of one pound of vegetables?

A)3

4 pound of meat B) 1.2 pounds of meat

C) 11

3 pounds of meat D) 12 pounds of meat

Answer: ADiff: 2 Page Ref: 42-43Topic: Opportunity CostLearning Outcome: Micro 2: Interpret and analyze information presented in different types of graphsAACSB: Analytic Skills

16) Refer to Figure 2-2. What is the opportunity cost of one pound of meat?

A)3

4 pound of vegetables B) 1

1

3 pounds of vegetables

C) 1.6 pounds of vegetables D) 16 pounds of vegetables

Answer: BDiff: 2 Page Ref: 42-43Topic: Opportunity CostLearning Outcome: Micro 2: Interpret and analyze information presented in different types of graphsAACSB: Analytic Skills



17) Refer to Figure 2-2. Suppose Mendonca is currently producing 60 pounds of vegetables per

period. How much meat is it also producing, assuming that resources are fully utilized?

A) 45 pounds of meat B) 75 pounds of meat

C) 80 pounds of meat D) 100 pounds of meat

Answer: BDiff: 2 Page Ref: 42-43Topic: Opportunity CostLearning Outcome: Micro 2: Interpret and analyze information presented in different types of graphsAACSB: Analytic Skills

18) Refer to Figure 2-2. The linear production possibilities frontier in the figure indicates that

A) Mendonca has a comparative advantage in the production of vegetables.

B) Mendonca has a comparative disadvantage in the production of meat.

C) the tradeoff between meat and vegetables is constant.

D) it is progressively more expensive to produce meat.

Answer: CDiff: 2 Page Ref: 42-43Topic: Opportunity CostLearning Outcome: Micro 2: Interpret and analyze information presented in different types of graphsAACSB: Analytic Skills

19) A production possibilities frontier with a bowed outward shape indicates

A) the possibility of inefficient production.

B) constant opportunity costs as more and more of one good is produced.

C) increasing opportunity costs as more and more of one good is produced.

D) decreasing opportunity costs as more and more of one good is produced.

Answer: CDiff: 2 Page Ref: 44Topic: Opportunity CostLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

20) Increasing opportunity cost is represented by a ________ production possibilities frontier.

A) linear B) bowed in C) bowed out D) vertical

Answer: CDiff: 2 Page Ref: 44Topic: Opportunity CostLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

21) The slope of a production possibilities frontier

A) has no economic relevance or meaning.

B) is always constant.

C) is always varying.

D) measures the opportunity cost of producing one more unit of a good.




22) ________ marginal opportunity cost implies that the more resources already devoted to any

activity, the payoff from allocating yet more resources to that activity increases by progressively

smaller amounts.

A) Increasing B) Decreasing C) Constant D) Negative

Answer: ADiff: 2 Page Ref: 44Topic: Opportunity CostLearning Outcome: Micro 20: Apply the concepts of opportunity cost, marginal analysis, and present value to make

decisionsAACSB: Reflective Thinking

23) If opportunity costs are constant, the production possibilities frontier would be graphed as

A) a ray from the origin.

B) a positively sloped straight line.

C) a negatively sloped curve bowed in toward the origin.

D) a negatively sloped straight line.


Figure 2-3

24) Refer to Figure 2-3. Sergio Vignetto raises cattle and llamas on his land. His land is equally

suitable for raising either animal. Which of the graphs in Figure 2-3 represent his production

possibilities frontier?

A) Graph A

B) Graph B

C) Graph C

D) either Graph A or Graph C

E) either Graph B or Graph C

Answer: ADiff: 2 Page Ref: 44Topic: Opportunity CostLearning Outcome: Micro 2: Interpret and analyze information presented in different types of graphsAACSB: Reflective Thinking



25) Refer to Figure 2-3. Sergio Vignetto raises cattle and llamas on his land. A portion of his land is

more suitable for raising cattle, and the other portion is better suited for raising llamas. Which of

the graphs in Figure 2-3 represent his production possibilities frontier?

A) Graph A

B) Graph B

C) Graph C

D) either Graph A or Graph C

E) either Graph B or Graph C

Answer: CDiff: 2 Page Ref: 44Topic: Opportunity CostLearning Outcome: Micro 2: Interpret and analyze information presented in different types of graphsAACSB: Reflective Thinking

Table 2-1

Production choices for Tomasoʹs Trattoria

Choice

Quantity of

Pizzas

Produced

Quantity of

Calzones

Produced

A 48 0

B 36 15

C 24 30

D 12 45

E 0 60

26) Refer to Table 2-1. Assume Tomasoʹs Trattoria only produces pizzas and calzones. A

combination of 24 pizzas and 30 calzones would appear

A) along Tomasoʹs production possibilities frontier.

B) inside Tomasoʹs production possibilities frontier.

C) outside Tomasoʹs production possibilities frontier.

D) at the horizontal intercept of Tomasoʹs production possibilities frontier.

Answer: ADiff: 2 Page Ref: 41Topic: Production Possibilities FrontiersLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Analytic Skills









Answer: CDiff: 2 Page Ref: 41Topic: Production Possibilities FrontiersLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Analytic Skills







Answer: BDiff: 2 Page Ref: 41Topic: Production Possibilities FrontiersLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Analytic Skills

29) Refer to Table 2-1. Assume Tomasoʹs Trattoria only produces pizzas and calzones. Tomaso faces

________ opportunity costs in the production of pizzas and calzones.

A) increasing B) decreasing C) constant D) negative

Answer: CDiff: 2 Page Ref: 41Topic: Opportunity CostLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Analytic Skills

30) An inward shift of a nationʹs production possibilities frontier can occur due to

A) a reduction in unemployment.

B) a natural disaster like a hurricane or bad earthquake.

C) a change in the amounts of one good desired.

D) an increase in the labor force.

Answer: BDiff: 2 Page Ref: 45Topic: Economic GrowthLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking



31) An outward shift of a nationʹs production possibilities frontier represents

A) economic growth.

B) rising prices of the two goods on the production possibilities frontier model.

C) an impossible situation.

D) a situation in which a country produces more of one good and less of another.

Answer: ADiff: 1 Page Ref: 45Topic: Economic GrowthLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

32) Economic decline (negative growth) is represented on a production possibilities frontier model

by the production possibility frontier

A) shifting outward. B) shifting inward.

C) becoming steeper. D) becoming flatter.

Answer: BDiff: 1 Page Ref: 45Topic: Economic GrowthLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

33) Without an increase in the supplies of factors of production, how can a nation achieve economic

growth?

A) by producing more high-value goods and less of low-value goods

B) through technological advancement which enables more output with the same quantity of

resources

C) by lowering the prices of factors of production

D) by increasing the prices of factors of production

Answer: BDiff: 2 Page Ref: 45Topic: Economic GrowthLearning Outcome: Micro 17: Explain the effects of the factors of production, factor demand, and factor supply and

labor in factor marketsAACSB: Reflective Thinking

34) Which of the following would shift a nationʹs production possibilities frontier outward?

A) discovering a cheap way to convert sunshine into electricity

B) an increase in demand for the nationʹs products

C) a decrease in the unemployment rate

D) a law requiring workers to retire at age 50

Answer: ADiff: 2 Page Ref: 45Topic: Economic GrowthLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Analytic Skills



Figure 2-4

Figure 2-4 shows various points on three different production possibilities frontiers for a nation.

35) Refer to Figure 2-4. A movement from X to Y

A) could be due to a change in consumersʹ tastes and preferences.

B) could occur because of an influx of immigrant labor.

C) is the result of advancements in food production technology only, with no change in the

technology for plastic production.

D) is the result of advancements in plastic production technology only, with no change in

food production technology.

Answer: BDiff: 2 Page Ref: 45Topic: Economic GrowthLearning Outcome: Micro 2: Interpret and analyze information presented in different types of graphsAACSB: Analytic Skills

36) Refer to Figure 2-4. A movement from Y to Z

A) represents an increase in the demand for plastic products.

B) could occur because of general technological advancements.

C) is the result of advancements in food production technology.

D) is the result of advancements in plastic production technology.

Answer: DDiff: 2 Page Ref: 45Topic: Economic GrowthLearning Outcome: Micro 2: Interpret and analyze information presented in different types of graphsAACSB: Analytic Skills



37) Refer to Figure 2-4. Consider the following events:

a. an increase in the unemployment rate

b. a decrease in a nationʹs money supply

c. a war that kills a significant portion of a nationʹs population

Which of the events listed above could cause a movement from Y to W ?

A) a, b and c

B) a and b only

C) a and c only

D) a only

E) c only

Answer: EDiff: 2 Page Ref: 45Topic: Economic GrowthLearning Outcome: Micro 2: Interpret and analyze information presented in different types of graphsAACSB: Analytic Skills

38) Refer to Figure 2-4. Consider the following movements:

a. from point V to point W

b. from point W to point Y

c. from point Y to point Z

Which of the movements listed above represents economic growth?

A) a, b, and c B) b and c only C) a only D) b only

Answer: BDiff: 2 Page Ref: 45Topic: Economic GrowthLearning Outcome: Micro 2: Interpret and analyze information presented in different types of graphsAACSB: Analytic Skills


a. a decrease in the unemployment rate

b. general technological advancement

c. an increase in consumer wealth

Which of the events listed above could cause a movement from V to W ?

A) a only B) a and b only C) b and c only D) a, b, and c

Answer: ADiff: 2 Page Ref: 45Topic: Economic GrowthLearning Outcome: Micro 2: Interpret and analyze information presented in different types of graphsAACSB: Analytic Skills




a. a reduction in the patent protection period to no more than 2 years

b. a war that destroys a substantial portion of a nationʹs capital stock

c. the lack of secure and enforceable property rights system

Which of the events listed above could cause a movement from W to V?

A) a only

B) a and b only

C) a and c only

D) b and c only

E) a, b, and c

Answer: CDiff: 2 Page Ref: 45Topic: Economic GrowthLearning Outcome: Micro 2: Interpret and analyze information presented in different types of graphsAACSB: Reflective Thinking

41) The Great Depression of the 1930s with a large number of workers and factories unemployed

would be represented in a production possibilities frontier graph by

A) a point inside the frontier.

B) a point outside the frontier.

C) a point on the frontier.

D) an intercept on either the vertical or the horizontal axis.

Answer: ADiff: 2 Page Ref: 41Topic: Production Possibilities FrontiersLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

42) Suppose there is no unemployment in the economy and society decides that it wants more of

one good. Which of the following statements is true?

A) It can only achieve this with an advance in technology.

B) It can increase output without giving up another good.

C) It can only achieve this with an increase in resource supplies.

D) It will have to give up production and consumption of some other good.




43) If society decides it wants more of one good and all resources are fully utilized, then

A) it is unable to do this unless technology advances.

B) additional resource supplies will have to be found.

C) it has to give up some of another good and incur some opportunity costs.

D) more unemployment will occur.

Answer: CDiff: 2 Page Ref: 41Topic: Opportunity CostLearning Outcome: Micro 20: Apply the concepts of opportunity cost, marginal analysis, and present value to make


44) According to the production possibility model, if more resources are allocated to the production

of physical and human capital, then which of the following is likely to happen?

A) fewer goods will be produced for consumption today.

B) the production possibilities frontier will be shift inward in the future

C) future economic growth will decline.

D) the countryʹs total production will fall.

Answer: ADiff: 2 Page Ref: 41Topic: Opportunity CostLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Analytic Skills



Figure 2-5

45) Refer to Figure 2-5. If the economy is currently producing at point Y, what is the opportunity

cost of moving to point W?

A) 2 million tons of steel B) zero

C) 9 million tons of paper D) 16 million tons of paper

Answer: BDiff: 2 Page Ref: 44Topic: Opportunity CostLearning Outcome: Micro 2: Interpret and analyze information presented in different types of graphsAACSB: Analytic Skills

46) Refer to Figure 2-5. If the economy is currently producing at point W, what is the opportunity

cost of moving to point X?

A) 3 million tons of steel B) 19 million tons of steel

C) 5 million tons of paper D) 9 million tons of paper

Answer: CDiff: 1 Page Ref: 44Topic: Opportunity CostLearning Outcome: Micro 2: Interpret and analyze information presented in different types of graphsAACSB: Analytic Skills



47) In a report made to the U.S. Congress in 2001, the National Academy of Sciences cautioned that

if fuel economy encourages the production of smaller and lighter cars, ʺSome additional traffic

fatalities would be expected.ʺ This statement suggests that

A) U.S. auto manufacturers are more concerned about producing fuel efficient cars to

compete with their Japanese and South Korean rivals than about consumer safety.

B) there is a tradeoff between safety and fuel economy.

C) society should value safety more highly than fuel economy.

D) society should value fuel economy more highly than consumer safety because of the long

term environment benefits generated by less gasoline use.

Answer: BDiff: 2 Page Ref: 41Topic: Opportunity CostLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

48) Suppose your expenses for this term are as follows: tuition: $12,000, room and board: $6,500,

books and other educational supplies: $1,500. Further, during the term, you can only work

part-time and earn $3,500 instead of your full-time salary of $14,000. What is the opportunity

cost of going to college this term, assuming that your room and board expenses would be the

same even if you did not go to college?

A) $13,500 B) $20,000 C) $24,000 D) $30,500


decisionsAACSB: Analytic Skills

49) The opportunity cost of taking a semester-long economics class is

A) the cost of tuition and fees only.

B) the value of the time spent in the classroom.

C) zero because there is no admission charged if you are enrolled in the course.

D) equal to the highest value of an alternative use of the time and money spent on the class.

E) the knowledge and enjoyment you receive from attending the class.

Answer: DDiff: 2 Page Ref: 41Topic: Opportunity CostLearning Outcome: Micro 20: Apply the concepts of opportunity cost, marginal analysis, and present value to make




Figure 2-6

General Motors recently approved for production the Cadillac Converj, an electric car based on its Chevy

Volt. The Converj will feature a ʺGeneration 1.5 Voltecʺ powertrain, with a hybrid engine that runs on a

combination of electricity and gasoline. Assume GM chooses to produce both hybrid-engine vehicles and

gasoline-engine vehicles for its Cadillac brand. Figure 2-6 shows changes to its production possibilities

frontier in response to new developments and different strategic production decisions.

50) Refer to Figure 2-6. Assume a technological advancement greatly reduces the cost to produce

hybrid-engine vehicles. This is best represented by the

A) movement from E to F in Graph A. B) movement from G to H in Graph B.

C) movement from K to L in Graph C. D) movement from H to J in Graph B.

Answer: ADiff: 2 Page Ref: 45Topic: Economic GrowthLearning Outcome: Micro 2: Interpret and analyze information presented in different types of graphsAACSB: Reflective Thinking

51) Refer to Figure 2-6. In response to changing consumer demands, GM has cut back on the

production of hybrids and increased its production of gasoline-powered vehicles. This strategy

is best represented by the

A) movement from F to E in Graph A. B) movement from G to J in Graph B.

C) movement from L to K in Graph C. D) movement from J to H in Graph B.

Answer: DDiff: 2 Page Ref: 45Topic: Opportunity CostLearning Outcome: Micro 2: Interpret and analyze information presented in different types of graphsAACSB: Reflective Thinking



52) Refer to Figure 2-6. Assume that in 2011, GM was able to reopen one of its factories after an

extensive remodelling which now allows for the production of both types of vehicles. This is

best represented by the

A) movement from E to F in Graph A. B) movement from H to J in Graph B.

C) movement from L to K in Graph C. D) movement from J to G in Graph B.

Answer: CDiff: 2 Page Ref: 45Topic: Economic GrowthLearning Outcome: Micro 2: Interpret and analyze information presented in different types of graphsAACSB: Reflective Thinking

53) The U.S. government provides health care to about 30 percent of the population through

programs such as Medicare and Medicaid. The Congressional Budget Office estimates that as

the U.S. population ages and medical costs continue to rise, federal government spending on

Medicare will

A) cause the federal government to go bankrupt within the next 5 years.

B) leave no funds for Medicaid, which will virtually eliminate this program.

C) more than double over the next 10 years.

D) start to decrease, since Medicare will be funded by social security contributions beginning

in 2012.

Answer: CDiff: 1 Page Ref: 43-44Topic: Economic GrowthLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

54) A decrease in the unemployment rate may be represented as a movement from a point on the

production possibilities frontier to a point outside the frontier.

Answer: FALSEDiff: 2 Page Ref: 45Topic: Economic GrowthLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

55) If a country is producing efficiently and is on the production possibilities frontier, the only way

to produce more of one good is to produce less of the other.

Answer: TRUEDiff: 1 Page Ref: 41Topic: Opportunity CostLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

56) Consider a country that produces only two goods: kayaks and coconuts. Suppose it is possible

for this country to increase its production of kayaks without producing fewer coconuts. In this

case, its current output combination is efficient.

Answer: FALSEDiff: 2 Page Ref: 40Topic: Production Possibilities FrontiersLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking



57) Any output combination outside a production possibility frontier is associated with unused or

underutilized resources.

Answer: FALSEDiff: 1 Page Ref: 41Topic: Production Possibilities FrontiersLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

58) An increase in the labor force shifts the production possibility frontier inwards over time.

Answer: FALSEDiff: 1 Page Ref: 45Topic: Economic GrowthLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

59) If additional units of a good could be produced at a constant opportunity cost, the production

possibility frontier would be bowed outward (concave).

Answer: FALSEDiff: 2 Page Ref: 44Topic: Opportunity CostLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

60) On a diagram of a production possibility frontier, opportunity cost is represented by the

production possibility frontier shifting outward.

Answer: FALSEDiff: 2 Page Ref: 44Topic: Opportunity CostLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

61) To increase gas mileage, automobile manufacturers make cars small and light. Large cars absorb

more of the impact of an accident than small cars but yield lower gas mileage. These facts

suggest that a negative relationship exists between safety and gas mileage.

Answer: TRUEDiff: 2 Page Ref: 40Topic: Production Possibilities FrontiersLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Analytic Skills

62) What is a production possibilities frontier? What do points along the frontier represent? What

do points inside and outside the frontier represent?

Answer: A production possibilities frontier is a curve showing the maximum attainable

combinations of two products that may be produced with available resources and current

technology. Points along a production possibilities frontier are attainable with the

resources available and are efficient. Points inside the frontier are attainable but

inefficient. Points outside the frontier are unattainable.Diff: 2 Page Ref: 40-41Topic: Production Possibilities FrontiersLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking



63) What shape does a production possibilities frontier take if it displays increasing opportunity

costs? What shape does a production possibilities frontier take if it displays constant

opportunity costs? Which shape is most common in production situations?

Answer: A production possibilities frontier which displays increasing opportunity costs is bowed

out. A production possibilities frontier which displays constant opportunity costs is

linear. A bowed out production possibilities frontier is most common in production

situations.Diff: 2 Page Ref: 44Topic: Opportunity CostLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

64) a. Draw a production possibilities frontier for a country that produces two goods, beer and

pretzels. Assume that resources are equally suited to both tasks.

b. Define opportunity costs.

c. Use your production possibilities frontier graph to demonstrate the principle of opportunity

costs.

Answer: a. The PPF is linear to reflect the fact that resources are equally suited to both tasks.

b. Opportunity cost is defined as the highest valued alternative that must be forgone by

taking an action.

c. In the PPF graph in part (a), suppose the country is currently producing at point X

and wishes to move to point Y so that it can produce more beer. The only way it can

obtain more beer is to give up some amount of pretzels.Diff: 2 Page Ref: 41Topic: Production Possibilities FrontiersLearning Outcome: Micro 2: Interpret and analyze information presented in different types of graphsAACSB: Analytic Skills



Table 2-2

Possible Output

Combinations

Apples

(thousands of

pounds)

Pears

(thousands of

pounds)

A 70 0

B 60 20

C 50 36

D 40 48

E 30 56

F 20 60

G 10 63

H 0 65

65) Refer to Table 2-2. The Fruit Farm produces only apples and pears. The table above shows the

maximum possible output combinations of the two fruits using all resources and currently

available technology.

a. Graph The Fruit Farmʹs production possibilities frontier. Put apples on the horizontal axis

and pears on the vertical axis. Be sure to identify the output combination points on your

diagram.

b. Suppose The Fruit Farm is currently producing at point D. What is the opportunity cost of

producing an additional 8,000 pounds of pears?

c. Suppose The Fruit Farm is currently producing at point D. What happens to the

opportunity cost of producing more and more pears? Does it increase, decrease or remain

constant? Explain your answer.

d. Suppose The Fruit Farm is currently producing at point G. What happens to the

opportunity cost of producing more and more apples? Does it increase, decrease or remain

constant? Explain your answer.

e. Suppose The Fruit Farm is plagued by the apple maggot infestation which destroys apple

trees but not pears. Show in a graph what happens to its PPF.

Answer: a.



b. 10,000 pounds of apples

c. It increases. For example to move to E, The Fruit Farm has to give up 10,000 pounds

of apples to produce an additional 8,000 pounds of pears. For each additional 10,000

pounds of apples foregone, the payoff in terms of pears gets progressively smaller.

d. It increases. Each time it wants to produce an additional 10,000 pounds of apples,

more and more pears must be given up.

e.

Diff: 3 Page Ref: 42-43Topic: Production Possibilities FrontiersLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Analytic Skills

2.2 Comparative Advantage and Trade

1) You have an absolute advantage whenever you

A) are better educated than someone else.

B) can produce more of something than others with the same resources.

C) prefer to do one particular activity.

D) can produce something at a lower opportunity cost than others.

Answer: BDiff: 1 Page Ref: 48Topic: Absolute AdvantageLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking



Table 2-3

Serena Haley

Bracelets 8 9

Necklaces 16 12

Table 2-3 shows the output per week of two jewelers, Serena and Haley. They can either devote their time to

making bracelets or making necklaces.

2) Refer to Table 2-3. Which of the following statements is true?

A) Haley has an absolute advantage in making both products.

B) Serena has an absolute advantage in making both products.

C) Haley has an absolute advantage in making bracelets and Serena in making necklaces.

D) Haley has an absolute advantage in making necklaces and Serena in making bracelets.

Answer: CDiff: 1 Page Ref: 48Topic: Absolute AdvantageLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Analytic Skills

3) Refer to Table 2-3. What is Haleyʹs opportunity cost of making a bracelet?

A) 3/4 of a bracelet B) 3 bracelets

C) 1 1/3 necklaces D) 2 necklaces



4) Refer to Table 2-3. What is Haleyʹs opportunity cost of making a necklace?

A) 3/4 of a bracelet B) 3 bracelets

C) 1 1/3 necklaces D) 2 necklaces



5) Refer to Table 2-3. What is Serenaʹs opportunity cost of making a bracelet?

A) 2 necklaces B) 1/2 of a bracelet

C) 1/2 of a necklace D) 3/4 of a bracelet





6) Refer to Table 2-3. What is Serenaʹs opportunity cost of making a necklace?

A) 2 necklaces B) 1/2 of a bracelet

C) 1/2 of a necklace D) 3/4 of a bracelet

Answer: BDiff: 2 Page Ref: 49Topic: Opportunity CostLearning Outcome: Micro 20: Apply the concepts of opportunity cost, marginal analysis, and present value to make


7) Refer to Table 2-3. Which of the following statements is true?

A) Haley has a comparative advantage in making both products.

B) Serena has a comparative advantage in making both products.

C) Haley has a comparative advantage in making bracelets and Serena in making necklaces.

D) Haley has a comparative advantage in making necklaces and Serena in making bracelets.

Answer: CDiff: 3 Page Ref: 49Topic: Comparative AdvantageLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Analytic Skills

8) Comparative advantage means the ability to produce a good or service

A) at a lower selling price than any other producer.

B) at a lower opportunity cost than any other producer.

C) of a higher quality than any other producer.

D) at a higher profit level than any other producer.

Answer: BDiff: 1 Page Ref: 49Topic: Comparative AdvantageLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

9) Specializing in the production of a good or service in which one has a comparative advantage

enables a country to do all of the following except

A) engage in mutually beneficial trade with other nations.

B) increase the variety of products that it can consume with no increase in resources.

C) consume a combination of goods that lies outside its own production possibilities frontier.

D) produce a combination of goods that lies outside its own production possibilities frontier.

Answer: DDiff: 3 Page Ref: 49Topic: Comparative AdvantageLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking



10) For each bottle of wine that Italy produces, it gives up the opportunity to make 10 pounds of

cheese. France can produce 1 bottle of wine for every 25 pounds of cheese it produces. Which of

the following is true about the comparative advantage between the two countries?

A) Italy has the comparative advantage in cheese.

B) Italy has the comparative advantage in wine.

C) France has the comparative advantage in wine and cheese.

D) France has the comparative advantage in wine.

Answer: BDiff: 2 Page Ref: 49Topic: Comparative AdvantageLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Analytic Skills

Figure 2-7

Figure 2-7 shows the production possibilities frontiers for Pakistan and Indonesia. Each country produces

two goods, cotton and cashews.

11) Refer to Figure 2-7. What is the opportunity cost of producing 1 bolt of cotton in Pakistan?

A) 3/8 of a pound of cashews B) 5/8 of a pound of cashews

C) 1 3/5 pounds of cashews D) 150 pounds of cashews

Answer: BDiff: 2 Page Ref: 48-49Topic: Opportunity CostLearning Outcome: Micro 20: Apply the concepts of opportunity cost, marginal analysis, and present value to make


12) Refer to Figure 2-7. What is the opportunity cost of producing 1 bolt of cotton in Indonesia?

A) 3/8 of a pound of cashews B) 5/8 of a pound of cashews

C) 2 2/3 pounds of cashews D) 120 pounds of cashews

Answer: ADiff: 2 Page Ref: 48-49Topic: Opportunity CostLearning Outcome: Micro 20: Apply the concepts of opportunity cost, marginal analysis, and present value to make




13) Refer to Figure 2-7. What is the opportunity cost of producing 1 pound of cashews in Pakistan?

A) 3/8 of a bolt of cotton B) 5/8 of a bolt of cotton

C) 1 3/5 bolts of cotton D) 240 bolts of cotton

Answer: CDiff: 2 Page Ref: 48-49Topic: Opportunity CostLearning Outcome: Micro 20: Apply the concepts of opportunity cost, marginal analysis, and present value to make


14) Refer to Figure 2-7. What is the opportunity cost of producing 1 pound of cashews in Indonesia?

A) 3/8 of a bolt of cotton B) 5/8 of a bolt of cotton

C) 2 2/3 bolts of cotton D) 320 bolts of cotton



15) Refer to Figure 2-7. Which country has a comparative advantage in the production of cotton?

A) Indonesia B) They have equal productive abilities.

C) Pakistan D) neither country

Answer: ADiff: 2 Page Ref: 48-49Topic: Comparative AdvantageLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Analytic Skills

16) Refer to Figure 2-7. Which country has a comparative advantage in the production of cashews?

A) Indonesia B) They have equal productive abilities.

C) Pakistan D) neither country

Answer: CDiff: 2 Page Ref: 48-49Topic: Comparative AdvantageLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Analytic Skills

17) Refer to Figure 2-7. If the two countries have the same amount of resources and the same

technological knowledge, which country has an absolute advantage in the production of cotton?

A) Indonesia B) They have the same advantage.

C) Pakistan D) cannot be determined

Answer: ADiff: 2 Page Ref: 48-49Topic: Absolute AdvantageLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Analytic Skills



18) Which of the following statements is true?

A) Individuals who have never been the best at doing anything cannot have a comparative

advantage in producing any product.

B) Individuals who have never been the best at doing anything can still have a comparative

advantage in producing some product.

C) Individuals who have never been the best at doing anything perform all tasks at a higher

opportunity cost than others.

D) Individuals who have never been the best at doing anything must have an absolute

advantage in at least ones task.

Answer: BDiff: 2 Page Ref: 49Topic: Comparative AdvantageLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

Table 2-4

One Digital

CameraWheat (per pound)

China 100 hours 4 hours

South Korea 60 hours 3 hours

Table 2-4 shows the number of labor hours required to produce a digital camera and a pound of wheat in

China and South Korea.

19) Refer to Table 2-4. Does either China or South Korea have an absolute advantage and if so, in

what product?

A) South Korea has an absolute advantage in wheat.

B) China has an absolute advantage in wheat.

C) South Korea has an absolute advantage in both products.

D) China has an absolute advantage in digital cameras.

Answer: CDiff: 1 Page Ref: 50-51Topic: Absolute AdvantageLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Analytic Skills

20) Refer to Table 2-4. What is Chinaʹs opportunity cost of producing one digital camera?

A) 0.04 pounds of wheat B) 4 pounds of wheat

C) 25 pounds of wheat D) 40 pounds of wheat





21) Refer to Table 2-4. What is South Koreaʹs opportunity cost of producing one digital camera?

A) 0.05 pounds of wheat B) 20 pounds of wheat

C) 25 pounds of wheat D) 60 pounds of wheat

Answer: BDiff: 2 Page Ref: 50-51Topic: Opportunity CostLearning Outcome: Micro 20: Apply the concepts of opportunity cost, marginal analysis, and present value to make


22) Refer to Table 2-4. What is Chinaʹs opportunity cost of producing one pound of wheat?

A) 0.04 units of a digital camera B) 4 digital cameras

C) 25 digital cameras D) 40 digital cameras

Answer: ADiff: 2 Page Ref: 50-51Topic: Opportunity CostLearning Outcome: Micro 20: Apply the concepts of opportunity cost, marginal analysis, and present value to make


23) Refer to Table 2-4. What is South Koreaʹs opportunity cost of producing one pound of wheat?

A) 60 digital cameras B) 20 digital cameras

C) 5 digital cameras D) 0.05 units of a digital camera

Answer: DDiff: 2 Page Ref: 50-51Topic: Opportunity CostLearning Outcome: Micro 20: Apply the concepts of opportunity cost, marginal analysis, and present value to make


24) Refer to Table 2-4. China has a comparative advantage in the production of

A) wheat. B) digital cameras.

C) both products. D) neither product.

Answer: BDiff: 2 Page Ref: 50-51Topic: Comparative AdvantageLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Analytic Skills

25) Refer to Table 2-4. South Korea has a comparative advantage in the production of

A) wheat. B) digital cameras.

C) both products. D) neither product.

Answer: CDiff: 2 Page Ref: 50-51Topic: Comparative AdvantageLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Analytic Skills



26) Refer to Table 2-4. If the two countries specialize and trade, who should export wheat?

A) There is no basis for trade between the two countries.

B) China

C) South Korea

D) They should both be exporting wheat.

Answer: BDiff: 1 Page Ref: 50-51Topic: SpecializationLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Analytic Skills

27) Refer to Table 2-4. If the two countries specialize and trade, who should export digital cameras?

A) There is no basis for trade between the two countries.

B) China

C) South Korea

D) They should both be importing digital cameras.

Answer: CDiff: 1 Page Ref: 50-51Topic: SpecializationLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Analytic Skills

28) If the best surgeon in town is also the best at cleaning swimming pools, then according to

economic reasoning, this person should

A) should pursue the activity he enjoys more.

B) specialize in cleaning swimming pools because it is more labor-intensive.

C) split his time evenly between being a surgeon and cleaning swimming pools.

D) specialize in being a surgeon because its opportunity cost is lower.

Answer: DDiff: 1 Page Ref: 46Topic: SpecializationLearning Outcome: Micro 20: Apply the concepts of opportunity cost, marginal analysis, and present value to make


29) Rayburn Reed is a highly talented photographer. He has chosen to specialize in photography

because of all of the following except

A) he obviously has a comparative advantage in photography.

B) his opportunity cost of pursuing another career is very low.

C) for him, this is the most lucrative way to purchase the products that he wants to consume.

D) his photographs are highly esteemed by art lovers who are willing to pay very high prices.

Answer: BDiff: 3 Page Ref: 46Topic: SpecializationLearning Outcome: Micro 20: Apply the concepts of opportunity cost, marginal analysis, and present value to make




30) If Sanjaya can shuck more oysters in one hour than Tatiana, then Sanjaya has a comparative

advantage in shucking oysters.

Answer: FALSEDiff: 2 Page Ref: 48Topic: Absolute AdvantageLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

31) The basis for trade is comparative advantage, not absolute advantage.

Answer: TRUEDiff: 1 Page Ref: 49Topic: Comparative AdvantageLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

32) If a country produces only two goods, it is possible to have a comparative advantage in the

production of both those goods.

Answer: FALSEDiff: 1 Page Ref: 49Topic: Comparative AdvantageLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

33) In a two-good, two country world, if one country has an absolute advantage in the production

of both goods, it cannot benefit by trading with the other country.

Answer: FALSEDiff: 2 Page Ref: 48Topic: Absolute AdvantageLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

34) For a person to have a comparative advantage in producing a product, she must be able to

produce that product at a lower opportunity cost than her competitors.


35) It is possible to have a comparative advantage in producing a good or service without having an

absolute advantage.




36) What is comparative advantage? What is absolute advantage?

Answer: Comparative advantage is the ability of an individual, firm, or country to produce a good

or service at a lower opportunity cost than competitors. Absolute advantage is the ability

of an individual, firm, or country to produce more of a good or service than competitors,

using the same amount of resources.Diff: 1 Page Ref: 48-49Topic: Comparative AdvantageLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

37) Is it possible for a firm to have an absolute advantage in producing something without having a

comparative advantage? Why or why not?

Answer: Yes, a firm can have an absolute advantage without having a comparative advantage. A

firm may be able to produce more of a good or service than its competitors, but that does

not necessarily mean it can produce the good or service at a lower opportunity cost than

its competitors.Diff: 2 Page Ref: 48-49Topic: Absolute AdvantageLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking



Table 2-5

Digital Camera Wheat (bushels)

China 100 hours 5 hours

South Korea 90 hours 3 hours

38) Refer to Table 2-5. This table shows the number of labor hours required to produce a digital

cameras and a bushel of wheat in China and South Korea.

a. Which country has an absolute advantage in the production of digital cameras?

b. Which country has an absolute advantage in the production of wheat?

c. What is Chinaʹs opportunity cost of producing one digital camera?

d. What is South Koreaʹs opportunity cost of producing one digital camera?

e. What is Chinaʹs opportunity cost of producing one pound of wheat?

f. What is South Koreaʹs opportunity cost of producing one pound of what?

g. If each country specializes in the production of the product in which it has a comparative

advantage, who should produce digital cameras?

h. If each country specializes in the production of the product in which it has a comparative

advantage, who should produce wheat?

Answer: a. South Korea has an absolute advantage in the production of digital cameras.

b. South Korea has an absolute advantage in wheat production.

c. Chinaʹs the opportunity cost of producing one digital camera is 20 bushels of wheat.

d. South Koreaʹs opportunity cost of producing one digital camera is 30 bushels of

wheat

e. Chinaʹs opportunity cost of one bushel of wheat is 0.05 units of a digital camera.

f. South Koreaʹs opportunity cost of one bushel of wheat is 0.03 units of a digital

camera.

g. China should specialize in producing digital cameras.

h. South Korea should specialize in producing wheat.Diff: 3 Page Ref: 48-49Topic: SpecializationLearning Outcome: Micro 20: Apply the concepts of opportunity cost, marginal analysis, and present value to make


39) Refer to Table 2-5. This table shows the number of labor hours required to produce a digital

camera and a bushel of wheat in China and South Korea.

a. If each country has a total of 9,000 labor hours to devote to the production of the two goods,

draw the production possibilities frontier for each country. Put ʺDigital Cameraʺ on the

horizontal axis and ʺWheatʺ on the vertical axis. Be sure to identify the intercept values on your

graphs.

b. Suppose each country allocates 60% its labor hours to wheat production and 40% to the

production of digital cameras. Complete Table 2-6 below to show each countryʹs output of the

two products.



Table 2-6: Production and Consumption with no Trade

Digital Camera

Output

Wheat

Output

(bushels)

China

South Korea

Total

c. If the two countries do not trade and consume whatever they produce, identify the current

production and consumption point for each country on their respective production possibilities

frontiers. Label Chinaʹs consumption point ʺCʺ and South Koreaʹs consumption point, ʺK.ʺ

d. Suppose the two countries specialize and trade. Who should produce digital cameras and

who should produce wheat? Explain your answer.

e. Complete Table 2-7 below to show each countryʹs output with specialization.

Table 2-7: Output with Specialization

Digital Camera

Output

Wheat

Output

(bushels)

China

South Korea

Total

f. Did specialization increase the combined output for the two countries without any increase

in resources? If so, by how much?

g. Suppose China and South Korea agree to trade so that in exchange for 1,200 bushels of

wheat, the exporter of wheat receives 48 digital cameras. Complete Table 2-8 below to show

each countryʹs consumption bundle after trade.

Table 2-8: Consumption with Trade

Digital Camera Wheat

(bushels)

China

South Korea

h. Show the consumption points after trade on each countryʹs production possibilities frontier.

Label these points ʺBʺ for China and ʺJʺ for South Korea.

i. Has trade made the two countries better off? Explain your answer.

Answer: a.



Answer:

b.

Table 2-6: Production and Consumption with no Trade

Digital Camera

Output

Wheat

Output

(bushels)

China 36 1,080

South Korea 40 1,800

Total 76 2,880

c. See graph in part (a)

d. China should specialize in producing digital cameras because it has a lower

opportunity cost: 20 bushels of wheat as opposed to South Koreaʹs 30 bushels of wheat.

South Korea should specialize in producing wheat because it has a lower opportunity

cost: 0.03 units of a digital camera as opposed to Chinaʹs 0.05 units of a digital camera.

e.

Table 2-7: Output with Specialization

Digital Camera

Output

Wheat

Output

(bushels)

China 90 0

South Korea 0 3,000

Total 90 3,000

f. Yes, digital camera output increased by 14 units (from 76 units to 90 units) and wheat

output increased by 120 bushels (from 2,880 bushels to 3,000 bushels).

g.

Table 2-8: Consumption with Trade

Digital Camera Wheat

(bushels)

China 42 1,200

South Korea 48 1,800



h. See graph in part (a)

i. Yes, trade has enabled the two countries to consume outside their PPFs.Diff: 3 Page Ref: 50-51Topic: SpecializationLearning Outcome: Micro 20: Apply the concepts of opportunity cost, marginal analysis, and present value to make


40) Suppose in Belize, the opportunity cost of producing a sailboat is 5 hang gliders. In Honduras,

the opportunity cost of producing a sailboat is 8 hang gliders.

a. What is the opportunity cost of producing a hang glider for Belize?

b. What is the opportunity cost of producing a hang glider for Honduras?

c. Which country has a comparative advantage in the production of hang gliders?

d. Which country has a comparative advantage in the production of sailboats?

Answer: a. For Belize, the opportunity cost of producing a hang glider is 1/5 of a sailboat.

b. For Honduras, the opportunity cost of producing a hang glider is 1/8 of a sailboat.

c. Honduras has a comparative advantage in the production of hang gliders.

d. Belize has a comparative advantage in the production of sailboats.Diff: 3 Page Ref: 48-49Topic: Opportunity CostLearning Outcome: Micro 20: Apply the concepts of opportunity cost, marginal analysis, and present value to make


2.3 The Market System

1) Which of the following is not a factor of production?

A) an acre of farmland B) a drill press in a machine shop

C) the manager of the local tire shop D) $1,000 in cash

Answer: DDiff: 2 Page Ref: 51Topic: Factors of ProductionLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

2) An example of a factor of production is

A) stock issued by Dell. B) the computers exported by Dell.

C) a computer produced by an Dell. D) a worker hired by Dell.

Answer: DDiff: 2 Page Ref: 51Topic: Factors of ProductionLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking



3) If a commercial dairy farm wants to raise funds to purchase feeding troughs, it does so in the

A) output market. B) product market.

C) factor market. D) dairy products market.

Answer: CDiff: 1 Page Ref: 51Topic: MarketsLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

4) The natural resources used in production are made available in the

A) goods and services market. B) product market.

C) government market. D) factor market.

Answer: DDiff: 1 Page Ref: 51Topic: MarketsLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

5) When you purchase a new pair of jeans you do so in the

A) factor market. B) input market.

C) product market. D) resource market.


6) The resource income earned by those who supply ________ is called wages.

A) labor B) capital

C) natural resources D) entrepreneurship

Answer: ADiff: 1 Page Ref: 51Topic: Factors of ProductionLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

7) Which of the following statements about an entrepreneur is false?

A) organizes the other factors of production into a working unit

B) develops the vision for the firm and funds the producing unit

C) sells his entrepreneurial services in the output market

D) risks the personal funds provided

Answer: CDiff: 2 Page Ref: 51Topic: Factors of ProductionLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking



8) The ________ demonstrates the roles played by households and firms in the market system.

A) production possibilities frontier B) circular flow model

C) theory of comparative advantage D) business cycle

Answer: BDiff: 2 Page Ref: 52Topic: The Circular Flow of IncomeLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

9) Households

A) have no influence on the circular flow in a market economy.

B) purchase resources in the factor market.

C) sell goods in the product market.

D) sell resources in the factor market.

Answer: DDiff: 1 Page Ref: 52Topic: The Circular Flow of IncomeLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

10) Households ________ final goods and services in the ________ market.

A) purchase; factor B) purchase; product

C) sell; factor D) sell; product


11) In the circular flow model, producers

A) sell goods and services in the input market.

B) and households spend earnings from resource sales on goods and services in the factor

market.

C) hire resources sold by households in the factor market.

D) spend earnings from resource sales on goods and services in the product market.

Answer: CDiff: 1 Page Ref: 52Topic: The Circular Flow of IncomeLearning Outcome: Micro 20: Apply the concepts of opportunity cost, marginal analysis, and present value to make




12) Which of the following is a flow in the circular flow model?

A) the flow of goods and services from households to firms

B) the flow of profit and the flow of revenue

C) the flow of income earned by firms and the flow of expenditures earned by households

D) the flow of revenue received by firms and the flow of payments to resource owners

Answer: DDiff: 2 Page Ref: 52Topic: The Circular Flow of IncomeLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

Figure 2-8

13) Refer to Figure 2-8. One segment of the circular flow diagram in the figure shows the flow of

labor services from market K to economic agents J. What is market K and who are economic

agents J?

A) K = factor markets; J = households B) K = product markets; J = households

C) K = factor markets; J = firms D) K = product markets; J = firms

Answer: CDiff: 2 Page Ref: 52-53Topic: The Circular Flow of IncomeLearning Outcome: Micro 2: Interpret and analyze information presented in different types of graphsAACSB: Reflective Thinking


wages and salaries from market K to economic agents M. What is market K and who are

economic agents M?

A) K = factor markets; M = households B) K = product markets; M = households

C) K = factor markets; M = firms D) K = product markets; M = firms

Answer: ADiff: 2 Page Ref: 52-53Topic: The Circular Flow of IncomeLearning Outcome: Micro 2: Interpret and analyze information presented in different types of graphsAACSB: Reflective Thinking



15) Which of the following are separate flows in the circular flow model?

A) the flow of goods and the flow of services

B) the flow of costs and the flow of revenue

C) the flow of income earned from the sale of resources and the flow of expenditures on

goods and services.

D) the flow of income received by households and the flow of tax revenues paid by

households

Answer: CDiff: 2 Page Ref: 52Topic: The Circular Flow of IncomeLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

16) Which of the following statements about a simple circular flow model is false?

A) Producers are buyers in the factor market and sellers in the product market.

B) Households are neither buyers nor sellers in the input market.

C) Producers are buyers in the factor market.

D) Households are sellers in the product market.




Figure 2-9


goods and services from market C to economic agents A. What is market C and who are

economic agents A?

A) C = factor markets; A = households B) C = product markets; A = households

C) C = factor markets; A = firms D) C= product markets; A = firms

Answer: BDiff: 2 Page Ref: 52-53Topic: The Circular Flow of IncomeLearning Outcome: Micro 2: Interpret and analyze information presented in different types of graphsAACSB: Reflective Thinking



Figure 2-10


funds from economic agents E to market F. Who are economic agents E and what is market F?

A) E = households; F = product markets B) E = firms; F = product markets

C) E = households ; F = factor markets D) E = firms; F = factor markets

Answer: ADiff: 2 Page Ref: 52-53Topic: The Circular Flow of IncomeLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

19) All of the following are examples of spending on factors of production in the circular flow

model except

A) Bima hires two students to work at his ice-cream store.

B) ʺGet Fit Togetherʺ purchases 3 new treadmills for its gym.

C) Iris buys a dozen roses for her motherʹs birthday.

D) The Banyan Tree rents a much larger property so that it can add a restaurant to its

facilities.

Answer: CDiff: 2 Page Ref: 52Topic: The Circular Flow of IncomeLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

20) Which of the following is an example of spending on goods and services in the circular flow

model?

A) Belinda purchases a new computer for her tax-preparation business.

B) Javier buys 800 square feet of wood flooring for his vacation home.

C) Celeste buys fresh herbs at the farmersʹ market to use in her restaurant.

D) Timmy purchases a new examination table for use in his veterinary clinic.




21) ʺAn Inquiry into the Nature and Causes of the Wealth of Nationsʺ published in 1776 was written

by

A) John Maynard Keynes. B) Karl Marx.

C) Alfred Marshall. D) Adam Smith.

Answer: DDiff: 1 Page Ref: 53/53Topic: MarketsLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

Figure 2-11

22) Refer to Figure 2-11. Which two arrows in the diagram depict the following transaction:

LaDonna sells 20 pairs of sunglasses at the Oakley store.

A) J and M B) J and G C) K and M D) K and G

Answer: DDiff: 2 Page Ref: 52-53Topic: The Circular Flow of IncomeLearning Outcome: Micro 2: Interpret and analyze information presented in different types of graphsAACSB: Reflective Thinking

23) Refer to Figure 2-11. Which two arrows in the diagram depict the following transaction: Dorian

Gray hires ʺWild Oscarʺ, a professional portrait artist, to paint his picture.

A) J and M B) K and G C) K and M D) J and G

Answer: BDiff: 2 Page Ref: 52-53Topic: The Circular Flow of IncomeLearning Outcome: Micro 2: Interpret and analyze information presented in different types of graphsAACSB: Reflective Thinking



24) Refer to Figure 2-11. Which two arrows in the diagram depict the following transaction: Barney

earns $250 for selling scissors and razors to Floydʹs Barber Shop.

A) J and M B) K and G C) K and M D) J and G

Answer: ADiff: 2 Page Ref: 52-53Topic: The Circular Flow of IncomeLearning Outcome: Micro 2: Interpret and analyze information presented in different types of graphsAACSB: Reflective Thinking

25) Adam Smithʹs behavioral assumption about humans was that people

A) typically act irrationally.

B) usually act in a rational, self-interested way.

C) are consistently greedy.

D) typically act randomly.

Answer: BDiff: 1 Page Ref: 54Topic: MarketsLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

26) All of the following countries come close to the free market benchmark except

A) Canada. B) North Korea. C) Germany. D) Singapore.

Answer: BDiff: 1 Page Ref: 54Topic: MarketsLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

27) Adam Smithʹs invisible hand refers to

A) the governmentʹs unobtrusive role in ensuring that the economy functions efficiently.

B) property ownership laws and the rule of the court system.

C) the process by which individuals acting in their own self-interest bring about a market

outcome that benefits society as a whole.

D) the laws of nature that influence economics decisions.

Answer: CDiff: 2 Page Ref: 54Topic: MarketsLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Reflective Thinking

28) All of the following are critical functions of the government in facilitating the operation of a

market economy except

A) protecting private property.

B) enforcing property rights.

C) ensuring an equal distribution of income to all citizens.

D) enforcing contracts.




29) The term ʺproperty rightsʺ refers to

A) the physical possession of a house or any other property which the owner legally

purchased.

B) the ability to exercise control over oneʹs own resources within the confines of the law.

C) the governmentʹs right to appropriate land from wealthy land owners to redistribute to

peasants.

D) the right of a business not to have its assets confiscated by the government in the event

that the business is accused of committing fraud.

Answer: BDiff: 1 Page Ref: 57Topic: Property RightsLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

30) The primary purpose of ________ is to encourage the expenditure of funds on research and

development to create new products.

A) centrally planned economies B) government-run health care

C) nationalizing oil companies D) patents and copyrights

Answer: DDiff: 1 Page Ref: 57Topic: Property RightsLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

31) A major factor contributing to the slow growth rate of less developed economies is

A) the lack of well-defined and enforceable property rights.

B) the lack of natural resources.

C) the lack of workers.

D) the high rate of illiteracy.

Answer: ADiff: 2 Page Ref: 57Topic: Property RightsLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

32) A successful market economy requires

A) a government-controlled banking system and government price controls.

B) well-defined property rights and an independent court system to adjudicate disputes

based on the law.

C) generous unemployment benefits and paid medical leave for everyone in the labor force.

D) an equitable distribution of income and limits on immigration.

Answer: BDiff: 2 Page Ref: 57Topic: Property RightsLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking



33) Consider the following items:

a. the novel ʺThe DaVinci Codeʺ by Dan Brown

b. the ʺThe Spirited Shipperʺ, an innovative wine shipping box

c. a Swiss chefʹs award-winning recipe

d. an original fabric design, for example, the fabric used for ʺCoachʺ bags and luggage

Which of the items listed is an example of intellectual property?

A) a and b only B) a, b, and c

C) a and d only D) all of the items listed

Answer: DDiff: 2 Page Ref: 57Topic: Property RightsLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

34) An organization of producers that limits the amount of a good produced is known as a

A) free market organization. B) guild.

C) collective. D) co-op.

Answer: BDiff: 1 Page Ref: 53Topic: MarketsLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

35) In 18th century Europe, governments gave guilds legal authority to limit production of goods.

Did this authority obstruct or improve the market mechanism and how?

A) It improved the market mechanism by making it more efficient because the guilds were

able to quickly identify and rectify any market shortages and surpluses.

B) It improved the market mechanism because the governmentʹs actions provided the correct

set of signals to the market so that producers can adjust their output to better meet the

needs of consumers.

C) It obstructed the market mechanism because the guildʹs actions prevented the forces of

demand and supply from coordinating the self-interested decisions of producers and

consumers.

D) It obstructed the market mechanism because with one more party having to coordinate

activities (the guilds) there were delays in getting the products to consumers.




36) Stricter laws and regulations to protect intellectual property rights

A) will help to create a more successful market system.

B) will only benefit those companies whose intellectual property rights have in the past been

ignored.

C) will tend to have little impact on an economy since intellectual property is not tangible.

D) will create a stronger and more successful black market for intellectual property.

Answer: ADiff: 1 Page Ref: 57Topic: Property RightsLearning Outcome: Micro 5: List ways in which governments intervene in markets and explain the consequences of

such interventionAACSB: Reflective Thinking

37) If a nation changes its laws to more actively enforce intellectual property rights, all of the

following will most likely take place except

A) more software companies will choose to export their products to that country.

B) more film makers will choose to do business in that country.

C) the black market for intellectual property will become more prosperous in in that country.

D) foreign investment in that country will increase.

Answer: CDiff: 2 Page Ref: 57Topic: Property RightsLearning Outcome: Micro 5: List ways in which governments intervene in markets and explain the consequences of

such interventionAACSB: Reflective Thinking

38) The payment received by suppliers of entrepreneurial skills is called interest.

Answer: FALSEDiff: 1 Page Ref: 51Topic: Factors of ProductionLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

39) In the circular flow model, households supply resources such as labor services in the product

market.

Answer: TRUEDiff: 1 Page Ref: 52Topic: The Circular Flow of IncomeLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

40) Entrepreneurs bring together the factors of production to produce goods and services.

Answer: TRUEDiff: 1 Page Ref: 52Topic: Factors of ProductionLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking



41) In a free market there are virtually no restrictions, or at best few restrictions on how factors of

production can be employed.

Answer: TRUEDiff: 1 Page Ref: 52Topic: MarketsLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

42) Crude oil is not an example of a factor of production, but when crude oil is processed into

gasoline, it is a factor of production.

Answer: FALSEDiff: 2 Page Ref: 51Topic: Factors of ProductionLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

43) Each person goes about her daily business seeking to maximize her own self interests. In doing

so, she contributes to the welfare of society at large. This is the idea underlying Adam Smithʹs

ʺinvisible hand.ʺ

Answer: TRUEDiff: 2 Page Ref: 54Topic: MarketsLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

44) What is the difference between product markets and factor markets?

Answer: Product markets are markets for goods and services. Factor markets are markets for the

factors of production, which are the inputs used to make goods and services.Diff: 1 Page Ref: 51Topic: MarketsLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

45) How do firms and households interact in markets?

Answer: Firms supply goods and services to households, and buy factors of production from

households. Households supply factors of production to firms, and buy goods and

services from firms.Diff: 1 Page Ref: 52Topic: The Circular Flow of IncomeLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking

46) What is meant by the term ʺfree marketʺ?

Answer: A free market is a market with few government restrictions on how a good or service can

be produced or sold or on how factors of production can be employed.Diff: 1 Page Ref: 52Topic: MarketsLearning Outcome: Micro 3: Discuss different types of market system and the gains that can be made from tradeAACSB: Reflective Thinking



47) How does Adam Smithʹs idea of the ʺinvisible handʺ apply to the various parts, made by many

different manufacturers in many different countries, that are used by Apple to produce an iPad?

Answer: Smith used the ʺinvisible handʺ reference to explain why markets provide consumers

with desired products and services. In the case of the iPad, the invisible hand of the

market has led these parts manufacturers to contribute their knowledge and resources to

the process that ultimately results in a product available for sale in the United States and

around the world.Diff: 3 Page Ref: 55Topic: MarketsLearning Outcome: Micro 1: Identify the basic principles of economics and explain how to think like an economistAACSB: Analytic Skills


Documents

TEST ITEM FILE - testbankonly.comtestbankonly.com/pdf/Essentials-of-Economics-3rd-Edition-Hubbard... · vi Hubbard/O’Brien – Economics, Fourth Edition ... 2 Hubbard/OʹBrien Essentials