ECON CHAP 1-5

1. Bill is restoring a car and has already spent $4000 on the restoration. He expects to be able to sell the car for $5800. Bill discovers that he needs to do an additional $2400 of work to make the car worth $5800 to potential buyers. He could also sell the car now, without completing the additional work, for $3800. What should he do? a. He should sell the car now for $3800. b. He should keep the car since it wouldn't be rational to spend $6400 restoring a car and then sell it for only $5800 c. He should complete the additional work and sell the car for $5800. d. It does not matter which action he takes since the outcome will be the same either way

A

1. Economics deals primarily with the concept of a. scarcity b. money c. poverty d. banking

A

1. It costs a company $50,000 to produce 5000 beach towels. The company's cost will be $50,009 if it produces an additional beach towel. If the company produces 5,000 beach towels then a. its average cost is greater than its marginal cost b. its average cost and its marginal cost are equal c. its average cost is less than its marginal cost d. there is insufficient information to compute average and marginal costs

A

1. Suppose the state of Massachusetts passes a law that increases the tax on alcoholic beverages. As a result, residents in Massachusetts start purchasing their alcohol in surrounding states. Which of the following principles does this best illustrate? a. People respond to incentives b. Rational people think at the margin c. Trade can make everyone better off d. Markets are usually a good way to organize economic activity

A

1. To increase living standards, public policy should a. ensure that workers are well educated and have the necessary tools and technology. b. make unemployment benefits more generous c. move workers into jobs directly from high school d. ensure a greater degree of equality, taking all income-earners into account

A

2. The idea that the cost of something is what you give up to get it is known in economics as a. opportunity cost. b. sunk cost. c. market price. d. net marginal benefit

A

4. A rational decisionmaker takes an action if and only if a. the marginal benefit of the action exceeds the marginal cost of the action. b. the marginal cost of the action exceeds the marginal benefit of the action. c. the marginal cost of the action is zero. d. the opportunity cost of the action is zero.

A

5. Suppose the state of Massachusetts passes a law that increases the tax on alcoholic beverages. As a result, residents in Massachusetts start purchasing their alcohol in surrounding states. Which of the following principles does this best illustrate? a. People respond to incentives b. Rational people think at the margin c. Trade can make everyone better off d. Markets are usually a good way to organize economic activity

A

5. The U.S. is devoting substantial resources towards the War on Terrorism and homeland security. As long as our resources were being used efficiently, the production possibilities curve would suggest that: a. We will have to give up the production of other goods that could have been produced with these resources b. We will be able to produce the same amount of other goods as before c. The military spending will result in an outward shift in the production possibilities curve if we use borrowed money d. We will be unable to devote the resources necessary toward these efforts unless there is an improvement in technology.

A

7. Which of the following is an example of a normative statement? a. Universal health care would be good for U.S. citizens. b. An increase in the cigarette tax would cause a decrease in the number of smokers. c. A law requiring the federal government to balance its budget would increase economic growth. d. A decrease in the minimum wage would decrease unemployment.

A

8. The producer that can produce a product with fewer inputs has a. an absolute advantage in the production of that good. b. neither a comparative nor absolute advantage in the production of that good. c. both a comparative and absolute advantage in the production of that good. d. a comparative advantage in the production of that good.

A

For two individuals who engage in the same two productive activities, it is impossible for one of the two individuals to a. have a comparative advantage in both activities. b. have an absolute advantage in both activities. c. be more productive per unit of time in both activities. d. gain from trade with each other.

A

If Iowa's opportunity cost of corn is lower than Oklahoma's opportunity cost of corn, then a. Iowa has a comparative advantage in the production of corn. b. Iowa has an absolute advantage in the production of corn. c. Iowa should import corn from Oklahoma. d. Oklahoma should produce just enough corn to satisfy its own residents' demands.

A

Mike and Sandy are two woodworkers who both make tables and chairs. In one month, Mike can make 4 tables or 20 chairs, while Sandy can make 6 tables or 18 chairs. Given this, we know that a. Mike has an absolute advantage in chairs. b. Mike has a comparative advantage in tables. c. Sandy has an absolute advantage in chairs. d. Sandy has a comparative advantage in chairs.

A

Suppose the United States has a comparative advantage over Mexico in producing pork. The principle of comparative advantage asserts that a. the United States should produce more pork than what it requires and export some of it to Mexico. b. the United States should produce a moderate quantity of pork and import the remainder of what it requires from Mexico. c. the United States should refrain altogether from producing pork and import all of what it requires from Mexico. d. Mexico has nothing to gain from importing United States pork.

A

1. The most common data for testing economic theories come from a. carefully controlled and conducted laboratory experiments. b. computer models of economies. c. historical episodes of economic change. d. centrally planned economies.

C

1. Economists believe that production possibilities frontiers are often bowed because a. trade-offs inevitably create unemployment. b. resources are not completely adaptable. c. opportunity costs are constant. d. of improvements in technology.

B

1. Economists face an obstacle that many other scientists do not face. What is that obstacle? a. It is often difficult to formulate theories in economics b. It is often difficult and sometimes impossible to perform experiments in economics. c. Economics cannot be addressed objectively; it must be addressed subjectively. d. The scientific method cannot be applied to the study of economics.

B

1. In economics, capital refers to a. the finances necessary for firms to produce their products. b. buildings and machines used in the production process. c. the money households use to purchase firms' output. d. stocks and bonds.

B

1. One way to characterize the difference between positive statements and normative statements is as follows: a. Positive statements tend to reflect optimism about the economy and its future, whereas normative statements tend to reflect pessimism about the economy and its future. b. Positive statements offer descriptions of the way things are, whereas normative statements offer opinions on how things ought to be. c. Positive statements involve advice on policy matters, whereas normative statements are supported by scientific theory and observation. d. Economists outside of government tend to make normative statements, whereas government-employed economists tend to make positive statements.

B

1. Suppose a nation is currently producing at a point inside its production possibilities frontier. We know that a. the nation is producing beyond its capacity, so inflation will occur. b. the nation is not using all available resources or is using inferior technology or both. c. the nation is producing an efficient combination of goods. d. there will be a large opportunity cost if the nation tries to increase production of any good.

B

1. The opportunity cost of an item is a. the number of hours needed to earn money to buy the item. b. what you give up to get that item c. usually less than the dollar value of the item d. the dollar value of the item

B

1. The production possibilities frontier is a graph that shows the various combinations of output that an economy can possibly produce given the available factors of production and a. society's preferences. b. the available production technology. c. a fair distribution of the output. d. the available demand for the output.

B

1. When the government implements programs such as progressive income tax rates, which of the following is likely to occur? a. equality is increased and efficiency is increased b. equality is increased and efficiency is decreased c. equality is decreased and efficiency is increased d. equality is decreased and efficiency is decreased

B

1. Which of the following is an example of a normative, as opposed to positive, statement? a. If the price of a product decreases, people's willingness to buy that product will increase. b. Reducing tax rates on the wealthy would benefit the nation. c. If the national saving rate were to increase, so would the rate of economic growth. d. The elimination of trade restrictions would increase an economy's standard of living.

B

1. Which of the following principles is not one of the four principles of individual decision making? a. People face tradeoffs. b. Trade can make everyone better off. c. People respond to incentives. d. Rational people think at the margin

B

1. The production possibilities frontier is a graph that shows the various combinations of output that an economy a. should produce. b. wants to produce. c. can produce. d. demands.

C

1. Which of the following statements about the circular-flow diagram is correct? a. One must imagine that the economy operates without money in order to make sense of the diagram. b. The diagram leaves out details that are not essential for understanding the economic transactions that occur between households and firms. c. The government cannot be excluded as a decision maker in a circular-flow diagram. d. All of the above are correct.

B

10. A production possibilities frontier can shift outward if a. government increases the amount of money in the economy. b. there is a technological improvement. c. resources are shifted from the production of one good to the production of the other good. d. the economy abandons inefficient production methods in favor of efficient production methods.

B

7. In economics, capital refers to a. the finances necessary for firms to produce their products. b. buildings and machines used in the production process. c. the money households use to purchase firms' output. d. stocks and bonds.

B

8. In the circular-flow diagram, a. firms are buyers in the markets for goods and services. b. households are sellers in the markets for the factors of production. c. firms are sellers in the markets for factors of production and in the markets for goods and services. d. dollars that are spent on goods and services flow directly from firms to households.

B

Assume that Aruba and Iceland can switch between producing coolers and producing radios at a constant rate. Labor Hours Needed to Make 1 Cooler Radio Aruba 2 5 Iceland 1 4 15.Refer to Table 3-2. Aruba should export a. coolers and import radios. b. radios and import coolers. c. both goods and import neither good. d. neither good and import both goods.

B

Canada and the U.S. both produce wheat and computer software. Canada is said to have the comparative advantage in producing wheat if a. Canada requires fewer resources than the U.S. to produce a bushel of wheat. b. the opportunity cost of producing a bushel of wheat is lower for Canada than it is for the U.S. c. the opportunity cost of producing a bushel of wheat is lower for the U.S. than it is for Canada. d. the U.S. has an absolute advantage over Canada in producing computer software.

B

Suppose a gardener produces both green beans and corn in her garden. If she must give up 14 bushels of corn to get 5 bushels of green beans, then her opportunity cost of 1 bushel of green beans is a. 0.36 bushel of corn. b. 2.8 bushels of corn. c. 14 bushels of corn. d. 70 bushels of corn.

B

Suppose a gardener produces both green beans and corn in her garden. If the opportunity cost of one bushel of corn is 3/5 bushel of green beans, then the opportunity cost of 1 bushel of green beans is a. 3/5 bushel of corn. b. 5/3 bushels of corn. c. 3 bushels of corn. d. 5 bushels of corn.

B

. The principle of comparative advantage does not provide answers to certain questions. One of those questions is a. Do specialization and trade benefit more than one party to a trade? b. Is it absolute advantage or comparative advantage that really matters? c. How are the gains from trade shared among the parties to a trade? d. Is it possible for specialization and trade to increase total output of traded goods?

C

1. A rational decisionmaker a. ignores marginal changes and focuses instead on "the big picture." b. ignores the likely effects of government policies when he or she makes choices c. takes an action only if the marginal benefit of that action exceeds the marginal cost of that action d. takes an action only if the combined benefits of that action and previous actions exceed the combined costs of that action and previous actions

C

1. A tradeoff exists between a clean environment and a higher level of income in that a. studies show that individuals with higher levels of income pollute less than low-income individuals. b. efforts to reduce pollution typically are not completely successful. c. laws that reduce pollution raise costs of production and reduce incomes d. employing individuals to clean up pollution causes increases in employment and income

C

1. An economic outcome is said to be efficient if the economy is a. using all of the scarce resources it has available. b. conserving on resources, rather than using all available resources. c. getting all it can get from the scarce resources it has available. d. able to produce more than what is currently being produced without additional resources.

C

1. Central planning refers to a. markets guiding economic activity. Today many countries that had this system have abandoned it. b. markets guiding economic activity. Today many countries that did not have this system have implemented it. c. government guiding economic activity. Today many countries that had this system have abandoned it. d. government guiding economic activity. Today many countries that did not have this system have implemented it.

C

1. For an economist, the idea of making assumptions is regarded generally as a a. bad idea, since doing so leads to the omission of important ideas and variables from economic models. b. bad idea, since doing so invariably leads to data-collection problems. c. good idea, since doing so helps to simplify the complex world and make it easier to understand. d. good idea, since economic analysis without assumptions leads to complicated results that the general public finds hard to understand.

C

1. Olivia was accepted to Notre Dame and another college. She is trying to decide where to go. Which of the following should she include in making her decision? a. how much she spent applying to Notre Dame, and the difference between living expenses at Notre Dame and the other college b. how much she spent applying to Notre Dame, but not the difference between living expenses at Notre Dame and the other college c. the difference between living expenses at Notre Dame and her second choice, but not how much she spent applying to Notre Dame d. neither how much she spent applying to Notre Dame nor the difference between living expenses at Notre Dame and her second choice

C

1. The bowed shape of the production possibilities frontier can be explained by the fact that a. all resources are scarce. b. economic growth is always occurring. c. the opportunity cost of one good in terms of the other depends on how much of each good the economy is producing. d. the only way to get more of one good is to get less of the other.

C

1. The production possibilities frontier provides an illustration of the principle that a. trade can make everyone better off. b. governments can sometimes improve market outcomes. c. people face trade-offs. d. people respond to incentives.

C

1. The scientific method is a. the use of modern technology to understand the way the world works b. the use of controlled laboratory experiments to understand the way the world works c. the dispassionate development and testing of theories about how the world works. d. the search for evidence to support preconceived theories about how the world works.

C

1. Which of the following is a correct statement about production possibilities frontiers? a. An economy can produce only on the production possibilities frontier. b. An economy can produce at any point inside or outside a production possibilities frontier. c. An economy can produce at any point on or inside the production possibilities frontier, but not outside the frontier. d. An economy can produce at any point inside the production possibilities frontier, but not on or outside the frontier.

C

4. The Secretary of Labor states that wage rates in the country have risen by two percent this past year. The head of a local labor union states that wage gains should have been higher. The Secretary's statement is a ______ economic statement, and the labor head's statement is a _____ economic statement. a. normative, normative b. positive, positive c. positive, normative d. normative, positive

C

A production possibilities frontier is a straight line when a. the more resources the economy uses to produce one good, the fewer resources it has available to produce the other good. b. an economy is interdependent and engaged in trade instead of selfsufficient. c. the rate of tradeoff between the two goods being produced is constant. d. the rate of tradeoff between the two goods being produced depends on how much of each good is being produced.

C

Suppose that a worker in Cornland can grow either 40 bushels of corn or 10 bushels of oats per year, and a worker in Oatland can grow either 20 bushels of corn or 5 bushels of oats per year. There are 20 workers in Cornland and 20 workers in Oatland. Which of the following statements is true? a. Both countries could gain from trade with each other. b. Neither country could gain from trade with each other because Cornland has an absolute advantage in both goods. c. Neither country could gain from trade with each other because neither one has a comparative advantage. d. Oatland could gain from

C

Suppose that a worker in Radioland can produce either 4 radios or 1 television per year and a worker in Teeveeland can produce either 2 radios or 5 televisions per year. Each nation has 100 workers, and each country specializes according to the principle of comparative advantage. If Radioland trades 100 televisions to Teeveeland in exchange for 100 radios each year, then each country's maximum consumption of new radios and televisions per year will be a. higher than it would be in the absence of trade because of the gains from trade. b. the same as it would be in the absence of trade. c. less than it would be in the absence of trade because neither country is specializing in the product in which it has a comparative advantage. d. less than it would be in the absence of trade because Teeveeland has an absolute advantage in both goods and so it cannot benefit by trading with Radioland.

C

1. A marginal change is a a. change that involves little, if anything, that is important b. large, significant adjustment c. change for the worse, and so it is usually a short-term change d. small, incremental adjustment

D

1. Bridget drinks three sodas during a particular day. The marginal benefit she enjoys from drinking the third soda a. can be thought of as the total benefit Bridget enjoys by drinking three sodas minus the total benefit she would have enjoyed by drinking just two sodas. b. determines Bridget's willingness to pay for the third soda c. is likely different from the marginal benefit provided to Bridget by the second soda d. All of the above are correct.

D

1. Economists, like mathematicians, physicists, and biologists a. make use of the scientific method b. try to address their subject with a scientist's objectivity c. devise theories, collect data, and then analyze these data in an attempt to verify or refute their theories d. all of the above are correct

D

1. In a certain economy, toys and greeting cards are produced, and the economy currently operates on its production possibilities frontier. Which of the following events would allow the economy to produce more toys and more greeting cards, relative to the quantities of those goods that are being produced now? a. The economy experiences economic growth. b. There is a technological advance in the toy industry, but the greeting card industry experiences no such advance. c. There is a technological advance in the greeting card industry, but the toy industry experiences no such advance. d. All of the above are correct.

D

1. In considering how to allocate its scarce resources among its various members, a household considers a. each member's abilities b. each member's efforts c. each member's desires d. all of the above

D

1. On a bowed production possibilities frontier, as you move down along the curve a. more of one good must be given up to receive one unit of the other good. b. the available production technology does not change. c. the opportunity cost increases. d. All of the above are correct.

D

1. Rationale for government involvement in a market economy is a. markets sometimes fail to produce a fair distribution of economic well-being b. markets sometimes fail to produce an efficient allocation of resources. c. property rights have to be enforced. d. All of the above are correct.

D

1. Sometimes economists disagree because their scientific judgments differ. Which of the following instances best reflects this source of disagreement? a. One economist believes income tax cuts are unfair to those with low incomes; another economist believes income tax cuts are not unfair to those with low incomes. b. One economist believes unemployment causes more human suffering than does inflation; another economist believes inflation causes more human suffering than does unemployment. c. One economist believes the policies of the Democratic party offer the best hope for America's future; another economist believes the policies of the Republican party offer the best hope for America's future. d. One economist believes increases in the minimum wage increase unemployment; another economist believes increases in the minimum wage do not increase unemployment.

D

1. US citizens have better nutrition, better healthcare, and a longer life expectancy than citizens of Ghana. Which of the following conclusions can be drawn from this statement? a. Average income in the US is higher than the average income in Ghana. b. The US has a higher standard of living than Ghana. c. Productivity in the US is higher than productivity in Ghana. d. All of the above are correct.

D

1. Which of the following is not an example of the opportunity cost of going to school? a. The money a student could have earned by working if he had not gone to college b. The nap a student could have enjoyed if he had not attended class c. The party a student could have enjoyed if he had not stayed in to study for his exam d. The money a student spends on rent for his apartment while attending school

D

3. Efficiency means that a. society is conserving resources in order to save them for the future. b. society's goods and services are distributed equally among society's members. c. society's goods and services are distributed fairly, though not necessarily equally, among society's members. d. society is getting the maximum benefits from its scarce resources.

D

4. Suppose there are only two people in the world. Each person's production possibilities frontier also represents his or her consumption possibilities when a. neither person faces trade-offs. b. the frontiers are straight lines. c. the frontiers are bowed out. d. they choose not to trade with one another

D

6. In the circular-flow diagram, which of the following is not a factor of production? a. labor b. land c. capital d. money

D

6. The producer that can produce a product with lower opportunity cost has a. an absolute advantage in the production of that good. b. neither a comparative nor absolute advantage in the production of that good. c. both a comparative and absolute advantage in the production of that good. d. a comparative advantage in the production of that good.

D

9. On a bowed production possibilities frontier, as you move down along the curve a. more of one good must be given up to receive one unit of the other good. b. the available production technology does not change. c. the opportunity cost increases. d. All of the above are correct.

D

When can two countries gain from trading two goods? a. when the first country can only produce the first good and the second country can only produce the second good b. when the first country can produce both goods, but can only produce the second good at great cost, and the second country can produce both goods, but can only produce the first good at great cost c. when the first country is better at producing both goods and the second country is worse at producing both goods d. Two countries could gain from trading two goods under all of the above conditions

D

Which of the following is not a reason people choose to depend on others for goods and services? a. to improve their lives b. to allow them to enjoy a greater variety of goods and services c. to consume more of each good without working any more hours d. to allow people to produce outside their production possibilities frontiers.

D