chapter 2 practice quiz

49. If a market system functions well, which of the following is necessary for the enforcement of contracts and property rights? a. powerful political connections b. an independent court system c. action by government to prevent the exercise of certain property rights d. all of the above

b. an independent court system

43.In a free market system, which of the following groups brings together the factors of production— labor, capital, and natural resources—in order to produce goods and services? a. the government b. entrepreneurs c. lobbyists d. politicians

b. entrepreneurs

34.Fill in the blanks. In a simple circular-flow model, there are flows of _________ and flows of _________. a. factors of production; goods and services b. funds received from the sale of factors of production; spending on final goods and services c. Both (a) and (b) are correct. d. None of the above. Actually, there are no flows in the circular flow of income.

c. Both (a) and (b) are correct.

41. According to Adam Smith, which of the following is necessary for the proper functioning of the market system? a. For markets to work, people should take into account how their decisions affect society as a whole. b. For markets to work, government should help citizens make the right decisions. c. For markets to work, people must be free to pursue their self-interest. d. For markets to work, people and government need to coordinate their decisions.

c. For markets to work, people must be free to pursue their self-interest.

42.What is the role of an entrepreneur? a. to operate a business that produces a good or service b. to bring together the factors of production—labor, capital, and natural resources c. to take risks d. all of the above

d. all of the above

20.Which of the following would create economic growth, that is, shift the production possibilities frontier outward? a.an increase in the available labor b.an increase in technology that affects the production of both goods c.an increase in the available natural resources d.all of the above

d.all of the above

40.According to Adam Smith, which of the following is the instrument the invisible hand uses to direct economic activity? a. price b. government regulation c. financial markets d. cost

a. price

48. In the United States, property rights a. are guaranteed by two amendments to the U.S. Constitution. b. are guaranteed by some state governments but not other state governments. c. are prohibited by the federal government. d. exist in markets but are not enforced by the government.

a. are guaranteed by two amendments to the U.S. Constitution.

47. What is the outcome of enforcing contracts and property rights in a market system? a. increased economic activity b. decreased economic activity c. no effect on economic activity d. an unpredictable but definite effect on economic activity

a. increased economic activity

31. Which of the following refers to markets where goods such as computers or services such as medical treatment are offered? a. product markets b. essential markets c. factor markets d. competitive markets

a. product markets

16. The principle of increasing marginal opportunity cost states that the more resources devoted to any activity, the __________ the payoff to devoting additional resources to that activity. a. smaller b. greater c. proportional d.more instant

a. smaller

15.If the opportunity cost of producing one good in creases as more of that good is produced, then a.the production possibility frontier is linear. b.the production possibility frontier is bowed out. c.the production possibility frontier does not exist. d.the production possibility frontier has a positive slope.

b. the production possibility frontier is bowed out.

21.Which of the following statements is most consistent with the principle about the basis for international trade? a.The United States would be better off being self-sufficient because it has an absolute advantage in producing most goods. b.The United States would be better off if it specialized in the production of some goods, and then traded some of them to other countries. c.The United States would be better off by producing at home the goods that it now imports—that way the nation can generate additional jobs here at home. d.The United States can never have an absolute advantage in producing every good it consumes, so it would be better off if it imported goods that it does not have an absolute advantage.

b.The United States would be better off if it specialized in the production of some goods, and then traded some of them to other countries.

33.Which of the following comprises the two key groups of participants in the circular flow of income? a. domestic residents and foreign residents b. government and financial institutions c. households and firms d. savers and borrowers

c. households and firms

1.What is the term for the highest-valued alternative that must be given up to engage in any activity? a.scarcity b.the production possibilities frontier c.opportunity cost d.a trade-off

c. opportunity cost

An individual who has comparative advantage in producing a good must also have absolute advantage in producing that good T/F

false

The circular-flow diagram is used to explain why the opportunity cost of increasing the production of one good is the decrease in production of another good. T/F

false

Without regulations to protect property rights, there will be more incentives for entrepreneurs to introduce new products T/F

false

It is possible to have an absolute advantage in producing a good without having a comparative advantage. T/F

true

2.What happens if a country produces a combination of goods that uses all of the resources available in the economy? a.The country is operating on its production possibilities frontier. b.The country is maximizing its opportunity cost. c.The country has eliminated scarcity. d.All of the above occur if a country uses all available resources

a. The country is operating on its production possibilities frontier.

44. Which of the following is critical to the success of a market system? a. to allow individuals or firms to have exclusive use of their property b. to prevent individuals from buying or selling their property depending on the circumstances c. Both a. and b. are critical to the success of a market system. d. to allow the government to determine the optimal use of private property

a. to allow individuals or firms to have exclusive use of their property

32.In which markets are factors of production, such as labor, capital, natural resources, and entrepreneurial ability traded? a. product markets b. essential markets c. factor markets d. competitive markets

c. factor markets

Technological advances always increase the production of all goods and services equally. T/F

false

22.Absolute advantage is the ability of an individual, firm, or country to a.produce more of a good or service than competitors using the same amount of resources. b.produce a good or service at a lower opportunity cost than other producers. c.consume more goods or services than others at lower costs. d.reach a higher production possibilities frontier by lowering opportunity costs

a.produce more of a good or service than competitors using the same amount of resources.

If property rights are not enforced by the government, then more goods and services will be produced in free markets. T/F

false

Opportunity cost refers to the all of the alternatives that must be given up to engage in an activity. T/F

false

45.Generally speaking, for a market system to work, individuals must a. be very cautious in their approach to saving and investment. b. take risks and act in rational, self-interested ways. c. be able to evaluate and understand all available options. d. consult people who have experience.

b. take risks and act in rational, self-interested ways.

39.According to Adam Smith, which of the following is true? a.Markets work because producers, aided by government, ensure that neither too many nor too few goods are produced. b. Market prices can come to reflect the prices desired by all consumers. c. Individuals usually act in a rational, self-interested way. d. A guild system is the best way for coordinating the activities of buyers and sellers.

c. Individuals usually act in a rational, self-interested way.

23. If a country has a comparative advantage in the production of a good, then that country a.also has an absolute advantage in producing that good. b. should allow another country to specialize in the production of that good. c. has a lower opportunity cost in the production of that good. d. All of the above are true.

c. has a lower opportunity cost in the production of that good.

46. What are copyrights designed to do? a. prevent entrepreneurs from earning excessive profits b. eliminate unnecessary duplication whenever it arises c. protect intellectual property rights d. all of the above

c. protect intellectual property rights

People can increase their production and consumption by specializing in producing goods and services in which they have an absolute advantage. T/F

false

in his book An Inquiry into the Nature and Causes of the Wealth of Nations, Adam Smith argued that a guild system was the most efficient way for a nation to coordinate the decisions of buyers and sellers T/F

false

A nation with an absolute advantage in the production of two goods will usually have a comparative advantage in only one of the goods. T/F

true

A production possibilities frontier that is bowed outward illustrates increasing marginal opportunity costs. T/F

true

Because the governments of the United States, Canada, and Western European countries impose few restrictions on economic activity, the economies of these countries approximate free market economies. T/F

true

Households are suppliers of the factors of production that are used by firms to produce goods and services. T/F

true

The marginal opportunity cost along a linear (straight-line) production possibilities frontier is constant. T/F

true

The story about Apple's production of the iPad shows how production requires the coordinated activities of many people, spread around the world T/F

true