ECON 1A - CH 2
Evaluate the following argument: "Adam Smith's analysis is based on a fundamental flaw: He assumes that people are motivated by self-interest. But this isn't true. I'm not selfish, and most people I know aren't selfish." A. This statement is based on the misconception that following your self-interest and being selfish are the same thing. B. This statement correctly identifies how Smith's analysis ignored charitable acts of giving and benevolence. C. This statement is based on the misconception that Smith's analysis applies to firms and households. D. This statement is based on the misconception that Smith's analysis applies to every aspect of life. E. This statement is based on the misconception that Smith's analysis provides no role for government guidance.
A
Is it possible for a country to have a comparative advantage in producing a good without also having an absolute advantage? A country without an absolute advantage in producing a good A. will have a comparative advantage if it has a lower opportunity cost of producing that good. B. will not have a comparative advantage because it has fewer resources. C. will have a comparative advantage if it is able to produce that good at a low total cost. D. will have a comparative advantage if it devotes more resources toward that good's production. E. will have a comparative advantage if it produces more efficiently.
A
What is a free market?
A free market is one where the government does not control the production of goods and services.
Identify whether each of the following transactions will take place in the factor market or in the product market and whether households or firms are supplying the good or service or demanding the good or service. A. George buys a Tesla Model S. This takes place in the (factor/product) market. The household (demands/supplies) the good and the firm (demands/supplies) the good. B. Tesla increases employment at its Fremont plant. This takes place in the (factor/product) market. The households (demand/supply) the labor and the firm (demands/supplies) the labor. C. George works 20 hours per week at McDonald's. This takes place in the (factor/product) market. The household (demands/supplies) the labor and the firm (demands/supplies) the labor. D. George sells land he owns to McDonald's so it can build a new restaurant. This takes place in the (factor/product) market. The household (demands/supplies) the factor of production and the firm (demands/supplies) the factor of production.
A. product, demands, supplies B. factor, supply, demands C. factor, supplies, demands D. factor, supplies, demands
During the 1928 presidential election campaign, Herbert Hoover, the Republican candidate, argued that the United States should only import those products that could not be produced here. Do you believe that this would be a good policy? Explain. A. This is a good policy because countries would only produce those goods that they can make at lower opportunity cost than other countries. B. This is not a good policy because it does not necessarily result in countries producing those goods for which they have a comparative advantage. C. This is not a good policy because it does not allow countries to import those goods that are scarce. D. This is a good policy because countries would only produce those goods that cannot be made elsewhere. E. This is not a good policy because it does not necessarily result in countries producing those goods for which they have an absolute advantage.
B
One of the great benefits of trade is A. that it provides society what it desires most in life even if it does not enhance the means for achieving its goals. B. that it makes it possible for society to become better off by increasing its consumption. C. that it makes it possible for society to become better off if individuals, firms, and countries specialize in producing goods and services for which they have an absolute advantage. D. that it makes it possible for society to become better off by increasing its production but not its consumption.
B
We can show economic inefficiency: A. with points outside the production possibilities frontier. B. with points inside the production possibilities frontier. C. with points on and outside the production possibilities frontier. D. with points on the production possibilities frontier. E. with points inside and on the production possibilities frontier.
B
What is the circular-flow diagram and what does it illustrate? A. The circular-flow diagram shows how firms are linked through product and factor markets. B. The circular-flow diagram shows how households and firms are linked through product and factor markets. C. The circular-flow diagram shows the maximum attainable combinations of two products that may be produced with available resources and current technology. D. The circular-flow diagram shows the government's role in markets through taxes and transfer payments. E. The circular-flow diagram shows how households and firms are linked through product markets.
B
A production possibilities frontier: A. shows the act of buying and selling. B. shows how unlimited wants exceed the limited resources available to fulfill those wants. C. shows the maximum attainable combinations of two goods that may be produced with available resources. D. shows how participants in the market are linked. E. shows the market for a good or service.
C
We can show economic efficiency: A. with points on and outside the production possibilities frontier. B. with points inside the production possibilities frontier. C. with points on the production possibilities frontier. D. with points outside the production possibilities frontier. E. with points inside and on the production possibilities frontier.
C
Which participants are of greatest importance in determining what goods and services are produced? A. The financial sector. B. Firms. C. Households. D. Entrepreneurs. E. The government.
C
The production possibilities frontier will shift outward A. if resources are not used in production. B. if production occurs outside the production possibilities frontier. C. if resources are not used to produce capital goods. D. if technological advances occur. E. if resources are used to produce consumption goods.
D
What are the two main categories of participants in markets? A. Firms and banks. B. Domestic participants and international participants. C. Households and entrepreneurs. D. Firms and households. E. Households and the government.
D
What is the basis for trade? A. Efficiency. B. Absolute advantage. C. Available resources. D. Comparative advantage. E. Economic growth.
D
How can a country gain from specialization and trade? A. A country can specialize by using all available resources to produce goods and services to avoid trading with other countries. B. A country can specialize by using all available resources to invest in capital goods to promote economic growth. C. A country can specialize in producing that for which it has an absolute advantage and then trade for other needed goods and services. D. A country can specialize in producing that which is most scarce and then trade for other needed goods and services. E. A country can specialize in producing that for which it has a comparative advantage and then trade for other needed goods and services.
E
In the 1950s, the economist Bela Balassa compared 28 manufacturing industries in the United States and Britain. In every one of the 28 industries, Balassa found that the United States had an absolute advantage. In these circumstances, would there have been any gain to the United States from importing any of these products from Britain? Explain. A. Since the United States had an absolute advantage in all 28 industries, it had more bargaining power and would have gained from importing all of these products from Britain. B. Since the United States had an absolute advantage in all 28 industries, it also had a comparative advantage in each industry and would not have gained anything from importing any of these products from Britain. C. Even with an absolute advantage, the United States would have benefited from importing those products for which Britain had the same opportunity cost. D. Even with an absolute advantage, the United States would have benefited from importing those products that Britain could have produced at lower total cost. E. Even with an absolute advantage, the United States would have benefited from importing those products for which Britain had a comparative advantage.
E
What role do they play in the working of a market system? Private property rights: A. encourage a significant number of people to be willing to risk funds by investing them in business. B. encourage firms to spend money on research and development. C. determine what goods and services will be produced. D. are the basis for international trade. E. both a and b.
E
Why are independent courts important for a well-functioning economy? Independence is necessary for courts: A. to make their decisions based on the law. B. to make their decisions free of intimidation by criminal gangs. C. to make their decisions free of influence from other parts of the government. D. to make their decisions free of influence from people with powerful political connections. E. all of the above.
E
What is an entrepreneur?
Entrepreneurs operate businesses that produce goods and services.
Why do entrepreneurs play a key role in a market system?
They bring together factors of production.
The primary difference between absolute and comparative advantage is
absolute advantage refers to the ability to produce more of a good or service using the same amount of resources and comparative advantage refers to the ability to produce a good or service at a lower opportunity cost.
In what ways does a free market economy differ from a centrally planned economy? Unlike a free market economy,
centrally planned economies have extensive government controls.
Two key groups participate in markets. A (household/firm/government) consists of all the individuals in a home. (Households/Firms/Governments) are suppliers of goods and services. We can use a simple economic model called the (supply and demand/circular-flow diagram/production possibilities frontier) to see how participants in markets are linked.
household, Firms, circular-flow diagram
Comparative advantage is
the ability to produce a good or service at a lower opportunity cost than other producers.
Absolute advantage is
the ability to produce more of a good or service than competitors using the same amount of resources.
What are private property rights? Private property rights are:
the rights individuals and firms have to the exclusive use of tangible, physical property and intellectual property.