economics test 3

Which of the following is an example of an external cost?

A factory emits toxic pollution that harms nearby residents and crops

Which of the following goods is/are considered to be scarce? Education Time Water

I, II, and III

Which of the following criteria does a business use to decide whether to hire an additional employee?

The extra revenue produced by the additional employee compared to the employee's wage

If a nation is going to achieve its full potential, it must have

a mechanism to attract savings and channel them into productive investment projects.

The value of the best alternative given up when a decision is made is called

an opportunity cost.

The period starting around 200 years ago is important in economic history because this is approximately the time when

economic growth began in some countries, resulting in sustained improvements in the standard of living.

Higher standards of living are a result of

expansion in the production of goods and services that are highly valued.

In a market economy, individuals have a strong incentive to develop skills and improve their productivity because

greater productivity enhances their ability to earn income.

Transfer payments and subsidies now account for approximately

half of the federal budget

From the consumers standpoint, the price of a good

helps consumers decide among scarce goods and allocate resources toward the things they value most.

Which of the following will discourage investment?

high and variable rates of inflation

When competition is present and private ownership rights are clearly defined and securely enforced by the legal system, business firms will have a strong incentive to

innovate and develop better products and lower cost production methods.

If a poor country is going to grow rapidly and achieve a high level of per capita income, which of the following is most important?

institutions and policies that encourage productive activities

Countries are likely to reduce the ability of their citizens to achieve prosperity when they

interfere with voluntary exchange on a domestic level, but not internationally.

The lack of a profit motive in the political process means that

it is difficult for the government to reliably direct resources toward productive activities.

An increase in income tax rates will

make it less expensive for a successful lawyer to attend a tax deductible professional meeting in Hawaii

The total indebtedness of the federal government in the form of outstanding interest-earning bonds is the

national debt.

When the price of a good is legally set below the equilibrium level, a shortage often results. This shortage

occurs because the price ceiling prevents the market mechanism from establishing an equilibrium price.

The shortsightedness effect suggests that

politicians have a strong incentive to support projects that yield immediate and easily recognized benefits, especially when the costs of the projects are difficult to identify and are observable only in the distant future.

Throughout all of human history, until the last couple centuries, the average human was

poor and short-lived.

An increase in marginal tax rates will

reduce the share of additional earnings that individuals are permitted to keep.

High tariffs and other restraints on international trade will

reduce the volume of trade and the realization of gains from specialization, exchange, and the competitive process.

Money is valuable because it

reduces transaction costs

The political attractiveness of tariffs, quotas, and other trade restrictions is primarily the result of the

special-interest nature of trade restrictions.

The popularity of trade restrictions, tariffs, and quotas often reflects that

the immediate benefits are highly visible, while the secondary effects of lost jobs in other industries are less visible.

A demand curve for personal computers indicates

the number of personal computers consumers will purchase at alternative prices.

Economists use the term monopoly to refer to

the situation where there is only one seller of a good or service in the market

Which of the following is true?

A budget deficit will increase the national debt.

Which of the following scenarios would most likely result in decreased transaction costs?

A developing country invests in a highway system that will open up trucking routes.

Which of the following provides the most reasonable explanation for why agricultural interest groups lobby for higher farm subsidies and price supports that fix farm prices above equilibrium?

Agricultural interests seek a redistribution of income favoring themselves.

Which of the following best explains why Americans produce and earn approximately thirty times more per person today than in 1750?

Capital formation, improvements in technology, and gains from trade have made higher incomes possible.

An entrepreneur wishes to open a spa that would offer cutting-edge health and beauty services. Which of the following is most necessary to make the business a success and satisfy the public?

Competition from other spas

Why do supermarkets stock thousands of items that people enjoy?

Competition, self-interest, and market prices influence the supermarkets' decisions on which items to stock

Which of the following most accurately illustrates the impact of price incentives?

Consumers will adjust the amount they purchase in response to changes in prices.

Why have market-based economies been more prosperous than centrally planned economies? Smarter people work in the private sector. Central planning substitutes politics for market verdicts. People using their own money make better choices than central planners using other people's money.

II and III

Which of the following will be the result(s) of freer international trade? ​ I. Low-income workers will be exploited. II. Rich countries will become richer, and poor countries will become poorer. III. Countries will be able to produce and consume more goods and services.

III only

Which of the following is true of taxes and subsidies?

If you tax something, you will get less of it; if you subsidize an activity, you will get more of it.

Which of the following is true?

In a market economy, the link between productivity and income provides individuals with an incentive to provide resources that are highly valued by others.

Which of the following is a key element of the economic way of thinking

Incentives influence behavior in a predictable manner

To say that Iowa has a comparative advantage relative to other states in the production of corn is similar to saying that

Iowa produces corn at a lower opportunity cost than other states.

Which of the following is true of public goods?

It is difficult to establish a one-to-one link between payment and receipt of such goods.

Kelly is an architect and she is trying to decide whether to hire Mike, a draftsman, to assist with her work. Kelly could hire Mike at $20 per hour but it would take him three times as long to complete a task as it takes Kelly. Kelly is able to earn $90 per hour and has more architectural jobs than she is able to handle. Which of the following is true?

Mike should be hired at the $20 per hour wage rate

Are jobs the key to economic progress and the achievement of high income levels?

No, employment will not lead to higher incomes if it does not involve production of goods and services that people value.

Which of the following is true in markets where price controls are applied?

Price controls distort the incentives faced by both buyers and sellers.

Which of the following countries is likely to have the highest rate of economic growth?

Taiwan, with an Economic Freedom of the World rating of 7.84.

Which of the following best explains why soda vending machines allow customers to buy only one can at a time while newspaper vending machines provide access to all the papers in the machine?

The marginal benefit of the second newspaper to most consumers is zero.

Which of the following is true?

The rational ignorance effect indicates that voters have very little incentive to be well informed when making political choices.

A state has sold its toll roads to a private company. What will be the most likely outcome of this action?

The toll road system will be run more efficiently and service will improve.

Which of the following was the result of Fannie Mae and Freddie Mac being both privately-owned and government-sponsored enterprises?

Their activities were more susceptible to political influence and favoritism.

Standby passengers on airlines who pay low rates for seats benefit from the low price. How are the airlines affected?

They benefit as long as the additional revenue derived from the standby passengers exceeds the marginal cost.

Why do nations often impose trade barriers that make it difficult for their own citizens to trade with people in another country?

Trade restrictions often provide benefits to highly visible special interest groups while imposing a less visible cost on the general populace.

Which of the following is true?

Voters have little incentive to cast a well-informed vote, but consumers have a strong incentive to make informed choices.

Which of the following statements most clearly reflects the concept of opportunity costs?

You can't have your cake and eat it too.

If foreigners are investing more in the United States than Americans are investing abroad, this is likely to result in

a balance of trade deficit in the United States

The 2009, Cash for Clunkers, government program provided car buyers with cash payments if they purchased a new car and traded in an older one that had to be destroyed. This program resulted in

a reduction in the supply of used cars and a temporary increase in spending on new automobiles.

Because private owners are held responsible for damages their property causes to the property of others, private owners have

a strong incentive to take steps to reduce the chance that they will harm the property of others.

What is inflation?

a sustained increase in the general price level

Which of the following is the best example of a middleman?

a used car deale

Suppose that most people who take antibiotics to fight bacterial infection stop taking the medication once they feel better. Because they do not take the entire dose, the bacteria is not completely killed, and it eventually develops an immunity to the antibiotics. As a result, there will be no effective medication available to many people in the future who are infected. People who fail to take the entire dose of antibiotics are creating a market failure known as

an externality

Because of the free-rider problem

competitive markets will tend to undersupply public goods

Regulations are sometimes used by existing firms to prevent new firms from entering an industry. When this happens,

consumers are made worse off because they will generally have fewer choices and confront higher prices.

The producer's decision to direct resources to the production of a good or service will be profitable when

consumers are willing to pay a price greater than the per-unit cost of production.

If the price of a good or service is below the equilibrium price

consumers will want to purchase more than producers are willing to supply.

The economic way of thinking indicates that personal benefits and costs influence the actions of

consumers, producers, voters, and politicians in both the private and the public sectors.

Just before Valentine's Day, the price of roses increases dramatically. This is because

demand increases while the supply of roses remains relatively constant.

The invisible hand principle indicates that when individuals are directed by prices determined in competitive markets, their actions will tend to promote the efficient use of resources

even when each market participant cares only about their own self interest rather than the overall efficiency of resource use.

When the purchasing power of money is stable and predictable, this

facilitates gains from specialization, investment, and trade

If import restrictions prohibit foreigners from selling various goods and services in the U.S. market,

foreigners will have fewer U.S. dollars with which to buy U.S. goods and services.

Increased economic freedom is associated with

greater economic growth, longer life expectancy, higher incomes for the poor.

An effective minimum wage

increases the earnings of some low-skill workers while reducing the employment and training opportunities available to others.

Economic analysis indicates that higher unemployment benefits will

lead to more lengthy spells of unemployment and a higher unemployment rate.

The term "pork-barrel legislation" refers to

legislation that bundles together a number of projects, each benefiting local interests at the expense of general taxpayers.

The invisible hand principle suggests that

market forces tend to channel the actions of self-interested individuals into activities that promote the general betterment of society

Even-handed enforcement of contracts fuels economic prosperity because it

promotes gains from trade by keeping transaction costs low

Private ownership of property

provides owners with an incentive to maintain and conserve resources.

Which of the following activities is not part of the protective role of government?

providing capital to large banks in economic crises

Economic analysis indicates that high tax rates will

reduce productive activity, retard capital formation, promote wasteful use of resources.

Trade restrictions like tariffs and quotas will

reduce the value of goods and services that we will be able to produce and consume.

As the baby boomers begin moving into the retirement phase of life during the years following 2010, spending on Social Security and Medicare will

rise and this will make it more difficult for the federal government to balance its budget.

According to the law of supply, as the price of a good falls,

sellers will produce less of the good

If the construction of a bridge project creates benefits of $20 billion while the cost is $15 billion to construct, this indicates the project

should be built.

An externality occurs when

some of the costs or benefits of an action are imposed on a third party.

Which of the following is a category of activity that results in government failure?

special interest effect

The student government associations at several universities have experimented with purchasing bicycles to leave around campus for everyone's use. Anyone who needs the bike can use it, and they are not allowed to lock the bike up or take it home, but rather must leave it on campus for someone else to use. Economic theory would predict that

students will not take as good of care of these commonly owned bicycles as they do their own bicycles.

Which of the following groups would most directly benefit from a new law that is extremely tough on those who drink and drive?

taxi drivers

Other things constant, countries with higher investment rates will

tend to have higher incomes in the future.

To an economist, scarcity means that

the amount of resources freely available from nature to produce the goods desired by humans are limited..

Adam Smith's invisible hand principle stresses the tendency of

the competitive market process to direct self-interested individuals into activities that enhance the economic welfare of society.

"Mediocre economists often consider only the immediate direct effects of a change, whereas a good economist will also consider indirect effects that may only become observable over time." This statement most clearly emphasizes

the importance of secondary effects.

What is the primary source of high earnings in a market economy?

the skill and ability to provide others with goods and services they value highly

The cost of taxes imposed on the private sector is equal to

the tax revenue plus the cost of tax compliance and the excess burden of taxation.

When politicians push for free healthcare, what they are actually advocating is

the use of tax revenues to cover the actual costs of the free healthcare.

The supply curve of a good or service is

the various amounts producers are willing to supply at alternative prices.

Government action will often result in the counterproductive use of resources because

there is often a conflict between winning political elections and adoption of only productive programs.

Private ownership allows people to decide how they will use their property, as long as

they do not invade or damage the property of others.

When decentralized governmental units operate independently and compete with each other, governments will attract residents and expand their tax base when

they provide residents with desired services at an attractive tax cost.

When an investment project generates output that is valued more highly than the value of the resources required for its production,

undertaking the project will create wealth.

Which of the following would a private owner be prohibited from doing?

using the property in a manner that invades or infringes on the property of another

In markets for most goods, competition forces firms to keep their prices low relative to per unit cost. This pressure is weak in

when monopoly is present

Under democratic representative government, legislators will have a strong incentive to support spending programs

when these programs are favored by well organized groups capable of delivering political support to legislators.