CHAPTER 2 ECON

In the circular flow model of the market system, business firms: A. Buy products and resources B. Sell products and resources C. Buy products and sell resources D. Sell products and buy resources

D

A fundamental difference between the command system and laissez-faire capitalism is that, in command systems: A. the division of output is decided by central planning rather than by individuals operating freely through markets. B. all economic decisions are made by the government, whereas there is no government in laissez-faire capitalism. C. scarcity does not exist, whereas it does in laissez-faire capitalism. D. money is not used, whereas it is in laissez-faire capitalism.

A

Anything that is generally acceptable in trading for goods and services is a: A. Medium of exchange B. Capital good C. Store of value D. Token money

A

Economic systems differ according to which two main characteristics? A. Who owns the factors of production and the methods used to coordinate economic activity. B. The technology used in production and the quantity and quality of natural resources. C. How goods are produced and who gets them. D. The political system in place and the degree of scarcity facing the economy.

A

How does human specialization contribute towards increasing an economy's output? A. It exploits the differences in abilities B. It is a process of creative destruction C. It pushes each worker to master the whole product D. It encourages people to be "jacks-of-all-trades"

A

In a market system, the distribution of goods and services among consumers is largely determined by: A. The willingness and ability of consumers to pay the prices B. Whoever needs the goods and services the most C. Whoever has the closest connection to firms and the government D. A random factor that is almost impossible to predict

A

Laissez-faire capitalism is characterized by: A. Very limited government role in the economy B. Active government intervention in the economy C. Individuals and firms abiding by a government economic plan D. A very fair distribution of income and wealth

A

Refer to the diagram. Flow 1 represents: A. wage, rent, interest, and profit income. B. land, labor, capital, and entrepreneurial ability. C. goods and services. D. consumer expenditures.

A

The fact that the major indicator of enterprise success in the Soviet Union and pre-reform China was the quantity of output implied that: A. product quality was neglected. B. production costs were minimized. C. product-mix met consumer needs. D. technological advance was too rapid.

A

The following table illustrates alternative production techniques for producing 18 widgets that can be sold for $1 each for a total revenue of $18. Picture Based on the data given in the table above, the most economically efficient production technique is: A B C D

A

The market system's answer to the fundamental question "What will be produced?" is essentially: A. "Goods and services that are profitable." B. "Low-cost goods and services." C. "Goods and services that can be produced using large amounts of capital." D. "Goods and services that possess lasting value."

A

The market system's answer to the fundamental question "Who will get the goods and services?" is essentially: A. "Those willing and able to pay for them." B. "Those who physically produced them." C. "Those who most need them." D. "Those who get utility from them."

A

Which is true of an economy which operates entirely through central planning? A. Individual economic incentive is reduced by the absence of the profit motive B. There is relative ease in matching resource allocation to consumer demand C. Central planners receive market information through the price mechanism D. The system adapts easily to technological change

A

By freedom of enterprise, we mean that individual: A. Workers are free to look for jobs and work in whichever firm will hire them B. Firms are free to employ resources, to produce their output, and to sell their products C. Producers are free to produce whatever the government decides are needed by the society D. Consumers are free to buy whatever products will satisfy their needs the most

B

In a capitalist system, the decisions and actions of millions of consumers and firms are highly coordinated by: A. The state and government B. Markets and prices C. A central planning agency D. An international organization

B

In a competitive market economy, firms select the least-cost production technique because: A. such choices will result in full employment of available resources. B. to do so will maximize the firms' profits. C. this will prevent new firms from entering the industry. D. "dollar voting" by consumers mandates such a choice.

B

In a market system, as one industry expands while another contracts, resources will flow: A. Away from the expanding industry towards the contracting one B. From one industry due to the changes in resource prices paid by firms C. Towards the industry where the product demand is declining D. Because resource allocation will have to equalize between the two industries

B

In a market system, resources will move away from an industry when: A. Profits of firms in the industry are rising B. Demand for the industry's product is decreasing C. The production of output in the industry is rising D. Profits of firms in other industries are falling

B

In what type of business do the owners bear no personal financial responsibility for the company's debts and obligations? A. Partnerships. B. Corporations C. Sole proprietorships. D. In all of the businesses listed in the other answers.

B

Refer to the diagram. Flow 2 represents: A. wage, rent, interest, and profit income. B. land, labor, capital, and entrepreneurial ability. C. goods and services. D. consumer expenditures.

B

Suppose a firm can produce 70 units of a product, Zenia, by combining labor, land, capital, and entrepreneurial ability, as in the four alternative techniques shown in the table below. Assume further that the firm can hire labor at $3 per unit, land at $3 per unit, capital at $6 per unit, and entrepreneurship at $9 per unit. Picture Refer to the above table. If the price of labor declines from $3 to $2 per unit, then what is the least costly way of producing Zenias? A B C D

B

The invisible hand refers to the: A. fact that the U.S. tax system redistributes income from rich to poor. B. notion that, under competition, decisions motivated by self-interest promote the social interest. C. tendency of monopolistic sellers to raise prices above competitive levels. D. fact that government controls the functioning of the market system.

B

According to the concept of the "invisible hand," if Susie opens and operates a profitable childcare center, then: A. government should regulate the business to ensure quality. B. the profit Susie earns indicates that she is overcharging for her services. C. she has served society's interests by providing a desired good or service. D. this demonstrates that consumer sovereignty is not present in this market.

C

Firms are motivated to minimize production costs because: A. it is the most environmentally friendly way to produce goods. B. least-cost production techniques use the smallest total quantity of resources. C. competitive pressures in the market will drive out higher-cost producers. D. the government provides tax credits and subsidies to low-cost producers.

C

If competitive industry Y is incurring substantial losses, output will: A. expand as resources move toward industry Y. B. contract as resources move toward industry Y. C. contract as resources move away from industry Y. D. expand as resources move away from industry Y.

C

If competitive industry Z is making substantial economic profit, output will: A. fall in industry Z and firms will likely leave the market. B. fall in all industries except industry Z. C. expand in industry Z as more resources will move to that industry. D. expand in industry Z, but no new firms will enter the market.

C

In the circular flow model of the market system, households: A. Buy products and resources B. Sell products and resources C. Buy products and sell resources D. Sell products and buy resources

C

Private property: A. discourages cooperation because people don't want to part with what they own. B. discourages innovation, as people are often afraid to risk losing their own property. C. encourages owners to maintain or improve their property so as to preserve or enhance value. D. does everything indicated by the other answers.

C

Refer to the diagram. Flow 3 represents: A. wage, rent, interest, and profit income. B. land, labor, capital, and entrepreneurial ability. C. goods and services. D. consumer expenditures.

C

The regulatory mechanism of the market system is: A. self-interest. B. private property. C. competition. D. specialization.

C

Which of the following is the main problem with the barter system of exchange? A. It encourages self-interest B. It fosters the division of labor C. It requires a coincidence of wants D. It undermines the right to bequeath

C

Which of the following statements about self-interest in a market system is false? A. Self-interest usually motivates an individual to deliver something of value to others B. Self-interest of entrepreneurs implies seeking maximum profits or minimum losses C. Self-interest applies only to capitalists and entrepreneurs, not to workers employed by others D. In a market system, consumers are just like firms: self-interest is what motivates them

C

An economic system in which money is not used is a: A. Planned economy B. Market economy C. Mixed economy D. Barter economy

D

From society's point of view, the economic function of profits and losses is to: A. promote the equal distribution of real assets and wealth. B. achieve full employment and price level stability. C. contribute to a more equal distribution of income. D. reallocate resources from less desired to more desired uses.

D

One major element of the command system is: A. An emphasis on private ownership of resources B. Individual decentralized decision-making C. Reliance on supply-and-demand forces to guide economic activity D. Central planning conducted by the government

D

Refer to the diagram. Flow 4 represents: A. wage, rent, interest, and profit income. B. land, labor, capital, and entrepreneurial ability. C. goods and services. D. consumer expenditures.

D

Specialization—the division of labor—enhances productivity and efficiency by: A. allowing workers to take advantage of existing differences in their abilities and skills. B. avoiding the time loss involved in shifting from one production task to another. C. allowing workers to develop skills by working on one, or a limited number, of tasks. D. all of the means identified in the other answers.

D

Suppose a firm can produce 70 units of a product, Zenia, by combining labor, land, capital, and entrepreneurial ability, as in the four alternative techniques shown in the table below. Assume further that the firm can hire labor at $3 per unit, land at $3 per unit, capital at $6 per unit, and entrepreneurship at $9 per unit. Picture Refer to the above table. Which technique is the most economically efficient way of producing Zenia? A B C D

D

The market system's answer to the fundamental question A. "How will the goods and services be produced?" is essentially: A. "With as much machinery as possible." B. "Using the latest technology." C. "By exploiting labor." D. "In ways that minimize the cost per unit of output."

D

The money income of households consists of all the following, except: A. Wages B. Profits C. Interest D. Revenues

D

Which of the following best illustrates the circular flow model in action? A. Bobbie goes to work and builds cars, and uses the income she receives to buy food at the grocery store. B. Evan buys a new couch; the owner of the furniture store uses some of the money from the sale to pay her supplier, and uses the rest to take her family out to dinner. C. Boeing experiences a surge in orders for new airplanes, prompting the company to hire more workers. D. All of these answers illustrate the workings of the circular flow model.

D

The market system's answer to the fundamental question "How will the system promote progress?" is essentially: A. "Through government-funded research programs." B. "Through redistribution of income to promote greater equality." C. "Through training and retraining programs." D. "Through the profit potential that encourages development of new technology."

S