Chapter 3 Economics Study Guide

We all have an interest in the efficient use of all of society's resources because more of everything we care about can be available for our use as a result.

T

An economy can grow despite a lack of qualitative and quantitative improvements in the factors of production.

F

Economic growth means a movement along an economy's production possibilities curve in the direction of producing more consumer goods.

F

From a point inside the production possibilities curve, in order to get more of one thing, an economy must give up something else.

F

In any economy, it would always be less efficient to dig ditches by having many workers use their hands than to use workers with shovels or a backhoe.

F

The market where households sell the use of their inputs to firms is called the product market.

F

Underutilized resources or those not being put to their best uses are illustrated by output combinations along the production possibilities curve.

F

With a straight-line production possibilities curve, the opportunity cost of producing another unit of a good increases with its output.

F

All economies, regardless of political structure, must decide how, from several possible ways, to produce the goods and services that they want.

T

Command economies rely on central planning, where decisions about what and how many are largely determined by a government official associated with the central planning organization.

T

Consumer sovereignty describes how individual consumers in market economies determine what is to be produced.

T

Each nation tends to use the production processes that conserve its relatively scarce (and thus relatively more expensive) resources and use more of its relatively abundant resources.

T

If resources are being used efficiently, at a point along a production possibilities curve, more of one good or service requires the sacrifice of another good or service as a cost.

T

In a market economy, with private ownership and control of the means of production, the amount of output one is able to obtain depends on the quantity and quality of the scarce resources that the individual controls.

T

Investing in capital goods will increase the future production capacity of an economy, so an economy that invests more now (consumes less now) will be able to produce, and therefore consume, more in the future.

T

The basic reason for increasing opportunity cost is that some resources and skills cannot be easily adapted from their current uses to alternative uses.

T

The circular flow model illustrates the continuous flow of goods, services, inputs, and payments between firms and households.

T

The economy cannot produce beyond the levels indicated by the production possibilities curve during a given time period, but it is possible to operate inside the production possibilities curve.

T

What are the three basic economic questions? How are decisions made differently in a market economy than in planned economies?

The three basic economic questions are: What is to be produced? How are these goods to be produced? For whom are the goods produced? Scarcity requires that these questions be addressed in some way by every economy. Market economies answer these questions in a decentralized way through the interaction of millions of buyers and sellers. In command economies, decisions are made largely through planning boards. The manner in which an economic system answers these questions helps determine the allocation of limited resources.

How would the following events be shown using a production possibilities curve for shelter and food? a. The economy is experiencing double-digit unemployment. b. Economic growth is increasing at more than 5 percent per year. c. Society decides it wants less shelter and more food. d. Society decides it wants more shelter and less food.

a)Double digit unemployment would not affect the production possibilities curve itself. An economy experiencing double-digit unemployment would be operating at a point inside the production possibilities curve. b)The production possibilities curve shifts outward whenever the economy experiences economic growth. c)Assuming resources are being used efficiently, the economy moves from one point along the production possibilities curve to another in the direction of more food production (requiring a sacrifice of some shelter). d)Assuming resources are being used efficiently, the economy moves from one point along the production possibilities curve to another in the direction of more shelter (requiring a sacrifice of some food).

Refer to Figure 3-1. In the circular flow diagram, payments for goods and services: a.) flow in a clockwise direction. b.) flow in a counterclockwise direction. c.) are received by firms in the factor market. d.) are characterized by both a. and c. e.) are characterized by both b. and c.

a.) flow in a clockwise direction.

The circular flow of economic activity is a model of the: a.) flow of goods, services, and payments between households and firms. b.) influence of government on business behavior. c.) role of unions and government in the economy. d.) interaction among taxes, prices, and profits. e.) economy's banking system.

a.) flow of goods, services, and payments between households and firms.

In a market economy, the goods produced go to those who(m): a.) have sufficient income and are willing to pay the price asked for those goods. b.) the government views as best suited for consumption. c.) business firms choose to favor. d.) desire the goods the least. e.) need them the most.

a.) have sufficient income and are willing to pay the price asked for those goods.

Refer to Figure 3-2. A movement from Point C to Point B: a.) involves sacrificing bread in order to produce a greater quantity of wine. b.) involves sacrificing wine in order to produce a greater quantity of bread. c.) involves no sacrifice of output, as the opportunity cost of production is zero everywhere along the production possibilities curve. d.) will increase the level of unemployment in the economy. e.) will decrease the level of unemployment in the economy.

a.) involves sacrificing bread in order to produce a greater quantity of wine.

The use of large amounts of labor relative to capital in an economy indicates: a.) labor-intensive production. b.) capital-intensive production. c.) that wage rates will be relatively high. d.) that hand-made goods are of better quality than machine-made goods.

a.) labor-intensive production.

Refer to Figure 3-2. At Point A: a.) only wine is produced. b.) only bread is produced. c.) both wine and bread are produced. d.) the economy is operating inefficiently.

a.) only wine is produced.

Which of the following is not a question that all societies must answer? a.How can scarcity be eliminated? b.What goods and services will be produced? c.Who will get the goods and services? d.How will the goods and services be produced? e.All of the above are questions that all societies must answer.

a.How can scarcity be eliminated?

Which of the following is least likely to shift the production possibilities curve outward? a.a change in preferences away from one of the goods and toward the other b.an invention that reduces the amount of natural resources necessary for producing a good c.the discovery of new natural resources d.a reduction in people's preferences for leisure

a.a change in preferences away from one of the goods and toward the other

The degree of government involvement in the economy is greatest in a.a command economy. b.a mixed economy. c.a market economy. d.a traditional economy.

a.a command economy.

A system of economic organization in which the ownership and control of productive capital assets rests with the state and resources are allocated through central planning and political decision making is called: a.) a market economy. b.) a command economy. c.) a corporate economy. d.) capitalism. e.) a unified economy.

b.) a command economy.

Which concept explains how individual consumers in market economies determine what is to be produced? a.) competition b.) consumer sovereignty c.) decentralized decision-making d.) free enterprise

b.) consumer sovereignty

Refer to Figure 3-1. In the circular flow diagram, goods and services: a.) flow in a clockwise direction. b.) flow in a counterclockwise direction. c.) are sold by businesses in the factor market. d.) are characterized by both a. and c. e.) are characterized by both b. and c.

b.) flow in a counterclockwise direction.

Capital, entrepreneurship, land, and labor are needed to produce goods and services. The respective payments for each of these factors of production are: a.) profits, rent, wages and salaries, and interest. b.) interest, profits, rent, and wages and salaries. c.) profits, interest, rent, and wages and salaries. d.) interest, profits, wages and salaries, and rent.

b.) interest, profits, rent, and wages and salaries.

Refer to Figure 3-2. A movement from Point B to Point C: a.) involves sacrificing bread in order to produce a greater quantity of wine. b.) involves sacrificing wine in order to produce a greater quantity of bread. c.) involves no sacrifice, as the opportunity cost of production is zero everywhere along the production possibilities curve. d.) will increase the level of unemployment in the economy. e.) will decrease the level of unemployment in the economy.

b.) involves sacrificing wine in order to produce a greater quantity of bread.

Which of the following is consistent with the implications of the production possibilities curve? a.If the resources in an economy are being used efficiently, scarcity will not be a problem. b.If the resources in an economy are being used efficiently, more of one good can be produced only if less of another good is produced. c.Producing more of any one good will require smaller and smaller sacrifices of other goods as more of that good is being produced in an economy. d.An economy will automatically attain that level of output at which all of its resources are fully employed. e.Both b and c are consistent with the implications of the production possibilities curve.

b.If the resources in an economy are being used efficiently, more of one good can be produced only if less of another good is produced.

Say that a technological change doubles an economy's ability to produce good X and triples the economy's ability to produce good Y. As a result, a.the economy will tend to produce less X and more Y than before. b.the opportunity cost of producing units of Y in terms of X forgone will tend to fall. c.the production possibilities curve will shift out further along the X-axis than along the Y-axis. d.both b and c would be true.

b.the opportunity cost of producing units of Y in terms of X forgone will tend to fall.

Refer to Figure 3-2. An economy is operating at full employment, and then workers in the bread industry are laid off. This change is portrayed in the movement from: a.) A to B. b.) B to E. c.) C to F. d.) G to F. e.) None of the above are correct.

c.) C to F.

Refer to Figure 3-2. Currently, it is not possible to produce at: a.) Point A. b.) Point B. c.) Point E. d.) Point G. e.) either Point E or Point G.

c.) Point E.

The private ownership of property and the use of the market system to direct and coordinate economic activity is most characteristic of: a.) a command economy. b.) a mixed economy. c.) a market economy. d.) a traditional economy.

c.) a market economy.

In a market economy, resources are allocated: a.) by central planners using a price system. b.) by decentralized planners at the local level. c.) by individual decision-makers responding to market prices. d.) by government bureaucracies because of the absence of a price system.

c.) by individual decision-makers responding to market prices.

Refer to Figure 3-2. A movement from Point G to Point F: a.) involves sacrificing bread in order to produce a greater quantity of wine. b.) involves sacrificing wine in order to produce a greater quantity of bread. c.) involves no sacrifice of output, as both more wine and bread can be produced if available resources are used more efficiently. d.) will increase the level of unemployment in the economy

c.) involves no sacrifice of output, as both more wine and bread can be produced if available resources are used more efficiently.

The concavity (bowed-out shape. of the production possibilities curve is the result of: a.) the law of demand. b.) the law of supply. c.) the law of increasing opportunity cost. d.) complementarily in consumption. e.) complementarity in production.

c.) the law of increasing opportunity cost.

Countries with high labor costs tend to: a.) rely on only one method for the production of goods. b.) use more labor rather than capital in the production process. c.) use more capital rather than labor in the production process. d.) be relatively poor countries.

c.) use more capital rather than labor in the production process.

Which of the following is the most accurate statement about a production possibilities curve? a.An economy can produce at any point inside or outside its production possibilities curve. b.An economy can produce only on its production possibilities curve. c.An economy can produce at any point on or inside its production possibilities curve, but not outside the curve. d.An economy can produce at any point inside its production possibilities curve, but not on or outside the curve.

c.An economy can produce at any point on or inside its production possibilities curve, but not outside the curve.

Economic disputes over the distribution of income are generally associated with which economic question? a.Who should produce the goods? b.What goods and services will be produced? c.Who will get the goods and services? d.How will the goods and services be produced?

c.Who will get the goods and services?

The private ownership of property and the use of the market system to direct and coordinate economic activity are most characteristic of a. a command economy. b.a mixed economy. c.a market economy. d.a traditional economy.

c.a market economy.

In the circular flow model, a.firms supply both products and resources. b.firms demand both products and resources. c.firms demand resources and supply products. d.firms supply resources and demand products.

c.firms demand resources and supply products.

Inefficiency is best illustrated by which of the following? a.forgoing civilian goods in order to produce more military goods b.limiting economic growth by reducing capital spending c.having high levels of unemployment of labor and other resources that could be productively employed d.producing outside the production possibilities frontier e.all of the above

c.having high levels of unemployment of labor and other resources that could be productively employed

Suppose Country A produces few consumption goods and many investment goods while Country B produces few investment goods and many consumption goods. Other things being equal, you would expect a.per capita income to grow more rapidly in Country B. b.population to grow faster in Country B. c.the production possibilities curve for Country A to shift out more rapidly than that of Country B. d.that if both countries started with identical production possibilities curves, in 20 years, people in Country B will be able to produce more consumer goods than people in Country A. e.that both c and d are true.

c.the production possibilities curve for Country A to shift out more rapidly than that of Country B.

Which of the following best characterizes the circular flow of income? a.) Households buy factors of production from businesses, and businesses buy goods and services from households. b.) The government purchases resources from businesses and households and then sells goods and services to businesses and households. c.) Businesses buy resources from the government, and households buy goods and services from businesses. d.) Businesses buy resources from households, and households use their income from the sale of resources to buy goods and services from businesses.

d.) Businesses buy resources from households, and households use their income from the sale of resources to buy goods and services from businesses.

The economic system of which of the following countries can be treated as an example of a command economy? a.) United States b.) Canada c.) United Kingdom d.) Cuba

d.) Cuba

Three economic questions must be determined in all societies. What are they? a.) How much will be produced? When will it be produced? How much will it cost? b.) What will the price of each good be? Who will produce each good? Who will consume each good? c.) What is the opportunity cost of production? Does the society have a comparative advantage in production? Will consumers desire the goods being produced? d.) What goods will be produced? How will goods be produced? Who will get the goods produced?

d.) What goods will be produced? How will goods be produced? Who will get the goods produced?

A technological advance that increases the productivity of all inputs is best illustrated as: a.) a movement along the production possibilities curve. b.) a flattening of the production possibilities curve. c.) an inward shift of the production possibilities curve. d.) an outward shift of the production possibilities curve.

d.) an outward shift of the production possibilities curve.

Economic growth can be illustrated by: a.) a movement along the production possibilities curve. b.) a movement from a point on the production possibilities curve to a point inside the production possibilities curve. c.) an inward shift of the production possibilities curve. d.) an outward shift of the production possibilities curve. e.) a steepening of the production possibilities curve.

d.) an outward shift of the production possibilities curve.

A production possibilities curve is negatively sloped because: a.) the price of a good falls as you move down along the curve. b.) resources are wasted as you move along the curve. c.) it is not possible to adjust production decisions at all once an economy operates on the curve. d.) once on the frontier, it is only possible to increase production of one good by reducing production of the other. e.) the opportunity cost of production is negative.

d.) once on the frontier, it is only possible to increase production of one good by reducing production of the other.

A point beyond the boundary of an economy's production possibilities curve is: a.) efficient. b.) inefficient c.) attainable. d.) unattainable. e.) both attainable and efficient.

d.) unattainable.

Three economic questions must be determined in all societies. What are they? a.How much will be produced? When will it be produced? How much will it cost? b.What will the price of each good be? Who will produce each good? Who will consume each good? c.What is the opportunity cost of production? Does the society have a comparative advantage in production? Will consumers desire the goods being produced? d.What goods and services will be produced? How will the goods and services be produced? Who will get the goods and services?

d.What goods and services will be produced? How will the goods and services be produced? Who will get the goods and services?

Which of the following is most likely to shift the production possibilities curve outward? a.an increase in unemployment b.a decrease in the stock of physical or human capital c.a decrease in the labor force d.a technological advance

d.a technological advance

Consider a production possibilities curve for an economy producing bicycles and video game players. It is possible to increase the production of bicycles without sacrificing video game players if a.the production possibilities curve shifts outward due to technological progress. b.the production possibilities curve shifts outward due to increased immigration (which enlarges the labor force). c.the economy moves from a point inside the production possibilities curve to a point on the curve. d.any of the above occurs. e.either a or b, but not c, occurs.

d.any of the above occurs.

When a command economy is utilized to resolve economic questions regarding the allocation of resources, then a.everyone will receive an equal share of the output produced. b.the preferences of individuals are of no importance. c.economic efficiency will be assured. d.the role of markets will be replaced by political decision making.

d.the role of markets will be replaced by political decision making.

A point beyond the boundary of an economy's production possibilities curve is a.efficient. b.inefficient. c.attainable. d.unattainable. e.both attainable and efficient.

d.unattainable.

Refer to Figure 3-2. Along the production possibilities curve, the most efficient point of production depicted is: a.) Point B. b.) Point C. c.) Point D. d.) Point G. e.) All points on the production possibilities curve are equally efficient.

e.) All points on the production possibilities curve are equally efficient.

Refer to Figure 3-2. The most inefficient point depicted is: a.) Point A. b.) Point C. c.) Point D. d.) Point F. e.) Point G.

e.) Point G.

Which of the following is true? a.In the product markets, firms are buyers and households are sellers. b.In the factor markets, firms are sellers and households are buyers. c.Firms receive money payments from households for capital, land, labor, and entrepreneurship. d.All of the above are true. e.None of the above are true.

e.None of the above are true.

What determines the position and shape of a society's production possibilities curve? a.the physical resources of that society b.the skills of the workforce c.the level of technology of the society d.the number of factories available to the society e.all of the above

e.all of the above

A virulent disease spreads throughout the population of an economy, causing death and disability. This event can be portrayed as a.a movement from a point on the production possibilities curve to a point inside the curve. b.a movement from a point on the production possibilities curve to the northeast. c.a movement along the production possibilities curve to the southeast. d.an outward shift of the production possibilities curve. e.an inward shift of the production possibilities curve.

e.an inward shift of the production possibilities curve.

In a circular flow diagram, a.goods and services flow in a clockwise direction. b.goods and services flow in a counterclockwise direction. c.product markets appear at the top of the diagram. d.factor markets appear at the left of the diagram. e.both b and c are true.

e.both b and c are true.