1. Basic Economic Concepts

Which of the following economic systems primarily relies on prices for allocating resources and goods? A) free market B) traditional C) command D) mixed E) socialism

A) free market

Which of the following best explains why individuals and societies must make choices when presented with alternatives? A) People possess limited knowledge. B) resources are scarce C) People cannot agree on societal goals. D) Resources are not fully employed. E) People are more interested in their own well-being than in society's well-being.

B) resources are scarce

An outward shift in the production possibilities curve of an economy can be caused be an increase in A) unemployment B) the labor force C) inflation D) output E) demand

B) the labor force

Oscar spent his entire income on only two goods: good X and good Y. At his current consumption of the two goods, the marginal utility of X is 8 and the marginal utility of Y is 2. If the price of X is $4.00 and the price of Y is $0.50, then to maximize his total utility, Oscar should have A) bought more X and more Y B) bought more X and less Y C) bought less X and more Y D) bought less X and less Y E) maintained his current consumption

C) bought less X and more Y

According to the theory of consumer behavior, which of the following decreases first as additional units of a product are consumed? A) total utility B) average utility C) marginal utility D) marginal physical product E) total physical product

C) marginal utility

A production possibilities curve can shift inward if there is A) an increase in productivity B) an increase in unemployment C) an increase in the price of raw materials D) a misallocation of resources E) a natural disaster

E) a natural disaster

Of the feasible and efficient points on the production possibilities curve (PPC) above, producing at which point will lead to the most economic growth in the future?

Point A

Nation Alpha can produce either 3 units of good X or 1 unit of good Y with one hour of labor, whereas nation Beta can produce either 4 units of good X or 2 units of good Y with one hour of labor. Assuming that labor is the only input, which of the following is true? A) Beta has an absolute advantage in the production of good X. B) Alpha has an absolute advantage in the production of good Y. C) Beta has a comparative advantage in the production of good X D) Alpha has a comparative advantage in the production of good Y E) Alpha has both an absolute and comparative advantage in the production of good Y.

a) Beta has an absolute advantage in the production of good XX.

The study of economics is primarily concerned with which of the following? A) The testing of hypotheses under controlled conditions B) The allocation of scarce resources, given unlimited wants C) The fair and equal treatment of all households D) The provision of conclusive answers to public policy issues E) The development of the dynamics of group behavior

b) The allocation of scarce resources, given unlimited wants

The basic economic problem of all countries is the existence of A) tax increases and budget deficits B) limited resources and unlimited wants C) unemployment and inflation D) government and private industry E) unions and monopoly firms

b) limited resources and unlimited wants

Assume that an economy produces televisions and shoes. Which of the following would cause the production possibilities curve for this economy to shift outward? A) An increase in the labor force B) An increase in the prices of both goods C) An increase in the prices of resources used to produce both goods D) A decrease in the demand for shoes E) A change in consumers' tastes in favor of televisions

A) An increase in the labor force

A professor hires two aides, assigning them the tasks of reading student papers and of typing lecture notes on a computer. One of the aides, Ben, can read 1 page of a student paper per minute or type 50 words of lecture notes per minute, and the other aide, Ann, can read 3 pages of a student paper per minute or type 60 words of lecture notes per minute. Which of the following statements is true? A) Ann has a comparative advantage in reading student papers, and Ben has a comparative advantage in typing lecture notes. B) Ann has an absolute advantage in reading student papers, and Ben has an absolute advantage in typing lecture notes. C) Ben has a comparative advantage in reading student papers, and Ann has a comparative advantage in typing lecture notes D) Ben has a comparative advantage in both reading student papers and typing lecture notes. E) Ben has an absolute advantage in both reading student papers and typing lecture notes.

A) Ann has a comparative advantage in reading student papers, and Ben has a comparative advantage in typing lecture notes.

In which of the following situations is a good NOT scarce? A) Consumer give up nothing to obtain more of the good. B) Consumer can purchase as much of the good as they want at its current market price. C) Large quantities of the good are available in the marketplace. D) There is a surplus of the good at some positive price. E) There is a shortage of the good at some positive price.

A) Consumer give up nothing to obtain more of the good.

Assume both Italy and Greece produce only two goods: wine and olive oil. If Italy holds a comparative advantage in the production of wine, then which of the following statements is NOT true? A) Italy must hold an absolute advantage in the production of wine. B) Greece holds a comparative advantage in the production of olive oil. C) Italy's opportunity cost of producing one additional unit of wine is lower than Greece's. D) Greece's opportunity cost of producing one additional unit of olive oil is lower than Italy's. E) If trade is open between them, these countries have an incentive to trade.

A) Italy must hold an absolute advantage in the production of wine.

Assume there are two goods in a market economy. The amount of each good produced is determined by A) buyers and sellers' interactions in the market for each good B) a central planning agency C) the desires of households only D) each citizen's minimum needs for survival E) popular voting with one vote per citizen

A) buyers and sellers' interactions in the market for each good

Compared to a market economy, in a command economy there is greater A) government involvement in the allocation of resources B) protection of private property rights C) reliance on prices for allocating scarce resources D) reliance on private businesses for the allocation of resources and distribution of goods E) consumption of consumer goods

A) government involvement in the allocation of resources

The diagram above shows an economy's current production possibilities curve for capital goods and consumer goods. If society chooses more capital goods over consumer goods, society is choosing A) more future consumption in exchange for less current consumption B) more current capital goods in exchange for less future consumption C) more future and current consumption D) less future consumption in exchange for more current consumption E) less current capital goods in exchange for greater future consumption

A) more future consumption in exchange for less current consumption

A country can consume beyond its present production possibilities curve when it A) trades with other countries, thus taking advantages of different opportunity costs B) reduces unemployment, thus increasing output C) experiences decreasing opportunity costs. D) faces an upward-sloping production possibilities curve E) faces a downward-sloping production possibilities curve

A) trades with other countries, thus taking advantages of different opportunity costs

Assume the price of a candy bar is $2 and the price of a bag of chips is $3. Assume Lilly's marginal utility from consuming an additional candy bar is 10 utils and her marginal utility from consuming an additional bag of chips is 12 utils. If Lilly is spending her fixed weekly allowance on candy bars and bags of chips, which of the following actions will maximize Lilly's total utility? A) Buying more candy bars and bags of chips B) Buying more candy bars and fewer bags of chips C) Buying fewer candy bars and more bags of chips D) Buying fewer candy bars and bags of chips E) Buying the same number of candy bars and bags of chips

B) Buying more candy bars and fewer bags of chips

Cost-benefit analysis assumes rational agents do which of the following? A) Always make a decision that is best for society B) Compare additional costs and additional benefits when making a decision C) Consider only what they will lose when making a decision D) Consider only what they will gain when making a decision E) Always make the same decision

B) Compare additional costs and additional benefits when making a decision

A power company decides to use wind turbines to provide electricity instead of coal. Which basic economic question does this decision answer in a free market economy? A) What goods or services will be produced? B) How will goods or services be produced? C) Who will consume the goods or services? D) What economic system should be adopted? E) Who gets to decide?

B) How will goods or services be produced?

A country produces computers and rice. If resources are fully employed and there is technological progress only in the production of rice, the opportunity costs of producing computers and rice will change in which of the following ways? A) OC of Computers increase and OC of rice increase B) OC of Computers increase and OC of rice decrease C) OC of Computers no change; OC of rice decrease D) OC of Computers decrease; OC of rice increase E) OC of Computers decrease; OC of rice decrease

B) OC of Computers increase and OC of rice decrease

Improvements in technology for producing all goods must result in A) an inward shift in the production possibilities curve B) an outward shift in the production possibilities curve C) a flatter production possibilities curve D) a steeper production possibilities curve E) greater unemployment of labor

B) an outward shift in the production possibilities curve

The amount of product Z that must be forgone in order to obtain some amount of product Y is called A) factor payments B) opportunity cost C) marginal product D) income effect E) substitution effect

B) opportunity cost

When total utility is at its maximum, marginal utility is A) increasing B) negative C) = 0 D) at a maximum E) at minimum

C) = 0

Oren's father tells Oren he can have one dessert after dinner. He can choose from a scoop of ice cream, a slice of apple pie, a cup of chocolate pudding, or a piece of fruit. Oren prefers chocolate pudding to a piece of fruit; he prefers apple pie to chocolate pudding; and he prefers ice cream to apple pie. If Oren chooses a scoop of ice cream, what is his opportunity cost? A) A piece of fruit. B) A cup of chocolate pudding. C) A slice of apple pie. D) A scoop of ice cream. E) A piece of fruit, a cup of pudding and a slice of apple pie.

C) A slice of apple pie.

Nation Aga can produce either 3 units of good X or 1 unit of good Y with one hour of labor, while nation Kaza can produce either 4 units of good X or 2 units of good Y with one hour of labor. Assuming that labor is the only input, mutually beneficial exchange can take place between Aga and Kaza if A) Aga exchanges 1/2 unit of good XX for 1 unit of good YY. B) Aga exchanges 1.5 units of good XX for 1 unit of good YY. C) Aga exchanges 2.5 units of good XX for 1 unit of good YY. D) Kaza exchanges 1 unit of good YY for 1 unit of good XX . E) Kaza B exchanges 2 units of good YY for 1 unit of good XX .

C) Aga exchanges 2.5 units of good XX for 1 unit of good YY.

Which of the following is an example of a nonrival resource? A) National park camping sites that can be reserved by anyone B) Farmland that can be used to grow corn or soybeans C) Solar energy D) fish in the ocean E) timber in a forest

C) Solar energy

Relative to a command economy, resources in a market economy are more commonly allocated by A) democratic elections B) government planning C) the price system D) established traditions E) a system of checks and balances

C) the price system

In the country Beta it takes two hours of labor to produce a unit of tea and four hours of labor to produce a unit of bread. In the country Zeta it takes three hours of labor to produce a unit of tea and nine hours of labor to produce a unit of bread. Which of the following is true? A) Country Zeta has an absolute advantage in producing both tea and bread. B) Country Zeta has an absolute advantage and a comparative advantage in producing tea. C) Country Beta has an absolute advantage and a comparative advantage in producing tea. D) Country Beta has the lower opportunity cost in producing bread and therefore a comparative advantage in producing bread. E) Country Beta, with trade, will export both tea and bread to country Zeta.

D) Country Beta has the lower opportunity cost in producing bread and therefore a comparative advantage in producing bread.

Which of the following will enable an economy to reach a point outside of the PPC? A) Reallocating currently available resources from apple production to production of oranges B) Reallocating currently available resources from orange production to production of apples C) Fully allocating currently available and unemployed resources efficiently D) Creating or discovering new resources E) Becoming a mixed economy

D) Creating or discovering new resources

Scarcity is correctly described by which of the following statements? I.Scarcity exists if there are more uses for resources than can be satisfied at one time. II. Scarcity exists if decisions must be made about alternative uses for resources. III. Scarcity would not exist in a society in which people wanted to help others instead of themselves. A) I B) II C) III D) I and II E) I, II, and III

D) I and II

Because of conflict and political instability in Country Y , millions of its citizens emigrate to Country X. Which of the following best explains what will happen to Country X's production possibilities curve (PPC) ? A) Its PPC will not change, but consumption of goods will decrease. B) It will move to a point inside its PPC , indicating slower growth C) It will move to a point on its PPC at which it produces only consumer goods. D) Its PPC will shift outward over time E) Its PPC will shift inward over time

D) Its PPC will shift outward over time Emigration will increase Country X's labor force. The growth in the labor force is one factor that causes economic growth.

If Nation X produces coffee at a higher opportunity cost than Nation Y, which of the following is true? A) Nation X must have an absolute advantage in producing coffee. B) Nation X must have a comparative advantage in producing coffee. C) Nation Y must have an absolute advantage in producing coffee. D) Nation Y must have a comparative advantage in producing coffee. E) There is insufficient information to determine both absolute and comparative advantage.

D) Nation Y must have a comparative advantage in producing coffee.

Suppose that Habib has a weekly fixed budget and spends it all on music downloads and snacks. At his current combination of consumption, the marginal utility of the last dollar spent on music downloads is greater than the marginal utility of the last dollar spent on snacks. Has Habib maximized his utility? A) Yes, because he has purchased the maximum possible with his limited budget. B) Yes, because he has purchased the two goods in proportion so that he can get the maximum utility from each. C) Yes, because changing his current consumption combination will reduce his total utility. D) No, because he can increase his total utility by purchasing more music downloads and fewer snacks. E) No, because he can increase his total utility by purchasing fewer music downloads and more snacks.

D) No, because he can increase his total utility by purchasing more music downloads and fewer snacks.

Which of the following is necessary in a well-functioning capitalist economy but not in a command economy? A) centralized decision making B) Scarcity of resources C) Monopolies D) Protection of property rights E) Positive externalities

D) Protection of property rights

Let MUs be the marginal utility of a sandwich, MUh be the marginal utility of a hot dog, Ps be the price of a sandwich, and Ph be the price of a hot dog. When the price of the goods is zero, Pat eats a sandwich. When Pat has to pay, she eats a hot dog. When Pat has to pay, which of the following is necessarily true? A) MUs = MUh = Ps = Ph B) (MUs / Ps ) > (MUh / Ph) C) Ps < Ph D) Ps > Ph E) MUs = 0

D) Ps > Ph

In contrast to a market economy, a command economy relies on which of the following? A) The private sector in deciding what goods will be produced B) Private ownership of resources C) Profits as incentives to make choices D) The government to allocate resources E) Supply and demand to determine prices

D) The government to allocate resources

Assume a worker can either cut grass or wash windows in a given day. It takes 5 hours to mow a one-acre lawn and 2.5 hours to wash all the windows in a house. When a worker chooses to wash the windows of four houses in a neighborhood, what is the opportunity cost of this decision? A) The pay the worker receives for washing the windows in the four houses B) The pay the worker would receive for cutting one lawn C) Cutting the grass at the same four houses D) The pay the worker would have received from cutting the grass at two houses E) The pay the worker would receive for cutting .25 lawns

D) The pay the worker would have received from cutting the grass at two houses

Which of the following is an example of a scarce factor of production? A) Money B) food C) flour D) airplanes E) established knowledge

D) airplanes Airplanes are capital goods used to produce transportation services; therefore they are a factor of production. Airplanes are also scarce. A factor of production is a resource that can be used over and over to produce goods or services.

All of the following are included in computing the opportunity cost of attending college EXCEPT A) interest paid on student loans B) wages the student gave up to attend college C) money spent on college tuition D) money spent on clothing expenses E) money spent on books and supplies

D) money spent on clothing expenses

Assume Pat spends all of her allowance to purchase 4 apples and 4 candy bars. Pat's marginal utility of the fourth apple is 20 utils, and her marginal utility of the fourth candy bar is 40 utils. If an apple costs $1.00 and a candy bar $0.50, to maximize utility Pat should A) purchase more apples and more candy bars B) maintain the current purchase of 4 apples and 4 candy bars C) purchase more apples and fewer candy bars D) purchase fewer apples and more candy bars E) purchase fewer apples and fewer candy bars

D) purchase fewer apples and more candy bars

Which of the following is associated with a command economy? A) Competitive product markets B) Use of resources for private gain C) Use of available resources to meet all the needs and wants of its citizens D) Entry of firms into industries with economic profit E) Public ownership of the means of production

E) Public ownership of the means of production

A production possibilities curve is bowed out, indicating increasing opportunity cost because of A) the law of demand the law of diminishing marginal utility C) the existence of unemployment D) differences in consumer tastes E) imperfect adaptability of resources to alternative uses

E) imperfect adaptability of resources to alternative uses

When marginal utility is falling but positive, total utility will A) decrease at an increasing rate B) decrease at a decreasing rate C) remain constant D) increase at an increasing rate E) increase at an decreasing rate

E) increase at an decreasing rate

Which of the following explains why a production possibilities curve is often represented as concave (bowed out) from the origin? A) law of demand B) law of supply C) constant returns to scale D) decreasing opportunity cost E) increasing opportunity cost

E) increasing opportunity cost

To maximize utility, a consumer with a fixed budget will purchase quantites of goods so that the ratios of the marginal utility of each good to its A) total utility are the greatest B) total utility are the same C) prices are the greatest D) prices are = to 1 E) price are equal

E) price are equal

As a factor of production, capital refers to the A) money available to start a business B) stocks and bonds issued by businesses to raise funds C) financial investment of businesses D) currency in circulation and deposits in financial institutions E) tools and machinery used to produce goods and services

E) tools and machinery used to produce goods and services