Chapter 2 Exam Study Guide (Microeconomics)

An economy produces capital goods and consumer goods. This economy is operating at a point on its production possibility frontier associated with a small amount of capital goods and a large amount of consumer goods. This is most likely to be a A) "poor" country because such a nation has difficulty devoting many resources to the production of capital goods. B) "rich" country because such a nation can afford to sacrifice. C) country with a free market. D) country with a command economy.

A) "poor" country because such a nation has difficulty devoting many resources to the production of capital goods.

As more of a good, such as television sets, is produced, the opportunity costs of producing it increases. This most likely occurs because A) as more of a good is produced, the inputs used to produce that good will increase in price. B) consumers would be willing to pay higher prices for the good as more of the good is produced. C) resources are not equally well suited to producing all goods, and as more of a good is produced, it is necessary to use resources less well suited to the production of that good. D) as more of a good is produced, the quality of that good declines, and therefore the costs of production increase.

A) as more of a good is produced, the inputs used to produce that good will increase in price.

If an economy begins to use its resources more efficiently, it will move A) closer to its ppf. B) farther away from its ppf. C) from a point along its ppf to a point outside its ppf. D) from one point to another point along its ppf.

A) closer to its ppf.

As you move down the production possibility frontier, the absolute value of the marginal rate of transformation A) increases. B) decreases. C) initially increases, then decreases. D) initially decreases, then increases

A) increases.

Production inefficiency occurs A) only when an economy produces underneath its production possibility frontier. B) only when an economy produces at the wrong point on the production possibility frontier. C) either when an economy produces underneath the production possibility frontier or when the economy is producing the wrong combination of goods on the production possibility frontier. D) only when the economy produces outside the production possibility frontier.

A) only when an economy produces underneath its production possibility frontier.

An improvement in technology will cause the A) production possibility frontier to shift outward. B) production possibility frontier to shift inward. C) economy to move down the production possibility frontier. D) economy to move closer to its production possibility frontier.

A) production possibility frontier to shift outward.

The marginal rate of transformation is the A) slope of the production possibility frontier. B) dollar value of the best forgone alternative. C) process of using resources to produce new capital. D) transformation of resources into a form that is useful to people.

A) slope of the production possibility frontier.

In a laissez-faire economy, ________ what gets produced, how it is produced, and who gets it. A) the behavior of buyers and sellers determines B) the central government authority determines C) firms but not consumers determine D) consumers but not firms determine

A) the behavior of buyers and sellers determines

Which of the following does NOT constitute an act of "investment" as economists use the term? A) The city council authorizes the construction of a new fire station. B) A retiree buys 50 shares of stock at $10 a share and then sells the stock at a profit for $20 a share. C) An accountant attends a seminar on changes in the federal tax code. D) A department store increases its inventory of football jerseys before the Super Bowl.

B) A retiree buys 50 shares of stock at $10 a share and then sells the stock at a profit for $20 a share.

Which of the following statements is FALSE? A) Many planned economies have not fared very well in recent years; many of these economies have almost completely collapsed. B) Command economies operate the most efficiently because the government makes all the production decisions. C) In command economies, consumers still exercise choice. D) In a command economy, the government answers the questions of what to produce, how to produce it, and how to distribute it.

B) Command economies operate the most efficiently because the government makes all the production decisions.

Which of the following is NOT true of a market economy? A) In its pure form, it is also known as a laissez-faire economy. B) Decisions are regulated by a central agency. C) The interaction between buyers and sellers answers the basic economic questions of what gets produced, how it gets produced, and who gets it. D) It relies on millions of individual economic decisions to determine economic outcomes.

B) Decisions are regulated by a central agency.

The economic problem can best be stated as A) How can the economy improve technology so as to shift the production possibility frontier up and to the right? B) Given scarce resources, how exactly do societies go about deciding what to produce, how to produce it, and for whom to produce? C) Given the fact that the economy is inefficient, how much and what type of government intervention should be used to improve the efficiency of the economy? D) What is the best rate of economic growth for a society?

B) Given scarce resources, how exactly do societies go about deciding what to produce, how to produce

The gap between rich and poor countries A) has decreased over time because poor countries can more easily devote resources to capital production. B) has increased over time because poor countries find it difficult to devote resources to capital production. C) has remained constant over time because technological advances can be easily shared among nations. D) has remained constant over time because the rate of capital production has remained constant in rich and poor nations

B) has increased over time because poor countries find it difficult to devote resources to capital production.

An economy that is producing on the production possibility frontier at some point other than the output of efficient allocation is A) efficient, as it is on the production possibility frontier. B) inefficient, as the combination of goods and services produced is not what people want. C) efficient, as the economy is producing goods at the lowest possible cost. D) inefficient, as that combination of goods could be produced at a lower cost if more efficient technology were employed.

B) inefficient, as the combination of goods and services produced is not what people want.

The process of using resources to produce new capital is A) research and development. B) investment. C) consumption. D) economic growth.

B) investment.

If resources are combined efficiently in production, then the society A) is producing at the most-desirable point on the production possibility frontier. B) is producing at a point on the production possibility frontier but not necessarily at the most-desirable point. C) is producing at a point outside the production possibility frontier. D) is experiencing economic growth.

B) is producing at a point on the production possibility frontier but not necessarily at the most-desirable

An economy in which individual people and firms pursue their own self-interest without any central direction or regulation is a(n) A) command economy. B) laissez-faire economy. C) invisible-hand economy. D) private-sector economy.

B) laissez-faire economy.

If the unemployment rate increases from 10% to 14%, the economy will A) move closer to a point on the ppf. B) move away from the ppf toward the origin. C) remain on the ppf. D) remain on the origin.

B) move away from the ppf toward the origin.

If the opportunity costs of producing a good increase as more of that good is produced, the economy's production possibility frontier will be A) negatively sloped and "bowed inward" toward the origin. B) negatively sloped and "bowed outward" from the origin. C) a negatively sloped straight line. D) a positively sloped straight line.

B) negatively sloped and "bowed outward" from the origin.

The production possibility frontier is used to illustrate the concept of A) the laissez-faire economy. B) opportunity costs. C) equilibrium. D) aggregate demand

B) opportunity costs.

Periods of less than full employment correspond to A) points outside the ppf. B) points underneath the ppf. C) points on the ppf. D) either points inside or outside the ppf.

B) points underneath the ppf.

The basic coordinating mechanism in a free market system is A) quantity. B) price. C) a central government authority. D) the corporation.

B) price.

An example of forgoing present benefits in order to receive future benefits is A) production. B) saving. C) consumption. D) growth.

B) saving.

In economics, investment always refers to A) the act of buying stocks or bonds. B) the creation of capital. C) increasing the quantity of labor. D) an increase in per capita output.

B) the creation of capital.

In terms of the production possibility frontier, an increase in productivity attributable to new technology would best be shown by A) a movement along the frontier. B) the production possibility frontier shifting outward, away from the origin. C) a movement from a point inside the frontier to a point on it. D) a movement toward the origin.

B) the production possibility frontier shifting outward, away from the origin.

The amount that households have accumulated out of past income through saving and inheritance is A) future income. B) wealth. C) consumption. D) past income

B) wealth.

Which of the following is an element of a command economy? A) The market decides distribution. B) The means of production are privately owned. C) Production decisions are centralized. D) The market decides what will be produced

C) Production decisions are centralized.

Which of the following statements is NOT true for a command economy? A) Consumers have some choices concerning what they buy. B) The government decides what is produced. C) The amount of a good supplied always equals the amount of the good demanded. D) The state decides how to distribute what is produced.

C) The amount of a good supplied always equals the amount of the good demanded.

Which of the following statements is FALSE? A) In a free market system, the basic economic questions are answered without the help of a central government plan or directive. B) Individuals guided by their own-self interest will produce products and services that other people want. C) The basic coordinating mechanism in a free market system is quantity adjustments toward equilibrium. D) In a free market system, competition forces firms to adopt efficient production techniques.

C) The basic coordinating mechanism in a free market system is quantity adjustments toward equilibrium.

An institution through which buyers and sellers interact and engage in exchange is A) a central authority. B) "laissez-faire." C) a market. D) a production frontier

C) a market.

• Because resources are scarce, the opportunity cost of investment in capital is A) zero. B) forgone future consumption. C) forgone present consumption. D) infinite.

C) forgone present consumption.

Outputs in the production process are A) pollution. B) money. C) goods and services of value to households. D) resources.

C) goods and services of value to households.

A society can produce two goods: donuts and beer. The society's production possibility frontier is negatively sloped and "bowed outward" from the origin. As this society moves down its production possibility frontier, producing more and more units of donuts, the opportunity cost of producing beer A) decreases. B) remains constant. C) increases. D) could decrease or increase depending on the technology.

C) increases.

Consumer sovereignty A) is dependent on profits. B) is the idea that consumers can buy whatever they want to. C) is the idea that consumers determine what is produced in the economy through their demands. D) is only possible in a monarchy.

C) is the idea that consumers determine what is produced in the economy through their demands.

The process by which resources are transformed into useful forms is A) capitalization. B) consumption. C) production. D) allocation.

C) production.

The opportunity cost of investment in capital is forgone present consumption because A) capital takes a long time to produce. B) capital increases the productivity of labor. C) resources are scarce. D) capital is an intangible good.

C) resources are scarce.

The concept of opportunity cost is based on the principle of A) need. B) consumption. C) scarcity. D) profit.

C) scarcity

The concept of trade-offs would become irrelevant if A) we were dealing with a very simple, one-person economy. B) poverty were eliminated. C) scarcity were eliminated. D) capital were eliminated.

C) scarcity were eliminated.

During the Iraq War, many of Iraq's oil refineries were destroyed. This would best be represented by a A) movement down Iraq's production possibility frontier. B) movement off Iraq's production possibility frontier to some point inside the frontier. C) shift of Iraq's production possibility frontier toward the origin. D) movement up Iraq's production possibility frontier.

C) shift of Iraq's production possibility frontier toward the origin.

An example of an investment is A) the purchase of a share of Google stock. B) the purchase of an Exxon Mobil bond. C) the purchase of a Hewlett Packard laser printer for use by a business. D) all of the above.

C) the purchase of a Hewlett Packard laser printer for use by a business.

Consider two countries, Japan and Malaysia. Japan devotes a smaller portion of its production to capital. All other things equal, which of the following statements is most likely true? A) Japan is a poorer country than Malaysia. B) Japan will move up its production possibility curve faster than Malaysia. C) Malaysia is producing inside its production possibility frontier, whereas Japan is producing at a point on its production possibility frontier. D) Malaysia's production possibility frontier will shift up and out farther and faster than Japan's.

D) Malaysia's production possibility frontier will shift up and out farther and faster than Japan's.

Which of the following would an economist classify as capital? A) a $50 bill B) a corporate bond C) a post office employee D) a guitar used by a musician

D) a guitar used by a musician

Advocates of an unregulated market system argue that A) competition promotes efficiency. B) competition leads to innovation. C) competition leads to product variety and quality. D) all of the above

D) all of the above

Some economists advocate government intervention in a market economy A) to produce collective goods and services. B) when resource costs for a private producer do not reflect the full cost to society. C) to stabilize the economy. D) all of the above

D) all of the above

The production possibility frontier is a graph that shows A) all the combinations of goods and services that are consumed over time if all of society's resources are used efficiently. B) the amount of goods and services consumed at various average price levels. C) the rate at which an economy's output will grow over time if all resources are used efficiently. D) all the combinations of goods and services that can be produced if all of society's resources are used efficiently.

D) all the combinations of goods and services that can be produced if all of society's resources are used efficiently.

Economic growth may occur when A) a society acquires new resources. B) a society learns to produce more using existing resources. C) the society begins to produce the combination of goods society wants most. D) both A and B

D) both A and B

An economy in which a central authority draws up a plan that establishes what will be produced and when, sets production goals, and makes rules for distribution is a A) free market economy. B) laissez-faire economy. C) public goods economy. D) command economy

D) command economy

The idea that consumers ultimately dictate what will be produced by choosing what to purchase is known as A) laissez-faire. B) the economic problem. C) centralized decision making. D) consumer sovereignty.

D) consumer sovereignty.

In a free market system, the amount of output that any one household gets depends on its A) income. B) wealth. C) wage and interest income. D) income and wealth.

D) income and wealth.

For an economy to produce at a point beyond its current ppf, the economy must A) waste less. B) be more efficient. C) reduce inputs. D) increase its resource base.

D) increase its resource base.

Which of the following is NOT a resource as the term is used by economists? A) land B) labor C) buildings D) money

D) money

Capital, as economists use the term, A) is the money the firm spends to hire resources. B) is money the firm raises from selling stock. C) refers to the process by which resources are transformed into useful forms. D) refers to things that have already been produced that are in turn used to produce other goods and services.

D) refers to things that have already been produced that are in turn used to produce other goods and services.