Econ 102 Test ch 2

1) What is absolute​ advantage? A. The ability to produce more of a good or service than competitors using the same amount of resources. B. The gain from selling a product for more than it costs to produce that product. C. The gain from consuming a product whose benefit is greater than its cost. D. The ability to use all available resources to produce output. E. The ability to produce a good or service at a lower opportunity cost than other producers. 2) What is comparative​ advantage? A. The ability to use all available resources to produce output. B. The ability to produce a good or service at a lower opportunity cost than other producers. C. The gain from selling a product for more than it costs to produce that product. D. The ability to produce more of a good or service than competitors using the same amount of resources. E. The gain from consuming a product whose benefit is greater than its cost. 3) Is it possible for a country to have a comparative advantage in producing a good without also having an absolute​ advantage? A country without an absolute advantage in producing a good A. will not have a comparative advantage because it has fewer resources. B. will have a comparative advantage if it produces more efficiently. C. will have a comparative advantage if it devotes more resources toward that​ good's production. D. will have a comparative advantage if it has a lower opportunity cost of producing that good. E. will have a comparative advantage if it is able to produce that good at a low total cost.

1)A 2)B 3)D

1) Whether carried out by an individual or a​ country, production beyond the production possibilities frontier A. is not physically possible. B. is possible only through trade. C. happens as a result of forced saving. D. can occur by acquiring more productive resources. 2) With respect to​ consumption, individuals and countries A. ​can, by choosing not to save for the​ future, consume beyond their production possibilities frontiers. B. are contrained to consume on or inside their production possibilities frontiers. C. can, through​ trade, consume beyond their production possibilities frontiers. D. can consume beyond their production possibilities frontiers only during periods of economic prosperity.

1)A 2)C

[Related to Making the​ Connection] Nobel Prize winning economist Kenneth Arrow of Stanford University once wrote that the argument that the outcomes in a market​ system, "may be very different​ from, and even opposed​ to, intentions is surely the most important intellectual contribution that economic thought has​ made." 1) It is possible for the outcomes in a market system to be different from what firms and consumers intended them to be because A. most firms and consumers do not really understand the market system. B. neither firms nor consumers are directly interested in increasing economic efficiency or the standard of living of the average person. C. both firms and consumers are directly interested in increasing economic efficiency and the standard of living of the average person. D. firms and consumers do not directly communicate. 2) This idea is an important intellectual contribution because A. the interaction of firms and consumers in markets produces outcomes that are economically efficient and that promote the economic growth that results in rising living standards. B. if it were not for the interaction of firms and consumers in​ markets, a central planning body would have to organize the market. C. most consumers and firms have the same​ objective, which is to increase economic efficiency and the standard of living of the average person. D. without the interaction of firms and consumers in​ markets, there would be few goods and services produced.

1)B 2)A

State government Medicaid programs provide medical insurance to poor and disabled people. Under federal​ law, the programs must provide reimbursements to people who use any prescription drug that has been approved as effective by the U.S. Food and Drug Administration​ (FDA). In recent​ years, pharmaceutical firms have developed new prescription drugs that cost as much as​ $1,000 per pill to treat Hepatitis​ C, a liver disease. A news story notes​ that, "State Medicaid programs are particularly sensitive to annual cost​ increases...[because] coverage is paid​ for, in​ part, out of state​ budgets, which have to be balanced every​ year." 1) When new prescription drugs are introduced with much higher prices than existing​ drugs, state governments face a​ trade-off between A. the death of individuals from one type of illness compared to another. B. a reduction in spending on another worthwhile program or an increase in taxes. C. funding pharmaceutical firms and funding other firms. D. those with Medicaid and those without Medicaid. 2) Do you agree with the federal law requiring that Medicaid programs must cover every drug that has FDA​ approval? A. This is a positive economic issue that people will often disagree about. B. This is a normative economic issue that people will often disagree about. C. ​No, because such spending is definitively not the best use of state​ governments' scarce resources. D. Yes, because such spending is definitively the best use of state​ governments' scarce resources.

1)B 2)B

1) What does increasing marginal opportunity costs​ mean? A. Increasing the production of a good requires smaller and smaller decreases in the production of another good. B. Increasing the production of a good requires larger and larger decreases in the production of another good. C. Increasing the production of a good requires decreases in the production of another good. D. Production is not occurring on the production possibilities frontier. E. The economy is unable to produce increasing quantities of goods and services. 2) What are the implications of this idea for the shape of the production possibilities​ frontier? A. The production possibilities frontier will be a straight line. B. The production possibilities frontier will have a negative slope. C. The production possibilities frontier will be bowed inward. D. The production possibilities frontier will be bowed outward. E. The production possibilities frontier will have a positive slope.

1)B 2)D

1) What is an​ entrepreneur? A. Entrepreneurs are policymakers in the government. B. Entrepreneurs operate businesses that produce goods and services. C. Entrepreneurs manage the free market. D. Entrepreneurs regulate profits. E. Entrepreneurs manage households that consume goods and services. 2) Why do entrepreneurs play a key role in a market​ system? A. They supply labor as a factor of production. B. They determine what goods and services are produced. C. They influence income distribution through taxes and transfer payments. D. They bring together factors of production. E. They determine who will receive goods and services.

1)B 2)D

1) What are private property​ rights? Private property rights​ are: A. the rights individuals but not firms have to the exclusive use of​ tangible, physical property and intellectual property. B. the rights individuals and firms have to the exclusive use of​ tangible, physical property and intellectual property. C. the rights individuals have to the exclusive use of intellectual property and firms have to the exclusive use of​ tangible, physical property. D. the rights individuals and firms have to the exclusive use of intellectual property but not​ tangible, physical property. E. the rights individuals and firms have to the exclusive use of​ tangible, physical property but not intellectual property. 2) What role do they play in the working of a market​ system? Private property​ rights: A. encourage a significant number of people to be willing to risk funds by investing them in business. B. encourage firms to spend money on research and development. C. determine what goods and services will be produced. D. are the basis for international trade. E. both a and b. 3) Why are independent courts important for a​ well-functioning economy? Independence is necessary for​ courts: A. to make their decisions free of influence from people with powerful political connections. B. to make their decisions free of intimidation by criminal gangs. C. to make their decisions based on the law. D. to make their decisions free of influence from other parts of the government. E. all of the above.

1)B 2)E 3)E

1) A production possibilities​ frontier: A. shows the act of buying and selling. B. shows how participants in the market are linked. C. shows how unlimited wants exceed the limited resources available to fulfill those wants. D. shows the maximum attainable combinations of two goods that may be produced with available resources. E. shows the market for a good or service. 2) We can show economic​ efficiency: A. with points outside the production possibilities frontier. B. with points on the production possibilities frontier. C. with points on and outside the production possibilities frontier. D. with points inside the production possibilities frontier. E. with points inside and on the production possibilities frontier. 3) We can show economic​ inefficiency: A. with points outside the production possibilities frontier. B. with points inside and on the production possibilities frontier. C. with points on and outside the production possibilities frontier. D. with points inside the production possibilities frontier. E. with points on the production possibilities frontier. 4) The production possibilities frontier will shift outward A. if resources are used to produce consumption goods. B. if resources are not used to produce capital goods. C. if resources are not used in production. D. if production occurs outside the production possibilities frontier. E. if technological advances occur.

1)D 2)B 3)D 4)E

Some economists have been puzzled that although entrepreneurs take on the risk of losing time and money by starting new​ businesses, on average their incomes are lower than those of people with similar characteristics who go to work at large firms. William Baumol believes part of the explanation for this puzzle may be that entrepreneurs are like people who buy lottery tickets. On​ average, people who​ don't buy lottery tickets are left with more money than people who buy tickets because lotteries take in more money than they give out. Baumol argues that​ "the masses of purchasers who grab up the​ [lottery] tickets are not irrational if they receive an adequate payment in another​ currency: psychic​ rewards." 1) The term​ "psychic rewards" refers to A. gains attained by​ "out psyching"​ one's foes. B. rewards that accrue from the use of psychic powers. C. financial payments that boost​ one's psyche. D. nonmonetary forms of remuneration that are psychologically uplifting. 2) Psychic rewards that an entrepreneur might receive include ​(check all that ​apply)​: A. stock options. B. the pride of​ self-accomplishment. C. status within the community. D. being​ one's own boss.

1)D 2)BCD

1) What is a free​ market? A. A free market is one where the government restricts how a factor of production can be employed. B. A free market is one where the government restricts how a good or service can be produced. C. A free market is one with perfect equality. D. A free market is one where the government does not control the production of goods and services. E. A free market is one without property rights. In what ways does a free market economy differ from a centrally planned​ economy? Unlike a free market​ economy, A. centrally planned economies have no government. B. centrally planned economies do not use money. C. centrally planned economies have extensive government controls. D. centrally planned economies have no government restrictions. E. centrally planned economies do not trade internationally.

1)D 2)C

1) What is the basis for​ trade? A. Available resources. B. Efficiency. C. Absolute advantage. D. Comparative advantage. E. Economic growth. 2) How can a country gain from specialization and​ trade? A. A country can specialize in producing that for which it has an absolute advantage and then trade for other needed goods and services. B. A country can specialize in producing that which is most scarce and then trade for other needed goods and services. C. A country can specialize by using all available resources to produce goods and services to avoid trading with other countries. D. A country can specialize by using all available resources to invest in capital goods to promote economic growth. E. A country can specialize in producing that for which it has a comparative advantage and then trade for other needed goods and services.

1)D 2)E

1) Two key groups participate in markets. A __________ consists of all the individuals in a home. __________are suppliers of goods and services. 2) We can use a simple economic model called the _________ to see how participants in markets are linked.

1)household, Firms 2) circular-flow diagram

Writing in the New York Times​, Michael Lewis argued that ​"...a market economy is premised on a system of incentives designed to encourage an ignoble human​ trait: self-interest." What incentives does a market system provide to encourage​ self-interest? A. Financial reward. B. Selfishness. C. Equity. D. Government sanctions. E. Both a and b.

A

Evaluate the following​ argument: "Adam​ Smith's analysis is based on a fundamental​ flaw: He assumes that people are motivated by​ self-interest. But this​ isn't true. ​ I'm not​ selfish, and most people I know​ aren't selfish." A. This statement is based on the misconception that​ Smith's analysis applies to every aspect of life. B. This statement is based on the misconception that​ Smith's analysis applies to firms and households. C. This statement is based on the misconception that following your​ self-interest and being selfish are the same thing. D. This statement correctly identifies how​ Smith's analysis ignored charitable acts of giving and benevolence. E. This statement is based on the misconception that​ Smith's analysis provides no role for government guidance.

C

In​ economics, the term capital refers to A. the difference between a​ firm's assets and its liabilities. B. financial resources used by businesses to hire resources. C. goods used to produce other goods. D. the process of raising funds from venture capitalists.

C

​[Related to​ Don't Let This Happen to​ You] In the​ 1950s, the economist Bela Balassa compared 28 manufacturing industries in the United States and Britain. In every one of the 28​ industries, Balassa found that the United States had an absolute advantage LOADING.... In these​ circumstances, would there have been any gain to the United States from importing any of these products from​ Britain? Explain. A. Even with an absolute​ advantage, the United States would have benefited from importing those products that Britain could have produced at lower total cost. B. Since the United States had an absolute advantage in all 28​ industries, it had more bargaining power and would have gained from importing all of these products from Britain. C. Even with an absolute​ advantage, the United States would have benefited from importing those products for which Britain had a comparative advantage. D. Since the United States had an absolute advantage in all 28​ industries, it also had a comparative advantage in each industry and would not have gained anything from importing any of these products from Britain. E. Even with an absolute​ advantage, the United States would have benefited from importing those products for which Britain had the same opportunity cost.

C

The primary difference between product markets and factor markets is that A. product markets are markets for factors of production long dash​labor, ​capital, natural​ resources, and entrepreneurial​ ability, while factor markets are markets for goods and services. B. product markets produce goods for final sale while the output of factor markets is included in the purchase price of the good itself long dash factors are not sold. C. product markets are generally after factor markets in the distribution chain. D. product markets are markets for​ goods, while factor markets are markets for factors of production long dash​labor, ​capital, natural​ resources, and entrepreneurial ability.

D

Which of the following events would create economic​ growth, that​ is, shift the production possibilities frontier​ outward? A. An increase in the available natural resources. B. An increase in the available labor. C. An increase in technology that affects the production of both goods. D. All of the above.

D

​[Related to the Chapter​ Opener] In addition to making​ cars, Tesla planned to open a new factory in Nevada in 2016 to make​ batteries, including home storage battery packs. ​Source: Mike Ramsey and Anne​ Steele, "Tesla Loss Widens as Spending​ Jumps," Wall Street Journal​, May​ 6, 2015. The opportunity cost of​ Tesla's investment in a new battery factory in Nevada is A. equal to the cost of inventory for the new battery factory. B. measured in terms of the competition Telsa will present to exisiting firms. C. indeterminate since their plans are not detailed well enough. D. what the company considered to be the best foregone option to the factory.

D

In the​ circular-flow diagram showing how a market system​ works, A. firms and households are both suppliers in product markets. B. households are demanders and firms are suppliers in factor markets. C. households purchase output produced by firms in product and factor markets. D. income flows to households and the government through product markets. E. income flows to households through factor markets.

E

An economist remarks that​ "the cost of consuming a book is the combination of the retail price and the opportunity cost of the time spent​ reading." The cost of _______ a book is the price you pay to buy the​ book, but the cost of ________ a book would include the time spent reading the book.

buying, consuming