Macro chapter 2

What happens if a country produces a combination of goods that uses all of the resources available in the economy?

The country is operating on its production possibilities frontier.

What is the role of an entrepreneur?

a. to operate a business that produces a good or service b. to bring together the factors of production—labor, capital, and natural resources c. to take risks

According to Adam Smith, which of the following is necessary for the proper functioning of the market system?

For markets to work, people must be free to pursue their self-interest.

According to Adam Smith, which of the following is true?

Individuals usually act in a rational, self-interested way.

What is the term for the highest-valued alternative that must be given up to engage in any activity?

Opportunity cost

Which of the following statements is most consistent with the principle about the basis for international trade?

The United States would be better off if it specialized in the production of some goods, and then traded some of them to other countries

Which of the following would create economic growth, that is, shift the production possibilities frontier outward?

a. an increase in the available labor b. an increase in technology that affects the production of both goods c. an increase in the available natural resources

If a market system functions well, which of the following is necessary for the enforcement of contracts and property rights?

an independent court system

In the United States, property rights

are guaranteed by two amendments to the U.S. Constitution.

In a free market system, which of the following groups brings together the factors of production— labor, capital, and natural resources—in order to produce goods and services?

entrepreneurs

In which markets are factors of production, such as labor, capital, natural resources, and entrepreneurial ability traded?

factor markets

Which of the following comprises the two key groups of participants in the circular flow of income?

households and firms

What is the outcome of enforcing contracts and property rights in a market system?

increased economic activity

According to Adam Smith, which of the following is the instrument the invisible hand uses to direct economic activity?

price

Absolute advantage is the ability of an individual, firm, or country to

produce more of a good or service than competitors using the same amount of resources.

Which of the following refers to markets where goods such as computers or services such as medical treatment are offered?

product markets

What are copyrights designed to do?

protect intellectual property rights

If a country has a comparative advantage in the production of a good, then that country

should allow another country to specialize in the production of that good.

The principle of increasing marginal opportunity cost states that the more resources devoted to any activity, the __________ the payoff to devoting additional resources to that activity.

smaller

Generally speaking, for a market system to work, individuals must

take risks and act in rational, self-interested ways.

If the opportunity cost of producing one good increases as more of that good is produced, then

the production possibility frontier is bowed out.

Which of the following is critical to the success of a market system?

to allow individuals or firms to have exclusive use of their property