EC 251 Macroeconomics Practice Exam 1.1: Economic Foundations

9. Which of the following is true? a. Human choice is generally not influenced by changes in incentives. b. What is true for the individual must be true for the group as a whole. c. Using scarce resources to meet one need reduces our ability to meet needs in other areas. d. The economic way of thinking stresses that good intentions usually lead to sound economic policy. ____

Using scarce resources to meet one need reduces our ability to meet needs in other areas.

31. Which of the following is true regarding value and exchange? a. Middlemen fail to create value since they do not expand the supply of physical goods. b. A good or service has a given value regardless of who uses it or how it is used. c. If it were not for middlemen, transaction costs would be zero. d. Voluntary exchange creates value by channeling goods into the hands of people who value them most.

Voluntary exchange creates value by channeling goods into the hands of people who value them most

41. What are the three basic questions faced by every economy? a. What, how, and for whom will goods be produced? b. When, where, and how much will be produced? c. Why, where, and when will goods be produced? d. How, how much, and why will goods be produced? _

What, how, and for whom will goods be produced?

6. Which of the following is part of the economic way of thinking? a. The accuracy of the assumptions is the best test of an economic theory. b. When an option becomes more expensive, people will be less likely to choose it. c. The value of a good can be determined objectively by measuring the amount of labor required for its production. d. All of the above.

When an option becomes more expensive, people will be less likely to choose it.

Which one of the following statements is most clearly inconsistent with the economic way of thinking? a. "If you give a person a fish, you feed him for a day; if you teach him to fish, you feed him for life." b. "If the government provides a good free to citizens, then the opportunity cost of the good is zero." c. "If you derive the same satisfaction from a hamburger as a chicken sandwich, it makes sense to have the cheaper alternative for lunch." d. "When it is cheaper to have someone else mow your lawn than to mow it yourself, hiring someone to do the job is consistent with economizing behavior." ____

"If the government provides a good free to citizens, then the opportunity cost of the good is zero."

14. A local restaurant offers an "all you can eat" Sunday brunch for $12. Susan eats four servings but leaves half of a fifth helping uneaten. Why? a. Her marginal value of a serving of brunch has fallen below $12. b. Her marginal value of a serving has fallen below $2.40 ($12 divided by 5 servings). c. Her marginal value of food has fallen to zero. d. The total value she places on brunch today exactly equals $12.

Her marginal value of food has fallen to zero.

__ 20. Which of the following best illustrates the fallacy of composition? a. If Mr. Johnson had more money, he could afford to buy more goods. b. If Ms. Dawes stood up at a basketball game, she could get a better view of the game; if everyone stood up at a basketball game, everyone could have a better view of the game. c. If the price of bread rose, consumers would buy less; if consumers bought less bread, the price of bread would rise. d. High housing prices cause people to buy less housing, but an increase in income might cause them to buy more housing.

If Ms. Dawes stood up at a basketball game, she could get a better view of the game; if everyone stood up at a basketball game, everyone could have a better view of the game.

_ 36. Which of the following most accurately indicates the implications of an economy's production possibilities curve? a. If all the resources of an economy are being used efficiently, more of one good can be produced only if less of another good is produced. b. If all the resources of an economy are being used efficiently, it is generally possible to produce more of one good without having to sacrifice the production of other goods. c. Over time, it is generally impossible for a country to expand its production of goods. d. An economy will automatically move toward a point that lies outside of the production possibilities curve unless proper government policy constrains production.

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

Which one of the following states a central element of the economic way of thinking? a. Scarce goods are priceless. b. Incentives matter--human choice is influenced in predictable ways by changes in personal costs and benefits. c. The realism of the assumptions is the best test of an economic theory. d. When deciding how to allocate time, the concept of opportunity cost is meaningless.

Incentives matter--human choice is influenced in predictable ways by changes in personal costs and benefits

_ 22. Which of the following is a guidepost to economic thinking? a. The value of a good can be objectively measured. b. Individuals should never make a decision without having complete information. c. Incentives matter. d. Goods are scarce for the poor but not for the rich.

Incentives matter.

____ 30. Which of the following most accurately states the function of middlemen? a. Middlemen add to the expense of buyers and sellers without providing any benefit. b. Our economy would work just as well without middlemen since they do not expand the availability of physical goods. c. Middlemen reduce the number of transactions since they increase the buyer's price and reduce the seller's net revenue. d. Middlemen create value by arranging trades and providing information to buyers and sellers.

Middlemen create value by arranging trades and providing information to buyers and sellers.

Kelly is an architect and she is trying to decide whether to hire Mike, a draftsman, to assist with her work. Kelly could hire Mike at $20 per hour but it would take him three times as long to complete a task as it takes Kelly. Kelly is able to earn $90 per hour and has more architectural jobs than she is able to handle. Which of the following is true? a. Kelly should not hire Mike because it would be faster for her to do the work herself. b. Kelly should do the drafting work herself because she has the lower opportunity cost. c. Mike should be hired at the $20 per hour wage rate. d. Mike should be hired, but only if he is paid more than $30 per hour.

Mike should be hired at the $20 per hour wage rate.

Which of the following is part of the economic way of thinking? a. Opportunity costs will always be incurred when scarce resources are used to produce a good. b. When the cost of an option increases, individuals will be less likely to choose it. c. In addition to their immediate direct effects, economic actions often generate secondary effects that are observable only after the passage of time. d. All of the above are part of the economic way of thinking

Opportunity costs will always be incurred when scarce resources are used to produce a good. When the cost of an option increases, individuals will be less likely to choose it In addition to their immediate direct effects, economic actions often generate secondary effects that are observable only after the passage of time.

24. Which of the following will most likely occur under a system of clearly defined and enforced private property rights? a. Resource owners will fail to conserve vital resources, even if they expect their supply to be highly limited in the future. b. Resource owners will ignore the wishes of others, including others who would like to use the resource that is privately owned. c. Resource owners will fail to consider the wishes of potential future buyers when they decide how to employ privately owned resources. d. Resource owners will gain by discovering and employing their resources in ways that are highly valued by others.

Resource owners will gain by discovering and employing their resources in ways that are highly valued by others.

_ 18. Senator DuMonde favors a government program that he believes will help save endangered species. Economic analysis indicates that a. because Senator DuMonde has good intentions, his new program will have the desired results. b. Senator DuMonde's new program could have unintended consequences that might result in an outcome different from what was intended. c. regardless of any secondary effects, costs should not be considered when designing environmental legislation. d. because Senator DuMonde's proposal is a government program, it will not have an opportunity cost.

Senator DuMonde's new program could have unintended consequences that might result in an outcome different from what was intended.

45. If Shawn can produce more donuts in one day than Sue can produce in one day, then a. Shawn has a comparative advantage in the production of donuts. b. Sue has a comparative advantage in the production of donuts. c. Shawn has an absolute advantage in the production of donuts. d. Shawn should produce donuts and Sue should spend her time on a different activity.

Shawn has an absolute advantage in the production of donuts.

17. Which of the following could be considered to be a secondary effect caused by making drugs such as cocaine illegal? a. The higher prices that result from making them illegal results in more property theft by users to afford the drugs. b. The usage of police and law enforcement resources to enforce drug laws leads to lower enforcement (and thus a higher amount) of other crimes. c. Without the ability to use the legal system to enforce contracts, violence often results when one party to a drug deal does not live up to their end of the bargain, thus the amount of violence increases by making drugs illegal. d. All of the above would be considered secondary effects of making drugs illegal. ___

The higher prices that result from making them illegal results in more property theft by users to afford the drugs. The usage of police and law enforcement resources to enforce drug laws leads to lower enforcement (and thus a higher amount) of other crimes. Without the ability to use the legal system to enforce contracts, violence often results when one party to a drug deal does not live up to their end of the bargain, thus the amount of violence increases by making drugs illegal.

____ 38. In Europe during the 14th century, the Black Plague killed 24 million people or close to 37 percent of the population. How would this affect the production possibilities curves for the countries of Europe at that time? a. The production possibilities curves for these countries would have shifted outward. b. The production possibilities curves for these countries would have shifted inward. c. The production possibilities curves for these countries would have been unaffected. d. This would have been illustrated by a movement along the production possibilities curves for these countries, but it would not have shifted them.

The production possibilities curves for these countries would have shifted inward.

10. "The resources now going into the War on Terrorism and into improved airport security would save more lives if they were invested in medical research." This statement most clearly reflects which of the following? a. The best test of an economic theory is its ability to predict. b. There is no such thing as a free lunch--the use of scarce resources always has an opportunity cost. c. selfishness; if people were not selfish, we could have more of everything. d. The value of goods can be determined objectively.

There is no such thing as a free lunch--the use of scarce resources always has an opportunity cost.

___ 42. Which of the following is not a basic question that each economy must answer? a. Which resources are scarce? b. For whom shall the goods be produced? c. How shall goods be produced? d. What goods shall be produced?

Which resources are scarce?

33. Because private owners are held responsible for damages their property causes to the property of others, private owners have a. a strong incentive to take steps to reduce the chance that they will harm the property of others. b. a strong incentive to use their property now rather than conserving it for the future. c. little incentive to take good care of the property. d. little incentive to consider the harm their property may do to the property of others.

a strong incentive to take steps to reduce the chance that they will harm the property of other

If scarcity were eliminated, a. all goods would be free. b. no one would have to make any choices. c. everyone could have all they want at no cost. d. all of the above are true.

all goods would be free. no one would have to make any choices. everyone could have all they want at no cost.

39. Other things constant, which of the following would you expect to increase the output growth rate of a country? a. an increase in the rate of taxation on personal income b. an increase in the rate of investment as a share of total output c. passage of regulations restricting international trade d. passage of regulations restricting domestic trade

an increase in the rate of investment as a share of total output

If a motorist is stranded in front of a pay phone and has only dollar bills, and he ends up buying a quarter from a passerby for $1, a. the stranded motorist must not understand that four quarters are worth $1. b. economic theory is unable to explain this transaction. c. both parties have gained from this exchange. d. the passerby was made better off and the motorist worse off.

both parties have gained from this exchange.

____ 44. A form of economic organization that relies primarily on private ownership of productive assets, freedom of exchange, and market prices to allocate goods and resources is often called a. national socialism. b. the welfare state. c. a corporate economy. d. capitalism.

capitalism.

43. Even countries that depend primarily on market forces to resolve the basic economic questions will usually rely on the collective decision-making process to a. determine the prices of goods and resources. b. allocate goods that are essential to life. c. determine the distribution of income among citizens. d. define and enforce private-property rights and designate the acceptable forms of competitive economic behavior.

define and enforce private-property rights and designate the acceptable forms of competitive economic behavior.

35. The reason that the production possibilities curve is usually a bow-shaped curve instead of a straight line is that a. it makes it easier to illustrate the concepts of scarcity and prices with a bow-shaped curve than it is with a straight line b. early economists began drawing them in this way and the convention has continued throughout the years c. output eventually reaches a maximum and then declines d. resources are not perfectly adaptable to the production of all goods

esources are not perfectly adaptable to the production of all goods

13. If a college enforces a new policy where anyone caught cheating is immediately expelled, the basic postulate of economics suggests that a. cheating will be completely eliminated. b. fewer students will attempt to cheat. c. the amount of cheating will be unaffected. d. any of the above is possible because student behavior is unpredictable.

fewer students will attempt to cheat

32. Richer economies often have more middlemen. Economic thinking indicates that such economies a. suffer losses from these activities. b. gain since the opportunity costs of arranging trades would be higher without middlemen. c. become progressively more wasteful, and middlemen are one sign of the waste. d. are unable to employ middlemen in any other way.

gain since the opportunity costs of arranging trades would be higher without middlemen.

23. Which of the following is a positive economic statement? a. The federal minimum wage should be raised to $6.50 per hour. b. The United States spends too much on national defense. c. Higher rates of investment lead to higher rates of economic growth. d. Economics is more interesting to study than history. ____

higher rates of investment lead to higher rates of economic growth.

15. A restaurant offers an "all you can eat" lunch buffet for $12. Jim has eaten three servings and is trying to decide whether or not to go back for a fourth. The economic way of thinking suggests that Jim should go back for the fourth serving if and only if a. his marginal benefit of the additional serving is greater than zero. b. his marginal benefit of the additional serving is at least $3. c. his marginal benefit of the additional serving is $12 or more. d. his total value from the meal exceeds $12. __

his marginal benefit of the additional serving is greater than zero

The fallacy of composition is the incorrect view that a. everything else is always held constant when a change occurs. b. a small change in an economic variable will have unrecognizable but significant consequences on the economy. c. when two events are associated, the one observed first must have caused the second. d. if something is true for an individual, then it must also be true for the group.

if something is true for an individual, then it must also be true for the group.

____ 27. Which of the following would be most likely to increase your opportunity cost of attending college? a. a recession in the economy that made finding a job more difficult b. receiving a very attractive offer to start a job today that would permit you to earn about 50 percent more than you expected to make after graduation c. the retirement of your favorite professor under whom you hoped to study during the next semester d. information indicating that salaries were declining and that there were very few openings for college graduates in your field

receiving a very attractive offer to start a job today that would permit you to earn about 50 percent more than you expected to make after graduation

4. Criteria for rationing goods and resources must be established because of a. the law of comparative advantage. b. the use of capitalism as a form of economic organization. c. the inability of politicians to develop efficient forms of economic organization. d. scarcity imposed by nature.

scarcity imposed by nature.

12. When economists say an individual displays economizing behavior, they simply mean that she is a. making a lot of money. b. buying only those products that are cheap and of low quality. c. learning how to run a business more effectively. d. seeking the lowest cost method to accomplish her objectives.

seeking the lowest cost method to accomplish her objectives.

For a college student who wishes to calculate the true costs of going to college, the costs of room and board a. should be counted in full, regardless of the costs of eating and sleeping elsewhere. b. should be counted only to the extent that they are more expensive at college than elsewhere. c. usually exceed the opportunity cost of going to college. d. plus the cost of tuition, equals the opportunity cost of going to college.

should be counted only to the extent that they are more expensive at college than elsewhere

21. "If Tom had twice as much money, he could consume twice as much. If everyone had twice as much money, they could consume twice as much." This quote illustrates a. the difference between positive and normative economics. b. the fallacy of composition. c. that association is not causation. d. the law of unintended consequences. ___

the fallacy of composition

29. If the Internet makes it easier for sellers to find buyers and makes it easier for buyers to learn about the products that are available for sale, we would expect that a. the volume of trade will decline. b. transaction costs will rise. c. the gains from trade will increase. d. buyers and sellers will be worse off.

the gains from trade will increase.

40. The economic principle that states that individuals or nations can gain by specializing in the production of goods that they produce cheaply and exchanging for other desired goods that they could only produce at a higher cost is a. the law of absolute advantage. b. the law of comparative advantage. c. the law of production possibilities. d. the exchange maximum principle.

the law of comparative advantage.

____ 26. Hutch Technology makes computer monitors, which sell for $500 each. What is the opportunity cost of producing ten monitors? a. $5,000 b. the other goods that could be produced with the resources that produce the ten monitors c. the profits that Hutch earns when it sells the ten monitors d. the profits that Hutch loses if it does not produce the monitors e. All of the above are correct.

the other goods that could be produced with the resources that produce the ten monitors

_ 34. Beginning in the early 1990s, private landowners in Zimbabwe have started fencing in large areas of land that contain black rhinos, which were on the verge of extinction. These private owners charge fees for a stay at the lodges on the property (eco-tourism) and also sell hunting safaris and photo safaris. As a result, a. the population of black rhinos has fallen substantially. b. the population of black rhinos has increased. c. many black rhinos are being poached. d. the incomes of residents in Zimbabwe has fallen substantially.

the population of black rhinos has increased.

7. The expression "There's no such thing as a free lunch" means a. if one person gains, someone else must lose. b. each person must pay for exactly what he or she receives. c. the use of resources to produce a good has an opportunity cost because of scarcity. d. you cannot have a free lunch at the expense of someone else.

the use of resources to produce a good has an opportunity cost because of scarcity.

When a good is scarce, a. this indicates that producers are withholding output so they can raise the price of the good. b. some method must be used to allocate the good among users. c. price is one way to ration the good. d. both b and c are correct. e. all of the above are correct.

this indicates that producers are withholding output so they can raise the price of the good. some method must be used to allocate the good among users. price is one way to ration the good.

Which of the following is a transaction cost? a. price of a ticket to a concert b. price of food eaten before a concert c. time spent standing in line to buy the ticket d. price of a T-shirt at the concert

time spent standing in line to buy the ticket

_ 28. In economics, transaction costs refer to the a. time, effort, and other resources needed to search out and negotiate an exchange. b. dollar cost or price of the item traded. c. cost an economy suffers when it allows specialization according to comparative advantage. d. amount by which the price of an item increases due to the presence of a middleman.

time, effort, and other resources needed to search out and negotiate an exchange

Which of the following best describes the implications of the law of comparative advantage? If each person sells goods for which he or she has the greatest comparative advantage in production and buys those for which his or her comparative advantage is least, the a. total output available to each person can be expanded by specialization and exchange. b. total output will fall. c. buyers of goods will gain at the expense of sellers. d. sellers of goods will gain at the expense of buyers.

total output available to each person can be expanded by specialization and exchange.

__ 16. In economics, secondary effects refer to the a. best alternative that must be forgone as the result of a choice. b. unintended consequences of a change that are not immediately identifiable but are felt only with time. c. immediate and visible intended consequences of a change. d. impact of the scarcity of resources on the scarcity of the goods that are produced with those resources.

unintended consequences of a change that are not immediately identifiable but are felt only with time.

25. Three basic decisions must be made by all economies. What are they? a. how much will be produced, when it will be produced, and how much it will cost b. what the price of each good will be, who will produce each good, and who will consume each good c. what will be produced, how goods will be produced, and for whom goods will be produced d. how the opportunity cost principle will be applied, if and how the law of comparative advantage will be utilized, and whether the production possibilities constraint will apply

what will be produced, how goods will be produced, and for whom goods will be produced

_ 37. A production possibilities curve indicates that when resources are being used efficiently, a. you can only produce more of one good only if you lower its price. b. you can only produce more of one good only if you produce more of another good. c. you can only produce more of one good only if you produce less of another good. d. it is impossible to expand the total output of goods over time.

you can only produce more of one good only if you produce less of another good.

____ 46. Refer to Figure 2-9. The opportunity cost of obtaining 10 additional toasters by moving from point B to point A is a. 10 toothbrushes. b. 20 toothbrushes. c. 30 toothbrushes. d. zero, since the economy has the additional resources to produce 10 additional toasters.

zero, since the economy has the additional resources to produce 10 additional toasters.