Microeconomics - Chapter 2 - Trade-off's, Comparative Advantage, and the Market System
37. In the circular-flow diagram above, which arrow shows the flow of spending by households? a. A b. B c. C d. D
A
47. What are copyrights designed to do? a. prevent entrepreneurs from earning excessive profits b. eliminate unnecessary duplication whenever it arises c. protect intellectual property rights d. all of the above
C
Entrepreneur
Someone who operates a business, bringing together the factors of production—labor, capital, and natural resources—to produce goods and services.
18. Refer to the graphs below. Which graph represents the concept of economic growth? a. the graph on the left b. the graph on the right c. both graphs d. neither graph
A
38. In the circular-flow diagram above, which arrow shows the flow of factors of production? a. A b. B c. C d. D
C
39. In the circular-flow diagram above, which two arrows show the flow of funds? a. A and B b. B and C c. B and D d. A and D
D
True or False: An individual who has comparative advantage in producing a good must also have absolute advantage in producing that good.
F
Opportunity cost
The highest-valued alternative that must be given up to engage in an activity.
Factors of production
The inputs used to make goods and services.
11. Refer to the graph below. As you move from point A to point B and then to point C on this graph, what happens to the marginal opportunity cost? a. It increases. b. It decreases. c. It remains constant. d. It equals zero.
A
4. Refer to the graph below. Which of the following combinations is inefficient? a. combination G b. combination F c. combinations A or E d. both F and G
B
True or False: If property rights are not enforced by the government, then more goods and services will be produced in free markets.
F
15. If the opportunity cost of producing one good is the same regardless of the quantity that the good is produced, then a. the production possibility frontier is linear. b. the production possibility frontier is bowed out. c. the production possibility frontier does not exist. d. the production possibility frontier has a positive slope
A
16. 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. a. smaller b. greater c. proportional d. more instant
A
27. The table below shows the quantity of two goods that a worker in Country A and a worker in Country B can produce per day. Which country has an absolute advantage in the production of each good? a. Country A has an absolute advantage in the production of each good. b. Country B has an absolute advantage in the production of each good. c. Both countries have an absolute advantage in the production of each good. d. Neither country has an absolute advantage in the production of each good
A
29. Consider the table below. What is country A's opportunity cost of producing 1 unit of clothing? a. 2 units of food b. 1/2 a unit of food c. 6 units of food d. 2 units of clothing
A
50. If a market system functions well, which of the following is necessary for the enforcement of contracts and property rights? a. powerful political connections b. an independent court system c. action by government to prevent the exercise of certain property rights d. all of the above
B
10. Refer to the graph below. Which of the following combinations of pies and cakes is unattainable given existing resources? a. two cakes and six pies b. one cake and seven pies c. zero cakes and ten pies d. four cakes and seven pies
D
3. Could a production possibilities frontier ever slope upward?
No, production possibilities frontiers will always slope downward. Resources used in production are scarce, and increasing production of one good will always require a decrease in the production of another good along a production possibilities frontier. This means that production possibilities frontiers are always negative sloped, or downward sloping.
Absolute advantage
The ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources.
Economic growth
The ability of the economy to increase the production of goods and services.
Trade
The act of buying and selling.
Property rights
The rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it.
True or False: A nation with an absolute advantage in the production of two goods will usually have a comparative advantage in only one of the goods.
T
True or False: A production possibilities frontier that is bowed outward illustrates increasing marginal opportunity costs.
T
2. What happens if a country produces a combination of goods that uses all of the resources available in the economy? a. The country is operating on its production possibilities frontier. b. The country is maximizing its opportunity cost. c. The country has eliminated scarcity. d. All of the above occur if a country uses all available resources.
A
3. Refer to the graph below. Which of the following combinations is unattainable with the current resources available in this economy? a. combination G b. combination F c. combinations A or E d. None of the combinations above can be attained with current resources.
A
14. Refer to the graph below. What does the term "increasing marginal opportunity cost" mean in this graph? a. There is a higher opportunity cost of producing either aircraft carriers or automobiles, so long as the quantity produced of that good is decreasing. b. There is a higher opportunity cost of producing either aircraft carriers or automobiles, so long as the quantity produced of that good is increasing. c. Increasing the production of aircraft carriers results in higher automobile production costs, such as the costs of labor and capital to build automobiles. d. Increasing the production of either aircraft carriers or automobiles creates more opportunities in the economy
B
17. Refer to the graphs below. Which graph better represents an improvement only in the technology used to make automobiles? a. the graph on the left b. the graph on the right c. both graphs d. neither graph
B
36. In the circular-flow diagram above, which arrow shows the flow of goods and services? a. A b. B c. C d. D
B
5. In the explanation of Adam Smith's argument in favor of replacing the guild system with a market system, the textbook states that "a key to understanding Smith's argument is the assumption that individuals usually act in a rational, self-interested way." Did Smith believe that the success of a market system requires that people act selfishly?
Smith did not believe that self-interest was the sole motive nor did he believe that self-interest was synonymous with selfishness. People are motivated by a broad range of factors, but when they buy and sell in markets, monetary rewards usually provide the most important motivation.
2. Comment briefly on the following statement: "The circular-flow diagram implies that households' spending on goods and services in product markets equals the income they earn from providing factors of production in factor markets."
This is true. In the circular-flow diagram, households' spending for the goods and services they purchase is linked to the income they earn from providing factors of production. For household members to earn income to buy the goods and services they want, they must first sell their resource services to firms who purchase these services in factor markets. The market value of factor services determines the income resource owners receive.
25. Refer to the graphs below. Each graph represents one country. Which country has a comparative advantage in the production of shirts? a. Country A b. Country B c. neither country d. both countries
B
30. Refer to the graphs below. If you have a comparative advantage in the production of apples, what point would best represent your production with trade? a. A b. A' c. C d. D
C
43. 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 d. all of the above
D
True or False: In his book An Inquiry into the Nature and Causes of the Wealth of Nations, Adam Smith argued that a guild system was the most efficient way for a nation to coordinate the decisions of buyers and sellers.
F
True or False: Opportunity cost refers to the all of the alternatives that must be given up to engage in an activity.
F
True or False: Technological advances always increase the production of all goods and services equally.
F
True or False: Because the governments of the United States, Canada, and Western European countries impose few restrictions on economic activity, the economies of these countries approximate free market economies.
T
Factor markets
A market for the factors of production, such as labor, capital, natural resources, and entrepreneurial ability
Free market
A market with few government restrictions on how a good or service can be produced or sold or on how a factor of production can be employed.
40. According to Adam Smith, which of the following is true? a. Markets work because producers, aided by government, ensure that neither too many nor too few goods are produced. b. Market prices can come to reflect the prices desired by all consumers. c. Individuals usually act in a rational, self-interested way. d. A guild system is the best way for coordinating the activities of buyers and sellers.
C
42. According to Adam Smith, which of the following is necessary for the proper functioning of the market system? a. For markets to work, people should take into account how their decisions affect society as a whole. b. For markets to work, government should help citizens make the right decisions. c. For markets to work, people must be free to pursue their self-interest. d. For markets to work, people and government need to coordinate their decisions.
C
7. Refer to the graph below. What is the opportunity cost of moving from point B to point C? a. 200 SUVs b. 400 SUVs c. 200 hybrids d. 400 hybrids
C
9. Refer to the graph below. The graph is a representation of the data in Solved Problem 2.1. In this problem, what is the opportunity cost of producing five cakes? a. zero cakes b. zero pies c. ten pies d. There is insufficient information to answer the question.
C
4. Provide an example showing that absolute advantage in an activity does not necessarily imply comparative advantage in an activity.
Consider the following example: Student One can read 10 pages of psychology per day or 8 pages of economics per day, while Student Two can read 5 pages of psychology per day or 5 pages of economics per day. Student One has an absolute advantage in reading both psychology and economics; however, Student One's cost of reading 1 page of economics is 1.25 pages of psychology, and Student Two's cost of reading 1 page of economics is only 1 page of psychology
12. Refer to the graph below. What is the opportunity cost of producing 400 aircraft carriers? a. 200 automobiles b. 50 aircraft carriers c. 200 automobiles d. 600 automobiles
D
13. Refer to the graph below. What is the opportunity cost of moving from point B to point C? a. 200 automobiles b. 400 automobiles c. 50 aircraft carriers d. 150 aircraft carriers
D
True or False: Households are suppliers of the factors of production that are used by firms to produce goods and services.
T
True or False: It is possible to have an absolute advantage in producing a good without having a comparative advantage.
T
20. Refer to the graphs below. Which of the following could have caused the outward shift of the curve in the graph on the left side? a. an increase in technology that affects the production of both aircraft carriers and automobiles b. technological change that affects only the aircraft carrier industry c. unemployment in the economy d. a change in the cost of producing automobiles
A
23. Absolute advantage is the ability of an individual, firm, or country to a. produce more of a good or service than competitors using the same amount of resources. b. produce a good or service at a lower opportunity cost than other producers. c. consume more goods or services than others at lower costs. d. reach a higher production possibilities frontier by lowering opportunity costs.
A
26. Refer to the graphs below. Each graph represents one country. Which country should specialize in the production of computer chips? a. Country A b. Country B c. Neither country; they both should produce some computer chips and some shirts. d. Both countries should specialize in the production of computer chips.
A
32. Which of the following refers to markets where goods such as computers or services such as medical treatment are offered? a. product markets b. essential markets c. factor markets d. competitive markets
A
41. According to Adam Smith, which of the following is the instrument the invisible hand uses to direct economic activity? a. price b. government regulation c. financial markets d. cost
A
45. Which of the following is critical to the success of a market system? a. to allow individuals or firms to have exclusive use of their property b. to prevent individuals from buying or selling their property depending on the circumstances c. Both a. and b. are critical to the success of a market system. d. to allow the government to determine the optimal use of private property
A
48. What is the outcome of enforcing contracts and property rights in a market system? a. increased economic activity b. decreased economic activity c. no effect on economic activity d. an unpredictable but definite effect on economic activity
A
49. In the United States, property rights a. are guaranteed by two amendments to the U.S. Constitution. b. are guaranteed by some state governments but not other state governments. c. are prohibited by the federal government. d. exist in markets but are not enforced by the government
A
6. Refer to the graph below. How many hybrids are produced at the point where BMW produces 800 SUVs? a. 0 b. any amount up to 800 c. exactly 800 d. 400
A
Production possibilities frontier (PPF)
A curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology.
Market
A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade.
Product markets
A market for goods—such as computers—and services—such as medical treatment.
Circular-flow diagram
A model that illustrates how participants in markets are linked.
Scarcity
A situation in which unlimited wants exceed the limited resources available to fulfill those wants.
22. Which of the following statements is most consistent with the principle about the basis for international trade? a. The United States would be better off being self-sufficient because it has an absolute advantage in producing most goods. b. 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. c. The United States would be better off by producing at home the goods that it now imports—that way the nation can generate additional jobs here at home. d. The United States can never have an absolute advantage in producing every good it consumes, so it would be better off if it imported goods that it does not have an absolute advantage
B
44. 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? a. the government b. entrepreneurs c. lobbyists d. politicians
B
46. Generally speaking, for a market system to work, individuals must a. be very cautious in their approach to saving and investment. b. take risks and act in rational, self-interested ways. c. be able to evaluate and understand all available options. d. consult people who have experience.
B
5. Refer to the graph below. Which of the following best represents the situation in which BMW must face a trade-off between producing SUVs and producing hybrids? a. any point on the graph represents that trade-off b. moving from B to C c. moving from F to B d. moving from C to G
B
1. What is the name given to the highest-valued alternative that must be given up to engage in any activity? a. scarcity b. the production possibilities frontier c. opportunity cost d. a trade-off
C
19. Refer to the graphs below. Which graph best represents the concept of economic growth? a. the graph on the left b. the graph on the right c. both graphs d. neither graph
C
24. If a country has a comparative advantage in the production of a good, then that country a. also has an absolute advantage in producing that good. b. should allow another country to specialize in the production of that good. c. has a lower opportunity cost in the production of that good. d. All of the above are true.
C
28. Consider the table below. Which country has a comparative advantage in the production of each good? a. Country A has a comparative advantage in the production of both goods. b. Country B has a comparative advantage in the production of both goods. c. Country A has a comparative advantage in the production of food; Country B has a comparative advantage in the production of clothing. d. Country B has a comparative advantage in the production of food; Country A has a comparative advantage in the production of clothing.
C
33. In which markets are factors of production, such as labor, capital, natural resources, and entrepreneurial ability traded? a. product markets b. essential markets c. factor markets d. competitive markets
C
34. Which of the following comprises the two key groups of participants in the circular flow of income? a. domestic residents and foreign residents b. government and financial institutions c. households and firms d. savers and borrowers
C
35. Fill in the blanks. In a simple circular-flow model, there are flows of _________ and flows of _________. a. factors of production; goods and services b. funds received from the sale of factors of production; spending on final goods and services c. Both (a) and (b) are correct. d. None of the above. Actually, there are no flows in the circular flow of income.
C
1. Does the story about Apple's production of the iPad on page 55 in the textbook imply that people must cooperate with one another in order for specialization in production and trade to occur? Explain.
Cooperation is essential for specialization and trade, but it is an impersonal cooperation. It is not necessary for business owners, workers, suppliers and consumers to know or see one another. In fact, many of these individuals can be located thousands of miles away from each other, live in different countries, and speak different languages. Their cooperation is due to their self-interest, not their regard for one another's welfare.
21. 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 d. all of the above
D
31. Refer to the graphs below. What is point B' on your neighbor's PPF curve? a. Point B' is your neighbor's production before trade. b. Point B' is your neighbor's consumption before trade. c. Point B' is your neighbor's production after trade. d. Point B' is your neighbor's consumption after trade.
D
8. Refer to the graph below. The graph shows the data from Solved Problem 2.1. What is the opportunity cost of switching from Choice D to Choice E? a. two pies b. eight pies c. two cakes d. one cake
D
True or False: The Bavarian Motor Works Company has always produced its automobiles in Germany to supervise production and employ German workers, who have high levels of technical skills.
F
True or False: The Congressional Budget Office has estimated that annual federal government spending on Medicare should remain at a constant level through 2020.
F
True or False: The circular-flow diagram is used to explain why the opportunity cost of increasing the production of one good is the decrease in production of another good.
F
True or False: The marginal opportunity cost along a linear (straight-line) production possibilities frontier is constant.
T
True or False: The story about Apple's production of the iPad shows how production requires the coordinated activities of many people, spread around the world.
T
Comparative advantage
The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors.
