CH 02

Fill in the blanks. In a simple circular-flow model, there are flows of . factors of production; goods and services funds received from the sale of factors of production; spending on final goods and services Both (a) and (b) are correct.\ None of the above. Actually, there are no flows in the circular flow of income.

Both (a) and (b) are correct.\

Consider the table below. Which country has a comparative advantage in the production of each good? FOOD CLOTHING COUNTRY A 6 3 COUNTRY B 1 2

Country A has a comparative advantage in the production of food; Country B has a comparative advantage in the production of clothing

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? FOOD CLOTHING COUNTRY A 6 3 COUNTRY B 1 2

Country A has an absolute advantage in the production of each good.

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.

which arrow shows the flow of factors of production?

From factor markets to firms

In the circular-flow diagram, which arrow shows the flow of spending by households?

From households to product markets

According to Adam Smith, which of the following is true? Markets work because producers, aided by government, ensure that neither too many nor too few goods are produced Market prices can come to reflect the prices desired by all consumers. Individuals usually act in a rational, self-interested way. All of the above

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

Which of the following would create economic growth; that is, shift the production possibilities frontier outward? an increase in the available labor an increase in technology that affects the production of both goods an increase in the available natural resources all of the above

all of the above

What is the role of an entrepreneur? to operate a business that produces a good or service. to bring together the factors of production—labor, capital, and natural resources. to take risks. all of the above

all of the above.

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 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

In the circular-flow diagram, which arrow shows the flow of income paid to the factors of production?

from firms to factor markets

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.

Consider the table below. What is country A's opportunity cost of producing 1 unit of clothing? Food Clothing Country A 6 3 Country B 1 2

2 units of food

Which of the following statements is most consistent with positive economic analysis? The United States would be better off being self-sufficient, so it wouldn't need to rely on other nations for certain goods. 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. The United States should produce at home the goods that it now imports—that way the nation can generate additional jobs here at home. The United States should establish trade with friendly countries and avoid trade with its enemies.

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.

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

The country is operating on its production possibilities frontier.

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

has a lower opportunity cost in the production of that good.

Which of the following comprises the two key groups of participants in the circular flow of income? product markets and factor markets government and the financial sector households and firms buyers and sellers

households and firms

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

increased economic activity

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

opportunity cost

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

product markets

What are patents and copyrights designed to do?

protect intellectual property rights

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.

A production possibilities frontier will be linear instead of bowed out if

the opportunity cost of producing more of either of the two goods is constant.

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