ECON 202

Test Bank: I Topic: Economic Systems

The term "laissez-faire" suggests that

land and other natural resources should be privately owned, but capitalshould be publiclyowned.

land and other natural resources should be publiclyowned, but capital should be privately owned.

C. government should not interfere with the operation of the economy.

D. government action is absolutely necessary if the economy is to achieve full employment and full production.

AACSB: AnalyticalThinking Accessibility: KeyboardNavigation

Blooms: Analyze Difficulty: 03 Hard

LearningObjective: 02-01 Differentiate between laissez-faire capitalism, the command system, and the marketsystem.

Test Bank: I Topic: Economic Systems

Economic systems differ according to which two main characteristics?

who owns the factors of production and the methods used to coordinate economic activity

the technology used in production and the quantity and quality of natural resources

how goods are produced and who gets them

the political system in place and the degree of scarcity facing the economy

AACSB: AnalyticalThinking Accessibility: Keyboard Navigation

Blooms:Analyze

Difficulty: 03 Hard LearningObjective: 02-01 Differentiate between laissez-faire capitalism, the command system, and the marketsystem.

Test Bank: I Topic: EconomicSystems

Command systems are also known as

market systems.

pure capitalism.

laissez-faire capitalism.

D. communism.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation

Blooms:Analyze

Difficulty: 03 Hard LearningObjective: 02-01 Differentiate between laissez-faire capitalism, the command system, and the marketsystem.

Test Bank: I Topic: Economic Systems

A fundamental difference between the commandsystem and laissez-faire capitalism is that, in command systems,

the division of output is decidedby central planningrather than by individuals operating freely throughmarkets.

all economic decisions are made by the government, whereas there is no government in laissez-faire capitalism.

scarcity does not exist, whereas it does in laissez-faire capitalism.

money is not used, whereas it is in laissez-faire capitalism.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation

Blooms: Analyze Difficulty: 03 Hard

LearningObjective: 02-01 Differentiate between laissez-faire capitalism, the command system, and the marketsystem.

Test Bank: I Topic: EconomicSystems

Which of the following is not a typical characteristic of a market system?

private property

freedom of enterprise

C. government ownership of most propertyresources

D. competition in product and resourcemarkets

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Blooms: Remember Difficulty: 01 Easy

LearningObjective: 02-02 List the main characteristics of the market system.

Test Bank: I Topic: Characteristics of the Market System

Which of the following is afundamental characteristic of the market system?

property rights

central planning by government

unselfish behavior

government-set wages and prices

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Blooms: Remember Difficulty: 01 Easy

Learning Objective: 02-02 List the main characteristics of the market system.

Test Bank: I Topic: Characteristics of the Market System

Property rights are important because they

ensure anequal distribution of income.

B. encourage cooperation by improvingthe chances of mutuallyagreeable transactions.

guarantee that any exchangewill make all parties better off than prior to the exchange.

allow the government to controlhow resources are allocated.

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Blooms: Remember Difficulty: 01 Easy

Learning Objective: 02-02 List the main characteristics of the market system.

Test Bank: I Topic: Characteristics of the Market System

Private property

discourages cooperationbecause people don't want to part with what they own.

discourages innovation, as people are often afraid to risk losingtheir own property.

C. encourages owners to maintain or improvetheir property so as to preserve or enhance value.

D. does everythingindicated by the other answers.

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Blooms: Remember Difficulty: 01 Easy

Learning Objective: 02-02 List the main characteristics of the market system.

Test Bank: I Topic: Characteristics of the Market System

Copyrights and trademarks are examples of

capital goods.

human capital.

C. property rights.

D. public goods.

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Blooms: Remember Difficulty: 01 Easy

LearningObjective: 02-02 List the main characteristics of the market system.

Test Bank: I Topic: Characteristics of the Market System

Freedom of enterprise

is a characteristic that is common to most economicsystems.

in a marketsystem means that entrepreneurs can obtain and use economicresources withoutany legal restraint.

C. allows businesses, within broad limits,to choose what goods to produce.

D. refersprimarily to the right of consumers to purchase whatthey want.

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Blooms: Remember Difficulty: 01 Easy

LearningObjective: 02-02 List the main characteristics of the market system.

Test Bank: I Topic: Characteristics of the Market System

The main mechanism that regulates the market system is

self-interest.

private property.

C. competition.

D. freedom of enterprise and choice.

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Blooms: Remember Difficulty: 01 Easy

Learning Objective: 02-02 List the main characteristics of the market system.

Test Bank: I Topic: Characteristics of the Market System

Broadly defined, competition involves

private property and freedom of expression.

B. independently acting buyers and sellersand freedom to enter or leave markets.

increasing opportunity costs and diminishing marginalutility.

capital goods and division of labor.

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Blooms:Remember

Difficulty: 01 Easy Learning Objective:02-02 List the main characteristics of the market system.

Test Bank: I Topic: Characteristics of the Market System

Competition means that

sellers can manipulate market priceby causing productscarcities.

B. there are independently acting buyers and sellers in each market.

a product can be purchased at a number of different prices.

there is more than one seller in a market.

AACSB: Knowledge ApplicationAccessibility: Keyboard Navigation

Blooms: Remember Difficulty: 01 Easy

LearningObjective: 02-02 List the main characteristics of the market system.

Test Bank: I Topic: Characteristics of the Market System

The division of labor means that

labor markets are geographically segmented.

unskilled workers outnumber skilled workers.

C. workers specialize in various production tasks.

D. each worker performs a large number of tasks.

AACSB: Knowledge ApplicationAccessibility: Keyboard Navigation

Blooms: Remember Difficulty: 01 Easy

LearningObjective: 02-02 List the main characteristics of the market system.

Test Bank: I Topic: Characteristics of the Market System

Specialization in production is importantprimarily because it

results in greatertotal output.

allows societytoavoid the coincidence-of-wants problem.

allows society to trade by barter.

allows society to have fewer capitalgoods.

Chapter 01 Limits, Alternatives, and Choices: ANSWER KEY

Multiple Choice Questions 1. For economists, the word "utility" means: A. versatility and flexibility. B. rationality. C. pleasure or satisfaction. D. purposefulness.

2. In economics, the pleasure, happiness, or satisfaction received from a product is called: A. marginal cost. B. rational outcome. C. status fulfillment. D. utility.

3. When economists say that people act rationally in their self interest, they mean that individuals: A. look for and pursue opportunities to increase their utility. B. generally disregard the interests of others. C. are mainly creatures of habit. D. are usually impulsive and unpredictable.

4. According to economists, economic self-interest: A. is a reality that underlies economic behavior. B. has the same meaning as selfishness. C. is more characteristic of men than of women. D. is usually self-defeating.

5. Joe sold gold coins for $1000 that he bought a year ago for $1000. He says, "At least I didn't lose any money on my financial investment." His economist friend points out that in effect he did lose money, because he could have received a 3 percent return on the $1000 if he had bought a bank certificate of deposit instead of the coins. The economist's analysis in this case incorporates the idea of: A. opportunity costs. B. marginal benefits that exceed marginal costs. C. imperfect information. D. normative economics.

6. A person should consume more of something when its marginal: A. benefit exceeds its marginal cost. B. cost exceeds its marginal benefit. C. cost equals its marginal benefit. D. benefit is still positive.

7. Economics may best be defined as the: A. interaction between macro and micro considerations. B. social science concerned with how individuals, institutions, and society make optimal choices under conditions of scarcity. C. empirical testing of value judgments through the use of logic. D. use of policy to refute facts and hypotheses.

8. The study of economics is primarily concerned with: A. keeping private businesses from losing money. B. demonstrating that capitalistic economies are superior to socialistic economies. C. choices that are made in seeking the best use of resources. D. determining the most equitable distribution of society's output.

9. The economic perspective entails: A. irrational behavior by individuals and institutions. B. a comparison of marginal benefits and marginal costs in decision making. C. short-term but not long-term thinking. D. rejection of the scientific method.

10. Purposeful behavior suggests that: A. everyone will make identical choices. B. resource availability exceeds economic wants. C. individuals may make different choices because of different desired outcomes. D. an individual's economic goals cannot involve tradeoffs.

11. Purposeful behavior means that: A. people are selfish in their decision-making. B. people weigh costs and benefits to make decisions. C. people are immune from emotions affecting their decisions. D. decision-makers do not make mistakes when weighing costs and benefits.

12. Economics involves marginal analysis because: A. most decisions involve changes from the present situation. B. marginal benefits always exceed marginal costs. C. marginal costs always exceed marginal benefits. D. much economic behavior is irrational.

13. You should decide to go to a movie: A. if the marginal cost of the movie exceeds its marginal benefit. B. if the marginal benefit of the movie exceeds its marginal cost. C. if your income will allow you to buy a ticket. D. because movies are enjoyable.

14. Marginal costs exist because: A. the decision to engage in one activity means forgoing some other activity. B. wants are scarce relative to resources. C. households and businesses make rational decisions. D. most decisions do not involve sacrifices or tradeoffs.

15. The assertion that "There is no free lunch" means that: A. there are always tradeoffs between economic goals. B. all production involves the use of scarce resources and thus the sacrifice of alternative goods. C. marginal analysis is not used in economic reasoning. D. choices need not be made if behavior is rational.

16. Consumers spend their incomes to get the maximum benefit or satisfaction from the goods and services they purchase. This is a reflection of: A. resource scarcity and the necessity of choice. B. purposeful behavior. C. marginal costs that exceed marginal benefits. D. the tradeoff problem that exists between competing goals.

17. If someone produced too much of a good, this would suggest that: A. rational choice cannot be applied to many economic decisions. B. the good was produced to the point where its marginal cost exceeded its marginal benefit. C. certain goods and services such as education and health care are inherently desirable and should be produced regardless of costs and benefits. D. the good was produced to the point where its marginal benefit exceeded its marginal cost.

18. Even though local newspapers are very inexpensive, people rarely buy more than one of them each day. This fact: A. is an example of irrational behavior. B. implies that reading should be taught through phonics rather than the whole language method. C. contradicts the economic perspective. D. implies that, for most people, the marginal benefit of reading a second newspaper is less than the marginal cost.

19. In deciding whether to study for an economics quiz or go to a movie, one is confronted by the idea(s) of: A. scarcity and opportunity costs. B. money and real capital. C. complementary economic goals. D. full production.

20. Which one of the following expressions best states the idea of opportunity cost? A. "A penny saved is a penny earned." B. "He who hesitates is lost." C. "There is no such thing as a free lunch." D. "All that glitters is not gold."

21. Suppose that a university decides to spend $1 million to upgrade personal computers and scientific equipment for faculty rather than spend $1 million to expand parking for students. This example illustrates: A. distorted priorities. B. opportunity costs. C. increasing opportunity costs. D. productive efficiency.

22. Which of the following most closely relates to the idea of opportunity costs? A. tradeoffs. B. economic growth. C. technological change. D. capitalism.

23. Economists contend that most economic decisions are: A. random B. chaotic C. spontaneous D. purposeful

24. Alex sees that his neighbors' lawns all need mowing. He offers to provide the service in exchange for a wage of $20 per hour. Some neighbors accept Alex's offer and others refuse. Economists would describe Alex's behavior as: A. rational self-interest, because he attempting to increase his own income by identifying and satisfying someone else's wants. B. greedy, because he is asking for a high wage. C. selfish, because he is asking for a wage that is higher than others might charge. D. irrational, because some neighbors refused his offer.

25. Kara was out jogging and despite being tired, decided to run one more mile. Based on her actions, economists would conclude that Kara: A. must be an avid runner. B. decided that the marginal benefit of running one more mile would outweigh the cost of the additional mile. C. decided that the marginal cost of running one more mile would outweigh the benefit of the additional mile. D. was not very tired, so the marginal cost of the extra mile was very low.

26. Economic theories: A. are useless because they are not based on laboratory experimentation. B. that are true for individual economic units are never true for the economy as a whole. C. are generalizations based on a careful observation of facts. D. are abstractions and therefore of no application to real situations.

27. In constructing models, economists: A. make simplifying assumptions. B. include all available information. C. must use mathematical equations. D. attempt to duplicate the real world.

28. The Latin term "ceteris paribus" means: A. that if event A precedes event B, A has caused B. B. that economics deals with facts, not values. C. other things equal. D. prosperity inevitably follows recession.

29. The basic purpose of the other-things-equal assumption is to: A. allow one to reason about the relationship between variables X and Y without the intrusion of variable Z. B. allow one to focus upon micro variables by ignoring macro variables. C. allow one to focus upon macro variables by ignoring micro variables. D. determine whether X causes Y or vice versa.

30. Suppose an economist says that "Other things equal, the lower the price of bananas, the greater the amount of bananas purchased." This statement indicates that: A. the quantity of bananas purchased determines the price of bananas. B. all factors other than the price of bananas (for example, consumer tastes and incomes) are assumed to be constant. C. economists can conduct controlled laboratory experiments. D. one cannot generalize about the relationship between the price of bananas and the quantity purchased.

31. The term "other things equal" means that: A. the associated statement is normative. B. many variables affect the variable under consideration. C. a number of relevant variables are assumed to be constant. D. when variable X increases so does related variable Y.

32. Macroeconomics approaches the study of economics from the viewpoint of: A. the entire economy. B. governmental units. C. the operation of specific product and resource markets. D. individual firms.

33. Which of the following is associated with macroeconomics? A. an examination of the incomes of Harvard Business School graduates B. an empirical investigation of the general price level and unemployment rates since 1990 C. a study of the trend of pecan prices since the Second World War D. a case study of pricing and production in the textbook industry

34. The problems of aggregate inflation and unemployment are: A. major topics of macroeconomics. B. not relevant to the U.S. economy. C. major topics of microeconomics. D. peculiar to command economies.

35. Which of the following statements pertains to macroeconomics? A. Because the minimum wage was raised, Mrs. Olsen decided to enter the labor force. B. A decline in the price of soybeans caused farmer Wanek to plant more land in wheat. C. National income grew by 2.7 percent last year. D. The Pumpkin Center State Bank increased its interest rate on consumer loans by 1 percentage point.

36. Macroeconomics can best be described as the: A. analysis of how a consumer tries to spend income. B. study of the large aggregates of the economy or the economy as a whole. C. analysis of how firms attempt to maximize their profits. D. study of how supply and demand determine prices in individual markets.

37. Microeconomics: A. is the basis for the "after this, therefore because of this" fallacy. B. is not concerned with details, but only with the overall big picture of the economy. C. is concerned with individual economic units and specific markets. D. describes the aggregate flows of output and income.

38. Which of the following is a microeconomic statement? A. The real domestic output increased by 2.5 percent last year. B. Unemployment was 6.8 percent of the labor force last year. C. The price of personal computers declined last year. D. The general price level increased by 4 percent last year.

39. Which of the following statements is true? A. Microeconomics focuses on specific decision-making units of the economy; macroeconomics examines the economy as a whole. B. Macroeconomics focuses on specific decision-making units of the economy; microeconomics examines the economy as a whole. C. Every topic in economics is either a microeconomic or a macroeconomic issue; a topic cannot be both. D. Topics in microeconomics have public policy implications; topics in macroeconomics do not.

40. A normative statement is one that: A. is based on the law of averages. B. applies only to microeconomics. C. applies only to macroeconomics. D. is based on value judgments.

41. A positive statement is one which is: A. derived by induction. B. derived by deduction. C. subjective and is based on a value judgment. D. objective and is based on facts.

42. Which of the following is a positive statement? A. The humidity is too high today. B. It is too hot to jog today. C. The temperature is 92 degrees today. D. Summer evenings are nice when it cools off.

43. Normative statements are concerned primarily with: A. facts and theories. B. what ought to be. C. what is. D. rational choice involving costs and benefits.

44. A positive statement is concerned primarily with: A. some goal that is desirable to society. B. what should be. C. what is. D. the formulation of economic policy.

45. Ben says that "An increase in the tax on beer will raise its price." Holly argues that "Taxes should be increased on beer because college students drink too much." We can conclude that: A. Ben's statement is normative, but Holly's is positive. B. Holly's statement is normative, but Ben's is positive. C. Both statements are normative. D. Both statements are positive.

46. The economizing problem is: A. the need to make choices because economic wants exceed economic means. B. how to distribute resources equally amongst all members of society. C. that people's means often exceed their wants. D. that people do not know how to rationally allocate resources.

47. The economizing problem is one of deciding how to make the best use of: A. virtually unlimited resources to satisfy virtually unlimited wants. B. limited resources to satisfy virtually unlimited wants. C. unlimited resources to satisfy limited wants. D. limited resources to satisfy limited wants.

48. The scarcity problem: A. persists only because countries have failed to achieve continuous full employment. B. persists because economic wants exceed available productive resources. C. has been solved in all industrialized nations. D. has been eliminated in affluent societies such as the United States and Canada.

49. The alternative combinations of two goods which a consumer can purchase with a given money income is shown by: A. a production possibilities curve. B. a demand curve. C. consumer expenditure line. D. a budget line.

50. The budget line shows: A. the amount of product A that a consumer is willing to give up to obtain one more unit of product B. B. all possible combinations of two goods that can be purchased, given money income and the prices of the goods. C. the minimum amount of two goods that a consumer can purchase with a given money income. D. all possible combinations of two goods that yield the same level of utility to the consumer.

51. Refer to the budget line shown in the diagram above. If the consumer's money income is $20, the: A. prices of C and D cannot be determined. B. price of C is $2 and the price of D is $4. C. consumer can obtain a combination of 5 units of both C and D. D. price of C is $4 and the price of D is $2.

52. Refer to the budget line shown in the diagram above. If the consumer's money income is $20, which of the following combinations of goods is unattainable? A. 4 units of C, and 6 units of D. B. 5 units of C, and no units of D. C. 1 unit of C, and 8 units of D. D. 2 units of C, and 6 units of D.

53. Refer to the budget line shown in the diagram above. The absolute value of the slope of the budget line is: A. MUC/MUD. B. one-half. C. PD/PC. D. PC/PD.

54. In moving along a given budget line: A. the prices of both products and money income are assumed to be constant. B. each point on the line will be equally satisfactory to consumers. C. money income varies, but the prices of the two goods are constant. D. the prices of both products are assumed to vary, but money income is constant.

55. An increase in money income: A. shifts the consumer's budget line to the right. B. shifts the consumer's budget line to the left. C. increases the slope of the budget line. D. has no effect on the budget line.

56. The shift of the budget line from cd to ab in the above figure is consistent with: A. decreases in the prices of both M and N. B. an increase in the price of M and a decrease in the price of N. C. a decrease in money income. D. an increase in money income.

57. Any combination of goods lying outside of the budget line: A. implies that the consumer is not spending all his income. B. yields less utility than any point on the budget line. C. yields less utility than any point inside the budget line. D. is unattainable, given the consumer's income.

58. Suppose you have a money income of $10, all of which you spend on Coke and popcorn. In the above diagram, the prices of Coke and popcorn respectively are: A. $.50 and $1.00. B. $1.00 and $.50. C. $1.00 and $2.00. D. $.40 and $.50.

59. Other things equal, an increase in a consumer's money income: A. increases the amount of utility a consumer receives from a given quantity of a good. B. shifts her budget line rightward because she can now purchase more of both products. C. eliminates the individual's economizing problem. D. causes the consumer to choose a different combination of goods along a given budget line.

60. The slope of a budget line reflects the: A. desirability of the two products. B. price ratio of the two products. C. amount of the consumer's income. D. utility ratio of the two products.

61. Suppose Elroy's budget line is as shown on the above diagram. If his tastes change in favor of Coke and against popcorn, the budget line will: A. become steeper. B. become flatter. C. shift rightward. D. be unaffected.

62. Assume the price of product Y (the quantity of which is on the vertical axis) is $15 and the price of product X (the quantity of which is on the horizontal axis) is $3. Also assume that money income is $60. The absolute value of the slope of the resulting budget line: A. is 5. B. is 1/5. C. is 4. D. is 20.

63. Suppose that Julia receives a $20 gift card for the local coffee shop, where she only buys lattes and muffins. If the price of a latte is $4 and the price of a muffin is $2, then we can conclude that Julia: A. should only buy muffins. B. should only buy lattes. C. can buy 5 lattes or 10 muffins if she chooses to buy only one of the two goods. D. can buy 5 lattes and 10 muffins with her $20 gift card.

64. Which of the following is a labor resource? A. a computer programmer B. a computer C. silicon (sand) used to make computer chips D. a piece of software used by a firm

65. Which of the following is a capital resource? A. a computer programmer B. a corporate bond issued by a computer manufacturer C. silicon (sand) used to make computer chips D. a piece of software used by a firm

66. The four factors of production are: A. land, labor, capital, and money B. land, labor, capital, and entrepreneurial ability C. labor, capital, technology, and entrepreneurial ability D. labor, capital, entrepreneurial ability, and money

67. Which of the following lists includes only capital resources (and therefore no labor or land resources)? A. an ice arena; a professional hockey player; hockey uniforms. B. the owner of a new startup firm; a chemistry lab; a researcher. C. a hydroelectric dam; water behind the dam; power lines. D. autos owned by a car rental firm; computers at the car rental agency; the vans that shuffle rental customers to and from the airport.

68. Money is not an economic resource because: A. money, as such, does not produce anything. B. idle money balances do not earn interest income. C. it is not scarce. D. money is not a free gift of nature.

69. Economic resources are also called: A. free gifts of nature. B. consumption goods. C. units of money capital. D. factors of production.

70. Which of the following do economists consider to be capital? A. a pair of stockings B. a construction crane C. a savings account D. a share of IBM stock

71. The main function of the entrepreneur is to: A. make routine pricing decisions. B. innovate. C. purchase capital. D. create market demand.

72. Which of the following is not a main function of the entrepreneur? A. make routine pricing decisions. B. innovate. C. assume the risk of economic losses. D. make strategic business decisions.

73. The production possibilities curve illustrates the basic principle that: A. the production of more of any one good will in time require smaller and smaller sacrifices of other goods. B. an economy will automatically obtain full employment of its resources. C. if all the resources of an economy are in use, more of one good can be produced only if less of another good is produced. D. an economy's capacity to produce increases in proportion to its population size.