This Document Contains Chapters 1 to 2 Chapter 01 Economics: The World Around You MULTIPLE CHOICE 1. Which of the following categories of educated workforce in the U. S. , aged between 25 and 64, usually receive the highest income? A. College graduates B. Individuals with professional degrees C. Individuals with a master degree D. College drop-outs E. High school students Answer: B 2. The wage disparity between college-educated and non-college-educated workers in the U. S. has declined since 2001 because: A. more Americans are pursuing college education. B. the colleges emphasize on technical education rather then textual knowledge. C. most of the skilled sector jobs have been outsourced to India and China. D. the variety of courses offered by the U. S. institutions have increased. E. the number of non-college-educated workers in the workforce has declined. Answer: C 3. Which of the following trends has been observed in the U. S. with respect to higher education? A. Students from less educated families stand a better chance of getting admitted to colleges. B. The divorce rate for college grads is twice as high as that of high school grads. C. The divorce rates for college grads are accelerating every year. D. High school grads are twice as likely to smoke as college grads. E. College grads are likely to live shorter and less healthy lives than high school grads. Answer: D 4. According to the U. S. Census Bureau, what is the difference between the earnings of a high school diploma holder and a medical practitioner between the ages of 25 and 64? A. $3. 2 million B. $1. 2 million C. $5 million D. No wage disparity E. $8. 5 million Answer: A 5. Approximately how many American adults hold a college degree? A. 70 percent B. 10 percent C. 30 percent D. 45 percent E. 50 percent Answer: C 6. Identify the logic of economics that those who have not studied economics may fail to understand. A. The implicit cost of a commodity is always higher than the explicit cost. B. Individual wants are limited by means. C. Private goods do not have a social cost. D. Public goods are available to us freely. E. There are costs to everything. Answer: E 7. In its most fundamental sense, economics is the study of: A. production and cost. B. supply and demand. C. scarcity and choice. D. specialization and trade. E. externality and public goods. Answer: C 8. Economics is the study of how people cope with: A. limited human wants. B. scarcity. C. unlimited resources. D. greed. E. limited time and unlimited income. Answer: B 9. Which of the following is considered to be the basic economic problem across all countries of the world? A. Inflation B. Unemployment C. Poverty D. Scarcity E. Wage disparity Answer: D 10. The heart of the economic problem is to: A. provide for full employment. B. stimulate GDP growth. C. improve the standard of living of people. D. allocate limited resources among unlimited uses. E. increase leisure. Answer: D 11. A good or service is said to be scarce when: A. its price is too low. B. it is offered only to high income earners. C. no one wishes to purchase it. D. it cannot be transported easily. E. at a price of zero, there will not be enough to satisfy everyone’s desire for it. Answer: E 12. The statement "people have unlimited wants," implies that people: A. always want more goods/services than they can purchase with their incomes. B. always have a desire to hold liquid money. C. always strive to be the best they can be. D. generally desire for goods and services which they can afford out of their income. E. try to earn more and more money as their experience at work increases. Answer: A 13. Goods are scarce when: A. their price is too high. B. their price is too low. C. the amount people want is more than the amount available at a zero price. D. they are necessities. E. their price is controlled. Answer: C 14. Which of the following defines an economic good? A. Anything that is provided by the government B. Anything that is provided by the nonprofit institutions C. Anything with a price on it D. Anything that has a very high demand in the market E. Anything that has a very high supply in the market Answer: C 15. To say that “there is a scarcity of gold” means that: A. gold prices will plummet. B. there is not enough gold to satisfy people’s demand. C. there are a very few substitutes for gold. D. gold is relatively less expensive than other metals. E. the demand for gold is changing. Answer: B 16. A good or service becomes scarcer over time if: A. the difference between the quantity demanded and the quantity supplied at a zero price decreases. B. the excess of the quantity demanded over the quantity supplied at a zero price increases. C. the economy is capable of producing more goods and services. D. people begin to reduce their requirements for the goods and services that are actually available E. the amount of a good available equals the amount desired Answer: B 17. The good for which has no scarcity is called: A. a necessity. B. an economic good. C. a free good. D. an economic bad. E. a social bad. Answer: C 18. A(n) _____ is anything that you would pay to get rid of. A. economic good B. economic bad C. resource D. free good E. public good Answer: B 19. Which of the following is a free good? A. Toll free roads B. Purified water C. Flora and fauna at a national park D. Air E. Congested roads Answer: D 20. Which of the following in an example of an economic bad? A. Corruption B. Bureaucracy C. Pollution D. A five year old car E. Life insurance Answer: C 21. Goods used to produce other goods are called: A. valuables. B. final goods. C. inputs. D. intermediaries. E. externalities. Answer: C 22. Which of the following can be categorized as financial capital? A. Offices and warehouses B. Stocks and bonds C. Machinery D. Land E. Equipment Answer: B 23. Which of the following resources will not be considered as land? A. Minerals B. Timber C. Water D. Fertile soil E. Processed cotton fibre Answer: E 24. People earn an income by selling their resources or by using them. Owners of land receive _____, while the owners of capital receive _____. A. rent; profit B. wage; profit C. profit; rent D. rent; interest E. interest; profit Answer: D 25. Which of the following phrases correctly describes at least one of the factors of production? A. Natural resources, such as minerals, timber, and water, as well as land itself B. The physical and intellectual services of technological advances C. Buildings and warehouses, but not factories D. Inventories E. Automobiles Answer: A 26. People can increase their wealth by: A. increasing the value of the resources they own. B. selling the land they own. C. investing in risky ventures. D. purchasing shares of stock. E. trading bonds they own for stocks. Answer: A 27. Which of the following is an example of capital as a factor of production? A. Products such as machinery and equipment that are used in the production process B. The financial condition of a privately held corporation C. The value of a company’s stock on the New York Stock Exchange D. A company’s outstanding liabilities E. A business cash flow Answer: A 28. Oil found underground in Texas is an example of: A. a labor resource. B. physical capital. C. financial capital. D. human capital. E. a land resource. Answer: E 29. Which of the following is not physical capital, as economists use the term? A. An office building B. Machinery on an assembly line C. An industrial robot D. Cash paid for raw materials E. A computer used by a business Answer: D 30. Which of the following statements is true of resources? A. Capital resources include unskilled labor. B. Natural resources are produced by nature and are available at a zero price. C. Labor includes the skills and training that people acquire to use in production. D. Technological know-how is an example of a natural resource. E. Stocks and bonds are referred to as capital. Answer: C 31. An economy’s resources: A. are limited in quantity. B. are always efficiently utilized. C. consist of land, labor, capital, and money. D. are unrelated to its standard of living. E. increase with the use of the latest technology. Answer: A 32. It seems as if the Internet has made the number of choices individuals have infinite. This means that: A. resources have become more plentiful. B. wants have become more limited. C. wants have become less limited. D. scarcity continues to exist because resources have not become unlimited. E. scarcity has been reduced. Answer: D 33. Economics is the study of how people use: A. their scarce resources to satisfy their basic wants. B. their scarce resources to attempt to satisfy their unlimited wants. C. the natural resources to satisfy their basic wants. D. the natural resources to attempt to satisfy their unlimited wants. E. their resources to influence the tastes and preferences of others. Answer: B 34. The term rational self-interest, as viewed by economists, means: A. consumers would never pay more for a good simply because it carried a certain designer label. B. only economists are capable of making choices according to rational self-interest. C. people never act until they have perfect information in order to guarantee that they act in their own self-interest. D. consumers always seek the least expensive option when making a purchase, regardless of individual preferences. E. people will make the choices that, given the information available, will give them the greatest amount of satisfaction. Answer: E 35. When an individual is behaving according to “rational self-interest,” he/she: A. is behaving out of greed. B. will always choose the path of least resistance. C. will always buy the cheapest product. D. is making choices that provide the greatest amount of satisfaction. E. is making a lot of money. Answer: D 36. Economists use the term _____ to emphasize the point that people do not have perfect knowledge or perfect insight. A. fallacy of composition B. rational self-interest C. cold call D. cognitive bias E. bounded rationality Answer: E 37. Individuals acting with rational self-interest: A. always choose the same options as other rational individuals. B. never do voluntary work. C. always try to attain satisfaction at the expense of others. D. choose options that give them the greatest amount of satisfaction. E. are selfish. Answer: D 38. A rational consumer: A. never makes mistakes. B. is also a successful entrepreneur. C. always has perfect information. D. never acts until he or she has perfect information E. seeks to gain the greatest possible satisfaction from purchases, using the available information. Answer: E 39. According to the text, human beings are self-interested, not selfish. This means: A. people are never selfish. B. people never act in a spiteful or belligerent manner. C. people never act in a fit of rage. D. people contribute to charities and otherwise help others. E. people care only about themselves and their families. Answer: D 40. When people make choices that (at the time and with the information they have at their disposal) give them the greatest amount of satisfaction, they are said to be: A. behaving irrationally. B. applying econometric models to their everyday behavior. C. living under a communist dictator. D. acting in their own rational self-interest. E. showing no willingness to plan for the future. Answer: D 41. A rational worker: A. always works for the least number of hours. B. always works for the highest money wage, other things being equal. C. never acts under conditions of uncertainty. D. deals only with positive and never with normative issues. E. would never quit a job until he or she had a better one Answer: B 42. Which of the following is not an example of rational self-interest, as defined by economists? A. A person risking his or her life to save someone else. B. A wealthy widow leaving a million dollars in her will to her cat. C. A farmer turning down an offer for his land that would make him independently wealthy. D. A collector paying $4 million for a particular painting, when other paintings by the same painter were available at a lower price. E. An individual paying a high price for an electronic widget at a store instead of buying it at the adjacent store offering the same widget at a lower price. Answer: E 43. Rational self-interest depends on: A. the level of education attained by individuals. B. the general family background. C. the social status of an individual. D. the amount of information available with an individual. E. the financial status of the individual. Answer: D 44. People who choose to do voluntary work: A. are not acting with rational self-interest. B. find it more satisfying than the alternatives. C. are not concerned with their own satisfaction. D. never consider the alternative options. E. are beyond the scope of economics. Answer: B 45. An economic approach used to search out answers to questions about the real world depends on the principles of: A. scarcity and rational self-interest. B. cost and benefit. C. public good and private good. D. economic good and economic bad. E. self-interest and selfishness. Answer: A 46. Identify the correct statement. A. Positive economics deals with what ought to be. B. Positive economics is subjective. C. Normative economics is objective. D. Normative economics deals with what is. E. Normative economics expresses someone’s opinion Answer: E 47. The category of economics that contains statements about "what ought to be" is known as: A. positive economics. B. normative economics. C. objective economics. D. applied economics. E. welfare economics. Answer: B 48. For an analysis to be considered positive, and not normative, it must include: A. some consideration of what ought to be. B. conclusions based on opinion. C. the rigors of the scientific method. D. suggestions for laws designed to protect people from harming themselves. E. strict implementation of policy prescriptions. Answer: C 49. Which of the following is a normative statement? A. Higher prices for cigarettes discourage people from buying cigarettes. B. The Federal Reserve should lower interest rates to help boost residential construction. C. High demand for cars drove up fuel prices. D. Government expenditure on public health and sanitation declined over the years. E. The U. S. experienced a high rate of unemployment in 2009. Answer: B 50. Which of the following is true of positive economics? A. It is concerned with what ought to be. B. It will usually indicate which economic policy is the best. C. It produces verifiable statements. D. It is strictly quantitative and so has little to say to those with philosophical goals to achieve in policymaking E. It is the same as normative economics. Answer: C 51. Whether to have more or less government involvement in the overall economy: A. is essentially a normative issue. B. is essentially a political issue, and therefore the techniques of economic analysis are not applicable. C. is essentially a positive issue. D. could be either a positive or a normative issue. E. is essentially a matter of personal opinion. Answer: D 52. Which of the following statements is in the realm of positive economics? A. The president should propose a tax cut because taxes are too high. B. Studies show that if taxes are cut, unemployment falls. C. The budget deficit is too high and should be lowered. D. Studies show that a national debt of over a trillion dollars is bad for the country and should not be allowed to occur. E. The share of defense spending in the budget ought to be changed. Answer: B 53. When a presidential candidate with a Ph. D. in economics makes a statement about what should be done to balance the budget, he or she is making a: A. normative statement. B. positive statement. C. microeconomic statement. D. statement that is objective. E. statement of fact. Answer: A 54. The statement, “All Americans should be entitled to public health care,” made by a politician would be considered a: A. positive statement. B. macroeconomic statement. C. microeconomic statement. D. normative statement. E. model. Answer: A 55. “Inflation is a more serious problem than education. ” This statement is an example of: A. a microeconomic analysis. B. bounded rationality. C. the fallacy of composition. D. a positive statement. E. a normative statement. Answer: E 56. “The Super Bowl on January 28, 2001, was won by the Baltimore Ravens. Since the Ravens were originally from Cleveland and are part of the old NFL, the stock market is expected to decline in 2001. ” This statement is an example of: A. the interpretation of association as causation. B. ceteris paribus (“everything else held constant”), analysis. C. rational behavior. D. the fallacy of composition. E. marginal analysis. Answer: A 57. Some economists have noted that throughout recent U. S. history, as the occurrence of sun spots has increased, so has the rate of overall inflation. If any of these economist based this observation on a short-term forecast of inflation, he/she would be: A. confusing the problems of scarcity and abundance. B. committing the fallacy of composition. C. committing the error of interpreting association as causation. D. using normative analysis. E. committing the fallacy of double counting. Answer: C 58. The fallacy of composition: A. is illustrated by the saying that if one moviegoer runs to an exit during a fire to get out of the building, then all the moviegoers should rush to that exit. B. is the error of attributing what applies to many to the case of one. C. is the same as interpreting association as causation. D. is illustrated by the assertion that the stock market rises when hemlines of current fashions rise. E. implies that not all variables are held constant. Answer: A 59. The common logical mistake of implying a cause-and-effect relationship between two events is called: A. rational self-interest. B. interpreting association as causation. C. the fallacy of composition. D. ceteris paribus (“everything else held constant”). E. normative analysis. Answer: B 60. The common logical mistake of interpreting association as causation: A. never occurs in the real world. B. is another term for the fallacy of composition. C. occurs when unrelated or coincidental events that occur at about the same time are said to have a cause-and-effect relationship. D. is the error of attributing what applies in the case of one to the case of many. E. occurs when one variable is closely associated with another variable. Answer: C 61. “Since a household cannot afford to keep adding indefinitely to its debt, a country cannot afford to do so either. ” This statement is an example of: A. interpretation of association as causation. B. ceteris paribus (“everything else held constant”) analysis. C. rational behavior. D. the fallacy of composition. E. marginal analysis. Answer: D 62. “If I stand up at a baseball game, I can see better; therefore, everyone should stand up to see better. ” This statement illustrates: A. the fallacy of composition. B. interpreting association as causation. C. the scientific method. D. positive economics. E. normative economics. Answer: A 63. Tim has noticed that every time women’s hemlines rise, stock market prices rise. He is therefore poised to invest in stocks the next time the local fashion editor predicts that shorter skirts will be in for the next season. Tim’s error is called: A. ceteris paribus. B. the fallacy of composition. C. the interpretation of association as causation. D. the scientific method. E. selfish behavior. Answer: C 64. Aunt Flora has discovered that her sick potted philodendron plant responds well to a certain type of fertilizer. She applies the fertilizer to the many flowers in her garden to make them all grow better. All but the philodendron die. Aunt Flora’s mistake is called: A. ceteris paribus. B. the fallacy of composition. C. the interpretation of association as causation D. the problem of heteroscedasticity. E. the problem of autocorrelation. Answer: B 65. Which of the following is true of microeconomics? A. It is often a focal point of debates in a presidential campaign. B. It is the study of the behavior of individual firms and individual consumers. C. It is often focused on the tradeoff between the rate of inflation and the unemployment rate. D. It is based on theories that help us understand the relationship between the money supply and interest rates. E. It is the study of the economy in aggregate. Answer: B 66. Macroeconomics is concerned primarily with: A. the operation of a particular firm. B. the labor market. C. individual consumer behavior. D. aggregate sectors of the economy such as the consumer sector or the business sector. E. a detailed examination of how price and output decisions are made in specific markets. Answer: D 67. Both microeconomic and macroeconomic theories: A. clearly state the public policies that should be undertaken to avoid or solve a particular problem under consideration. B. deal with the aggregate. C. deal with what ought to be as opposed to what is. D. are forms of positive economics. E. deal with individual entities in an economy. Answer: D 68. Microeconomics is the branch of economics that focuses on: A. deficit spending. B. the problems of inflation and unemployment. C. state and local economic problems. D. the individual units that make up an economy. E. development in the absence of economic growth. Answer: D 69. Which of the following is a microeconomic concern? A. The rate of economic growth in the United States B. The unemployment level for a country C. How to maintain or improve the profits of a particular firm D. Inflation E. The national output of the United States Answer: C 70. Which of the following is considered a macroeconomic question? A. How can one particular firm maximize profits? B. How does a family allocate income among various available goods and services? C. How can economic policy fight inflation? D. What factors determine the wage rate in a certain industry? E. What is the impact of competition on the profits of a business? Answer: C TRUE/FALSE 1. According to the American Shareholders Association, a majority of Americans prefer to invest in education rather than stock markets, because of the volatility in the rate of return from the latter. Answer: False 2. Economics is probably best defined as the study of unintended consequences. Answer: True 3. Because economics recognizes that any action has costs, it is often counterintuitive in its ability to point out the unintended consequences of public choices. Answer: True 4. It has been generally observed, the rich have limited wants while the poor have unlimited wants. Answer: False 5. A haircut at an upscale beauty salon would be regarded as a good in economics. Answer: False 6. Purified bottled water is an example of a free good. Answer: False 7. A positive (nonzero) price for a good means the good is in surplus. Answer: False 8. Producers use inputs, or resources, to produce their goods. Answer: True 9. In economics, money is capital because it can be used to buy resources to produce goods. Answer: False 10. Producers use the money received from selling their goods and services in the market to pay for the resource services. Answer: True 11. Scarcity impels an individual to make choices. Answer: True 12. People are compelled to make a choice because of the lack of time and money to buy everything they want. Answer: True 13. Only poor countries have to make choices because of limited resources. Answer: False 14. People who choose not to wear seat belts even after being aware that it reduces the probability of death in an accident are considered to be irrational by economists. Answer: False 15. If you agree that government should use a lottery to raise funds for improving education, you are using normative analysis. Answer: True 16. If two variables change, then it must mean that the change in one variable is caused by a change in the other variable. Answer: False 17. If unemployment rises when beer consumption rises, then the statement “Rising unemployment is the result of increased beer consumption” is an example of the ceteris paribus fallacy. Answer: False 18. “If a tax cut is good for me, it must be good for the whole economy. ” This statement is an example of the pitfall called the fallacy of composition. Answer: True 19. Microeconomics is concerned primarily with how individuals make their economic decisions. Answer: True 20. The study of inflation and unemployment in East Timor is in the realm of microeconomics. Answer: False Chapter 02 Choice, Opportunity Costs, and Specialization MULTIPLE CHOICE 1. Shirley can choose between peanut butter pretzels and caramel coated popcorns for her evening snack. According to economists, her _____ cost of consuming caramel coated popcorns would be the forgone peanut butter pretzels. A. internal B. opportunity C. average D. transaction E. social Answer: B 2. In economics, the concept of opportunity cost is: A. negated by ensuring that the government has a role in a capitalist society. B. defined to be the highest-valued alternative that must be forgone when a choice is made. C. best illustrated by knowing why consumers choose one good over another. D. quantifiable only if you know the real dollar prices of the goods and services you are giving up to consume something. E. the methodology that government economists use to determine the total amount of the national debt. Answer: B 3. Jane wins $100,000 in the lottery and immediately uses her winnings to open up a donut shop. Her direct costs are $50,000, and she puts the remaining money in a savings account earning 10 percent annual interest. Alternatively, Jane could have placed all her lottery winnings in the 10 percent savings account. Jane’s total cost is: A. $60,000. B. $50,000. C. $160,000. D. $45,000. E. $55,000. Answer: A 4. If you have a choice of consuming either two apples, three oranges, or one candy bar, the opportunity cost of the candy bar is: A. two apples. B. three oranges. C. two apples and three oranges. D. two apples or three oranges, whichever you value more. E. the difference in the prices of the three options. Answer: D 5. Which economic concept is the closest parallel to the saying “There’s no free lunch”? A. Specialization B. Unlimited wants C. Underutilization of resources D. Opportunity costs E. Overutilization of resources Answer: D 6. Opportunity cost is best defined as: A. the sum of all alternatives given up when a choice is made. B. the money spent once a choice is made. C. the highest-valued alternative given up when a choice is made. D. the difference between the cost price and the selling price of a good. E. the cost of capital resources used in the production of additional capital. Answer: C 7. Which of the following is an example of opportunity cost? A. The Chinese food that you gave up when you chose to eat Italian food. B. The tuition that you pay to attend college. C. For a professor of economics, the pleasure that he or she derives from teaching economics. D. Sweets given up by a person who would never eat them even if he or she could. E. The price paid for a ticket when you go to the movies. Answer: A 8. Nicky makes $25,000 a year as a sales clerk. He then decides to quit his job to enter an MBA program full-time (assume Nicky doesn’t work in the summer or hold any part-time jobs). His tuition, books, living expenses, and fees total $15,000 a year. Given this information, the annual total cost of Nicky's MBA studies is: A. $10,000. B. $30,000. C. $40,000. D. $15,000. E. $25,000. Answer: C 9. Which of the following is related to the concept of trade-off used in economics? A. The tuition you pay to attend college B. Paying a high price for a movie ticket on the first day of screening C. Not having enough information available to make a rational decision D. Giving up one good or activity in order to obtain some other good or activity E. Having your cake and eating it too Answer: D 10. The giving up of a good or activity in order to obtain some other good or activity is called: A. a tradeoff. B. a cost analysis. C. a random choice. D. an opportunity cost. E. a sunk cost. Answer: A 11. Which of the following best describes a tradeoff? A. An office executive enrolling into a management course to develop her skills. B. An investor buying stocks of a start-up company. C. A businessman investing a portion of company profits in research and development. D. A college student sacrificing a few hours of study time to work at the town cafeteria. E. A worker purchasing a new car with her bonus earnings. Answer: D 12. The city of Austin can buy roads or light rail. If 10 miles of roads cost $1 million and 2 miles of light rail cost $10 million, what is the city’s opportunity cost of 1000 miles of roads? A. $100 million B. 2 miles of light rail C. 200 miles of light rail D. $50 million E. $1,000 million Answer: A 13. The tradeoffs facing a society can be illustrated in a graph known as the: A. production operations curve. B. production cost curve. C. production cost model. D. production cost forecast curve. E. production possibilities curve. Answer: E 14. When constructing a production possibility curve for an economy, which of the following is assumed to be constant? A. The quantity of resources B. The government budget C. The quantity of goods produced D. The price level E. The money supply Answer: A NARRBEGIN: Table 2. 1 Following is the production possibilities schedule for an economy producing two goods Good A and Good B. 15. Refer to Table 2. 1. Identify the correct statement. A. This economy can produce 100 units of A and 20 units of B. B. The opportunity cost of producing more of A decreases as A increases. C. The opportunity cost of producing more of B decreases as B increases. D. This economy can produce 70 units of A and 40 units of B. E. If this economy fully and efficiently employs all its resources, it can produce 100 units of A and 80 units of B. Answer: D 16. Refer to Table 2. 1. According to the production possibilities schedule in the table above, which of the following statements is true? A. Moving from choice 2 to choice 3, the opportunity cost of 20 more B is 20 units of A. B. There are increasing opportunity costs associated with getting more B. C. Moving from choice 3 to choice 4, the opportunity cost of 20 more B is 30 units of A. D. Moving from choice 1 to choice 2, the opportunity cost of 20 more B is 10 units of A. E. All of these statements are true. Answer: E 17. While constructing a production possibilities frontier [PPF], we assume: A. dynamic technological know-how. B. flexible resource quality. C. fixed resource quantity. D. full and efficient use of resources. E. flexible money supply. Answer: D 18. Which of the following conditions will be true for a nation operating at a point lying inside its production possibilities curve? A. The nation has experienced a technological breakthrough in one of its key industries. B. The nation is clearly utilizing its resources efficiently. C. The nation is producing the maximum output that can be produced with a limited quantity of resources. D. The nation is not utilizing its resources efficiently. E. The nation is producing the maximum output that can be produced with its unlimited quantity of resources. Answer: D 19. Consider a nation with an endowment of iron ore and petroleum. If the nation specializes in the production of aluminum and gasoline instead of steel we can say that it is operating: A. on its production possibilities curve. B. outside its production possibilities curve. C. inside its production possibilities curve. D. on the highest achievable production possibilities curve. E. on the lowest production possibilities curve. Answer: C 20. A point inside a nation’s production possibilities curve can represent: A. a recession. B. an increase in population size. C. an economic growth. D. a technological advancement. E. an improvement in living standards. Answer: A 21. If the resources within a nation are not being fully or efficiently utilized, it means: A. that nation is operating at a point inside its production possibilities curve. B. that nation is operating at a point outside its production possibilities curve. C. that nation is operating at a point along its production possibilities curve. D. that nation is probably technologically advanced. E. the government of that nation should seize ownership of the resources in order to attain the necessary efficiencies. Answer: A 22. If society begins by producing 3 units of X and 4 units of Y and then alters production so that it is now producing 4 units of X and 4 units of Y, and we know that the quantity and quality of resources were unchanged and that technology did not change, then: A. 3 units of X and 4 units of Y are a combination best represented by a point inside the production possibilities curve [PPC]. B. society has moved along the PPC. C. resources were being fully utilized at 3 units of X and 4 units of Y. D. resources were being efficiently utilized at 3 units of X and 4 units of Y. E. 3 units of X and 4 units of Y are a combination best represented by a point outside the PPC. Answer: A 23. Given a production possibilities curve for defense goods and nondefense goods, which of the following is not true? A. A production point outside the curve may be attained if new resources are discovered. B. A production point outside the curve may be attained by acquiring a new technology. C. A production point outside the curve may be attained by shifting resources to defense goods. D. A production point outside the curve may be attained by acquiring both a new technology and greater resources. E. A production point outside the curve cannot be attained with the current level of resources and technology. Answer: C 24. A point outside the production possibilities curve [PPC]: A. represents inefficient use of resources. B. may be due to unemployment. C. is attainable if all resources are used efficiently. D. represents more resources than are currently available. E. will never be attainable, even if the quantity of resources increases. Answer: D NARRBEGIN: Figure 2. 1 The figure given below represents the production possibilities curves [PPC] of a country producing wine and cars. Figure 2. 1 NARREND 25. Refer to Figure 2. 1. Identify the correct statement. A. If the country is at point A and is using all of its resources, point E is unattainable. B. If the country is at point A and is using all of its resources, Point C is unattainable. C. If the country is at point B and is using all of its resources, there will be an underutilization of resources at point C. D. If the country is at point C, point B is unattainable. E. If the country is at point B, it will not move. Answer: C 26. Refer to Figure 2. 1. If the country has curve I as its PPC, _____ would most likely cause the curve to shift to curve II. A. more farmland B. an increase in the work force C. the discovery of new metal resources D. a labor movement E. a consumer boycott Answer: C 27. Refer to Figure 2. 1. If the country’s PPC curve is curve II, then: A. points D and E use all of the resources. B. point A is unattainable. C. point D represents an underutilization of resources. D. there is unemployment at point E. E. curve I is not possible because wine is less costly than cars. Answer: C 28. If the general education level within a country rises significantly over time, it is likely that: A. the country will move to a different point along its current production possibilities curve. B. the country’s production possibilities curve will not change in any way. C. the country’s production possibilities curve will shift in. D. the country’s production possibilities curve will shift out. E. the country’s production possibilities curve will become convex to the origin. Answer: D 29. Which of the following will result in an outward shift of the production possibilities curve [PPC]? A. A decrease in the quantity of resources B. An improvement in the quality of resources C. A fall in education standards D. A unsustainable growth in population E. An increase in unemployment rate Answer: B NARRBEGIN: Figure 2. 2 The figure given below represents an economy producing corn and planes under different economic situations. Figure 2. 2 NARREND 30. Refer to Figure 2. 2. Assume that the economy experiences a 20% drop in the work force. Which of the following graph(s) in the figure describe(s) the change in the economy’s production possibilities curve [PPC]? A. Graph A B. Graph B C. Graph C D. Graph B and C E. Graph A and C Answer: A 31. Refer to Figure 2. 2. If there is an increase in the effectiveness of pesticides, which of the following graph(s) will represent(s) the resulting shift in the production possibilities curve [PPC]? A. Graph A B. Graph B C. Graph C D. Graph A and B E. Graph B and C Answer: B 32. Refer to Figure 2. 2. If there is an increase in the education level of the population, graph(s) _____ best illustrate(s) what will happen to the production possibilities curve [PPC]. A. A B. B C. C D. A and C E. A and B Answer: C 33. Which of the following would not cause any kind of an outward shift of a nation’s production possibilities curve [PPC]? A. An improvement in the general level of education B. Technological innovation C. Discovery of a new source of energy D. An increase in the size of the labor force E. A flood that renders thousands of acres of farmland unusable Answer: E 34. Consider a PPC with automobiles on the vertical axis and cotton on the horizontal axis. The discovery of a new fertilizer that improves crop yield will shift: A. the vertical intercept up but will not shift the horizontal intercept. B. the horizontal intercept to the right but will not shift the vertical intercept. C. the horizontal intercept to the left and the vertical intercept upward. D. the vertical intercept downward and the horizontal intercept to the right. E. neither the horizontal intercept nor the vertical intercept. Answer: B 35. Which of the following will bring about an inward shift of a production possibilities curve [PPC]? A. A decrease in the amount of resource employment B. An increase in the working-age population C. An increase in unemployment D. A decrease in the availability of natural resources E. An increase in the amount of capital available Answer: D NARRBEGIN: Figure 2. 3 The figure given below represents the production possibilities curve for goods and services in an economy. Figure 2. 3 NARREND 36. Refer to Figure 2. 3. The movement from Curve X to Curve Y indicates: A. contraction in the production of goods. B. contraction in the production of services. C. expansion in the ability to produce both goods and services. D. expansion in the ability to produce goods. E. expansion in the ability to produce services. Answer: D 37. Which of the following actions is most likely to cause a rightward shift in a production possibilities curve [PPC]? A. Shifting from the production of one product to the production of another product B. Shifting all resources to the production of one product C. Employing idle resources D. Using fewer resources in production E. Increasing the technological know-how used in production Answer: E NARRBEGIN: Table 2. 3 Given below is the production possibilities schedule for capital goods and consumer goods. 38. If the nation depicted in Figure 2. 3 is producing at combination E, the opportunity cost of producing the tenth unit of consumer good is: A. 10 units of capital goods. B. 6 units of capital goods. C. 1 unit of capital good. D. 4 units of capital goods. E. zero unit of capital good. Answer: C 39. Consider Table 2. 3. The production possibilities curve [PPC] representing this schedule would be: A. bowed in. B. bowed out. C. a negatively sloped straight line. D. a positively sloped straight line. E. bowed in if consumer goods are plotted on the horizontal axis and bowed out if capital goods are plotted on the horizontal axis. Answer: B 40. A decrease in the quantity of available resources would be represented by: A. a steeper PPC. B. a point inside the PPC. C. an inward shift of the PPC. D. an upward movement along the PPC. E. a downward movement along the PPC. Answer: C NARRBEGIN: Table 2. 2 Given below is the production possibilities schedule for a small island nation in South Pacific that produces capital and consumer goods. 41. Refer to Table 2. 2. Identify the correct statement. A. The best the economy can do is to produce 10 units of capital goods and 4 units of consumer goods. B. If the economy produces 10 units of capital goods, it has sufficient resources to produce 4 units of consumer goods. C. If the economy produces 10 units of capital goods and no units of consumer goods, there is unemployment. D. If the economy produces 4 units of capital goods, it can manage to produce only 3 units of consumer goods. E. In order to produce the 10th unit of capital goods, 4 units of consumer goods must be forgone. Answer: D 42. Which of the following ideas is illustrated by the production possibilities curve [PPC]? A. There are no limits on the total feasible production attainable in an economy. B. An economy need not decrease the production of one commodity to increase the production of another. C. It is possible to satisfy unlimited wants in an economy through proper investment in research and development. D. When an economy chooses to produce a combination of goods and services, other combinations of goods and services are sacrificed. E. An economy can specialize in the production of only one good. Answer: D 43. Marginal opportunity cost refers to the: A. amount of one good or service that must be given up to obtain one additional unit of another good or service. B. temporary unemployment created in an economy when resources are transferred from one industry to another. C. additional input cost borne by producers to increase production. D. economies of scope realized by firms through efficient allocation of resources. E. economies of scale experienced by firms post specialization. Answer: A 44. Consider the production possibilities curve for an economy producing only two commodities wheat (represented on the X axis) and wine (represented on the Y axis). A movement up along the production possibilities curve [PPC] will imply: A. an increase in wheat production. B. an increase in both wheat and wine production. C. a decline in both wheat and wine production. D. an increase in wine production. E. no change in either wheat or wine production. Answer: D 45. Consider the production possibilities curve [PPC] for a country producing only two commodities; wheat and wine. Ceteris paribus, the _____ cost of producing wine increases with each successive increase in wine production. A. average B. marginal C. total D. external E. social Answer: B 46. A bowed-out production possibilities curve [PPC] implies that the marginal opportunity cost of producing more of one good is: A. decreasing. B. increasing. C. constant. D. zero. E. less than zero. Answer: B 47. Consider the production possibilities curve [PPC] for a country producing only cheese and wine. The first few resources transferred from cheese to wine production are: A. those that are most specialized in cheese production. B. those that are most specialized in wine production. C. those that are least specialized in cheese production. D. those that are neither specialized in cheese nor wine production. E. those that are highly specialized in both cheese and wine production. Answer: C 48. People (and all resources): A. tend to specialize in those activities in which their opportunity costs are minimized. B. tend to specialize in those activities in which their opportunity costs are maximized. C. never consider opportunity costs before specializing in a particular activity. D. consider only direct costs while choosing to specialize in a particular activity. E. do not act in their own self-interest but specialize in those activities which benefit others. Answer: A 49. If a nation specializes in activities in which opportunity costs are the lowest and then trades with other nations, it is most likely to: A. have a higher standard of living for its citizens than it would it if did not specialize and then trade. B. have a lower standard of living for its citizens than it would if it did not specialize and then trade. C. create as much wealth for its citizens as it could if it did not specialize and then trade. D. benefit in the short run but incur heavy loss in the long run. E. incur heavy loss in the short run and eventually cease production in the long run. Answer: A NARRBEGIN: Table 2. 4 The table given below represents the output per hour of cookies and chilies in Ohio and Iowa. 50. Refer to Table 2. 4. Calculate the opportunity cost of a cookie in Iowa. A. 8 chilies B. 4 chilies C. 96 chilies D. Less than in Ohio E. The same as in Ohio Answer: A 51. Refer to Table 2. 4. The opportunity cost of a chili in Ohio is: A. the same as in Iowa. B. 1/4 unit of a cookie. C. 4 units of cookies. D. 1/8 unit of a cookie. E. 8 units of cookies. Answer: B 52. Refer to Table 2. 4. Identify the correct statement. A. Ohio should specialize in the production of cookies and trade with Iowa. B. Iowa should specialize in the production of cookies and trade with Ohio. C. Ohio should specialize in the production of chilies and trade with Iowa. D. Both should specialize in the production of chilies. E. Each of the nations should continue to produce both the commodities and not specialize in any one commodity. Answer: A 53. Refer to Table 2. 4. If trade were to occur, what would be the least amount Ohio would be willing to accept for 1 cookie? A. 8 chilies B. 1/4 of a chili C. 1/8 of a chili D. 4 chilies E. 12 chilies Answer: D 54. Refer to Table 2. 4. If trade were to occur, what would be the most Ohio would be willing to pay for 1 chili? A. 4 cookies B. 8 cookies C. of a cookie D. of a cookie E. 6 cookies Answer: C 55. Assume that a doctor makes $200 per hour, a lawyer $250 per hour, an architect $140 per hour, a professor $50 per hour, and a waiter $35 per hour. Which of these professionals is most likely to spend time to negotiate with a car dealer? A. The doctor B. The lawyer C. The architect D. The professor E. The waiter Answer: E 56. The difference between what can be produced and consumed without specialization and trade and with specialization and trade is called: A. comparative advantage. B. a tradeoff. C. marginal cost. D. opportunity cost. E. gains from trade. Answer: E 57. Archie can paint 5 backyard fences or repair 2 cars in 8 hours, while Austin can paint 4 backyard fences or repair 2 cars in 8 hours. Identify the correct statement. A. Archie is relatively better in repairing cars. B. Archie is relatively better in painting fences. C. Austin is relatively better in painting fences. D. Archie and Austin are equally good in painting fences. E. Neither Archie not Austin are good in repairing cars. Answer: B 58. Bob and Bill can make 16 toys each if they devote 8 working hours in a day. Further, Bob can repair 4 cars and Bill can repair 2 cars, if they devote 8 working hours in a day. What is the opportunity cost of repairing one car to Bill? A. 10 toys B. 8 toys C. 16 toys D. 12 toys E. 4 toys Answer: B 59. Bob and Bill can make 16 toys each if they devote 8 working hours in a day. Further, Bob can repair 4 cars and Bill can repair 2 cars, if they devote 8 working hours in a day. What is the opportunity cost of repairing one car to Bob? A. 10 toys B. 8 toys C. 16 toys D. 12 toys E. 4 toys Answer: E 60. Bob and Bill can make 16 toys each if they devote 8 working hours in a day. Further, Bob can repair 4 cars and Bill can repair 2 cars, if they devote 8 working hours in a day. When these two individuals engage in trade, it would be advantageous for both if: A. Bob specializes in the production of toys and Bill specializes in car repairing. B. Bob specializes in car repairing and Bill specializes in the production of toys. C. they specialize only in car repairing. D. they specialize only in the production of toys. E. they distribute their working hours evenly between the production of two goods. Answer: B 61. Voluntary free trade results in: A. population growth. B. inflation. C. higher living standards. D. income disparity. E. unemployment. Answer: C NARRBEGIN: Table 2. 5 The table given below represents butter and ham production by two countries Norway and Sweden. 62. According to Table 2. 5, Norway has a comparative advantage in _____ and an absolute advantage in _____. A. butter and ham; butter B. ham; butter C. nothing; butter D. ham; nothing E. butter; ham Answer: D 63. Refer to Table 2. 5 and identify the correct statement. A. Norway has an absolute advantage in butter production. B. Sweden has a comparative advantage in ham production. C. Norway has an absolute advantage in ham production. D. Trade is not possible between these two nations. E. It would be advantageous for Sweden to trade with Norway. Answer: E 64. Economists refer to the ability of one person or nation to do something with a lower opportunity cost than another as _____. A. voluntary trade B. specialization C. gains from trade D. absolute advantage E. comparative advantage Answer: E 65. A person has a comparative advantage in producing a good if: A. that person can produce the good at a lower absolute cost than anyone else. B. that person can produce the good at a lower opportunity cost than anyone else. C. that person can do a better job than anyone else. D. that person spends less money in out-of-pocket expenses than anybody else. E. that person can produce the good at a higher opportunity cost than anyone else. Answer: B 66. A world-renowned brain surgeon can type twice as fast as her secretarial assistant. Which of the following statements is true in this situation? A. The secretary has an absolute advantage in typing. B. The surgeon should do her own typing to save money. C. The surgeon should fire the assistant and work weekends and evenings to stay up on her typing. D. The surgeon should spend her time doing brain surgery and allow her secretary to do the typing because the secretary has a comparative advantage in typing. E. The surgeon should spend her time doing brain surgery and allow her secretary to do the typing because the surgeon has a comparative advantage in typing. Answer: D 67. Which of the following statements is true about comparative advantage? A. Comparative advantage exists whenever one person, firm, or nation can do something with greater opportunity costs than some other individual, firm, or nation. B. Comparative advantage is interesting theoretically, but it is not relevant when evaluating real-world economic conditions. C. Third-world countries cannot possibly have a comparative advantage in the production of any good or service because of the relatively low educational attainment of their work force. D. Comparative advantage exists whenever one person, firm, or nation can do something with lesser opportunity costs than some other individual, firm, or nation. E. Only highly advanced economies can have a comparative advantage in the production of a good or service. Answer: D 68. The concept of comparative advantage applies to: A. only people with at least a high school diploma. B. only people who are currently employed. C. situations in which you have information about the salary levels of those with whom you are competing for a job. D. every case of trade or exchange. E. about half of all cases of trade or exchange. Answer: D 69. Assume that the United States uses 20 worker-hours to produce 1 computer and 5 worker-hours to produce 1 unit of food; assume also that Japan uses 10 worker-hours to produce 1 computer and 30 worker-hours to produce 1 unit of food. Which of the following statements is true? A. Japan has the comparative advantage in food production. B. The United States has the comparative advantage in food production. C. The United States has the comparative advantage in the production of computers. D. The United States has a lower opportunity cost for making computers. E. Japan has a lower opportunity cost for making food. Answer: B NARRBEGIN: Figure 2. 4 The figure given below represents the PPC in two nations - Germany and Korea, producing only two goods cars and food. Figure 2. 4 NARREND 70. Refer to Figure 2. 4 and identify the correct statement. A. Germany has comparative advantage in production of cars. B. Korea has comparative advantage in production of cars. C. Germany has comparative advantage in production of food. D. Korea has a lower opportunity cost for making cars. E. Germany has a lower opportunity cost for making food. Answer: A 71. Refer to Figure 2. 4. What would be the marginal opportunity cost of producing one unit of food in Korea assuming the economy is at point B? A. Two and a half cars B. One and a half car C. Two cars D. Half a car E. Three cars Answer: B 72. Private property rights: A. guarantee that most people will have everything they want. B. are necessary for trade to occur. C. guarantee that most people will have everything they need. D. discourage people from working hard. E. discourage people from engaging in free trade. Answer: B 73. Which of the following exemplifies a private property right? A. A tenant repairing his apartment without the owner’s consent B. Free entrance for morning walkers at the town park C. Tickets purchased for entering the town museum D. A patent right received by a software developer for her latest invention E. A toll-free expressway used by drivers Answer: D TRUE/FALSE 1. According to economists, human activity is unresponsive to changes in costs. Answer: False 2. When there is a choice between the consumption of bundle X and bundle Y, the opportunity cost of consuming bundle X is bundle Y. Answer: True 3. There is no cost of using your own savings in your business. Answer: False 4. Betty goes out to enjoy a bouffe with her friend instead of practicing calculus problems for her maths examination that is due the following day. This implies that the opportunity cost of the bouffe to Betty is zero. Answer: False 5. If you have a choice between studying and doing another activity, you will devote your time to studying as long as the additional benefit of studying is greater than the additional cost of studying. Answer: True 6. A point lying inside the production possibilities curve [PPC] is not an attainable combination. Answer: False 7. If an economy is operating at a point outside the PPC, either the society has resources that are not being fully used or production is not efficient. Answer: False 8. A nation’s production possibilities curve [PPC] will shift outward if its workers receive better training. Answer: True 9. An economy’s PPC illustrates the extent to which the economy consumes what it produces. Answer: False 10. Economic growth can be illustrated by an outward shift of the PPC. Answer: True 11. Julio makes wine and beer. Last year he made 20 bottles of wine and 20 cases of beer. If the price of grapes goes down (making wine cheaper to make), Julio will be able to make the same amount of wine and more beer. Answer: True 12. The marginal cost of producing a commodity increases because of specialization. Answer: True 13. Increasing marginal opportunity costs indicate that if a nation wants to produce more of one product, it may do so by giving up greater and greater amounts of another product. Answer: True 14. Individuals, firms, and nations should specialize in those activities which have the highest marginal cost. Answer: False 15. If using the same resources, the U. S. workers can produce more of any good than Mexican workers, then the United States should produce every good. Answer: False 16. Specialization and trade do not allow individuals, firms, or even nations to acquire goods that lie beyond their production capabilities. Answer: False 17. Free trade leads to an overall improvement in the standard of living in a country because everything is produced at the lowest possible cost. Answer: True 18. If an individual can produce a good or service with a lower opportunity cost than another individual, then he or she is said to have the comparative advantage. Answer: True 19. Specialization and trade can take place only if a country is endowed with more of something compared to other countries. Answer: False 20. It has been generally observed that most trade in the world occurs between a developed and a less-developed nation rather than between industrial or developed nations. Answer: False 21. Gains from trade can be realized if each country specializes in its comparative advantage good. Answer: True 22. Specialization according to comparative advantage followed by free trade makes every economy better off. Answer: True 23. Public property rights refer to the right of ownership that is absolutely necessary for trade to occur and are ensured by a legal system of laws and courts. Answer: False 24. The reason why South Korea flourished economically relative to North Korea was that the former retained a strong version of communism and totalitarianism post World War II. Answer: False 25. One of the reasons for China’s real per capita GDP being far lower than that of Taiwan in 2000 was the lack of private property rights in the former nation. Answer: True Test Bank for Microeconomics William Boyes, Michael Melvin 9781111826154
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