Practice Test 1-3

Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. ____ 1. The word that comes from the Greek word for "one who manages a household" is a market. . b consumer. . c producer. . d economy. .

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2. Economics is defined as the study of a business. . b how society manages its scarce resources. . c central planning. . d government regulation. .

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3. In most societies, resources are allocated by a a single central planner. . b those who own the resources. . c those firms that use resources to provide goods and services. . d the combined actions of millions of households and firms. .

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4. When the government attempts to cut the economic pie into more equal slices, a it is easier to cut the pie, and therefore the economy can produce a larger pie. . b the government can more easily allocate the pie to those most in need. . c the pie gets smaller, and there will be less pie for everyone. . d the economy will spend too much time cutting and loses the ability to produce enough . pie for everyone.

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5. When the government attempts to improve equity in an economy the result is often

a . b . c . d .

an increase in overall output in the economy. additional government revenue since overall income will increase. an actual reduction in equity. reduced efficiency in the economy.

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6. In a market economy, prices reflect the a value of a good to society. . b cost to society of making the good. . c quantity society will ultimately choose to produce. . d Both a and b are correct. .

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7. The term market failure refers to a a situation in which the market on its own fails to allocate resources efficiently. . b an unsuccessful advertising campaign which reduces buyer demand. . c a situation in which competition among firms becomes ruthless. . d a firm which is forced out of business because of losses. .

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8. Which of the following is most likely to generate an externality? a Teachers at a local high school have pizza delivered every Friday for lunch. . b A young man from a small town attends medical school to become a doctor. . c A newlywed couple buys a TV for their family room. . d John buys a tractor to mow his newly purchased 5-acre lot. .

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9. In the United States, incomes have historically grown about 2% per year. At this rate incomes will double every a 10 years. . b 25 years. . c 35 years.

. d 50 years. .

____ 10. A worker in Bangladesh can earn $1 per day making cotton cloth on a hand loom. A worker in the United States can earn $100 per day making cotton cloth with a mechanical loom. What accounts for the difference in wages? a U.S. textile workers belong to a union. . b There is little demand for cotton cloth in Bangladesh and great demand in the U.S. . c Labor is more productive making cotton cloth with a mechanical loom than with a hand . loom. d Bangladesh has a low-wage policy to make its textile industry more competitive in world . markets.

____ 11. A direct or positive relationship exists between a country's a productivity and its standard of living. . b government spending and its tax rates. . c total population and its per-capita income. . d prices for its goods and services and its exports. .

____ 12. One of the worst episodes of inflation occurred in a the United States in the 1960's. . b Argentina in the 1950's. . c Russia in the 1930's. . d Germany in the 1920's. .

____ 13. In the nation of Dictatorland, farmers traditionally feed grain to their livestock. Central planners, however, decided to increase the price of grain to make grain farmers happy and to reduce the price of bread made from that grain to make city dwellers happy. Now the price of bread is lower than the price of grain. We might now expect a farmers to continue to feed grain to their livestock. . b farmers to start feeding bread to their livestock. . c city dwellers to start buying grain to make bread to eat. .

d city dwellers to start buying grain to make bread to sell. .

____ 14. Senator Smart is trying to convince workers in her district that trade with other countries is beneficial. Senator Smart argues that trade can be beneficial a only if it allows us to obtain things that we couldn't make for ourselves. . b because it allows specialization, which increases total output. . c to us if we can gain and the others involved in the trade lose. . d in only a limited number of circumstances because others are typically self-interested. .

____ 15. The use of theory and observation is more difficult in economics than in sciences such as physics due to the difficulty in a evaluating an economic experiment. . b devising an economic experiment. . c actually performing an experiment in an economic system. . d All of the above are correct. .

____ 16. What would be the best statement about a theory based on assumptions that are not true? a If the assumptions underlying the theory are not true, the theory must be false. . b The ideas may be good in theory, but not in practice. . c The theory is a good one if it helps us to understand how the world works. . d The theory is a good one if no logical mistakes were made in developing it. .

____ 17. For a scientist, the decision of which assumption to make is a the easiest part of the scientific method. . b the flip of a coin. . c almost impossible. . d part art. .

____ 18. In the simple circular-flow diagram, markets consist of a the market for goods and services, the financial market, and the market for the factors of . production. b factors of production and the financial market. . c the market for goods and services and the financial market. . d the market for goods and services and the market for factors of production. .

Figure 2-2

____ 19. Refer to Figure 2-2. The outer loop represents the flow of a goods and services. . b spending. . c factors of production. . d All of the above are correct. .

____ 20. An economic outcome is said to be efficient if the economy is a using all of the resources it has available. . b conserving on resources and not using all it has. . c getting all it can from the scarce resources it has available. . d able to produce more than its current production without additional resources. .

____ 21. On a production possibilities frontier, production is efficient if the production point is a on the frontier. .

b outside the frontier. . c on or inside the frontier. . d inside the frontier. .

____ 22. Which of the following concepts is NOT illustrated by the production possibilities frontier? a efficiency . b opportunity cost . c equity . d tradeoffs .

Figure 2-8

____ 23. Refer to Figure 2-8. An efficient combination of bathtubs and barrels would be a 30 barrels and 6 bathtubs. . b 20 barrels and 8 bathtubs. . c 25 barrels and 12 bathtubs. . d 15 barrels and 12 bathtubs. .

____ 24. Which of the following is true? a Microeconomics and macroeconomics are two separate divisions of economics, . independent of each other. b It is possible to understand macroeconomics without understanding microeconomics, but . not vice versa.

c . d .

Microeconomics and macroeconomics are two distinct but closely intertwined fields of economics. Microeconomics and macroeconomics are two different names for basically the same thing in economics.

____ 25. Which of the following is an example of a normative statement? a If the price of a product decreases, quantity demanded increases. . b Reducing tax rates on the wealthy would be good for the country. . c If the national saving rate were to increase, so would the rate of economic growth. . d All of the above are correct. .

____ 26. Evaluating a positive statement involves a evaluating values as well as facts. . b examining evidence. . c our views on ethics and religion. . d All of the above are correct. .

____ 27. The Federal Reserve a designs tax policy. . b enforces the nation's antitrust laws. . c sets the nation's monetary policy. . d analyzes the data on workers. .

____ 28. Any economist that says all policy decisions are easy a must understand the relationship between a market economy and the government. . b must be running for office. . c has a Ph.D. in economics. . d cannot be trusted. .

____ 29. A demand curve shows the relationship a between income and quantity demanded. . b between price and income. . c between price and quantity demanded. . d among income, price, and quantity demanded. .

____ 30. When a relevant variable that is not named on either axis changes, a there will be a movement along the curve. . b the curve may or may not change. It depends on how the variables are related. . c the curve will be unaffected since only the variables on the axis affect the curve. . d the curve will shift. .

____ 31. The single most important purpose of your textbook is to teach you a about the effects of the government's economic policies. . b the language of economics. . c the economist's way of thinking. . d how to make money. .

____ 32. A country's consumption possibilities frontier can be outside its production possibilities frontier if a additional resources become available. . b there is an increase in the level of technology. . c the country engages in trade. . d All of the above are correct. . e Both a and b are correct. .

Table 3-1 Labor Hours Needed to Make 1 Pound of: Meat Potatoes Pounds produced in 40 hours: Meat Potatoes

Farmer Rancher

8 4

2 5

5 10

20 8

____ 33. Refer to Table 3-1. The Farmer has an absolute advantage in a meat, and the Rancher has an absolute advantage in potatoes. . b potatoes, and the Rancher has an absolute advantage in meat. . c meat, and the Rancher has an absolute advantage in meat. . d neither good, and the Rancher has an absolute advantage in both goods. .

____ 34. Refer to Table 3-1. The Rancher has an absolute advantage in a both goods, and the Farmer has a comparative advantage in meat. . b meat, and the Farmer has a comparative advantage in potatoes. . c meat, and the Farmer has a comparative advantage in neither good. . d both goods, and the Farmer has a comparative advantage in potatoes. .

These graphs illustrate the production possibilities available for dancing shoes to Fred and Ginger with 40 hours of labor. Figure 3-3

____ 35. Refer to Figure 3-3. Ginger has an absolute advantage in a ballet slippers and Fred has an absolute advantage in tap shoes. .

b tap shoes and Fred has an absolute advantage in ballet slippers. . c neither good and Fred has an absolute advantage in both goods. . d both goods and Fred has an absolute advantage in neither good. .

____ 36. Suppose a gardener produces both green beans and corn in her garden. If she must give up 13 bushels of corn to get 5 bushels of green beans, then the opportunity cost of 1 bushel of green beans is a 0.38 bushel of corn. . b 2.6 bushels of corn. . c 8 bushels of corn. . d 18 bushels of corn. .

____ 37. The country that has a comparative advantage in a product a should import that product. . b should export that product. . c would be better off keeping the product for domestic use since it is relatively inexpensive . to produce. d None of the above are correct. .

____ 38. The opportunity cost of an item is a the number of hours needed to earn money to buy it. . b what you give up to get that item. . c always less than the dollar value of the item. . d always equal to the dollar value of the item. .

____ 39. Trade can make everybody better off because it a increases cooperation among nations. . b allows people to specialize according to comparative advantage. . c requires some workers in an economy to be retrained. . d reduces competition among domestic companies.

Use the accompanying table to answer the following questions: Table 3-5 Labor hours needed to make one unit of Cheese Bread 1 2 2 8 Amount produced in 40 hours Cheese Bread 40 20 20 5

England Spain

____ 40. Refer to Table 3-5. England has a comparative advantage in a bread and Spain has a comparative advantage in cheese. . b cheese and Spain has a comparative advantage in bread. . c both goods and Spain has a comparative advantage in neither good. . d neither good and Spain has a comparative advantage in both goods. .

True/False Indicate whether the sentence or statement is true or false. ____ 41. Trade with any nation can be mutually beneficial. ____ 42. A market economy cannot produce a socially desirable outcome because individuals are motivated by their own selfish interests. ____ 43. Market failure refers to a situation in which the market does not allocate resources efficiently. ____ 44. Government spending is the ultimate source of inflation. ____ 45. While the scientific method is applicable to studying natural sciences, it is not useful in studying an economic system. ____ 46. A circular-flow diagram is a visual model of how an economy is organized. ____ 47. A survey of business, government, and academic economists revealed widespread disagreement on ten propositions about economic policy. ____ 48. It takes Barbara 3 hours to make a pie and 4 hours to make a shirt. It takes Gary 2 hours to make a pie and 5 hours to make a shirt. Barbara should specialize in making shirts and Gary should specialize in making pies, then they should trade.

____ 49. Two countries can achieve gains from trade even if one country has an absolute advantage in the production of both goods. ____ 50. International trade may make some individuals in a nation better off, while other individuals are made worse off. Short Answer 51. Define opportunity cost. What is the opportunity cost to you of attending college? What was your opportunity cost of coming to class today? 52. Julia can fix a meal in 1 hour, and her opportunity cost of one hour is $50. Jacque can fix the same kind of meal in 2 hours, and his opportunity cost of one hour is $20. Will both Julia and Jacque be better off if she pays him $45 per meal to fix her meals? Explain.

Practice Test 1-3 Answer Section

MULTIPLE CHOICE 1. ANS: D economy. DIF: 1 REF: SECTION: 1 OBJ: TYPE: M

2. ANS: B how society manages its scarce resources. DIF: 1 REF: SECTION: 1 OBJ: TYPE: M

3. ANS: D the combined actions of millions of households and firms. DIF: 2 REF: SECTION: 1 OBJ: TYPE: M

4. ANS: C the pie gets smaller, and there will be less pie for everyone. DIF: 3 REF: SECTION: 2 OBJ: TYPE: M

5. ANS: D reduced efficiency in the economy. DIF: 2 REF: SECTION: 2 OBJ: TYPE: M

6. ANS: D Both a and b are correct. DIF: 2 REF: SECTION: 2 OBJ: TYPE: M

7. ANS: A a situation in which the market on its own fails to allocate resources efficiently. DIF: 2 REF: SECTION: 2 OBJ: TYPE: M

8. ANS: B A young man from a small town attends medical school to become a doctor. DIF: 3 9. ANS: C 35 years. DIF: 2 REF: SECTION: 3 OBJ: TYPE: M REF: SECTION: 2 OBJ: TYPE: M

10. ANS: C Labor is more productive making cotton cloth with a mechanical loom than with a hand loom. DIF: 3 REF: SECTION: 3 OBJ: TYPE: M

11. ANS: A productivity and its standard of living. DIF: 2 REF: SECTION: 3 OBJ: TYPE: M

12. ANS: D Germany in the 1920s. DIF: 2 REF: SECTION: 3 OBJ: TYPE: M

13. ANS: B farmers to start feeding bread to their livestock. DIF: 2 REF: SECTION: 1 OBJ: TYPE: M

14. ANS: B because it allows specialization, which increases total output. DIF: 2 REF: SECTION: 2 OBJ: TYPE: M

15. ANS: C actually performing an experiment in an economic system. DIF: 2 REF: SECTION: 1 OBJ: TYPE: M

16. ANS: C The theory is a good one if it helps us to understand how the world works. DIF: 3 17. ANS: D part art. DIF: 1 REF: SECTION: 1 OBJ: TYPE: M REF: SECTION: 1 OBJ: TYPE: M

18. ANS: D the market for goods and services and the market for factors of production. DIF: 2 19. ANS: B spending. REF: SECTION: 1 OBJ: TYPE: M

DIF: 2

REF: SECTION: 1

OBJ: TYPE: M

20. ANS: C getting all it can from the scarce resources it has available. DIF: 2 21. ANS: A on the frontier. DIF: 2 22. ANS: C equity DIF: 2 REF: SECTION: 1 OBJ: TYPE: M REF: SECTION: 1 OBJ: TYPE: M REF: SECTION: 1 OBJ: TYPE: M

23. ANS: A 30 barrels and 6 bathtubs. DIF: 3 REF: SECTION: 1 OBJ: TYPE: M

24. ANS: C Microeconomics and macroeconomics are two distinct but closely intertwined fields of economics. DIF: 2 REF: SECTION: 1 OBJ: TYPE: M

25. ANS: B Reducing tax rates on the wealthy would be good for the country. DIF: 2 26. ANS: B examining evidence. DIF: 1 REF: SECTION: 2 OBJ: TYPE: M REF: SECTION: 2 OBJ: TYPE: M

27. ANS: C sets the nation's monetary policy. DIF: 1 28. ANS: D cannot be trusted. DIF: 1 REF: SECTION: 4 OBJ: TYPE: M REF: SECTION: 4 OBJ: TYPE: M

29. ANS: C between price and quantity demanded.

DIF: 2 30. ANS: D the curve will shift. DIF: 2

REF: SECTION: 4

OBJ: TYPE: M

REF: SECTION: 4

OBJ: TYPE: M

31. ANS: C the economist's way of thinking. DIF: 1 REF: SECTION: 4 OBJ: TYPE: M

32. ANS: C the country engages in trade. DIF: 3 REF: SECTION: 1 OBJ: TYPE: M

33. ANS: B potatoes, and the Rancher has an absolute advantage in meat. DIF: 2 REF: SECTION: 2 OBJ: TYPE: M

34. ANS: B meat, and the Farmer has a comparative advantage in potatoes. DIF: 3 REF: SECTION: 2 OBJ: TYPE: M

35. ANS: A ballet slippers and Fred has an absolute advantage in tap shoes. DIF: 2 36. ANS: B 2.6 bushels of corn. DIF: 2 REF: SECTION: 2 OBJ: TYPE: M REF: SECTION: 2 OBJ: TYPE: M

37. ANS: B should export that product. DIF: 1 REF: SECTION: 3 OBJ: TYPE: M

38. ANS: B what you give up to get that item. DIF: 1 39. ANS: B REF: SECTION: 3 OBJ: TYPE: M

allows people to specialize according to comparative advantage. DIF: 2 REF: SECTION: 3 OBJ: TYPE: M

40. ANS: A bread and Spain has a comparative advantage in cheese. REF: SECTION: 3 TRUE/FALSE 41. ANS: T 42. ANS: F 43. ANS: T 44. ANS: F 45. ANS: F 46. ANS: T 47. ANS: F 48. ANS: T 49. ANS: T 50. ANS: T SHORT ANSWER 51. ANS: Whatever must be given up to obtain some item it its opportunity cost. Basically, this would be a person's second choice. The opportunity cost of a person attending college is the value of the best alternative use of that person's time. For most students this would be the income the student gives up by not working. A student's opportunity cost of coming to class was the value of the best opportunity the student gave up. (For most students, that seems to be sleep.) REF: SECTION: 1 OBJ: TYPE: S REF: SECTION: 2 REF: SECTION: 2 REF: SECTION: 2 REF: SECTION: 3 REF: SECTION: 1 REF: SECTION: 1 REF: SECTION: 3 REF: SECTION: 2 REF: SECTION: 2 REF: SECTION: 3 OBJ: TYPE: T OBJ: TYPE: T OBJ: TYPE: T OBJ: TYPE: T OBJ: TYPE: T OBJ: TYPE: T OBJ: TYPE: T OBJ: TYPE: T OBJ: TYPE: T OBJ: TYPE: T OBJ: TYPE: M

52. ANS: Since Julia's opportunity cost of preparing a meal is $50, and Jacque's opportunity cost of preparing a meal is $40, each of them will be better off by $5 per meal if this arrangement is made. REF: SECTION: 2 OBJ: TYPE: S