Multiple Choice Tutorial Chapter 2 Economic Tools and

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Multiple Choice Tutorial Chapter 2 Economic Tools and Economic Systems 1

Multiple Choice Tutorial Chapter 2 Economic Tools and Economic Systems 1

1. The opportunity cost of an activity is a. zero if you choose the

1. The opportunity cost of an activity is a. zero if you choose the activity voluntarily. b. the amount of money spent on the activity. c. the value of the best alternative not chosen. d. the sum of benefits from all of the sacrificed alternatives. C. All decision making is based on opportunity cost. The cost to you of any decision is that which you give up in the best alternative endeavor. 2

2. The measure of the opportunity cost of going to college includes the costs

2. The measure of the opportunity cost of going to college includes the costs of tuition, books, and a. housing. b. housing and food. c. earnings foregone by working less. C. If you are not working because you are a full time student, a part of the cost of your education is the money foregone by not working at the highest paying job you qualify for and you realistically could have obtained. If you are working part time, or at a job that pays you less because of your school schedule, your opportunity cost is the difference between what you are making and what you could have made if it were not for your school schedule. 3

3. The net benefit of an activity is the a. value of benefits to

3. The net benefit of an activity is the a. value of benefits to others in the economy b. sum of all the benefits from that activity c. non-monetary benefits from that activity d. total benefits minus the total costs of that activity D. The term net means the difference between costs and benefits. Because there are costs and benefits in every activity you will engage in, you will either experience a net benefit or a net loss. 4

4. Rational choices must be based on a. complete knowledge and correct information. b.

4. Rational choices must be based on a. complete knowledge and correct information. b. the least amount of information possible. c. self-interest. d. expected opportunity cost. D. All decisions are based on expectations of the gains and costs of that decision. For every decision you make you ask yourself (sometimes unconsciously) “what will I have to give up for making this decision and how much will I gain? ” 5

5. The opportunity cost of an activity a. depends on the individual’s subjective values

5. The opportunity cost of an activity a. depends on the individual’s subjective values and opinions. b. is the same for everyone. c. must be calculated and known before undertaking the activity. A. Opportunity cost is a very personal thing, it differs from person to person. For example, should you paint your house or hire someone to paint it? If you can make $20 an hour and pay someone $8 an hour, you should hire the work out. However, if you can only make $7 an hour, it is better to paint the house yourself. 6

6. Your opportunity cost when choosing a particular activity a. can be easily and

6. Your opportunity cost when choosing a particular activity a. can be easily and accurately calculated b. cannot even be estimated c. does not change over time d. varies, depending on time and circumstances D. For example, the opportunity cost of cleaning your bedroom is higher on a sunny day then it would be on a rainy day. There are more things you can do outside when the sun is shining than you can do when it is raining. 7

7. Sunk costs a. are the most important consideration in rational decision making b.

7. Sunk costs a. are the most important consideration in rational decision making b. should be ignored when making economic choices c. are incurred only if you choose that activity d. may be recovered if you do not choose that activity B. Sunk cost are costs that have to be paid regardless. For example, if you pay $6 to get into a movie and decide half way through the movie that you do not like it, the $6 expense is the same whether you stay or leave. 8

8. The law of comparative advantage states that the person who should produce a

8. The law of comparative advantage states that the person who should produce a good is the person who a. has the lowest opportunity cost of producing that good b. can produce that good using the fewest resources c. will produce that good using the most expensive resources A. If you make $7 an hour and have to pay someone $8 an hour to paint your house, you have a comparative advantage of painting the house yourself. However, if you make $20 an hour, you do not have a comparative advantage in painting the house yourself. 9

9. Comparative advantage a. leads to all of the following b. leads to the

9. Comparative advantage a. leads to all of the following b. leads to the most efficient allocation of resources and the greatest combined output c. eliminates specialization, so that each person produces for all of his own needs independently B. Should a country produce those goods that it is best at producing? Not necessarily. For example, let’s suppose Americans were better than anyone else at producing hand made wicker baskets, should we spend our time and energy producing baskets? No, because that time and energy would be better spent in the technology area, like computers. 10

10. Ann and Bob are business partners. Ann can type one page every 5

10. Ann and Bob are business partners. Ann can type one page every 5 minutes, and she can complete one page of accounting every 15 minutes. Bob can type one page or complete one page of accounting every 10 minutes. Which statements are true? a. Bob has a comparative advantage in both activities. b. Bob has an absolute advantage in both activities. c. Ann should type and Bob should do the accounting. C. Ann has higher opportunity costs of doing the accounting than Bob, and Bob has higher opportunity costs of doing the typing. 11

11. Barter is a. illegal in the United States b. an efficient system of

11. Barter is a. illegal in the United States b. an efficient system of exchange c. most useful when there is much specialization and international trade d. the direct exchange of goods, without the use of money D. If you trade with someone good for another good, you are engaging in barter. 12

12. A medium of exchange must be a. approved by the government b. socially

12. A medium of exchange must be a. approved by the government b. socially acceptable in return for all goods and services c. easy to reproduce d. used to eliminate specialization and the division of labor B. Money is used as a medium of exchange because it is used to purchase goods and services; this mean that barter is not necessary. 13

13. Because of specialization and comparative advantage, most people a. consume only what they

13. Because of specialization and comparative advantage, most people a. consume only what they produce themselves b. consume the products produced by their family and friends c. consume the products of many other specialists C. Because of specialization and the fact that people pursue activities that they have a comparative advantage in, means that we do not have to be self sufficient. By specializing and then buying from one another, our standard of living increases. 14

14. Fast food is faster and cheaper than a similar meal you could prepare

14. Fast food is faster and cheaper than a similar meal you could prepare for yourself. Which of the following does not explain that fact? a. meal preparation has been divided into many separate tasks b. larger-scale production allows the introduction of more efficient machines c. workers gain productivity at a task over time d. workers are more productive when they are being paid D. The fact that workers are paid to prepare your meal does not make fast food cheaper than preparing your own meal. 15

15. The “division of labor” refers to a. discrimination in labor markets b. separating

15. The “division of labor” refers to a. discrimination in labor markets b. separating a job into smaller tasks completed by different people c. one worker who divides his time among different jobs and duties d. defining a job according to the appropriate sex B. One of the characteristics of a modern industrial society is a greater specialization of labor. This is one reason why productivity and a resultant higher standard of living is possible than in less developed economies. 16

16. Specialization of labor a. increases productivity without creating any problems b. reduces productivity,

16. Specialization of labor a. increases productivity without creating any problems b. reduces productivity, and is usually eliminated by business firms c. can create problems of boredom and repetitive motion injuries d. prevents the introduction of more sophisticated and efficient production techniques C. On an individual basis, the division of labor has the downside of boredom and physical and emotional type problems. 17

17. The economic model of society’s production possibilities frontier a. attempts to explain the

17. The economic model of society’s production possibilities frontier a. attempts to explain the immense complexity of the real economy b. illustrates that although resources are scarce for individuals, there is no problem of scarcity for society as a whole c. is based on unrealistic assumptions and therefore has no value as an economic tool. d. is based on simplifying assumptions, but is still useful for illustrating scarcity, opportunity cost, and economic growth. D. The production possibilities model greatly simplifies the real world, but is still useful. 18

18. On a given society’s production possibilities frontier, which of the following is assumed

18. On a given society’s production possibilities frontier, which of the following is assumed to be variable? a. all of the following b. qualities of resources c. technology d. quantities of commodities produced D. The production possibilities analysis shows the relationship between two goods, one is presented on the vertical axis, the other on the horizontal axis. Each axis shows the quantities of the good portrayed. 19

19. Which of the following is most appropriately measured along one axis of the

19. Which of the following is most appropriately measured along one axis of the production possibilities frontier? a. quantity of a produced good b. price of a produced good c. quantity of natural resources d. state of technology A. Same as the previous question. 20

20. The production possibilities frontier identifies a. the maximum possible combinations of two goods

20. The production possibilities frontier identifies a. the maximum possible combinations of two goods which society can use during a given time period b. the maximum possible combinations of two resources which society can use during a given time period c. society’s preferences for goods and services produced A. It is called production possibilities because the curve shows the greatest combinations that are possible with the given constraints. 21

21. “Efficiency” refers to a. producing output using the least amount of labor b.

21. “Efficiency” refers to a. producing output using the least amount of labor b. producing output using the least amount of capital c. producing as far inside the production possibilities frontier as possible d. getting the maximum possible output from available resources D. A country is being most efficient when it uses its resources the best way possible. 22

22. If all resources are used efficiently to produce goods and services, the nation

22. If all resources are used efficiently to produce goods and services, the nation will find itself producing a. inside its production possibilities frontier b. somewhere on its production possibilities frontier c. outside of its production possibilities frontier d. at one extreme of its production possibilities frontier B. If a country uses its resources inefficiently it will operate inside its production possibilities curve. 23

23. Points inside the production possibilities frontier represent a. full and efficient use of

23. Points inside the production possibilities frontier represent a. full and efficient use of all resources b. inefficiency or unemployment (or both) c. currently unattainable combinations of outputs d. currently unattainable combinations of resources B. When a country is operating inside its production possibilities frontier it can produce more by simply becoming more efficient. But it cannot produce beyond its production possibilities frontier because it does not have the resources to do so. 24

24. Points outside the boundary of the production possibilities frontier represent a. unemployment of

24. Points outside the boundary of the production possibilities frontier represent a. unemployment of resources b. inefficient use of resources c. combinations which are attainable only if all resources are used fully and efficiently d. currently unattainable combinations of outputs D. By increasing its resources or by improving its technology a country can push out its production possibilities frontier and therefore have more of both goods. 25

25. Any movement along the production possibilities frontier involves the production of a. more

25. Any movement along the production possibilities frontier involves the production of a. more of both goods b. more of on good and less of the other c. less of both goods d. more resources B. This is an example of opportunity cost and decision making. If a country is operating on its production possibilities curve, it cannot have more of one good without giving up units of the other. 26

26. On a production possibilities frontier, the opportunity cost of one more unit of

26. On a production possibilities frontier, the opportunity cost of one more unit of a commodity per time period is a. the monetary price of the commodity b. the amount of the other commodity which must be sacrificed c. the amount of unemployed resources which must be used B. If the vertical axis measures guns and the horizontal axis measure butter, if a country is operating on its production possibilities frontier, the opportunity cost of having more guns is to units of butter that has to be given up. 27

27. Opportunity cost is constant if a. resources are equally adaptable to the production

27. Opportunity cost is constant if a. resources are equally adaptable to the production of all goods b. each resource is specialized in the production of one particular good c. larger and larger sacrifices must be made to gain equal successive amounts of a good d. all resources are used fully and efficiently A. This is an unrealistic assumption but is sometimes made. For example, if you were a farmer, this would mean that an acre of land will yield the same amount no matter what crop you plant in the acreage. The land is equally suited for both crops being considered. 28

28. The law of increasing opportunity cost a. does not relate to the shape

28. The law of increasing opportunity cost a. does not relate to the shape of the production possibilities frontier b. states that the production possibilities frontier has a constant positive slope c. states that the slope of the production possibilities frontier becomes steeper as we move to the right on the graph C. This is a more realistic assumption. For example, different plants require different optimal growing conditions. If all land is used for one crop, to plant a second crop, the best acre will be chosen; each additional planted acre will be less and less suited for the plant. 29

29. The slope of the production possibilities frontier represents a. efficiency b. unemployment c.

29. The slope of the production possibilities frontier represents a. efficiency b. unemployment c. opportunity cost d. change in resources C. Opportunity costs of choosing between one option and the other is portrayed on the production possibilities curve. 30

30. A straight-line production possibilities frontier a. could never exist under ordinary circumstances b.

30. A straight-line production possibilities frontier a. could never exist under ordinary circumstances b. illustrates the law of increasing opportunity cost c. means that no economic growth has occurred d. implies constant opportunity cost D. This would mean that the alternative crops considered require identical growing conditions. 31

31. The production possibilities frontier will shift if there is a change in a.

31. The production possibilities frontier will shift if there is a change in a. technology b. unemployment c. product prices d. society’s preferences for commodities A. A change in technology means a change in costs. An increase in costs will shift the curve inward, a decrease in costs will shift the curve outward. 32

33. An outward shift in the production possibilities frontier a. reflects economic stability b.

33. An outward shift in the production possibilities frontier a. reflects economic stability b. reflects economic growth c. reflects economic decline d. does not relate to the state of the economy B. Economic growth occurs when a country can have more of both products being considered. A shifting outward of the curve will allow the country to have more of both products being considered. 33

34. Which of the following would not shift the production possibilities frontier outward? a.

34. Which of the following would not shift the production possibilities frontier outward? a. increased education and training of the labor forces b. increased production of machines and tools c. discovery of new oil resources d. elimination of inefficiency D. If a country is on its production possibilities frontier it is already operating at the most efficient level possible. 34

35. The production possibilities frontier represents scarcity with a. points inside the curve b.

35. The production possibilities frontier represents scarcity with a. points inside the curve b. a straight-line frontier c. points outside the curve d. prices of products and resources C. The production possibilities curve is a picture of limits. Because resources are scarce, a country cannot operate outside of its production possibilities frontier. 35

36. Which of the following cannot be determined from a nation’s position on a

36. Which of the following cannot be determined from a nation’s position on a graph of its production possibilities frontier? a. whether or not it is producing efficiently b. whether or not it has unemployed resources c. the opportunity cost of each good illustrated d. the prices of each good illustrated D. The production possibilities analysis is a picture of possibilities with given resources, the prices of the two goods being considered in irrelevant. 36

37. The set of mechanism and institutions that resolve the basic economic questions is

37. The set of mechanism and institutions that resolve the basic economic questions is called the a. economic system b. production possibilities dilemma c. business resolution device d. absolute advantage determination A. All countries have to have some mechanism to decide what to produce, how to produce, and who gets what and how much. The economic system, whether it be a free market system or a command system, is the mechanism countries use to answer these questions. 37

38. If newspaper and magazine publishers switch from human typesetting to computerized typesetting, they

38. If newspaper and magazine publishers switch from human typesetting to computerized typesetting, they are changing their answer to which economic question? a. What to produce? b. How to produce? c. For whom will commodities be produced? d. Why will commodities be produces? B. The typesetting chosen is a matter of preference, they are alternatives in how to produce. 38

39. Pure capitalism and command economies represent a. two extremely different ways of answering

39. Pure capitalism and command economies represent a. two extremely different ways of answering the basic economic questions b. two names describing exactly the same way of answering the basic economic questions c. the only two ways of answering the basic economic questions d. the most efficient ways to answer the basic economic questions A. A command economy is one where the central government makes all of the economic decisions. Capitalism is a system where the decisions are made by private individuals 39 that have as their motive, profit.

40. Which of the following does not distinguish between different types of economic systems?

40. Which of the following does not distinguish between different types of economic systems? a. laws about resource ownership b. the extent of government involvement in the economy c. whether or not the basic economic questions must be answered d. what process is used to allocate resources and products C. No matter the economic system, the basic economic questions must be answered. 40

41. Which of the following is a characteristic of a pure command economy? a.

41. Which of the following is a characteristic of a pure command economy? a. all resources are privately owned b. economic activity is coordinated by the price system c. competitive markets guide resources to their highest-valued uses d. centralized economic planning is used to answer basic economic questions D. Communism is an example of a pure command economy. 41

42. Which of the following is a characteristic of pure capitalism? a. all resources

42. Which of the following is a characteristic of pure capitalism? a. all resources are owned communally b. economic activity is coordinated by government decision makers c. the price system is used to guide resources to their highest-valued uses C. Because individuals are making decisions to maximize their welfare and profit, consumers will purchase at the lowest price possible and suppliers will sell at the highest price possible. The market is at equilibrium where the two parties reach an agreement. 42

43. The “invisible hand” described by Adam Smith refers to the a. allocative role

43. The “invisible hand” described by Adam Smith refers to the a. allocative role of markets and market forces b. importance of government intervention and central planning c. actions of successful entrepreneurs in directing the economy d. role of monopolized industries in leading the nation A. This interaction between buyers and sellers in a free market described in the previous slide is an example of the “invisible hand. ” 43

44. Problems with pure capitalism include which of the following? a. people have no

44. Problems with pure capitalism include which of the following? a. people have no incentive to direct resources to their highest-valued use b. the active government involvement in controlling the economy may not be in the best interest of the individuals involved c. public goods, while desirable, may not be produced C. This is why we have modified capitalistic system; we have modified it in an attempt to rectify some of its weaknesses. We support a government that taxes us and then uses the tax money to support things that would not exist in a purely free enterprise system. 44

45. Problems with a pure command economy include which of the following? a. property

45. Problems with a pure command economy include which of the following? a. property rights cannot be enforced b. public goods, while desirable, may not be produced c. the lack of a legal system makes it impossible to create contracts d. large, diverse economies may be extremely difficult for central authorities to analyze and control D. Command economies may have some advantages, but one of the big disadvantages is the fact that large complex and diversified economies are difficult to analyze and control 45 by any one central authority.

46. With regard to pure capitalistic economies and pure command economies, a. all real-world

46. With regard to pure capitalistic economies and pure command economies, a. all real-world societies are purely capitalistic b. all real-world societies are pure command c. all real-world societies are purely capitalistic or purely command d. real-world societies are usually a mixture of command capitalism D. Even our own American system, even though it is primarily a free market system, has some aspects of a command system in it. 46

47. A mixed capitalist economy occurs when a. decisions are based primarily on religion

47. A mixed capitalist economy occurs when a. decisions are based primarily on religion or custom b. all resources are publicly owned and economic planning is centralized c. all resources are privately owned and prices are used to coordinate economic activity d. resources are both publicly and privately owned and some markets are regulated D. Some economists call our type of economic system a mixed economic system because we have aspects of both systems. 47

48. In the United States, government directly accounts for approximately what proportion of all

48. In the United States, government directly accounts for approximately what proportion of all economic activity? a. one-hundredth (1/100 = 1%) b. one-twentieth (1/20 = 5%) c. one-third (1/3 = 33%) d. two-thirds (2/3 = 67%) C. The federal government spends one out of every four dollars, all governments (federal, state and local) spend one out of every three dollars. Consequently, we, as taxpayers, pay one out of every three dollars of our income as taxes. 48

49. One of the most centrally planned economies in the world today is found

49. One of the most centrally planned economies in the world today is found in a. the United States b. Germany c. Canada d. Cuba D. Cuba is one of the last remaining communistic economies left in the world. 49

52 53 Consumer goods 51 (millions of units per year) The Production Possibilities Frontier

52 53 Consumer goods 51 (millions of units per year) The Production Possibilities Frontier A B C D H E G F Capital goods (millions of units per year) 50

50. Which of the following points represent inefficiency in Exhibit 2 -1? a. A

50. Which of the following points represent inefficiency in Exhibit 2 -1? a. A b. E c. H d. G D. G is inside the production possibilities frontier; by becoming more efficient this economy could have more of both consumer goods and capital goods. 51

51. Which of the following points is unattainable in Exhibit 2 -1? a. A

51. Which of the following points is unattainable in Exhibit 2 -1? a. A b. E c. H d. G C. H is outside of the production possibilities frontier. Unless this country improves or increases its resources, it cannot obtain level H. 52

52. What is the opportunity cost of moving from point C to point E

52. What is the opportunity cost of moving from point C to point E in Exhibit 2 -1? a. GC units of capital plus GE units of consumer goods b. GC units of capital minus GC units of consumer goods c. CE units of capital goods and consumer goods d. CG units of consumer goods D. CG shows how many units of consumer goods would have to be given up to have GE more units of capital goods. 53

Shifts in the Economy’s PPF Consumer goods Panel D: Increase in resources or technology

Shifts in the Economy’s PPF Consumer goods Panel D: Increase in resources or technology that benefits capital goods A PPF' Capital goods 54

53. Which of the following would shift the Production Possibilities Frontier (PPF) from PPF

53. Which of the following would shift the Production Possibilities Frontier (PPF) from PPF to PPF’ in Exhibit 2 -2? a. improved technology in the production of consumer goods b. both of the following c. a reduction in inefficiency d. improved technology in the production of capital goods D. Improved technology would increase productivity pushing the PPF curve outward. 55

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