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Multiple Choice TutorialChapter 1

Why Economics?

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1. When is a good or service scarce?a. it is rare and hard to come by.b. there is not enough of it available for

everybody who wants it for free.c. there is plenty available for everyone who

wants it. d. there is a shortage.

B. Scarcity means that there is not enough of something so that everyone who wants it cannot have it for free. In this case, how do we decide who gets? Everything that is scarce will have a price, the price determines who gets and who does not get.

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2. Human wants and desires area. eventually satisfied in any societyb. constant from one time period to the nextc. virtually unlimitedd. limited and scarce

C. In our analysis of economics we assume that when given a choice, people would want more rather than less. Each time people make a choice between alternatives, the choice made is the one that they believe will increase their total welfare.

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3. Scarcity is an economic problema. only in capitalist economies.b. only in command economies.c. only in poor countries.d. in every country and in every household.

D. The only way not to have scarcity is for everyone to have everything they want for free, an impossible situation.

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4. Economic analysis would be unnecessary if there were no

a. taxesb. governmentc. scarcityd. moneyC. All of economic analysis revolves around

the fact that we live in a world of scarce resources. Therefore, the problem becomes, how do we meet people’s wants and needs in this world of scarcity?

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5. Because resources are scarce, a. opportunity costs are zero

b. people must make choices among alternatives

c. all human wants and desires can be satisfied

d. resource prices are flexible

B. No matter what economic system people live in, all people’s in every society are faced with the problem of scarcity.

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6. Economics deals with the problems caused by a. scarce resources and unlimited wants.

b. scarce resources and limited wants.c. abundant resources and unlimited wants.d. abundant resources and limited wants.

A. No matter what political system people live under there will always be people who want more than the economy can provide them for free.

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7. Resources are divided into the following broad categories:a. men, money, and machines.b. saving, spending, investment, and capital.c. human, technological, and government.d. land, labor, capital, and entrepreneurial

ability.D. The four resources to grow an

economy are land, labor, capital, and in a free market, entrepreneurship. In a command system, the fourth resource would be the government.

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8. In economics, “land” refersa. only to plots of ground on the surface of

the earth.b. to the specific area of the earth in a

country or region.c. to rural regions as distinguished from

urban areas.d. to any and all natural resources.

D. A land resource is anything from the earth. Some examples of a land resource are: timber, fresh water, fertile land, copper, iron ore, gold, silver, and anything else that can be used from the earth that can be used to produce goods and services.

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9. Physical and mental human effort in the attempt to solve the economic problem is defined in economics asa. laborb. manpowerc. productivityd. performance

A. The labor that we are talking about here is directed and productive labor. Labor that is directed to the production of goods and services helps build a productive economy.

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10. Labor is ultimately derived froma. capitalb. technologyc. natural resourcesd. time

D. This is particularly true when it comes to skilled labor. It takes time to acquire the knowledge and skills to be productive in this high tech economy we live in.

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11. In economics, “capital” refers to a. money.b. stocks, bonds, and other financial assets.c. the seat of government.d. machines, buildings, and tools.

D. Capital are those resources which can be used to produce goods and services.

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12. Which of the following is not an example of “capital”?a.the copy machine which duplicated this

examb. an economics professor’s knowledge of

economicsc. the building in which this class is locatedd. the amount of tuition which you paid for

this classD. The copy machine and the school building

are tangible things used in the productive process. The economic professor’s knowledge is what we call human capital, the knowledge necessary to work with capital. But the tuition you pay is neither capital or human capital.

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13. An entrepreneur isa. an intermediary between buyers and

sellers in the marketplace.b. the organizer who seeks profitable

opportunities and is willing to accept risks.c. a business organization involved in using

inputs to produce output.d. the administrator who runs an enterprise

without accepting any risk of financial loss.B. Someone has to decide what and how to

produce goods, in a command economy it is the government, in a free market, it is the entrepreneur.

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14. The driving force which directs and grows the economy in a free market economy isa. physical capitalb. technological abilityc. entrepreneurshipd. human labor

C. Anyone can be an entrepreneur, it does not necessarily take a lot of money. Entrepreneurship is an attitude more than anything else. If you have dreams of owning your own business and have a plan to start and and develop that business into a profitable venture, and take action on your dreams, you are an entrepreneur.

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15. What is the difference between a democracy and a republic?a. In a democracy the majority rules whereas

a republic is a system based on lawb. There is no difference between a

democracy and a republicc. A republic requires free elections whereas a

democracy does notd. None of the above

A. According to our Constitution we are a democracy in a republic, the purpose of many laws is to protect the minority from the majority

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16. In the 1600s and 1700s the purpose of colonies was toa. Enrich the mother countryb. Spread Christianityc. Explore new landd. Spread the free market economy

throughout the world

A. The purpose of colonies, which America was one, was to enrich the mother country, in our case , England

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17. In a production process, profit is the payment received by thea. capital.b. laborc. technology.d. entrepreneur.

D. The reward to someone to take risks in a business venture is called profit.

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18. Profit is also known asa. rentb. mark-upc. the monetary aggregated. the residual claimed by the entrepreneur

D. Residual is that which is left over. When one tallies up the total revenue and the total costs as a result of a business venture, if there is something left over, that something is called profit. If there is a deficit, a loss is incurred.

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19. Unlike a service, a gooda. is desirableb. uses resources to satisfy wantsc. is physical and tangibled. is abundant and free

C. The word ‘good’ is a term economists use to signify something physical and tangible that is useful.

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20. Adam Smith believed thata. A strong central government promoted

economic efficiency and growthb. A republic would always foster economic

freedom and growthc. Everyone would benefit from international

trade and minimal governmentd. A pure democracy was the best form of

government

C. Adam Smith, the father of modern day economics, believed that the invisible hand of self interest would guide a free market economy to prosperity and growth

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21. Which of the following is a trait of an entrepreneur?a. They own and sell resourcesb. They are risk takersc. produce goods and servicesd. all of the above

d. Without the influence of the entrepreneur a free market system could not function, if the entrepreneur is not the driving force, then the government takes over by default

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22. Which of the following traits are you demonstrating because you are a student?a. You have learned the lesson of delayed

gratificationb. You are a risk takerc. You have learned that to have more time

and money in the future you have to give up time and money

d. All of the aboved. You are demonstrating some of the

traits of an entrepreneur by the fact that you are in college

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23.The labor market is an example of a a. government market.b. classified market.c. communication market.d. resource market.

D. Labor is one of the four resources. The market that labor is bought and sold is therefore called the resource market.

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24. The economic behavior of individual decision makers and the determination of price and output in specific markets are both studies in a. microeconomics.b. macroeconomics.c. positive economics.d. normative economics.

A. Microeconomics is the study of the decision making process of economics.

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25. In macroeconomics, we analyze thea. all of the following.b. overall performance of the economy as a

whole.c. arrangements through which specific

products are exchanged.d. influences on the decision making of

particular households.

B. Macroeconomics is the study the economy in the large, it’s like if you were flying over the economy and able to see how all the different parts fit together.

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26. The assumption of rational self-interest means that economic decision makersa. have no concern for the welfare of others.b. consider the welfare of others to be more

important than their own happiness.c. know with certainty which choice will have

the best result.d. make reasonable decisions based on their

expectations of results.D. In order to make predictions as what people

will do when faced with choices, we have to assume that they will act rationally.

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27. In a free market a. There is always strifeb. Nothing is constant, everything is in fluxc. Economic slumps are inevitabled. All of the above

d. In our attempt to avoid inequities, slumps, and anything else we find objectionable we often make the situation worse, not better. We cannot thwart the market.

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28.Rational economic decision makers will make a change only ifa. the change is free of riskb. there are no costs involvedc. their expectations are correctd. expected marginal benefit exceeds

expected marginal cost

D. Marginal benefit is measured by how much benefit one receives from the last act; marginal cost is a measure of the cost of that last act. One will chose to do something if the marginal benefit of the last act is greater than the marginal cost of that last act.

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29.When economic choice involves adjustment to the existing situation, marginal analysis a. has no practical applications or real-world

uses.b. eliminates incorrect decisions and bad

choices.c. means comparing the additional costs and

additional benefits of an activity before deciding.

C. People make decisions based on the margin. For example, a person will buy a soda pop only if the expected pleasure received is greater than the value placed on the money that has to be given up to purchase the drink.

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30. Economic informationa. is scarce and costly to acquireb. is available for free to any decision makerc. is not required for rational decision makingd. must be complete before any decision is

made

A. The government and businesses spend an enormous amount of resources on acquiring information.

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31. The price mechanisma. Gives incentives to the supplierb. Determines the distribution of incomec. Will provide the skilled worker with a good

incomed. All of the above

D. The price mechanism can only work if we allow prices to fluctuate in accordance to market forces, the more we impede this free flow of prices the less smooth the economic system operates.

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32. The purpose of our Constitution isa. To make sure the federal government has

enough power to regulate the economyb. To make sure there is an equal distribution

of incomec. To make sure power remains decentralized

c. The largest threat to our personal freedom is centralized power. Our Constitution divides the power base among different parts of government.

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33. The “ceteris paribus” assumption meansa. “after all other changes have been taken

into consideration”.b. “all economic decision makers behave

according to rational self-interest”.c. “marginal benefit equals marginal cost”d. “holding all other variables constant”.

D. Economists can make predictions only if one variable changes and everything else stays the same. For example, people will buy more Cadillac cars when the price goes down, assuming that their incomes or the price of other luxury cars do not change.

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34. In a free market profits are maximized whena. Prices are kept as high as possibleb. Costs and prices both declinec. The government controls prices

b. A good example of this principle is Wal-Mart. Wal-Mart has prospered by lowering its costs and then lowering its prices to increase its sales volume.

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35. What causes unemployment?a. A shortage of goods and servicesb. Consumer’s greedc. Greed on the part of business ownersd. A surplus of goods and services on the

market

D. That one thing that will cause business owners to lay off employees is when they are producing, or purchasing wholesale, more units than they are selling retail.

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36. Which of the following events ushered in the Great Depression of the 1930sa. The Smoot Hawley Tariffb. A decrease in the money supplyc. An increase in taxesd. All of the above

D. The build up of excessive inventory due to business greed led to the unemployment problem in the early 1930s, but it was these three policies of the government after unemployment became a problem that actually ushered in the depression.

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37.The difference between positive economic statements and normative economic statements is that a. positive statements are based on opinion

and normative statements are based on fact.b. positive statements are true and normative

statements are often false.c. positive statements are based on fact and

normative statements are based on opinion.C. Positive economics is the study of what

actually happens. For example, to predict that people will buy more Cadillac cars when the price goes down is an example of positive economics. To say that people should not waste money on luxury is normative economics.

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38. What was the purpose of the Smoot-Hawley Tariff in the early 1930s?a. To raise moneyb. Encourage international tradec. To help bring down inflationd. To increase the price of imports

d. The thinking was that if we raised the price of imports Americans would buy more domestic products. However, the higher prices led to a decrease in buying power which made the unemployment problem worse.

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39. The depression of 1920-1921 was a. As severe as the depression of the 1930sb. Was brief and swiftc. Was a case where the economy was allowed

to correct the problem itself

c. We did not come in and impose all kinds of government programs as we did in the 1930s. Some economists believe that it was government policies of the 30s which led to the length and severity of the depression.

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40. The increase in the size and expense of national government worldwide has had a very negative side effect. That side effect is a. An increase in debt worldwideb. Smaller governmentc. A fall in the value of the dollard. None of the above

A. Large and increasing debts on the part of almost all governments worldwide is causing severe economic problems worldwide and limits our ability to solve our problems.

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END