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Multiple Choice TutorialChapter 2

Economic Tools and Economic Systems

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1. The opportunity cost of an activity isa. 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.

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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.

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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 activityc. non-monetary benefits from that activityd. 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.

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4. Rational choices must be based ona. 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?”

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5. The opportunity cost of an activitya. 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.

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6. Your opportunity cost when choosing a particular activitya. can be easily and accurately calculatedb.cannot even be estimatedc. does not change over timed. 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.

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7. Sunk costsa. are the most important consideration in

rational decision makingb. should be ignored when making economic

choicesc. are incurred only if you choose that

activityd. may be recovered if you do not choose

that activityB. 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.

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8. The law of comparative advantage states that the person who should produce a good is the person whoa. has the lowest opportunity cost of

producing that goodb. can produce that good using the fewest

resourcesc. will produce that good using the most

expensive resourcesA. 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.

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9. Comparative advantagea. leads to all of the followingb. leads to the most efficient allocation of

resources and the greatest combined outputc. 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 any 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.

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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.

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11. Barter isa. illegal in the United Statesb. an efficient system of exchangec. most useful when there is much

specialization and international traded. the direct exchange of goods, without the

use of money

D. If you trade with someone one good for another good, you are engaging in barter.

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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 reproduced. 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.

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13. Because of specialization and comparative advantage, most people

a. consume only what they produce themselvesb. consume the products produced by their

family and friendsc. consume the products of many other

specialistsC. 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.

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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 tasksb. larger-scale production allows the

introduction of more efficient machinesc. workers gain productivity at a task over timed. 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.

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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.

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16. Specialization of labor a. increases productivity without creating

any problemsb. reduces productivity, and is usually

eliminated by business firmsc. can create problems of boredom and

repetitive motion injuriesd. 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.

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

complexity of the real economyb. 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.

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18. On a given society’s production possibilities frontier, which of the following is assumed to be variable?a. all of the followingb. qualities of resourcesc. technologyd. 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.

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19. Which of the following is most appropriately measured along one axis of the production possibilities frontier? a. quantity of a produced goodb. price of a produced goodc. quantity of natural resourcesd. state of technology

A. Same as the previous question.

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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.

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

of laborb. producing output using the least amount

of capitalc. producing as far inside the production

possibilities frontier as possibled. getting the maximum possible output

from available resources

D. A country is being most efficient when it uses its resources the best way possible.

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22. If all resources are used efficiently to produce goods and services, the nation will find itself producinga. inside its production possibilities frontierb. somewhere on its production possibilities

frontierc. outside of its production possibilities

frontierd. at one extreme of its production

possibilities frontier

B. If a country uses its resources inefficiently it will operate inside its production possibilities curve.

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23. Points inside the production possibilities frontier representa. full and efficient use of all resourcesb. inefficiency or unemployment (or both)c. currently unattainable combinations of

outputsd. currently unattainable combinations of

resourcesB. 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.

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24. Points outside the boundary of the production possibilities frontier represent a. unemployment of resourcesb. inefficient use of resourcesc. combinations which are attainable only if

all resources are used fully and efficientlyd. 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.

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25. Any movement along the production possibilities frontier involves the production ofa. more of both goodsb. more of on good and less of the otherc. less of both goodsd. 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.

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26. On a production possibilities frontier, the opportunity cost of one more unit of a commodity per time period isa. the monetary price of the commodityb. the amount of the other commodity which

must be sacrificedc. the amount of unemployed resources which

must be usedB. 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.

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

production of all goodsb. each resource is specialized in the

production of one particular goodc. larger and larger sacrifices must be made

to gain equal successive amounts of a goodd. 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.

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

production possibilities frontierb. states that the production possibilities

frontier has a constant positive slopec. 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.

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29. The slope of the production possibilities frontier representsa. efficiencyb. unemploymentc. opportunity costd. change in resources

C. Opportunity costs of choosing between one option and the other is portrayed on the production possibilities curve.

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30. A straight-line production possibilities frontiera. could never exist under ordinary

circumstancesb. illustrates the law of increasing

opportunity costc. means that no economic growth has

occurredd. implies constant opportunity cost

D. This would mean that the alternative crops considered require identical growing conditions.

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31. The production possibilities frontier will shift if there is a change ina. technologyb. unemploymentc. product pricesd. 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.

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33. An outward shift in the production possibilities frontier a. reflects economic stabilityb. reflects economic growthc. reflects economic declined. 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.

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

a. increased education and training of the labor forcesb. increased production of machines and toolsc. discovery of new oil resourcesd. elimination of inefficiency

D. If a country is on its production possibilities frontier it is already operating at the most efficient level possible.

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35. The production possibilities frontier represents scarcity with

a. points inside the curveb. a straight-line frontierc. points outside the curved. 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.

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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 efficientlyb. whether or not it has unemployed

resourcesc. the opportunity cost of each good

illustratedd. 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.

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

a. economic systemb. production possibilities dilemmac. business resolution deviced. 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.

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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.

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39. Pure capitalism and command economies represent

a. two extremely different ways of answering the basic economic questionsb. two names describing exactly the same way

of answering the basic economic questionsc. the only two ways of answering the basic

economic questionsd. the most efficient ways to answer the basic

economic questionsA. 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 that have as their motive, profit.

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

a. laws about resource ownershipb. the extent of government involvement in

the economyc. whether or not the basic economic

questions must be answeredd. what process is used to allocate resources

and products

C. No matter the economic system, the basic economic questions must be answered.

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41. Which of the following is a characteristic of a pure command economy?a. all resources are privately ownedb.economic activity is coordinated by the

price systemc. competitive markets guide resources to

their highest-valued usesd. centralized economic planning is used to

answer basic economic questions

D. Communism is an example of a pure command economy.

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42. Which of the following is a characteristic of pure capitalism?a. all resources are owned communallyb. economic activity is coordinated by

government decision makersc. 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.

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43. The “invisible hand” described by Adam Smith refers to thea. allocative role of markets and market

forcesb. importance of government intervention

and central planningc. actions of successful entrepreneurs in

directing the economyd. role of monopolized industries in leading

the nationA. This interaction between buyers and sellers

in a free market described in the previous slide is an example of the “invisible hand.”

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44. Problems with pure capitalism include which of the following?

a. people have no incentive to direct resources to their highest-valued useb. 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.

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

a. property rights cannot be enforcedb. public goods, while desirable, may not be

producedc. the lack of a legal system makes it

impossible to create contractsd. 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 by any one central authority.

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46. With regard to pure capitalistic economies and pure command economies,

a. all real-world societies are purely capitalisticb. all real-world societies are pure commandc. all real-world societies are purely

capitalistic or purely commandd. real-world societies are usually a mixture

of command and 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.

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47. A mixed capitalist economy occurs whena. decisions are based primarily on religion or

customb. all resources are publicly owned and

economic planning is centralizedc. 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.

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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.

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

a. the United Statesb. Germanyc. Canadad. Cuba

D. Cuba is one of the last remaining communistic economies left in the world.

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Capital goods(millions of units per year)

Con

sum

er g

ood

s(m

illi

ons

of u

nit

s p

er y

ear)

The Production Possibilities Frontier

G

H

F

E

DC

BA51

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

a. Ab. Ec. Hd. 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.

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

a. Ab. Ec. Hd. GC. H is outside of the production

possibilities frontier. Unless this country improves or increases its resources, it cannot obtain level H.

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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 goodsb. GC units of capital minus GC units of

consumer goodsc. CE units of capital goods and consumer

goodsd. 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.

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Shifts in the Economy’s PPFPanel D: Increase in resources or

technology that benefits capital goodsC

onsu

mer

goo

ds

Capital goodsPPF

A

PPF'

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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 goodsb. both of the followingc. a reduction in inefficiencyd. improved technology in the production of

capital goodsD. Improved technology would increase

productivity pushing the PPF curve outward.

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