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Chapter 1: Introduction to Economics

Multiple Choice

1. The basic reason we study economics is because material wants and needs are:A) limited and so are resources.B) limited but resources are not.C) unlimited and so are resources.D) unlimited but resources are not.

Ans: DDifficulty: ETopic: WHAT IS ECONOMICS?

2. The basic problem that gives rise to the study of economics is the need to:A) control the effects of actions by foreign governments.B) be sure all the goods and services produced in an economy get sold.C) use scarce resources to satisfy people's unlimited material wants and needs.D) control people's tastes and wishes so that the available resources can produce all the goods and services they want.

Ans: CDifficulty: ETopic: WHAT IS ECONOMICS?

3. The basic concern of economics is:A) to provide stable economic conditions to ensure political stability.B) to match limited resources to people's limited material wants and needs.C) the scarcity problem created because people's desires for material things exceed the ability to produce them.D) to encourage society to acquire enough goods and services so that everybody has a job.

Ans: CDifficulty: MTopic: WHAT IS ECONOMICS?

4. Economics is concerned with:A) earning as much money as possible.B) limiting individuals' wants so that our scarce resources will not be used up.C) using scarce resources to satisfy virtually limitless material wants and needs.D) using as many workers as possible to produce any given level of output.


5. The "economic problem" exists because:A) for the first time in history, people are earning more money than they can spend.B) resources are limited while wants and needs for goods and services are virtually limitless.C) people are unwilling to put forth the effort required to attain the goods and services they want.D) there are more goods and services being produced than people want, causing some businesses to go bankrupt.

Ans: BDifficulty: MTopic: WHAT IS ECONOMICS?

6. There would be no need to study economics if:A) there were no government controls on people's actions.B) people were free to do whatever they wanted with their lives.C) there were enough resources to produce all the goods and services people would like to obtain.D) all of the above.


7. Which of the following statements is FALSE?A) Economics is the study of decision making in a world of scarcity.B) Scarcity is faced by all individuals, businesses, and societies.C) Scarcity arises because people's wants and needs are virtually unlimited, while the resources available to satisfy those wants and needs are not.D) Scarcity could be overcome if people were willing to work harder to produce all the goods and services that would satisfy their material wants and needs.

Ans: DDifficulty: MTopic: WHAT IS ECONOMICS?

8. Scarcity is a problem faced by:A) households, but not businesses and governments.B) households and businesses, but not governments because they can pass laws to get the goods and services they need.C) households and governments, but not businesses because they are the ones that produce the goods and services that people want.D) households, businesses and governments.


9. In economics, scarcity refers to the fact that there are not enough:A) goods and services to completely satisfy everyone's wants and needs.B) hours in the day to consume all the goods and services available in the economy.C) goods and services produced to allow everyone wanting to work to hold down a full-time job.D) dollars for spending on goods that have already been produced and directly satisfy our wants, such as food and clothing.

Ans: ADifficulty: MTopic: WHAT IS ECONOMICS?

10. We study economics to:A) understand how an economy operates.B) develop more sophisticated thought processes.C) develop skills which can be used in our careers.D) all of the above.


11. Because resources are scarce, individuals must:A) learn to do without.B) make value judgments.C) try to be more efficient.D) all of the above.


12. Because of scarcity:A) individuals and societies are not able to choose which material wants and needs to satisfy.B) individuals and societies must choose which material wants and needs to satisfy.C) all choices about satisfying wants and using resources must be made by the government.D) choices can be made about which wants to satisfy, but not about which resources to use.


13. Economics is concerned with tradeoffs caused by scarcity. "Tradeoffs" refers to:A) the alternatives given up when making choices.B) recycling old goods into new goods to reduce the scarcity problem.C) the buying and selling that occurs when unwanted goods are exchanged for goods that are desired.D) the decisions about whether households or businesses should bear the entire burden of the scarcity problem.


14. Rational decision-making under conditions of scarcity requires individuals to:A) place a monetary value on everything they do.B) know the prices of all goods they might possibly buy.C) understand that they have to make choices, or tradeoffs.D) be constantly alert to price reductions on desired products.

Ans: CDifficulty: HTopic: WHAT IS ECONOMICS?

15. The relative importance a person assigns to various actions or alternatives:A) reflects the person's value judgments.B) is the same for all people who earn the same income.C) depends only on the dollar prices of the actions or alternatives.D) all of the above.


16. The choices that are made because of scarcity:A) are always correct if solved mathematically.B) differ when they involve people's wants, but are similar when they involve people's needs.C) depend on the decision maker's value judgments about the relative importance of different alternatives.D) are important in poor countries, but not in economically advanced countries where people earn high incomes.


17. The opportunity cost of a purchase or a decision is:A) the lowest possible cost to make that purchase or decision.B) the highest cost that must be paid to make that purchase or decision.C) the actual amount paid to make that purchase or decision.D) what had to be given up to make that purchase or decision.


18. The cost of a purchase or decision measured by what is given up to make the purchase or carry out the decision is its:A) sunk cost.B) hidden cost.C) overhead cost.D) opportunity cost.


19. The opportunity cost of going to school rather than working is the:A) cost of food and clothing.B) cost of tuition and housing.C) cost of getting to and from school.D) wages which could have been earned.


20. The opportunity cost of working rather than going to school is:A) the cost of food and housing.B) the cost of clothing and transportation.C) the higher wages that come with additional education.D) zero, since the person is earning an income.


21. An opportunity cost:A) exists only for decisions involving expenditures of money.B) exists because there is only one way money and time can be spent.C) is equal to the value of what is given up to make a purchase or take an action.D) accompanies every decision made by individuals and businesses, but not by government because that reflects the wishes of society.


22. The opportunity cost to a student of preparing for an examination is:A) impossible to measure.B) the alternative use of the time required to prepare for the exam.C) high for a student with a high GPA and low for a student with a low GPA.D) zero since the tuition has already been paid for the course and there is not an extra fee to take the exam.

Ans: BDifficulty: HTopic: WHAT IS ECONOMICS?

23. The opportunity cost of a purchase is:A) zero if the item is what you want most.B) always equal to the selling price of the acquired item.C) always greater for people who are out of work than for people who are working.D) the alternative good or service that must be given up because this item is purchased.

Ans: DDifficulty: HTopic: WHAT IS ECONOMICS?

24. If there were no scarcity:A) there would be no opportunity costs.B) there would be no need to make tradeoffs.C) both of the above.D) none of the above.


25. Application 1.1, "To Work or Not to Work," focuses on the:A) cost to parents when adult working children move back home after graduating from college.B) effects on high school students' grades, and social and other activities from working long hours while in school.C) amounts cities spend to keep businesses from relocating elsewhere in order to keep employment rates high.D) amounts people spend on child care, transportation, and "professional wardrobes," in order to keep high-paying jobs.

Ans: BDifficulty: HTopic: WHAT IS ECONOMICS?

26. Efficiency means:A) producing output of a desired quality at the lowest possible cost.B) producing the largest possible output of a desired quality with a given set of resources.C) using the minimum cost inputs to produce a given amount of output of a desired quality.D) all of the above.


27. Increasing efficiency will:A) increase the problem of scarcity.B) reduce the problem of scarcity.C) eliminate the problem of scarcity.D) have no effect on the problem of scarcity because there is a fixed supply of resources.


28. If all goods and services were produced efficiently:A) there would be no more opportunity costs.B) there would no longer be a problem with scarcity.C) the largest attainable output would be produced from available resources.D) all of the above.


29. A student earning an A in a course would be considered efficient if she got that grade by:A) letting her grade drop in another course.B) quitting her job to spend more time studying.C) mastering the required material in the least amount of time.D) studying the subject matter for at least 15 hours per week.


30. If there were no scarcity:A) equity and efficiency would no longer be important concerns.B) both equity and efficiency would continue to be important concerns.C) equity would continue to be an important concern, but efficiency would not.D) efficiency would continue to be an important concern, but equity would not.


31. Questions about equity are difficult to answer because people:A) have different value judgments about what is fair.B) disagree over how fairness can be achieved.C) disagree over whether fairness should be an economic goal.D) all of the above.


32. Whether a distribution of goods and services is fair or just is a question of:A) equity.B) efficiency.C) how to produce at minimum cost.D) maximizing the employment of scarce resources.

Ans: ADifficulty: ETopic: WHAT IS ECONOMICS?

33. Which of the following statements is true?A) Equity requires that every person receive the same amount of goods and services.B) Equity requires that every person receive a sufficient amount of goods and services to satisfy their needs.C) Equity requires that every person receive an amount of goods and services proportional to what they contribute to society.D) The definition of equity depends on a person's value judgments, and any of the above could fulfill an individual's concept of equity.


34. Equity as defined in a market system requires that every person receive:A) the same amount of goods and services as every other person.B) a sufficient amount of goods and services to satisfy their needs.C) an amount of goods and services based on their contribution to production.D) none of the above.


35. Efficiency and equity:A) can never be achieved at the same time because increasing equity necessarily reduces efficiency.B) can always be achieved at the same time because increasing efficiency automatically increases equity.C) are separate goals that can be pursued independently.D) none of the above.

Ans: CDifficulty: HTopic: WHAT IS ECONOMICS?

36. The factor of production that organizes economic activity and bears the risk of success or failure in a business venture is:A) labor.B) capital.C) entrepreneurship.D) all of the above.

Ans: CDifficulty: ETopic: FACTORS OF PRODUCTION

37. An engineer employed by a city is an example of:A) land.B) labor.C) capital.D) entrepreneurship.

Ans: BDifficulty: ETopic: FACTORS OF PRODUCTION

38. A tractor used to harvest corn crops on a farm is:A) landB) laborC) capital.D) entrepreneurship.


39. A woman who owns and operates her own real estate company is an example of:A) land.B) labor.C) capital.D) entrepreneurship.

Ans: DDifficulty: ETopic: FACTORS OF PRODUCTION

40. An auto repair shop, a corn field, and a person managing a coffee shop that they own are, respectively, examples of:A) land, capital, and labor.B) capital, land, and labor.C) land, capital, and entrepreneurship.D) capital, land, and entrepreneurship.

Ans: DDifficulty: MTopic: FACTORS OF PRODUCTION

41. When classifying factors of production, capital refers to:A) stocks, bonds, and moneyB) machinery and equipment to produce goods and servicesC) the financial payments by an entrepreneur to start a business.D) all of the above

Ans: BDifficulty: MTopic: FACTORS OF PRODUCTION

42. The four factors of production are:A) interest, profit, rent, and wages.B) capital, entrepreneurship, labor, and land.C) buildings, equipment, natural resources, and supplies.D) management, money, natural resources, and workers.


43. A salaried corporate attorney, a vein of coal, the owner of a bakery, and a snowplow are, respectively:A) labor, capital, entrepreneurship, and land.B) labor, land, entrepreneurship, and capital.C) entrepreneurship, capital, labor, and land.D) entrepreneurship, land, labor, and capital.


44. The two functions of an entrepreneur are:A) supply and organize resources.B) organize and pay resources.C) supply resources and bear the risk of a business' failure.D) organize resources and bear the risk of a business' failure.


45. Which of the following statements is true?A) Organizing other resources is one function of an entrepreneur.B) Only real estate is included in the factor of production category termed land.C) The factor of production category termed capital includes stocks, bonds, and money.D) All of the statements are true.

Ans: ADifficulty: HTopic: FACTORS OF PRODUCTION

46. Which of the following statements is true?A) Land refers only to farm land, oil, and coal reserves.B) Money is important for economic activity, but it is not a factor of production.C) Stocks and bonds are included in the factor of production category termed capital.D) Labor refers to unskilled workers; all other human effort is classified as entrepreneurship.

Ans: BDifficulty: HTopic: FACTORS OF PRODUCTION

47. The incomes received by entrepreneurs, by labor, and by the owners of land and of capital resources are, respectively:A) rents, wages, interest and profits.B) profits, wages, rents, and interest.C) wages, rents, profits and interest.D) interest, rents, wages, and profits.


48. The incomes received by the four factors of production are:A) rents, wages, interest, and profits.B) rents, salaries, dividends, and net income.C) rents, profit sharing, dividends, and net income.D) capital gains, wages, dividends, and net income.

Ans: ADifficulty: ETopic: FACTORS OF PRODUCTION

49. An employee in a local shopping mall earns $9.00 per hour, the owner of heavy construction equipment receives $15,000 per month for the use of that equipment by contractors that build bridges and highways, and the owner of 5 acres of land receives $800 per month from a business that stores school buses on that land. These incomes are, respectively:A) interest, profit, and rent.B) profit, rent, and interest.C) wages, interest, and rent.D) wages, interest, and profit.

Ans: CDifficulty: MTopic: FACTORS OF PRODUCTION

50. A student earns $8 per hour from a part-time job, her mother receives $500 per month from a man who harvests crops from 80 acres of farmland that she owns, and her brother gets $100 every quarter from stock he owns in a corporation. These incomes are, respectively:A) wages, rent, and profit.B) profit, interest, and rent.C) wages, interest, and profit.D) wages, profit, and interest.

Ans: ADifficulty: MTopic: FACTORS OF PRODUCTION

51. Wages are earned by:A) owners of land.B) suppliers of labor.C) owners of capital.D) entrepreneurs.

Ans: BDifficulty: ETopic: FACTORS OF PRODUCTION

52. Interest is earned by:A) owners of land.B) suppliers of labor.C) owners of capital.D) entrepreneurs.


53. Rents are earned by:A) owners of land.B) suppliers of labor.C) owners of capital.D) entrepreneurs.

Ans: ADifficulty: ETopic: FACTORS OF PRODUCTION

54. Profits are earned by:A) owners of land.B) suppliers of labor.C) owners of capital.D) entrepreneurs.

Ans: DDifficulty: ETopic: FACTORS OF PRODUCTION

55. Distinctions between the different factor incomes are important because they affect:A) taxes paid by factor owners.B) class perceptions within society.C) legislative and public policy initiatives.D) all of the above.

Ans: DDifficulty: HTopic: FACTORS OF PRODUCTION

56. To an economist, scarce resources means that:A) the number of resources at our disposal is numerically small.B) resources are scarce compared to the goods and services people want and need.C) resources are hard to locate, and resource suppliers are unwilling to sell their resources.D) all of the above.


57. All resources are:A) scarce both in relative terms and in absolute terms.B) abundant both in relative terms and in absolute terms.C) scarce relative to the wants and needs they must satisfy, but many resources are abundant in absolute terms.D) scarce in absolute terms, but many resources are abundant compared to the wants and needs they must satisfy.

Ans: CDifficulty: HTopic: FACTORS OF PRODUCTION

58. Resources are scarce:A) when compared to the wants and needs people wish to satisfy.B) in less developed countries, but not in advanced economies, such as that of the United States.C) in the sense that there is almost no oil, coal, clean air, or water left, and the labor force is shrinking.D) because people do not demand enough goods and services to ensure that resources will be made available in large enough quantities.

Ans: ADifficulty: MTopic: FACTORS OF PRODUCTION

59. According to Application 1.2, Does Money Buy Happiness?:A) there have been no studies on how having more money affects happiness.B) there have been studies on money buying happiness, but they have not arrived at the same conclusion.C) there is clear evidence that having more money will always increase a person's happiness more than anything else.D) almost all studies show that having more money makes people less happy because the more money they have the more goods they want.


60. A formal explanation of the relationship between economic variables is an;A) assumption.B) economic theory.C) economic policy.D) opinion that usually cannot be supported.

Ans: BDifficulty: ETopic: ECONOMIC THEORY AND POLICY

61. Economic theories are:A) always expressed in terms of mathematical equations.B) actions, such as tax cuts, to change economic conditions.C) formal explanations of the relationships between economic variables.D) all of the above.

Ans: CDifficulty: ETopic: ECONOMIC THEORY AND POLICY

62. Which of the following is an example of an economic theory?A) The actual behavior of the economy over a one-year period.B) A tax cut to increase spending by businesses and households.C) Statistics showing the change in the unemployment rate since 2008.D) An explanation as to why raising the price of a product would cause people to buy less of that product.

Ans: DDifficulty: MTopic: ECONOMIC THEORY AND POLICY

63. Economic theory is:A) a set of conditions which are held to be true.B) an action taken to change economic conditions.C) a formal explanation of the relationship between economic variables.D) the statistical techniques used to determine the relationship between economic variables.

Ans: CDifficulty: MTopic: ECONOMIC THEORY AND POLICY

64. An economic theory may be disputed because it:A) focuses on just two variables.B) sometimes uses unrealistic assumptions.C) cannot give a precise cause-and-effect relationship, like that found in the physical sciences.D) all of the above.


65. Disputes about economic theories:A) prove that the economy is too complex to be studied.B) would never occur if the theories were logically presented.C) can arise from disagreements about the choice of variables or assumptions in the theories.D) are a matter of concern because they show that some people don't understand economics.

Ans: CDifficulty: MTopic: ECONOMIC THEORY AND POLICY

66. Econometrics:A) helps us better understand the economy.B) is useful in defending the accuracy of economic theories.C) is the use of statistical techniques to describe the relationship between economic variables.D) all of the above.


67. Econometrics is:A) the set of conditions held to be true in a model.B) measures taken to change economic conditions.C) a formal explanation of the relationship between economic variables.D) the use of the statistical techniques to determine the relationship between economic variables.

Ans: DDifficulty: ETopic: ECONOMIC THEORY AND POLICY

Reference: Ref 1-1

An economist has developed a model to explain the relationship between people losing their jobs and the frequency with which individuals experience severe emotional distress. The study is limited to urban areas with large populations, and uses information supplied by people meeting with local counselors for treatment. The study supports a theory that job loss can play a key role in explaining who will experience severe emotional distress.

68. In this theory, people's job status and the frequency with which emotional distress occurs are:A) variables.B) assumptions.C) conclusions.D) none of the above.

Ans: ARefer To: Ref 1-1Difficulty: MTopic: ECONOMIC THEORY AND POLICY

69. Holding the condition that this theory is true only in urban areas with large populations is an example of the use of:A) data in a model.B) variables in a model.C) conclusions in a model.D) assumptions in a model.

Ans: DRefer To: Ref 1-1Difficulty: MTopic: ECONOMIC THEORY AND POLICY

70. The information supplied by the people meeting with local counselors provides the:A) data for the model.B) variables for the model.C) conclusions for the model.D) assumptions for the model.

Ans: ARefer To: Ref 1-1Difficulty: ETopic: ECONOMIC THEORY AND POLICY

71. To say that job loss plays a key role in determining who experiences severe emotional distress:A) is a conclusion of the model.B) cannot be challenged since that is what the model shows.C) can, on the basis of this model, be said to be true for people regardless of where they live.D) all of the above.

Ans: ARefer To: Ref 1-1Difficulty: MTopic: ECONOMIC THEORY AND POLICY

72. Assumptions:A) must accurately reflect every detail of the real world.B) have no effect on the explanations a theory provides.C) are always given along the horizontal axis of a graph.D) are conditions held to be true when developing a theory.


73. Application 1.3, OK, What Are They? is about unidentified flying objects, or UFOs. Which of the following is true?A) There are no similarities in the rules for judging economic theories and theories about UFOs.B) Just like there are competing theories about economic conditions, there are also competing theories about UFOs.C) Economic theories are always based on realistic measurable assumptions, while there are no assumptions supporting theories about UFOs.D) All of the above.

Ans: BDifficulty: MTopic: ECONOMIC THEORY AND POLICY

74. Economic policy is a:A) condition held to be true in a model.B) guide to change an economic situation.C) formal explanation of the relationship between economic variables.D) statistical technique to determine the relationship between economic variables.


75. Economic policies:A) are guides to change economic conditions.B) have consequences that vary from policy to policy.C) are based on the value judgments of the persons forming the policies.D) all of the above.


76. Which of the following is an economic policy?A) Assuming that you will earn more if you have more education.B) Explaining what happens to the supply of a product as its price rises.C) Understanding that the scarcity problem is at the foundation of economics.D) Giving families a tax break on college tuition in order to encourage more degrees.


77. It is important for policy makers to understand economic theory because:A) there are different ways for achieving a policy goal.B) their decisions can alter the distribution of income in society.C) their decisions can produce undesirable unintended consequences.D) all of the above.


78. Up for Debate, Should St. Louis County, Missouri, Impose Mandatory Trash Pickup and Recycling? clearly shows that arguments for and against this mandatory policyA) were based on value judgments such as environmental concerns and the role of the government.B) were based on solid economic theories.C) disregarded both value judgments and economic theories.D) were useless since the only right thing to do was enact the mandatory program.

Ans: ADifficulty: MTopic: ECONOMIC THEORY AND POLICY

79. Which of the following can be used to express economic theories?A) Words.B) Graphs.C) Mathematical equations.D) All of the above.

Ans: DDifficulty: ETopic: TOOLS OF THE ECONOMIST

80. A line that slopes upward on a graph indicates that the variables measured on the graph are:A) unrelated.B) directly related.C) inversely related.D) always increasing but never decreasing.

Ans: BDifficulty: ETopic: TOOLS OF THE ECONOMIST

81. A line that slopes downward on a graph indicates that the variables measured on the graph are:A) unrelated.B) directly related.C) inversely related.D) always decreasing but never increasing.

Ans: CDifficulty: ETopic: TOOLS OF THE ECONOMIST

82. If A increases as B increases, a line on a graph showing the relationship between A and B would be:A) upward sloping.B) downward sloping.C) perfectly horizontal.D) perfectly vertical.

Ans: ADifficulty: MTopic: TOOLS OF THE ECONOMIST

83. If A decreases as B decreases, a line on a graph showing the relationship between A and B would be:A) upward sloping.B) downward sloping.C) perfectly horizontal.D) perfectly vertical.


84. If A increases as B decreases, a line on a graph showing the relationship between A and B would be:A) upward sloping.B) downward sloping.C) perfectly horizontal.D) perfectly vertical.

Ans: BDifficulty: MTopic: TOOLS OF THE ECONOMIST

85. Two variables are directly related when:A) neither variable increases nor decreases.B) one variable decreases as the other decreases.C) one variable increases as the other decreases.D) one variable does not change as the other decreases.

Ans: BDifficulty: ETopic: TOOLS OF THE ECONOMIST

86. Two variables are inversely related when:A) neither variable decreases nor increases.B) one variable increases as the other increases.C) one variable decreases as the other increases.D) one variable does not change as the other increases.


87. When graphing a direct relationship between two variables, the line on the graph will be:A) vertical.B) horizontal.C) upward sloping.D) downward sloping.


88. When graphing an inverse relationship between two variables, the line on the graph will be:A) vertical.B) horizontal.C) upward sloping.D) downward sloping.

Ans: DDifficulty: ETopic: TOOLS OF THE ECONOMIST

89. A direct relationship occurs when two variables move in:A) the same direction, and graph as an upward-sloping line.B) opposite directions, and graph as an upward-sloping line.C) the same direction, and graph as a downward-sloping line.D) opposite directions, and graph as a downward-sloping line.


90. An inverse relationship occurs when two variables move in:A) the same direction, and graph as an upward-sloping line.B) opposite directions, and graph as an upward-sloping line.C) the same direction, and graph as a downward-sloping line.D) opposite directions, and graph as a downward-sloping line.

Ans: DDifficulty: MTopic: TOOLS OF THE ECONOMIST

91. The statement "direct relationships graph as downward-sloping lines" is:A) true.B) false.C) true only when two variables move in opposite directions.D) true only when variables decrease; it is not true when they increase.


92. The statement inverse relationships graph as upward-sloping lines is:A) trueB) false.C) true only when two variables move in the same direction.D) true only when variables increase; it is not true when they decrease.


93. According to this figure:

A) variables A and B are directly related.B) an increase in the value of variable A is accompanied by an increase in the value of variable B.C) there is no relationship between variables A and B because the line in the figure is not straight.D) none of the above.


94. If the quantity of prerecorded CDs demanded is equal to 600 - 10 (price of the CD), at a price of $16 each, the number of CDs demanded would be:A) 16.B) 160.C) 440.D) 574.

Ans: CDifficulty: MTopic: TOOLS OF THE ECONOMIST

95. Given the equation: quantity of good X = 96 - 12(price of good X), if the price of good X were $2.00, the quantity would be:A) 12 units.B) 24 units.C) 72 units.D) 84 units.


96. Given that Q = 300 - 60P, where Q is quantity and P is price:A) if P = $2, then Q =180.B) if P = $5, then Q = 0.C) both of the above.D) none of the above.


97. Given that Q = 250 + 50P, where Q is quantity and P is price:A) if P = $1, then Q = 300.B) if P = $3, then Q = 400.C) both of the aboveD) none of the above.


98. Given the equation: quantity of good X = 280 - 40 (price of good X), the quantity of good X would be zero if its price were:A) $5.00.B) $7.00.C) $35.00.D) not enough information to answer the question.


99. A model:A) includes assumptions or conditions that are held to be true.B) is a framework in which a relationship between variables is explored.C) can use mathematics and/or logic to analyze the relationship explored.D) all of the above.


100. Which is NOT an example of a model?A) a floor plan.B) a list of key economic indicators for a year.C) a framework to explore the primary causes of a disease.D) an illustration of a bookshelf in a set of instructions for assembling bookshelves.


101. An economist developing a production possibilities model of an economy operating at peak capacity at a specific point in time would assume:A) resources are fully employed.B) production technology is held constant.C) the number of available resources is held constant.D) all of the above.


102. An economist developing a model of how an economy is expected to behave over the next 10 years would likely assume:A) population is increasing.B) resources are fixed in amount.C) production technology is constant.D) all of the above.

Ans: ADifficulty: HTopic: TOOLS OF THE ECONOMIST

103. Conditions held to be true in developing an economic model are:A) assumptions.B) economic theories.C) variables of the model.D) conclusions of the model.

Ans: ADifficulty: ETopic: TOOLS OF THE ECONOMIST

104. Which of the following best describes a model?A) Data on student grade-point averages at a particular school.B) A hypothetical economy used to analyze the effects of a tax cut.C) The imposition of a higher gasoline tax to fund highway construction.D) The assumption that most people would prefer large incomes to small incomes.


105. Which of the following statements is FALSE?A) Assumptions are conditions held to be true in a model.B) A model is a setting within which an economic theory is presented.C) Any time a hypothetical situation is created in a model, the model is invalid.D) One problem with model building is that important variables may be excluded from the model.


106. A production possibilities table or graph shows:A) different ways a particular good can be produced.B) different combinations of goods that a particular resource can produce.C) different amounts of two goods that an economy can produce at full employment with resources and technology held constant.D) the time it takes to produce two goods when the economy is at full employment and resources and technology are held constant.

Ans: CDifficulty: MTopic: SCARCITY, MODEL BUILDING, AND GRAPHS

107. A production possibilities curve shows:A) the two goods that are in the best interest of an economy to produce.B) the most desirable amounts of two goods that an economy can produce.C) the different amounts of two goods that an economy can produce when it is at full employment with fixed resources and technology.D) all of the above.


108. Which of the following concepts is illustrated by a production possibilities model?A) Scarcity.B) Tradeoffs.C) Opportunity cost.D) All of the above.

Ans: DDifficulty: MTopic: SCARCITY, MODEL BUILDING, AND GRAPHS

109. The concept of opportunity cost is illustrated in a production possibilities model by the:A) area under the production possibilities curve.B) area beyond the production possibilities curve.C) possibility that the curve would shift to the right.D) amount of one good that must be given up to get more of the other good while moving along the production possibilities curve.

Ans: DDifficulty: HTopic: SCARCITY, MODEL BUILDING, AND GRAPHS

110. The concept of unemployment is illustrated in a production possibilities model by operating at a point:A) on the production possibilities curve.B) in the area under, or to the left of, the production possibilities curve.C) in the area above, or to the right of, the production possibilities curve.D) none of the above.


Reference: Ref 1-2

Use the following figure.

111. If the economy in the production possibilities figure were operating at less than full employment, it would be at point:A) V.B) W.C) Z.D) none of the above.

Ans: ARefer To: Ref 1-2Difficulty: MTopic: SCARCITY, MODEL BUILDING, AND GRAPHS

112. It would be impossible for the economy in the production possibilities figure to produce the output shown by point:A) V.B) Z.C) W or Y.D) X.

Ans: BRefer To: Ref 1-2Difficulty: MTopic: SCARCITY, MODEL BUILDING, AND GRAPHS

113. The economy represented in the production possibilities figure would gain more of good A and give up some of good B by moving from point:A) V to point Y.B) W to point Z.C) W to point X.D) Y to point X.

Ans: DRefer To: Ref 1-2Difficulty: HTopic: SCARCITY, MODEL BUILDING, AND GRAPHS

114. The economy represented in the production possibilities figure would gain more of good B and give up some of good A by moving from point:A) V to point X.B) W to point X.C) Y to point V.D) Y to point W.

Ans: BRefer To: Ref 1-2Difficulty: HTopic: SCARCITY, MODEL BUILDING, AND GRAPHS

115. The economy represented in the production possibilities figure would gain more of good A without giving up any of good B by moving from point:A) V to point X.B) W to point Y.C) Y to point W.D) none of the above.

Ans: ARefer To: Ref 1-2Difficulty: HTopic: SCARCITY, MODEL BUILDING, AND GRAPHS

116. If there were an increase in the number of workers in the economy represented in the production possibilities figure, the production possibilities curve would:A) remain where it is.B) shift inward to the left.C) shift outward to the right.D) slope upward to the right.

Ans: CRefer To: Ref 1-2Difficulty: MTopic: SCARCITY, MODEL BUILDING, AND GRAPHS

117. If there were a decrease in the number of workers in the economy represented in the production possibilities figure, the production possibilities curve would:A) remain where it is.B) shift inward to the left.C) shift outward to the right.D) slope upward to the right.


118. If the economy represented in the production possibilities figure moved from point W to point X, it would experience:A) economic growth.B) an opportunity cost equal to the amount of good A it would give up.C) an opportunity cost equal to the amount of good B it would give up.D) no opportunity cost since it would continue to produce at full employment.


119. If the economy represented in the production possibilities figure moved from point Y to point X, it would experience:A) economic growth.B) an opportunity cost equal to the amount of good A it would give up.C) an opportunity cost equal to the amount of good B it would give up.D) no opportunity cost since it would continue to operate at full employment.

Ans: CRefer To: Ref 1-2Difficulty: HTopic: SCARCITY, MODEL BUILDING, AND GRAPHS

120. Unemployment can be represented on a production possibilities graph by a point located:A) anywhere on the graph.B) on the production possibilities curve itself.C) to the right of the production possibilities curve.D) inside, or to the left of, the production possibilities curve.


121. Economic growth is illustrated using a production possibilities curve by:A) a leftward shift of the curve.B) a rightward shift of the curve.C) moving from one point on the curve to another point on the curve.D) moving from a point inside, or to the left of, the curve to a point on the curve.

Ans: BDifficulty: MTopic: SCARCITY, MODEL BUILDING, AND GRAPHS

122. Which of the following can lead to economic growth?A) Improved technology.B) An increase in the supply of labor.C) An increase in the amount of available capital.D) All of the above.

Ans: DDifficulty: ETopic: SCARCITY, MODEL BUILDING, AND GRAPHS

Reference: Ref 1-3

A home entertainment shop sells CDs and DVDs. The production possibilities curve shown below gives the maximum combinations of these two goods that can be inventoried in the store.

123. On the basis of the production possibilities curve, what is the opportunity cost of increasing the stock of CDs from 1,500 to 2,750?A) 1,200 DVDs.B) 1,600 DVDs.C) 2,250 DVDs.D) Impossible to determine from this information.

Ans: ARefer To: Ref 1-3Difficulty: HTopic: SCARCITY, MODEL BUILDING, AND GRAPHS

124. On the basis of the production possibilities curve, what is the opportunity cost of increasing the stock of DVDs from 1,600 to 2,400?A) 400 CDs.B) 800 CDs.C) 1,000 CDs.D) 2,000 CDs.


125. As the shop adds more and more CDs to its inventory, the number of DVDs it must give up:A) remains the same.B) gets larger.C) gets smaller.D) gets larger or smaller, depending on how many compact discs the shop started out with.


Reference: Ref 1-4

Use the following figure.

126. This production possibilities curve shows:A) that the production of good X is directly related to the production of good Y.B) that the combination of goods X and Y shown by point E is out of reach for this economy.C) the different combinations of goods X and Y that this economy could produce at full employment.D) all of the above.

Ans: CRefer To: Ref 1-4Difficulty: MTopic: SCARCITY, MODEL BUILDING, AND GRAPHS

127. When the economy is operating on its production possibilities curve:A) more of good X is produced as each additional unit of good Y is produced.B) the same amount of good X is given up for each additional unit of good Y that is produced.C) a decreasing amount of good X is given up for each additional unit of good Y that is produced.D) an increasing amount of good X must be given up for each additional unit of good Y that is produced.


128. Which combination of goods X and Y shows that the economy is experiencing unemployment, and which combination is out of reach of the economy?A) A and D, respectively.B) E and F, respectively.C) F and A, respectively.D) F and E, respectively.


129. Goods, such as bottling machines,that are used to produce other goods and services are:A) cost goods.B) credit goods.C) capital goods.D) consumer goods.

Ans: CDifficulty: ETopic: SCARCITY, MODEL BUILDING, AND GRAPHS

130. Goods, such as corn chips, that are produced for final buyers are:A) credit goods.B) capital goods.C) consumer goods.D) expenditure goods.


Reference: Ref 1-5

Capital GoodsConsumer Goods(millions of units) (millions of units)0200201603612048805640600

131. According to this production possibilities table, the opportunity cost of going from 120 to 160 million units of consumer goods is:A) 16 million units of capital goods.B) 20 million units of capital goods.C) 36 million units of capital goods.D) 40 million units of capital goods.

Ans: ARefer To: Ref 1-5Difficulty: MTopic: SCARCITY, MODEL BUILDING, AND GRAPHS

132. Based on the information in this production possibilities table, the opportunity cost of going from 0 to 40 million units of consumer goods is:A) the same as the opportunity cost of going from 40 to 80 million units of consumer goods.B) greater than the opportunity cost of going from 40 to 80 million units of consumer goods.C) smaller than the opportunity cost of going from 40 to 80 million units of consumer goods.D) not enough information to answer the question.


133. According to this production possibilities table, an increase in the production of capital goods from 48 to 56 million units would:A) cost 80 million units of consumer goods.B) signal that the economy is experiencing unemployment.C) be impossible given available resources and technology.D) increase the likelihood the economy would grow in the future.


134. If you were to draw a production possibilities curve based on these numbers, the curve would:A) be a straight line.B) slope downward to the right.C) identify which of the possible combinations of capital goods and consumer goods is best for this economy.D) all of the above.


135. Macroeconomics is the study of:A) the economic motives of voters and elected officials.B) individual decision-making units, such as households and business firms.C) the operation of the economy as a whole, and economic topics such as total output, employment, and inflation.D) how government purchases affect specific markets, such as the market for computers.

Ans: CDifficulty: MTopic: MACROECONOMICS AND MICROECONOMICS

136. Microeconomics is the study of:A) how government activities affect the economy.B) individual decision-making units, such as households and business firms.C) collective decision-making and the economic motives of voters and elected officials.D) the operation of the economy as a whole, and economic topics such as total output, employment, and inflation.

Ans: DDifficulty: MTopic: MACROECONOMICS AND MICROECONOMICS

137. An increase in production costs at a Ford automobile plant, and an increase in the general level of prices in the U.S. economy are examples of:A) microeconomic problems.B) macroeconomic problems.C) a microeconomic problem and a macroeconomic problem, respectively.D) a macroeconomic problem and a microeconomic problem, respectively.

Ans: CDifficulty: ETopic: MACROECONOMICS AND MICROECONOMICS

138. Which of the following statements is true?A) Never use zero where the horizontal and vertical axes meet on a graph.B) The relationship between two variables is never easily represented in a graph.C) It is impossible to look at a graph and determine whether two variables are directly or inversely related.D) The appearance of the relationship between two variables on a graph can be altered by changing the numbering on the graph's axes.

Ans: DDifficulty: MTopic: APPENDIX TO CHAPTER ONE: GRAPHING

139. Which of the following statements is FALSE?A) A graph is a picture illustrating the relationship between variables.B) Two variables that are inversely related are represented by a downward-sloping line on a graph.C) If two points on a graph are $10 and 20 items, and $20 and 10 items, the relationship being graphed is direct.D) One problem with graphs is that the appearance of the relationship between two variables can be altered by the choice of numbers on a graph's axes.

Ans: CDifficulty: MTopic: APPENDIX TO CHAPTER ONE: GRAPHING

140. Which of the following is NOT a general rule for constructing a graph?A) Use equal spaces along an axis for equal amounts.B) Make the horizontal and vertical axes of equal length.C) Use zero where the vertical and horizontal axes meet.D) Work up the number scale as you move out along the vertical axis and the horizontal axis.

Ans: BDifficulty: ETopic: APPENDIX TO CHAPTER ONE: GRAPHING

141. The following points showing different price-quantity combinations are plotted on a graph: ($1.00 and 40 units), ($2.00 and 30 units), ($4.00 and 20 units). A line connecting these points would be:A) upward sloping.B) downward sloping.C) perfectly vertical.D) perfectly horizontal.

Ans: BDifficulty: ETopic: APPENDIX TO CHAPTER ONE: GRAPHING

142. Which of the following combinations illustrates an inverse relationship?A) ($1.00, 10 units), ($1.00, 20 units), ($1.00, 30 units).B) ($1.00, 30 units), ($2.00, 20 units), ($3.00, 10 units).C) ($1.00, 10 units), ($2.00, 20 units), ($3.00, 30 units).D) ($1.00, 10 units), ($2.00, 10 units), ($3.00, 10 units).

Ans: BDifficulty: MTopic: APPENDIX TO CHAPTER ONE: GRAPHING

143. Which of the following combinations illustrates a direct relationship?A) ($1.00, 10 units), ($1.00, 20 units), ($1.00, 30 units).B) ($1.00, 30 units), ($2.00, 20 units), ($3.00, 10 units).C) ($1.00, 10 units), ($2.00, 20 units), ($3.00, 30 units).D) ($1.00, 10 units), ($2.00, 10 units), ($3.00, 10 units).

Ans: CDifficulty: MTopic: APPENDIX TO CHAPTER ONE: GRAPHING

144. Economics is about how people use:A) limited resources to satisfy limited material wants and needs.B) limited resources to satisfy unlimited material wants and needs.C) unlimited resources to satisfy limited material wants and needs.D) unlimited resources to satisfy unlimited material wants and needs.


145. Which of the following statements is FALSE?A) Scarcity is the basic reason for studying economics.B) Scarcity forces people to make decisions about how to best satisfy their material wants and needs.C) The study of economics is simplified because value judgments have no effect on the choices people make because of scarcity.D) People must make tradeoffs, or give up one thing to get something else, because of scarcity.


146. The opportunity cost of an item purchased is:A) the tax paid on the item.B) the time required to make a decision about the purchase.C) the alternative purchase that is forgone to acquire the item.D) the dissatisfaction experienced by the buyer when the item is no longer desired.


147. Efficiency and equity refer to, respectively:A) producing at the lowest possible cost, and producing the largest attainable output.B) producing the largest possible output from a given set of resources, and fairness in the distribution of goods and services.C) paying people based on what they need, and paying them based on what they contribute to output.D) the main goal of economies that do not face a scarcity problem, and those that do face a scarcity problem.


148. Entrepreneurship involves:A) taking the risk for the success or failure of a business venture.B) organizing factors of production to produce goods and services.C) human effort not included in the factor of production category called labor.D) all of the above


149. John receives a wage, Carol receives profit, and Sandy receives interest. John's, Carol's, and Sandy's incomes are from, respectively:A) land, labor, and entrepreneurship.B) entrepreneurship, land, and capital.C) labor, capital, and entrepreneurship.D) labor, entrepreneurship, and capital.


150. Resources, or factors of production, are scarce:A) only because of inefficiency; if we produced efficiently scarcity would disappear.B) both in an absolute sense and relative to the wants and needs they must satisfy.C) in an absolute sense, but not relative to the wants and needs they must satisfy.D) relative to the wants and needs they must satisfy, but some are abundant in an absolute sense.


151. Which of the following statements concerning economic theories is FALSE?A) A model is a setting within which an economic theory is presented.B) Any time a hypothetical situation is created in a model or in a theory, the model or theory becomes invalid.C) Theories are generalized explanations of the relationships between economic variables.D) Since a graph illustrates a relationship between variables, a graph could portray an economic theory.


152. Which of the following is NOT a basic element of a model?A) Assumptions, which are conditions held to be true in developing economic theories.B) Two variables whose relationship is to be explored.C) Data collection and analysis.D) Recommendations for action based on the reported relationship between the variables.


153. Which of the following is an example of an economic policy?A) A tax cut passed by Congress to reduce unemployment.B) Statistics indicating the rate of unemployment since 2000.C) An explanation as to why a tax cut might reduce unemployment.D) The relationship between changes in taxes and rates of unemployment.

Ans: ADifficulty: ETopic: ECONOMIC THEORY AND POLICY

154. If A increases as B decreases, then A and B are:A) directly related, and the line showing their relationship slopes upward on a graph.B) directly related, and the line showing their relationship slopes downward on a graph.C) inversely related, and the line showing their relationship slopes upward on a graph.D) inversely related, and the line showing their relationship slopes downward on a graph.


155. How much of good X would be demanded at a price of $15.00 if the relationship between the price of good X and the quantity demanded were shown by the equation: quantity demanded = 1000 - 50 (price of good X)?A) 50 units.B) 250 units.C) 750 units.D) 950 units.


156. A point inside, or to the left of, a production possibilities curve indicates that:A) the economy is growing.B) the economy is operating at full employment.C) some of the economy's resources are unemployed.D) more of one good can be produced only by giving up some of another good.


157. Which of the following is an example of a capital good?A) In-line skates.B) Frozen yogurt.C) A cash register.D) Food donated to flood victims.


Reference: Ref 1-6

Use the following production possibilities curve.

158. Currently, it would be impossible for this economy to produce the combination of goods X and Y shown by point:A) AB) BC) DD) E

Ans: DRefer To: Ref 1-6Difficulty: MTopic: SCARCITY, MODEL BUILDING, AND GRAPHS

159. A move from point B to point D would occur if the economy:A) experienced economic growth.B) began to experience some unemployment.C) went from unemployment to full employment.D) none of the above.

Ans: BRefer To: Ref 1-6Difficulty: mTopic: SCARCITY, MODEL BUILDING, AND GRAPHS

160. Which of the following statements is true?A) There is no opportunity cost when going from point B to point C.B) The economy cannot go from point B to point C because it is at full employment at point B.C) The opportunity cost of going from point B to point C is the amount of good Y that must be given up.D) The opportunity cost of going from point B to point C is the amount of good X that must be given up.

Ans: DRefer To: Ref 1-6Difficulty: mTopic: SCARCITY, MODEL BUILDING, AND GRAPHS

161. If the economy were growing, the production possibilities curve would:A) remain in its current position.B) shift inward to the left.C) shift outward to the right.D) become perfectly horizontal.

Ans: CRefer To: Ref 1-6Difficulty: mTopic: SCARCITY, MODEL BUILDING, AND GRAPHS

162. The study of the U.S. economy as a whole, and how all households in the economy interact with all businesses and the government is:A) macroeconomics.B) megaeconomics.C) metaoeconomics.D) microeconomics.

Ans: ADifficulty: eTopic: MACROECONOMICS AND MICROECONOMICS

163. Which of the following steps in constructing a graph would result in a faulty graph?A) Use a zero at the origin where the vertical and horizontal axes meet.B) When assigning numbers, use equal spaces for equal amounts.C) When assigning numbers to the horizontal axis, work from right to left along the axis so that the largest number is at the origin.D) Plot data points that reflect specific combinations of the two variables, and connect the points.

Ans: CDifficulty: ETopic: APPENDIX TO CHAPTER ONE: GRAPHING

True/False

164. There would be no need to study economics if scarcity were eliminated.

Ans: FalseDifficulty: MTopic: WHAT IS ECONOMICS?

165. We could produce all of the goods and services needed to satisfy people's material wants and needs if resources were used effectively.


166. The concept of opportunity cost applies only to cases where dollar values can be assigned to alternatives between which people must choose.


167. The opportunity cost of a purchase or decision is measured by what is given up to make the purchase or decision.

Ans: TrueDifficulty: ETopic: WHAT IS ECONOMICS?

168. The income received by an owner of capital is classified as interest by economists.

Ans: TrueDifficulty: ETopic: FACTORS OF PRODUCTION

169. To be useful, an economic model must include all variables that could possibly affect what is being studied.

Ans: FalseDifficulty: MTopic: ECONOMIC THEORY AND POLICY

170. A government program to create affordable housing for low income families is an example of an economic policy.

Ans: TrueDifficulty: ETopic: ECONOMIC THEORY AND POLICY

171. Variable A decreases whenever variable B decreases. A line on a graph showing the relationship between A and B would slope downward.

Ans: FalseDifficulty: MTopic: TOOLS OF THE ECONOMIST

172. An economy experiencing growth can be represented by a shift of the economy's production possibilities curve to the right.

Ans: TrueDifficulty: MTopic: SCARCITY, MODEL BUILDING, AND GRAPHS

173. If an economy can gain more of good A without giving up some of good B, the economy is operating on its production possibilities curve for goods A and B.

Ans: FalseDifficulty: MTopic: SCARCITY, MODEL BUILDING, AND GRAPHS

Short Answer

174. Why must choices be made about economic matters, and why would you expect people's choices to differ?Ans: Choices must be made because resources are scarce, while wants are unlimited. Peoples choices will differ because people value goods differently.

Difficulty: MTopic: WHAT IS ECONOMICS?

175. What are tradeoffs and opportunity costs, and why does scarcity make tradeoffs and opportunity costs unavoidable?Ans: Tradeoffs and opportunity costs represent what must be given up to consume a good; because goods are scarce, a tradeoff will always exist.

Difficulty: HTopic: WHAT IS ECONOMICS?

176. What is efficiency, and why does scarcity make efficiency an important goal for an economy?Ans: Efficiency occurs when an economy is able to get the most output for a given set of resources. Because resources are scarce, it is important that an economy produce as much output as possible for the fewest amount of inputs to ensure that other resources are available for other goods.


177. Are equity and efficiency necessarily conflicting goals? Why?Ans: Equity and efficiency are not necessarily conflicting goals because equity describes the distribution of production, as opposed to production techniques itself. However, depending upon societys values seeking efficiency may require a tradeoff with equity.


178. Why are resources said to be scarce when so many of them are available in large numbers?Ans: In absolute terms, resources are available in large numbers. However, relative to the large number of wants that exist in society, resources are indeed scarce.

Difficulty: MTopic: FACTORS OF PRODUCTION

179. Briefly describe the roles of assumptions, variables, and data analysis in developing an economic theory.Ans: Assumptions are conditions held to be true in a theory, while variables are economic data that may share a causal relationship with each other. Data analysis helps economists test the relationships of variables in an economic theory.

Difficulty: MTopic: ECONOMIC THEORY AND POLICY

180. Why might disputes develop over the information value or usefulness of a particular economic model?Ans: Results of economic models depend on the particular variables, assumptions and data analysis techniques used in the model. As a result, when people disagree with the variables used, assumptions made, or analysis techniques used, they will disagree over the results.

Difficulty: HTopic: ECONOMIC THEORY AND POLICY

181. What is the difference between economic theory and economic policy?Ans: An economic theory is an attempt to explain relationships between economic variables, while economic policy represents a guide to action, perhaps based on the results of economic theory.

Difficulty: ETopic: ECONOMIC THEORY AND POLICY

182. What does it mean to say that two variables are inversely related, and how would inversely-related variables appear on a graph?Ans: If variables are inversely related, then as one rises the other falls. This would be represented by a negatively sloped line on a graph.

Difficulty: MTopic: TOOLS OF THE ECONOMIST

183. Why must an economy give up some of one good to gain more of another when it is operating on its production possibilities curve?Ans: If an economy is on the production possibilities curve, then it is maximizing the use of its resources in production. To produce anything else would require less production of another good.

Difficulty: MTopic: SCARCITY, MODEL BUILDING, AND GRAPHS

184. What does a point outside, or to the right of, a production possibilities curve represent, and what does a point inside, or to the left of, the curve represent?Ans: A point outside the production possibilities curve represents a combination of outputs that is not possible in an economy, while a point inside the curve represents a feasible, but inefficiently produced, point for an economy.


185. What is economic growth, and how would it be illustrated using a production possibilities curve?Ans: Economic growth represents an increase in output resulting from an increase in the amount of inputs available. This would be represented by a shift outward in the production possibilities curve.


186. What is the difference between capital goods and consumer goods?Ans: Consumer goods are final goods and services, while capital goods are used to produce other goods.

Difficulty: ETopic: SCARCITY, MODEL BUILDING, AND GRAPHS

187. What would happen to an economy over time if it produced only consumer goods?Ans: If an economy produced only consumer goods it would quickly lose the ability to produce additional consumer goods.

Difficulty: HTopic: SCARCITY, MODEL BUILDING, AND GRAPHS

188. What is macroeconomics and what is microeconomics?Ans: Macroeconomics is the study of the overall economy, while microeconomics is the study of individual decisionmaking units in the economy.

Difficulty: ETopic: MACROECONOMICS AND MICROECONOMICS

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