Question 1

Which of the following statements about market economies is correct?

Accepted Answer

A) In a market economy, no one is looking out for the economic well-being of society as a whole. 
B) Market economies are characterized by decentralized decision making and self-interested decision makers. 
C) Market economies have proven remarkably successful in promoting overall economic well-being. 
D) All of the above are correct.

Question 2

The price of diamonds is high, in part because the majority of the world's diamonds are controlled by a single firm. This is an example of

Accepted Answer

A) a market failure caused by an externality. 
B) a market failure caused by market power. 
C) a market failure caused by equality. 
D) There is no market failure in this case.

Question 3

One advantage market economies have over centrally-planned economies is that market economies

Accepted Answer

A) provide an equal distribution of goods and services to households. 
B) establish a significant role for government in the allocation of resources. 
C) solve the problem of scarcity. 
D) are more efficient.

Question 4

When Ukraine trades with Italy,

Accepted Answer

A) both countries are likely made better off. 
B) only Italy benefits since Ukraine can produce all goods at a higher level of quality than Italy. 
C) only Ukraine benefits since Italy's low wages guarantee that Italian firms will be profitable regardless of trade. 
D) neither country will benefit since Ukraine is more efficient than Italy in the production of all goods.

Question 5

Trade makes costs

Accepted Answer

A) higher and reduces the variety of goods and services available. 
B) higher but raises the variety of goods and services available. 
C) lower but reduces the variety of goods and services available. 
D) lower and raises the variety of goods and services available.

Question 6

To say that government intervenes in the economy to promote equality is to say that government is aiming to

Accepted Answer

A) create a more fair distribution of income. 
B) change the ingredients that are used to "bake" the economic pie. 
C) enlarge the economic pie. 
D) All of the above are correct.

Question 7

Which of the following observations was made famous by Adam Smith in his book The Wealth of Nations?

Accepted Answer

A) There is no such thing as a free lunch. 
B) People buy more when prices are low than when prices are high. 
C) No matter how much people earn, they tend to spend more than they earn. 
D) Households and firms interacting in markets are guided by an "invisible hand" that leads them to desirable market outcomes.

Question 8

The self-interest of the participants in an economy is guided into promoting general economic self-interest by

Accepted Answer

A) the invisible hand. 
B) market power. 
C) government intervention. 
D) oikonomos.

Question 9

John is an athlete. He has $120 to spend and wants to buy either a heart rate monitor or new running shoes. Both the heart rate monitor and running shoes cost $120, so he can only buy one. This illustrates the principle that

Accepted Answer

A) trade can make everyone better off. 
B) people face trade-offs. 
C) rational people think at the margin. 
D) people respond to incentives.

Question 10

To say that government intervenes in the economy to promote efficiency is to say that government is attempting to

Accepted Answer

A) create a more fair distribution of income. 
B) change the way in which the economic pie is divided. 
C) enlarge the economic pie. 
D) All of the above are correct.

Question 11

An increase in the marginal cost of an activity necessarily means that people will no longer engage in any of that activity.

Accepted Answer

A) True 
 B)False

Question 12

Trade can make everyone better off except in the case where one person is better at doing everything.

Accepted Answer

A) True 
 B)False

Question 13

President Gerald Ford referred to inflation as

Accepted Answer

A) a blight on our nation's economy. 
B) a necessary evil to combat high unemployment. 
C) public enemy number one. 
D) a fly in the ointment.

Question 14

Invisible hand is a term used by the economist ______ in his 1776 book An Inquiry into the Nature and Causes of the Wealth of Nations.

Accepted Answer

The answer of Invisible hand is a term used by...

Question 15

When the government prevents prices from adjusting naturally to supply and demand,

Accepted Answer

A) it equates the amount buyers want to buy with the amount sellers want to sell. 
B) it adversely affects the allocation of resources. 
C) it improves equality and efficiency. 
D) it improves efficiency but reduces equality.

Question 16

Scenario 1-3 It costs a company $35,000 to produce 700 graphing calculators. The company's cost will be $35,070 if it produces an additional graphing calculator. The company is currently producing 700 graphing calculators. -Refer to Scenario 1-3. A customer is willing to pay $60 for the 701^th calculator. Should the company produce and sell it? Explain.

Accepted Answer

The answer of Scenario 1-3
It costs a company $35,000 to...

Question 17

Which of the following firms is likely to have the greatest market power?

Accepted Answer

A) an electric company 
B) a farmer 
C) a grocery store 
D) a local electronics retailer

Question 18

Which of the following is not subject to scarcity?​

Accepted Answer

A) ​water 
B) ​steel 
C) ​diamonds 
D) none of the above

Question 19

Candice is planning her activities for a hot summer day. She would like to go to the local swimming pool and see the latest blockbuster movie, but because she can only get tickets to the movie for the same time that the pool is open she can only choose one activity. This illustrates the basic principle that

Accepted Answer

A) people respond to incentives. 
B) rational people think at the margin. 
C) people face tradeoffs. 
D) improvements in efficiency sometimes come at the expense of equality.

Question 20

Most economists believe that an increase in the quantity of money results in

Accepted Answer

A) an increase in the demand for goods and services. 
B) lower unemployment in the short run. 
C) higher inflation in the long run. 
D) All of the above are correct.

Exam 1: Ten Principles of Economics