Question 1

What are the three basic questions faced by every economy?

Accepted Answer

A)  What, how, and for whom will goods be produced? 
B)  When, where, and how much will be produced? 
C)  Why, where, and when will goods be produced? 
D)  How, how much, and why will goods be produced?

Question 2

Use the production possibilities data below to answer the following question(s).
Table 2-3
 Refer to Table 2-3. The farmer and the rancher both could benefit if the farmer were to specialize in

Accepted Answer

A)  meat and the rancher were to specialize in potatoes. 
B)  potatoes and the rancher were to specialize in meat. 
C)  neither good and the rancher were to specialize in both goods. 
D)  none of the above; they cannot both benefit by specialization and trade.

Question 3

Which of the following will most likely occur under a system of clearly defined and enforced private property rights?

Accepted Answer

A)  Resource owners will tend to abuse resources and use them selfishly. 
B)  Resource owners will conserve vital resources for the future, particularly if they expect the resource to increase in value. 
C)  Resource owners will ignore the wishes of others, including those who would like to use the resource that is privately owned. 
D)  Resource owners ignore the wishes of others since there is little incentive to employ privately owned resources in ways that are beneficial to others.

Question 4

Trade creates value by

Accepted Answer

A)  moving goods from people who value the goods less to people who value the goods more. 
B)  permitting trading partners to expand output through specialization in areas where they each have a comparative advantage. 
C)  permitting trading partners to expand output through the adoption of mass production methods. 
D)  all of the above.

Question 5

When the production possibilities curve is bowed out, resources are

Accepted Answer

A)  equally well-suited to production of both goods. 
B)  not being used efficiently. 
C)  not equally suited to the production of both goods. 
D)  available in larger and larger quantities as more of one good is produced.

Question 6

When Benjamin Franklin wrote, "Remember that time is money!" he understood

Accepted Answer

A)  the incentives created by property rights. 
B)  the law of comparative advantage. 
C)  the concept of opportunity cost. 
D)  that watches cost money.

Question 7

When collective decision making (the political process) is used to resolve economic questions regarding the allocation of resources,

Accepted Answer

A)  decentralized decision making is present. 
B)  central planning and political bargaining will replace market forces. 
C)  individual preferences are of no importance. 
D)  economic equality will result.

Question 8

A popular video program used to teach economics to primary school children defines opportunity cost as "what you give up to get something." In light of your understanding of opportunity cost, how would you modify this definition?

Accepted Answer

The answer of A popular video program used to teach...

Question 9

Which of the following attributes of trade explain why it is important for economic prosperity?

Accepted Answer

A)  Trade moves goods from people who value them less to people who value them more. 
B)  Trade makes it possible to produce a larger output as a result of lower per unit costs that often accompany large-scale production. 
C)  Trade makes it possible to produce a larger output as a result of gains from division of labor and specialization. 
D)  All of the above.

Question 10

The government enforces property rights by

Accepted Answer

A)  requiring property owners to pay property taxes. 
B)  providing police and courts. 
C)  forcing people to own property. 
D)  providing public parks and recreation facilities.

Question 11

The process by which new products and methods of production are continuously replacing old ones is known as

Accepted Answer

A)  the invisible hand principle. 
B)  the production possibilities frontier. 
C)  creative destruction. 
D)  the fallacy of composition.

Question 12

A nation that protects its workers from unemployment by limiting the use (by employers) of technological improvements will

Accepted Answer

A)  grow more rapidly because the rate of unemployment will be lower. 
B)  grow more rapidly because investors prefer a stable business environment rather than the uncertainties that accompany technological change. 
C)  grow less rapidly because technological change is an important factor contributing to the growth of output. 
D)  grow just as much as nations that adopt more rapidly technological improvements.

Question 13

In economics, the term that refers to the time, effort, and other resources needed to search out, negotiate, and consummate an exchange is

Accepted Answer

A)  transaction costs. 
B)  specialization costs. 
C)  pecuniary costs. 
D)  comparative costs.

Question 14

The opportunity cost of building a park in your hometown would be the

Accepted Answer

A)  money cost of constructing the park. 
B)  highest valued bundle of other goods and services that must be forgone because of the park construction. 
C)  necessary increase in tax revenues to finance the construction. 
D)  amount of time spent in leisure activities in the park once it is constructed.

Question 15

Using a production possibilities curve, a technological advance that increases the amount of output for the same amount of inputs would be illustrated as

Accepted Answer

A)  an inward shift of the curve. 
B)  a movement from one point to another point along the curve. 
C)  an outward shift of the curve. 
D)  a movement from a point on the curve to a point inside the curve.

Question 16

Internet sites such as eBay make it easier for sellers and buyers to find one another and, by doing so,

Accepted Answer

A)  reduce transactions costs. 
B)  increase transaction costs. 
C)  reduce the number of exchanges that occur. 
D)  lower the value created by the goods and services available.

Question 17

Which of the following most accurately states the function of middlemen?

Accepted Answer

A)  Middlemen add to the expense of buyers and sellers without providing any benefit. 
B)  Our economy would work just as well without middlemen since they do not expand the availability of physical goods. 
C)  Middlemen reduce the number of transactions since they increase the buyer's price and reduce the seller's net revenue. 
D)  Middlemen create value by arranging trades and providing information to buyers and sellers.

Question 18

In voluntary exchange, if the seller of a product gains,

Accepted Answer

A)  the buyer will generally lose an amount greater than the gain to the seller. 
B)  the buyer must lose an amount equal to what the seller gains. 
C)  someone else must lose an equal amount. 
D)  the buyer must also gain; mutual gain provides the foundation for exchange.

Question 19

Todd owns a truck that he values at $2,000. Susan, who does a lot of hauling, values the truck at $6,000. If these two are allowed to negotiate, which of the following will most likely occur?

Accepted Answer

A)  Todd will sell the truck for $1,500. 
B)  Susan will buy the truck for $7,000. 
C)  The truck will be sold at a price greater than $2,000 but less than $6,000, and both parties will benefit. 
D)  Susan will benefit more than Todd if the truck is sold.

Question 20

Which of the following is true regarding value, transaction costs, and exchange?

Accepted Answer

A)  Middlemen can be viewed as agents who create value by reducing transaction costs and, thereby, facilitating gains from exchange. 
B)  Middlemen fail to create value since they do not expand the supply of physical goods. 
C)  A good or service has a given value regardless of who uses it or how it is used. 
D)  Voluntary exchange reduces value by channeling goods into the hands of people who value them least.

Exam 2: Some Tools of the Economist