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Chapter 02 - Understanding Economics and How It Affects Business
2-61
Thomas Malthus was pessimistic about the ability of a society to achieve high standards
of living for most of its citizens because he believed that:
A. Government has a natural tendency to run deficits that would eventually bankrupt a
nation.
B. Significant population growth would result in shortages of food and resources.
C. Owners of businesses would deliberately exploit their employees in an attempt to earn
greater profits, and this would ultimately lead to a worker's revolt.
D. High tax rates would eventually undermine people's incentives to work hard and create
wealth.
Feedback: Thomas Malthus believed that human population would continue to grow until the
economy was unable to support any more people. This would result in a situation where the
standard of living of most people would be at a subsistence level.
178. Economics was known as the "Dismal Science" because:
A. Too many people would result in food shortages and shortages of other resources.
B. It was a very complex area of study based on mathematics.
C. The world population was growing slower than expected in the 1700s, leading
economists to call it a dismal period of time.
D. There were too many old people and not enough young people to care for them.
Feedback: Thomas Carlyle called economics the "dismal science" because of the argument
made by Thomas Malthus in the late 1700s and early 1800s that there would soon be too
many people and not enough food and other resources to support them.
179.
Chapter 02 - Understanding Economics and How It Affects Business
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How is it that people working in their own self-interest produce goods, services, and
wealth for others?
A. By taking advantage of a vast supply of labor, people working in their own self-interest
could hire others at very low wages.
B. In order to earn money and produce goods that improve lives, self-directed gain would
provide jobs, and subsequently wages for others.
C. The government pays entrepreneurs in the U.S. to produce goods, services, and wealth
for others.
D. Entrepreneurs tend to include themselves in a group of people who need charitable
support. A portion of the entrepreneur's profit (as required by law) goes to the charity of
one's choice to support the less fortunate.
Feedback: The way people can become wealthy by their own efforts is to sell what they
produce to others. As the business grows, labor is hired to produce more. This is the "invisible
hand" concept that turns self-directed gain into social and economic benefits for all.
180. Adam Smith believed that countries would prosper if businesspeople were free to start
and run their own businesses. Businesspeople would make a profit by providing the
goods, services and ideas that others in the economy wanted, and they would hire others to
help increase those profits, leading to social and economics benefits for many. This idea
was called the __________.
A. kinked demand theory.
B. invisible hand.
C. spending multiplier.
D. demand accelerator.
Feedback: Adam Smith believed that self-interest would lead profit-seeking entrepreneurs to
produce goods and services wanted by consumers, and to hire others to grow their businesses.
This would prove to be social and economic gain for the entrepreneur and for others.
181.
Chapter 02 - Understanding Economics and How It Affects Business
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Sue is a gifted cook. She plans to open a restaurant in which she will be the head chef. Sue
is willing to work long hours because she believes that her culinary talents and hard work
will allow her business to succeed and earn her sizeable profits. Sue's efforts are most
consistent with the economic theory developed by:
A. Thomas Malthus.
B. Karl Marx.
C. Adam Smith.
D. David Ricardo.
Feedback: In Smith's view, if businesspeople are allowed to follow their own self-interest
they will be motivated to work hard and provide needed products that increase the wealth of
society as a whole
182. Jake considers himself to be a follower of Thomas Malthus. Which of the following
statements would Jake be most likely to make?
A. The key to economic growth is to keep taxes and government regulations to a
minimum.
B. Command economies are more likely to encourage economic growth than free market
economies.
C. Allowing people to follow their self-interest is the best way to generate economic
growth and prosperity.
D. A society will not experience sustainable economic progress unless it accepts the need
to limit population growth.
Feedback: Thomas Malthus worried that overpopulation would make long term economic
prosperity impossible. Followers of Malthus today still believe that there are too many people
and emphasize birth control as the way to help raise standards of living.
183.
Chapter 02 - Understanding Economics and How It Affects Business
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Which of the following statements would a follower of Adam Smith be most likely to
make?
A. The federal government should use its ability to spend and tax to guide the decisions of
businesses and consumers.
B. Market economies are flawed because they put too much emphasis on economic
growth and not enough on environmental problems.
C. Overpopulation is the main danger confronting modern economies.
D. If people are given the freedom to follow their own interests, theoretically their efforts
will lead to economic growth that benefits society as a whole.
Feedback: Adam Smith believed that self-interest could motivate people to work hard and
start businesses that created jobs and wealth that benefited society as a whole. This was a
basic message of Smith's famous invisible hand principle.
184. Fourteen years ago, Sergio noticed that a lot of people who bought personal computers
did not know much about how to use them and frequently suffered system crashes and
other aggravations. He decided he could earn a nice profit by starting a consulting
business to help other people overcome their computer woes. Although the business
struggled at first, it has experienced a good deal of success for the past five years. Sergio
has many satisfied customers, and the business has grown to the point where he now
employs several workers. Sergio's experience is an example of:
A. Socialism at work.
B. The principle of comparative advantage.
C. The invisible hand concept.
D. The multiplier principle.
Feedback: The invisible hand concept suggests that people who seek to serve their own
interests can produce products and create jobs that benefit others in society.
185.
Chapter 02 - Understanding Economics and How It Affects Business
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For many years, Congressman Ricardo Perez has called for more government regulation
of business. "After all," the Congressman said recently, "businesspeople are out to make a
profit, not to create jobs or serve their customers. The government must pass more laws to
require businesses to take the interests of consumers and workers into account." From
these comments, it is clear that Congressman Perez:
A. Agrees with the ideas of Thomas Malthus.
B. Does not accept the "invisible hand" idea brought forth by Adam Smith.
C. Is unaware of the fact that most businesses in the United States are owned by the
government.
D. Does not realize that government regulation is already the main determinant of
business decisions in capitalist economies.
Feedback: The concept of the invisible hand, developed by Adam Smith in his famous book,
The Nature and Causes of the Wealth of Nations, says that in an effort to earn a profit,
entrepreneurs produce goods that satisfy the wants of consumers and create jobs for workers.
It is clear from his statements that Congressman Perez does not accept this philosophy.
186.
Chapter 02 - Understanding Economics and How It Affects Business
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In the boxed material "Making Ethical Decisions," the textbook describes corruption
practices in developing nations. These practices include payoffs to government officials in
order to get an edge on competing better in one's industry. Which of the following
statements best describes the ethical message explained in this box?
A. Bribery is commonplace and necessary in socialistic nations.
B. Bribery is acceptable if everyone is doing it. As a business person, you have to find the
right balance in whatever nation you want to sell your products.
C. Campaign contributions are not considered bribes, particularly if everyone in your
industry is doing the same.
D. Ethics plays an important role in a capitalistic system and in the freedom to compete.
Corruption can hinder economic growth.
Feedback: Corruption can destroy a system that champions capitalism. One of the foundations
of this system is the right to compete. Corruption and bribes jeopardize the competitive field.
A capitalistic system will thrive with checks and balances that stress the ethical behavior of
participants.
187.
Chapter 02 - Understanding Economics and How It Affects Business
According to the invisible hand concept, the best way for a society to encourage the
creation of jobs and the production of the products most wanted by consumers would be
to:
A. Permit government owned industries, such as telecommunications, transportation, and
energy, and operate these firms as nonprofit organizations.
B. Allow private ownership of businesses, but make use of extensive regulation to force
businesses to behave in a socially desirable way.
C. Allow entrepreneurs personal freedom to follow their own self-interest.
D. Impose high taxes on individuals, and use the revenue to subsidize businesses to
encourage them to produce the maximum rate of output.
Feedback: Personal freedom is an important premise of wealth creation. Entrepreneurs, acting
in their own self-interest need the personal freedom to own property and keep the earning
from their hard work.
188. A young couple living in rural west-central Missouri heard about the closing of a local
grocery store. Although a small operation, it served a small community that would now
have to travel another 20 miles to the nearest grocery store. With help from a local realtor
and banker, the couple purchased the store, remodeled it, and re-opened it. As new store
owners, they had to carefully watch cash flow. As their customer base began to grow,
they began offering hot food, and hired others to help with the operation. The economic
benefit created in this story is called:
A. an economic intervention.
B. an economic crisis control.
C. the invisible hand.
D. the deliberate process.
Personal freedom is an important premise of wealth creation. Entrepreneurs, acting in their
own self-interest need the personal freedom to own property and keep the earning from their
hard work.
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189.
Chapter 02 - Understanding Economics and How It Affects Business
_________ is the name of a free-market economic system in which most of the factors of
production and distribution - such as land, factories, railroads, and stores - are owned by
individuals.
A. Socialism
B. Capitalism
C. Communism
D. Marginalism
190. Under capitalism:
A. Most of the means of production and distribution are privately owned and operated for
profit.
B. The primary function of the government is to distribute wealth more evenly.
C. Utilities, health care, education, and other important services are operated by the
government.
D. Markets operate to carry out the decisions made by central planners.
191. The foundation of the U.S. economic system is based on:
A. Capitalism.
B. The ideas of Thomas Malthus.
C. Equality.
D. The saying, "from each according to ability, to each according to need."
