11) Consider the following economic agents:
a. the government
b. consumers
c. producers
Who, in a centrally planned economy, decides what goods and services will be produced with the
scarce resources available in that economy?
A) the government
B) producers
C) consumers
D) consumers and producers
E) the government, consumers and producers
12) The decision about what goods and services will be produced made in a market economy is
made by
A) lawmakers in the government voting on what will be produced.
B) workers deciding to produce only what the boss says must be produced.
C) producers deciding what society wants most.
D) consumers and firms choosing which goods and services to buy or produce.
E) consumers dictating to firms what they need most.
13) Which of the following statements about the economic decisions consumers, firms, and the
government have to make is false?
A) Governments face the problem of scarcity in making economic decisions.
B) Only individuals face scarcity; firms and the government do not.
C) Both firms and individuals face scarcity.
D) Each faces the problem of scarcity which necessitates trade-offs in making economic
decisions.
14) Why is it necessary for all economic systems to not only provide people with goods and
services, but also restrict them from getting as much of these goods and services as they wish?
A) Failure to do this could reduce the efficiency of the system by producing some goods and
services that are not as highly valued as others.
B) Failure to do this could lead to an inequitable allocation of goods and services produced.
C) Failure to do this could lead to drastic shortages of good and services.
D) Failure to do this could reduces efficiency and leads to an inequitable allocation of output.
15) Who receives the most of what is produced in a market economy?
A) lawmakers and other politically favored groups
B) those who are willing and able to buy them
C) everyone receives an equal amount
D) people who earn the highest incomes
16) How are the fundamental economic decisions determined in North Korea?
A) Individuals, firms, and the government interact in a market to make these economic decisions.
B) These decisions are made by the country’s elders who have had much experience in answering
these questions.
C) The government decides because North Korea is a centrally planned economy.
D) The United Nations decides because North Korea is a developing economy.
17) How are the fundamental economic questions answered in a market economy?
A) The government alone decides the answers.
B) Individuals, firms, and the government interact in markets to decide the answers to these
questions.
C) Households and firms interact in markets to decide the answers to these questions.
D) Large corporations alone decide the answers.
18) Which of the following is a problem inherent in centrally planned economies?
A) Households and firms make poor decisions in choosing how resources are allocated.
B) There is too little production of low-cost, high-quality goods and services.
C) Production managers are more concerned with satisfying consumer wants than with satisfying
government’s orders.
D) Exports tend to exceed imports.
19) All of the following contributed to the downfall of the Soviet Union in 1991 except
A) public dissatisfaction with low living standards and political repression.
B) an inability to produce low-cost consumer goods that households wanted.
C) lack of high-quality goods and services.
D) lack of a strong dictator who can coordinate economic activities.
20) ________ is a situation in which a good or service is produced at the lowest possible cost.
A) Allocative efficiency
B) Productive efficiency
C) Equity
D) Optimal marginalism
21) Productive efficiency is achieved when
A) firms add a low profit margin to the goods and services they produce.
B) firms produce the goods and services that consumers value most.
C) firms produce goods and services at the lowest cost.
D) there are no shortages or surpluses in the market.
22) When production reflects consumer preferences, ________ occurs.
A) allocative efficiency
B) productive efficiency
C) equity
D) efficient central planning
23) Allocative efficiency is achieved when firms produce goods and services
A) at the lowest possible cost.
B) that consumers value most.
C) at the lowest opportunity cost.
D) at a marginal cost of zero.
24) Markets promote
A) equity and competition.
B) voluntary exchange and equality.
C) equity and equality.
D) competition and voluntary exchange.
25) Which of the following statements is true about competition in a market?
A) Competition forces firms to outsource the production of their labor-intensive products.
B) Competition forces firms to undercut their selling price, thus benefiting consumers who will
be able to purchase products at the lowest price possible.
C) Competition forces firms to produce and sell products as long as the marginal benefit to
consumers exceeds the marginal cost of production.
D) Competition forces firms to add only low profit margins to their costs of production.
26) ________ increases economic efficiency because it forces firms to produce and sell goods
and services as long as the additional benefit to consumers is greater than the additional cost of
production.
A) Competition
B) Voluntary exchange
C) Equity
D) A centrally planned economy
27) Which of the following generates productive efficiency?
A) competition among sellers
B) competition among buyers
C) government inspectors
D) government production rules and regulations
28) Voluntary exchange between buyers and sellers generates ________ in a market economy.
A) scarcity
B) allocative efficiency
C) productive efficiency
D) equity
29) Which of the following is a result of a market economy?
A) environmental protection
B) an equal income distribution
C) agreement on equity
D) voluntary exchange
30) Political candidates often hold fund raisers by charging “per plate” for dinner. Wendy
purchased four tickets to a $1,000 per plate dinner for a local city council candidate. Is this
transaction economically efficient?
A) No, political candidates should never be allowed to overcharge for a fund raising dinner.
B) Yes, it was a voluntary exchange that benefited both parties.
C) No, Wendy paid too much for four dinners.
D) Yes, it is efficient only from the perspective of the candidate but not from the perspective of
Wendy.
31) In economics, the term “equity” means
A) everyone has an equal standard of living.
B) the hardest working individuals consume all they want.
C) only elected officials have high standards of living.
D) economic benefits are distributed fairly.
32) Which of the following is motivated by an equity concern?
A) Some states have transferred funds to food bank programs in order to increase benefits to
lower-income families.
B) Following the implementation of subsidies for energy conservation, household demand for
rooftop solar panels increased quite significantly in California.
C) The United Network for Organ Sharing advocates a system of rationing scarce kidneys that
would favor young patients over old in an effort to wring more life out of donated organs.
D) The United States offers patent protection to pharmaceutical manufacturers to prevent others
from duplicating their products.
33) Which of the following is motivated by an efficiency concern?
A) In December 2006, the Bush administration restarted a short-term housing assistance program
for victims of Hurricane Katrina.
B) Each year, the University of Notre Dame conducts a lottery to parcel out the 30,000 seats
available to contributors, former athletes and parents in the 80,000-seat stadium.
C) The United Network for Organ Sharing advocates a system of rationing scarce kidneys that
would favor young patients over old in an effort to wring more life out of donated organs.
D) The federal government’s housing choice voucher program assists very low-income families,
the elderly, and the disabled to afford decent, safe, and sanitary housing in the private market.
34) Which of the following is an example of an efficiency-equity trade-off faced by economic
agents?
A) According to an article by in the American Journal of Public Health by Edward Kaplan and
Michael Merson of Yale University School of Medicine, the federal government’s current
method of allocating HIV-prevention resources is not cost-effective. Instead of allocating
resources to states in proportion to reported AIDS cases, resources should flow first to those
activities that prevent more infections per dollar and then to less and less effective combinations
of programs and populations until funds are exhausted, even if it means that some populations
would be left without any prevention services.
B) Concerned about the falling birth rate, the French government has pledged more money for
families with three children, in an effort to encourage working women to have more babies.
C) Some U.S. colleges are actively recruiting foreign students for their technology-based
programs.
D) All New York City art museums are considering adopting a free-admission policy for local
residents one weekend per month.
35) Which of the following correctly describes the relationship between economic efficiency and
economic equity?
A) They are both automatically achieved in a free market economy.
B) They always call for opposite outcomes.
C) There is no conflict between the two goals.
D) There is often a trade-off between the two.
36) Allocative efficiency best explains ________, and productive efficiency best explains
________.
A) how something will be produced; when something will be produced
B) when something will be produced; why something will be produced
C) why something will be produced; what will be produced
D) what will be produced; how something will be produced
37) The government makes all economic decisions in a mixed economy.
38) When voluntary exchange takes place, both parties gain from the exchange.
39) A college must decide if it wants to offer more Internet-based classes. This decision involves
answering the economic question of “what to produce.”
40) One desirable outcome of a market economy is that it leads to a more equitable distribution
of income.
41) What is equity, and how does it differ from efficiency?
42) What is opportunity cost?
43) Define productive efficiency. Does productive efficiency imply allocative efficiency?
Explain.
44) What is a centrally planned economy?
1.3 Economic Models
1) Economic models do all of the following except
A) answer economic questions.
B) portray reality in all its minute details.
C) make economic ideas explicit and concrete for use by decision makers.
D) simplify some aspect of economic life.
2) All of the following are part of an economic model except
A) assumptions.
B) hypotheses.
C) data.
D) opinions.
3) Which of the following statements about positive economic analysis is false?
A) Positive analysis uses an economic model to estimate the costs and benefits of different
course of actions.
B) There is much more disagreement among economists over normative economic analysis than
over positive economic analysis.
C) There is much more disagreement among economists over positive economic analysis than
over normative economic analysis.
D) Unlike normative economic analysis, positive economic analysis can be tested.
4) Which of the following is a positive economic statement?
A) The standard of living in the United States should be higher.
B) If the price of iPhones falls, a larger quantity of iPhones will be purchased.
C) The government should revamp the health care system.
D) The U.S. government should not have bailed out U.S. auto manufacturers.
5) Which of the following is a positive economic statement?
A) People should not buy SUVs.
B) The government should mandate electric automobiles.
C) Scarcity necessitates that people make trade-offs.
D) Foreign workers should not be allowed to work for lower wages than the citizens of a
country.
6) Which of the following is a normative economic statement?
A) Rising global demand for coal has led to increases in the price of coal.
B) With rising mortgage rates and rising unemployment rates, the number of unsold homes has
increased.
C) The state of Texas is considering increasing funds for light-rail development to promote the
use of public transportation.
D) Pharmaceutical manufacturers should not be allowed to patent their products so prescription
drugs would be more affordable.
7) Which of the following is a normative economic statement?
A) The price of gasoline is too high.
B) The current high price of gasoline is the result of strong worldwide demand.
C) When the price of gasoline rises, the quantity of gasoline purchased falls.
D) When the price of gasoline rises, transportation costs rise.
8) Which of the following questions or statements regarding medical school is normative?
A) How do changes in expected future incomes affect the decisions of medical students about
which specialty to choose?
B) Medical students who enter specialized fields make a larger contribution to society than do
student who enter primary care.
C) What role does tuition play in a student’s decision about whether to attend medical school?
D) Have tuition increases had a large effect or a small effect on the number of applications to
medical school?
9) The economic analysis of minimum wage involves both normative and positive analysis.
Consider the following consequences of a minimum wage:
a. The minimum wage law causes unemployment.
b. A minimum wage law benefits some groups and hurts others.
c. In some cities such as San Francisco and New York, it would be impossible for low-skilled
workers to live in the city without minimum wage laws.
d. The gains to winners of a minimum wage law should be valued more highly than the losses
to losers because the latter primarily comprises businesses.
Which of the consequences above are positive statements and which are normative statements?
A) a, b, and c are positive statements and d is a normative statement.
B) a and b are positive statements, c and d are normative statement.
C) Only a is a positive statement, b, c and d are normative statements.
D) a and c are positive statements, b and d are normative statements.
10) “An increase in the price of gasoline will increase the demand for hybrid vehicles.” This
statement is an example of a positive economic statement.
11) “The distribution of income should be left to the market” is an example of a positive
economic statement.
12) Positive analysis is concerned with “what ought to be”, while normative analysis is
concerned with “what is.”
13) What is the difference between positive economic analysis and normative economic
analysis? Give one example each of a positive and normative economic issue or question or
statement.
14) Explain why economics is considered a social science.