9) Fast food restaurants produce a range of menu items such as hamburgers, chicken sandwiches,
salads, and french fries. What fundamental economic question are they addressing by offering
this range of items?
A) How to produce goods that consumers want?
B) Why produce a variety of menu items?
C) What to produce?
D) Who to produce the menu items for?
10) Consider the following economic agents:
a. the government
b. consumers
c. producers
Who, in a modern mixed 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
11) In a market economy, who decides what goods and services will be produced?
A) only the producers
B) only consumers
C) consumers and producers
D) the government
12) Which of the following is correct about the economic decisions consumers, firms, and the
government have to make?
A) Governments may face the problem of shortages but not scarcity in making economic
decisions.
B) Only individuals face scarcity; firms and the government do not.
C) Firms and the government face scarcity, individuals only face shortages.
D) Each faces the problem of scarcity which necessitates trade-offs in making economic
decisions.
13) It is necessary for all economic systems to provide people with goods and services and also
restrict them from getting as much of these goods and services as they wish, because failure to do
this could ________ the efficiency of the system by producing some goods and services that are
________.
A) reduce; not as highly valued as others
B) increase; not as highly valued as others
C) reduce; valued more than others
D) increase; valued more than others
14) How does a market system prevent people from getting as many goods and services as they
wish?
A) Governments interfere with the market mechanism to influence the allocation of goods and
services.
B) In a market system, firms can charge any price they want, thus preventing poor people from
getting as many goods and services as they wish.
C) The market system allocates goods and services to those who are able to pay for those
products and therefore income is a limiting factor.
D) The government imposes taxes on those who earn beyond a certain amount of income.
15) In a market economy, those who are willing and able to buy what is produced
A) receives what the government allows them to receive.
B) receive the most of what is produced.
C) receive no more than everyone else in the market.
D) solely determine what is produced.
16) How are the fundamental economic decisions determined in Cuba?
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 Cuba is a centrally planned economy.
D) The United Nations decides because Cuba is a developing economy.
17) In a market economy, ________ interact in markets to decide the answers to the fundamental
economic questions.
A) state and local governments
B) large corporations
C) households and firms
D) the judicial and legislative branches of the federal government
18) Which of the following is a problem inherent in centrally planned economies?
A) There are no problems and everyone, including consumers, is satisfied.
B) There is too much production of low-cost, high-quality goods and services.
C) Production managers are more concerned with satisfying government’s orders than with
satisfying consumer wants.
D) Unemployment is too high.
19) Which of the following contributed to the downfall of the Soviet Union in 1991?
A) public dissatisfaction with low living standards and political repression
B) producing higher-quality goods than were desired by consumers
C) the rapidly increasing standard of living
D) the lack of a strong dictator who can coordinate economic activities
20) When goods and services are produced at the lowest possible cost, ________ occurs.
A) allocative efficiency
B) productive efficiency
C) equity
D) efficient central planning
21) Productive efficiency is achieved when firms produce goods and services
A) most desired by society.
B) at the highest profit margin.
C) at the lowest cost.
D) of the highest quality.
22) When every good or service is produced up to the point where the last unit provides a
marginal benefit to society equal to the marginal cost of producing it, ________ occurs.
A) allocative efficiency
B) productive efficiency
C) equity
D) efficient central planning
23) Allocative efficiency is achieved when
A) goods and services are fairly distributed among consumers in an economy.
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.
24) Which of the following contributes to the efficiency of markets?
A) Governments play an active role in the day-to-day operations of markets.
B) Markets are able to bring about an equitable distribution of goods and services.
C) Markets promote equal standards of living.
D) Markets promote competition and voluntary exchange.
25) Competition forces firms to produce and sell products as long as the ________ to consumers
exceeds the ________ of production.
A) marginal benefit; marginal cost
B) marginal benefit; marginal benefit
C) marginal cost; marginal cost
D) marginal cost; marginal benefit
26) Voluntary exchange increases economic efficiency
A) because neither the buyer nor the seller would agree to a trade unless they both benefit.
B) because voluntary exchange only takes place with government permission.
C) because it is free and consequently does not cost anything.
D) because it allows wealthy individuals to act altruistically and give to the poor.
27) All ________ economies have been political dictatorships.
A) centrally planned
B) mixed
C) market
D) mixed and market
28) Which of the following generates allocative efficiency in a market economy?
A) national government intervention
B) voluntary exchange between buyers and sellers
C) United Nations rules for competition
D) equity
29) Competition among sellers generates
A) productive efficiency.
B) allocative efficiency.
C) equity.
D) scarcity.
30) Dr. Goldfinger decides to invest in companies which he believes can “improve the
productivity and efficiency” of health care services. How can Dr. Goldfinger strive to achieve
this productive efficiency?
A) by investing in companies that produce goods and services based on consumer preferences
B) by investing in companies that produce goods and services at the lowest possible cost
C) by investing in companies that fairly distribute their products and services
D) by investing in companies that produce up to the point where the marginal benefit of the last
unit produced is equal to the marginal cost of producing it.
31) Dr. Goldfinger decides to invest in companies which he believes can “improve the
productivity and efficiency” of health care services. What would Dr. Goldfinger need to do to try
to achieve allocative efficiency?
A) invest in companies that produce goods and services based on consumer preferences
B) invest in companies that produce goods and services at the lowest possible cost
C) invest in companies that fairly distribute their products and services
D) invest in companies that produce up to the point where the marginal cost of the last unit
produced is zero.
32) Selling tickets to graduation ceremonies has long been a tradition among students at
institutions that limit the number of guests. Suppose your classmate, Heidi purchased two tickets
for $40 each. Is this transaction economically efficient?
A) No, people should never be allowed to sell items they received for free.
B) Yes, it was a voluntary exchange that benefited both parties.
C) No, Heidi paid too much for the tickets.
D) Yes, it is efficient only from the perspective of the seller and not from the perspective of the
buyer.
33) ________ occurs when economic benefits are distributed fairly.
A) Productive efficiency
B) Allocative efficiency
C) Equality
D) Equity
34) Which of the following is motivated by an equity concern?
A) Some U.S. colleges have cut back on merit scholarships since these programs siphon money
from need-based programs, thus harming lower-income students with greater financial need.
B) Following the removal of subsidies in urban water use, household demand for water
decreased quite significantly in Bogor, Indonesia.
C) In November 2003, the Federal Communications Commission implemented the “local
number portability” rule which gives cell phone customers the option of keeping their number
when they switch carriers within the same geographic region.
D) The United States protects intellectual property rights, allowing inventors to prevent others
from using their inventions without payment.
35) Which of the following is motivated by an efficiency concern?
A) In 2009, the Obama administration increased unemployment benefits.
B) As part of an economic stimulus package, each taxpayer received a $3,000 tax rebate check.
C) Following a six-month drought, a city banned homeowners from watering their lawns in an
effort to conserve water.
D) Some U.S. colleges have cut back on merit scholarships since these programs siphon money
from need-based programs, thus harming lower-income students with greater financial need.
36) Which of the following is not 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) The growing demand for corn by ethanol producers has led to a surge in the price of tortillas,
a staple in the Mexican diet. To quell public outcry over rising tortilla prices, the Mexican
government released government corn stocks at prices well below the market, and pressured
states to impose price ceilings on tortillas.
D) Some US colleges cut back on merit scholarships since these programs siphon money from
need-based programs, thus harming lower-income students with greater financial need.
37) There is often a trade-off between
A) productive efficiency and allocative efficiency.
B) limited and unlimited resources.
C) voluntary and involuntary exchanges.
D) economic efficiency and economic equity.
38) The government makes all economic decisions in a centrally planned economy.
39) When voluntary exchange takes place, only one party gains from the exchange.
40) A college must decide if it wants to offer more evening and weekend classes. This decision
involves answering the economic question of “for whom to produce.”
41) In a centrally planned economy, the government decides how economic resources will be
allocated.
42) Trade-offs force society to make choices when answering what three fundamental questions?
43) What is the difference between economic efficiency and equity?
44) What is a market economy?
45) Define allocative efficiency. Explain the significance of this concept in economics?
1.3 Economic Models
1) Economic models
A) make no assumptions in order to remain as accurate as possible.
B) are simplified versions of reality.
C) can not be used to analyze real-world issues.
D) magnify the complexity of economic issues in order to provide useful data.
2) Which of the following is part of an economic model?
A) assumptions
B) norms
C) opinions
D) preferences of economic agents
3) Which of the following statements about positive economic analysis is true ?
A) Positive analysis uses an economic model to estimate the costs and benefits of different
course of actions.
B) There is much less 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 positive economic analysis, normative economic analysis can be tested.
4) Which of the following is a positive economic statement?
A) Everyone should live at the same standard of living.
B) If the price of gasoline rises, a smaller quantity of it will be bought.
C) The government should close income tax loopholes.
D) U.S. firms should not be allowed to outsource production of goods and services.
5) Which of the following is a positive economic statement?
A) People should not buy imported fruits and vegetables.
B) The government should subsidize solar power for homeowners.
C) The minimum wage law causes unemployment.
D) The number of work visas should not be limited by the government.
6) Which of the following is a normative economic statement?
A) Rising global demand for diesel and heating oil has led to increases in the price of crude oil.
B) With falling home prices and rising mortgage interest rates, the amount of foreclosures has
increased.
C) The federal government is considering raising the gasoline tax to promote the use of public
transportation.
D) Fashion designers should be allowed to copyright designs to promote innovation.
7) Which of the following is a normative economic statement?
A) The price of milk is too high.
B) The current high price of milk is the result of reduced worldwide supply.
C) When the price of milk rises, the quantity of milk purchased falls.
D) When the price of milk rises, the cost of milk-based products rises.
8) All of the following questions or statements regarding medical school are positive except:
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. Unemployment would be lower without a minimum wage law.
c. Minimum wage laws benefit some workers and harm others.
d. The minimum wage should be more than $7.25 per hour.
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) “A decrease in the price of digital cameras will decrease the demand for camera film.” This
statement is an example of a positive economic statement.
11) “The distribution of income should be determined by the government” is an example of a
normative economic statement.
12) Policies based on normative economic ideas tend to increase economic efficiency and
improve equity.
13) What is an economic variable? Give an example of an economic variable.
14) Which of the following are positive economic statements and which are normative economic
statements?
a. An increase in the minimum wage causes unemployment.
b. The government should raise the minimum wage above $7.25 per hour.
c. The prolonged recession has caused the unemployment rate to reach a 30-year high.
d. Interest rates need to be lower for the economy to emerge from the recession.
e. Inflation has decreased since the onset of the recession.
f. Once the recession has ended, interest rates should increased to assure that inflation does not
go up.