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d.
cause an economy to move from one point on the production possibilities curve to another
point on the curve.
95. Which of the following will most likely cause an outward shift in the production possibilities curve?
a.
a reduction in the man-made productive resources available to the economy as the result of
a decline in investment
b.
an increase in government payments to farmers for taking land out of production
c.
an increase from 40 to 50 hours in the average number of hours worked per week
d.
None of the above would cause an outward shift in the production possibilities curve.
96. Over time, an increase in a nation's stock of physical capital will
a.
shift the production possibilities curve inward.
b.
cause an economy to operate inside its production possibilities curve.
c.
shift the production possibilities curve outward.
d.
eliminate the basic economic problem of scarcity.
97. With time, which one of the following strategies would most likely result in an outward shift in the
production possibilities curve of an economy?
a.
passage of legislation reducing the workweek to 30 hours
b.
instituting a tax policy encouraging consumption at the expense of investment
c.
instituting a tax policy encouraging investment at the expense of consumption
d.
an increase in the marginal income tax rate, which would reduce the work effort of
individuals
98. Using a production possibilities curve, a technological advance that increases the amount of output for
the same amount of inputs would be illustrated as
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.
99. An improvement in a country's legal system that enhanced the ability of citizens to protect their
property rights and enforce contracts would result in which of the following changes to the country's
production possibilities curve?
a.
a movement from a point on the curve to a point outside 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
100. Suppose that country A produces mostly consumption goods and few investment goods, while country
B produces mostly investment goods with few consumption goods. Other things constant, which of the
following is most likely to happen in the future?
a.
The per capita income of country A will grow more rapidly than country B.
b.
The population of country B will grow more rapidly than country A.
c.
The production possibilities curve (PPC) of country B will shift out more rapidly than the
PPC of country A.
d.
The production possibilities curve (PPC) of country A will shift out more rapidly than the
PPC of country B.
101. Other things constant, which of the following would you expect to increase the output growth rate of a
country?
a.
an increase in the rate of taxation on personal income
b.
an increase in the rate of investment as a share of total output
c.
passage of regulations restricting international trade
d.
passage of regulations restricting domestic trade
102. Which of the following is true?
a.
The production possibilities curve indicates that it will be impossible to expand total
output with the passage of time.
b.
As long as resources are scarce, output cannot be increased.
c.
The size of the economic pie is fixed, and therefore, if one individual has more income,
others must have less.
d.
Over time, the output of goods and services can be increased through human ingenuity and
discovery of better ways of doing things.
103. With time, which one of the following strategies will most likely result in an outward shift in an
economy's production possibilities curve?
a.
passage of legislation reducing the workweek to 30 hours
b.
institution of a tax policy encouraging research that advances technology
c.
institution of a tax policy encouraging consumption at the expense of investment
d.
passage of a law requiring the minimum wage to increase every year
104. A nation that protects its workers from unemployment by limiting the use (by employers) of
technological improvements will
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.
105. Entrepreneurs are
a.
profit-seeking decision makers who decide which business projects to undertake.
b.
people who loan money to other business decision makers.
c.
managers who generally work for a salary because they are unwilling to take risks.
d.
none of the above.
106. A profit-seeking decision maker who decides which business projects to undertake and how they
should be undertaken is called
a.
a key man.
b.
an entrepreneur.
c.
a progressor.
d.
a stakeholder.
107. Entrepreneurs have a strong incentive to
a.
discover new production techniques that reduce costs.
b.
introduce new products that are highly valued relative to their cost.
c.
produce goods that are valued more highly than the resources required for their
production.
d.
do all of the above.
108. In order to prosper, entrepreneurs must
a.
undertake projects that create wealth and increase the value of resources.
b.
find ways to prevent technological change.
c.
have their own wealth with which to finance projects that they want to undertake.
d.
undertake projects that use resources that are more valuable than is the output they
produce.
109. The creation of a new product or process, often facilitated by the knowledge of engineering and
scientific relationships, is known as
a.
invention.
b.
innovation.
c.
application.
d.
sublimation.
110. The successful introduction and adoption of a new product or process is known as
a.
invention.
b.
innovation.
c.
origination.
d.
adaptation.
111. Creative destruction refers to the process where
a.
new products and methods of production are continuously replacing old ones
b.
producing more of one good causes you to produce less of another
c.
everybody involved is made worse off
d.
new ways to destroy buildings are employed
112. The process by which new products and methods of production are continuously replacing old ones is
known as
a.
the invisible hand principle.
b.
the production possibilities frontier.
c.
creative destruction.
d.
the fallacy of composition.
113. Michael takes 10 minutes to iron a shirt and 20 minutes to type a paper. Aiden takes 10 minutes to iron
a shirt and 30 minutes to type a paper. Which of the following statements is correct?
a.
Aiden has a comparative advantage in ironing.
b.
Aiden has a comparative advantage in typing.
c.
Michael has a comparative advantage in ironing.
d.
Neither can gain from specialization and exchange.
114. Jayden can produce 10 pens or 20 pencils in one hour while Alexander can produce 15 pens or 5
pencils in one hour. Which of the following statements is correct?
a.
Alexander has a comparative advantage over Jayden in the production of pencils
b.
Alexander has a comparative advantage over Jayden in the production of pens
c.
Jayden has a comparative advantage over Alexander in the production of pens
d.
Alexander and Jayden cannot gain from specialization and exchange.
115. Which of the following is true of exchange?
a.
Exchange is a zero sum activity; if one party to an exchange gains, the other must lose an
equal amount.
b.
The exchange value of a good is determined by the cost of the resources required to
produce the good.
c.
The total output trading partners are able to produce is not influenced by whether the
partners trade with each other.
d.
Exchange permits trading partners to expand their total output of goods and services as the
result of greater specialization in areas where each has a comparative advantage.
116. The notion that specialization in goods that one can produce at a low opportunity cost will make it
possible for trading partners to produce a larger joint output is called
a.
the law of absolute advantage.
b.
the law of comparative advantage.
c.
the law of production possibilities.
d.
the exchange maximum principle.
117. The economic principle that states that individuals or nations can gain by specializing in the
production of goods that they produce cheaply and exchanging for other desired goods that they could
only produce at a higher cost is
a.
the law of absolute advantage.
b.
the law of comparative advantage.
c.
the law of production possibilities.
d.
the exchange maximum principle.
118. According to the law of comparative advantage, both individuals and nations will be able to produce a
larger joint output if each productive activity is undertaken by
a.
the high opportunity cost producer.
b.
the low opportunity cost producer.
c.
the producer who is able to hire workers at the lowest wage.
d.
the party that can complete the productive activity most rapidly.
119. The law of comparative advantage implies that a nation, individual, or region should produce those
economic goods for which it
a.
has an absolute advantage.
b.
is a low opportunity cost producer.
c.
is a high opportunity cost producer.
d.
pays the highest wage rate.
120. According to the law of comparative advantage,
a.
individuals and nations gain when they specialize in producing those goods they consume.
b.
individuals and nations gain when they specialize in producing goods they can produce at
a high opportunity cost and can exchange for other desired goods they can produce
cheaply.
c.
individuals and nations gain when they specialize in producing those items for which they
are the low opportunity cost producers and exchange for other desired goods they can't
produce as cheaply.
d.
all of the above are true.
121. The law of comparative advantage suggests that
a.
curtailing U.S. trade with other countries would make U.S. consumers better off.
b.
everyone would be better off if they were self-sufficient.
c.
countries will tend to import commodities that they can produce at a relatively low
opportunity cost.
d.
countries will tend to import commodities that they can produce at a relatively high
opportunity cost.
122. The law of comparative advantage explains why
a.
specialization and exchange will make it possible for trading partners to expand their
combined output.
b.
there will be an inverse relationship between the price of a product and the quantity of it
that will be demanded.
c.
larger firms will have lower per unit costs than smaller firms.
d.
an increase in the price of a good will lead to an expansion in the quantity supplied by
business firms.
123. The law of comparative advantage applies to exchange between
a.
individuals.
b.
regions.
c.
nations.
d.
all of the above.
124. Which of the following is an implication of the law of comparative advantage?
a.
Countries with small amounts of labor relative to capital should specialize in producing
labor-intensive commodities.
b.
Since workers in high-income countries utilize larger amounts of capital than workers in
less developed nations, trade between capital-rich and capital-poor nations results in the
exploitation of labor in the less developed countries.
c.
Countries that are high cost producers of agricultural products should trade those products
for goods they can produce only at a low opportunity cost.
d.
Countries that are low opportunity cost producers of timber products should trade those
products for goods they can produce only at a high opportunity cost.
125. Which of the following appropriately applies the law of comparative advantage?
a.
Countries with small amounts of labor relative to capital should specialize in producing
labor-intensive commodities.
b.
Since Mexican labor is cheaper than American labor, trade between the countries results in
exploitation of American workers.
c.
Since workers in countries such as the United States utilize larger amounts of capital than
workers in less developed nations, trade between capital-rich and capital-poor nations
results in the exploitation of labor in the less developed countries.
d.
Countries that are low cost producers of agricultural products should trade those products
for goods they can produce only at a high opportunity cost.
126. Ashley is an attorney and also an excellent typist. She can type 120 words per minute, but she charges
attorney fees at $100 per hour. Benjamin would like some typing work but can only type 60 words per
minute. According to the law of comparative advantage, Ashley should hire Benjamin to do her typing
if and only if his wage rate is less than
a.
$10 per hour.
b.
$50 per hour.
c.
$60 per hour.
d.
$100 per hour.
127. Given freedom of movement for both goods and resources, if Florida producers specialize in oranges
and Georgia producers specialize in peaches, it would be reasonable to conclude that
a.
the opportunity cost of growing oranges is higher in Florida than in Georgia.
b.
Georgia has a comparative advantage in producing oranges.
c.
Florida has a comparative advantage in producing oranges.
d.
total output will be expanded when Georgia allocates more resources to producing oranges
and Florida allocates more resources to producing peaches.
128. Opportunity costs differ among nations primarily because
a.
nations employ different currencies.
b.
nations have different amounts of land, labor skills, capital, and technology.
c.
nations have different religious, political, and economic institutions.
d.
the work-leisure preferences of people vary considerably from one nation to another.
129. Suppose a country attempts to be self-sufficient and doesn’t trade with any other countries. From an
economic perspective, citizens of this nation can be expected to
a.
gain materially from this policy because they can consume more goods over time than if
they engaged in trade with foreigners.
b.
produce less total value than they could if they specialized and engaged in trade with other
nations.
c.
gain from more rapid growth since home markets are reserved for home producers.
d.
be just as well off without trade since the value of what is sent to other nations in trade just
equals the value of what is received in trade.
130. Economic analysis suggests that gains from specialization and exchange
a.
will not be realized unless a central planning authority requires that all goods be produced
by the low opportunity cost supplier.
b.
will be realized if individuals are allowed to pursue goals that are in their own
self-interest.
c.
will not be realized unless business firms employ economists when making decisions
about the proper combination of resources to utilize in the production process.
d.
will be realized if individuals place the public interest above the pursuit of their own
self-interest.
131. The most important source of gain from the division of labor is
a.
the repeal of the law of comparative advantage.
b.
the reduction in work effort because incentives are adversely affected.
c.
the increase in the number of jobs since more labor is used to produce goods.
d.
the benefits that result from specialization, adoption of mass production techniques, and
exchange.
132. Specialization in production is beneficial because
a.
it allows everyone to have a job that they like.
b.
it permits people to expand production and achieve rates of output that would otherwise be
unattainable.
c.
it allows everyone to be self-sufficient.
d.
it eliminates the need for the division of labor.
133. Which of the following most accurately states the economic significance of exchange?
a.
Physical goods have value because they exist; exchange can neither increase nor decrease
their value.
b.
Exchange creates value by permitting trading partners to expand total output as the result
of specialization in areas where they have a comparative advantage.
c.
Exchange creates value by moving goods from people who value the goods less to people
who value the goods more.
d.
Both b and c are true.
134. Trade creates value by
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.
135. Which of the following statements about exchange is true?
a.
If everyone starts off with the same quantities of each good, it would be impossible to
realize gains from trade.
b.
Exchange tends to move each good toward those individuals who value the good more
highly.
c.
Exchange always results in one party being made better off and the other being made
worse off.
d.
For trade to occur, everyone must start off with the same value of the good that is traded.
136. Which of the following is true of exchange?
a.
The value of a good is determined by the cost of the resources required to produce the
good.
b.
Exchange makes it possible for trading partners to produce more goods through division of
labor and adoption of mass production methods.
c.
Nothing new is created by exchange; if one party to an exchange gains, the other must lose
an equal amount.
d.
Both a and b are true.
137. Why is trade an important source of economic progress?
a.
It allows the trading partners to produce a larger joint output through specialization in the
areas where they have a comparative advantage.
b.
It allows the trading partners to produce a larger joint output as the result of greater
realization of cost reductions that accompany the adoption of mass production methods.
c.
It makes it possible to realize gains from the discovery and dissemination of innovative
products and production processes.
d.
All of the above are correct.
Use the production possibilities data below for Austria and Italy to answer the following question(s).
Table 2-1
Austria
Food
Clothing
0
6
2
4
4
2
6
0
Italy
Food
Clothing
0
9
1
6
2
3
3
0
138. Refer to Table 2-1. Which of the following is true?
a.
Austria has the comparative advantage in both goods.
b.
Austria has the comparative advantage in food.
c.
Italy has the comparative advantage in food.
d.
It would be impossible for Austria and Italy to gain from trade.
139. Refer to Table 2-1. Which of the following would be a mutually agreeable rate of exchange?
a.
1 Food = 1 Clothing
b.
1 Food = 2 Clothing
c.
1 Food = 3 Clothing
d.
No exchange rate would be mutually agreeable.
140. Refer to Table 2-1. According to the law of comparative advantage, both Austria and Italy could gain
if
a.
Austria produced all of the food and clothing and Italy did not produce anything.
b.
Austria specialized in producing clothing, Italy specialized in producing food, and they
traded.
c.
Austria specialized in producing food, Italy specialized in producing clothing, and they
traded.
d.
Italy and Austria were both were self-sufficient and did not trade.
Use the production possibilities data below for Honduras and Nicaragua to answer the following
question(s).
Table 2-2
Honduras
Oranges
Apples
0
16
1
12
2
8
3
4
4
0
Nicaragua
Oranges
Apples
0
8
1
6
2
4
3
2
4
0
141. Refer to Table 2-2. Which of the following is correct?
a.
Honduras has the comparative advantage in both goods.
b.
Nicaragua has the comparative advantage in oranges.
c.
Honduras has the comparative advantage in oranges.
d.
It would be impossible for Honduras and Nicaragua to gain from trade.
142. Refer to Table 2-2. Which of the following would be a mutually agreeable rate of exchange?
a.
Nicaragua trades one orange to Honduras for every one apple.
b.
Nicaragua trades one orange to Honduras for every two apples.
c.
Nicaragua trades one orange to Honduras for every three apples.
d.
Nicaragua trades one orange to Honduras for every four apples.
143. Refer to Table 2-2. According to the law of comparative advantage, both Honduras and Nicaragua
could gain if
a.
Honduras produced all of the apples and oranges and Nicaragua did not produce anything.
b.
Honduras specialized in producing apples, Nicaragua specialized in producing oranges,
and they traded.
c.
Honduras specialized in producing oranges, Nicaragua specialized in producing apples,
and they traded.
d.
Nicaragua and Honduras were both were self-sufficient and did not trade.
Use the production possibilities data below to answer the following question(s).
Table 2-3
Labor Hours Needed to
Make 1 Pound of:
Pounds produced in 40 hours:
Meat
Potatoes
Meat
Potatoes
Farmer
8
2
5
20
Rancher
4
5
10
8
144. Refer to Table 2-3. The opportunity cost of 1 pound of meat for the farmer is
a.
1/4 hour of labor.
b.
4 hours of labor.
c.
4 pounds of potatoes.
d.
1/4 pound of potatoes.
145. Refer to Table 2-3. The opportunity cost of 1 pound of meat for the rancher is
a.
4 hours of labor.
b.
5 hours of labor.
c.
4/5 pounds of potatoes.
d.
5/4 pounds of potatoes.
146. Refer to Table 2-3. The opportunity cost of 1 pound of potatoes for the farmer is
a.
8 hours of labor.
b.
2 hours of labor.
c.
4 pounds of meat.
d.
1/4 pound of meat.
