Figure 2-9
17) Refer to Figure 2-9. In the circular flow diagram, who are economic agents A and who are
economic agents B?
A) A = firms; B = households
B) A = households; B = firms
C) A = households; B = factor markets
D) A= firms; B = product markets
Figure 2-10
18) Refer to Figure 2-10. One segment of the circular flow diagram in the Figure shows the
flow of funds from market F to economic agents G. The funds represent spending on goods and
services. What is market F and who are economic agents G?
A) F = factor markets; G = households
B) F = product markets; G = households
C) F = factor markets; G = firms
D) F = product markets; G = firms
19) Which of the following is an examples of spending on factors of production in the circular
flow model?
A) Tuan purchases a cappuccino at the student union.
B) Laurence rents a car to drive to a wedding in San Diego.
C) Yvette pays $50 to join a softball league.
D) The “Lucky Ducky” casino buys a new craps table for the casino floor.
20) All of the following are examples of spending on goods and services in the circular flow
model except
A) Amanda purchases a new electric guitar to pursue her hobby seriously.
B) Chaitanya buys a new spa pedicure chair for her expanding nail salon business.
C) Hernan buys a pizza at Papa C’s.
D) Lenny buys a new digital camera to take pictures at his son’s graduation.
21) Published in 1776, ________ was written by Adam Smith.
A) “The General Theory of Employment, Interest, and Money”
B) “The Communist Manifesto”
C) “The Declaration of Economics”
D) “An Inquiry into the Nature and Causes of the Wealth of Nations”
Figure 2-11
22) Refer to Figure 2-11. Which two arrows in the diagram depict the following transaction:
Stanley purchases the novel, “Night of Sorrows” for his summer reading pleasure.
A) J and M
B) J and G
C) K and M
D) K and G
23) Refer to Figure 2-11. Which two arrows in the diagram depict the following transaction:
Lizzie Haxem hires “The Paint Pros,” a professional painting company, to paint her home.
A) J and M
B) K and G
C) K and M
D) J and G
24) Refer to Figure 2-11. Which two arrows in the diagram depict the following transaction:
Carter earns a $400 commission for selling men’s designer shoes at Brooks Brothers.
A) J and M
B) K and G
C) K and M
D) J and G
25) ________ behavioral assumption about humans was that people usually act in a rational,
self-interested way.
A) Thomas Malthus’s
B) Adam Smith’s
C) Karl Marx’s
D) Ben Bernanke’s
26) Which of the following countries does not come close to the free market benchmark?
A) the United States
B) Japan
C) Cuba
D) France
27) Adam Smith’s ________ refers to the process by which individuals acting in their own self-
interest bring about a market outcome that benefits society as a whole.
A) Utopian society
B) comparative advantage model
C) invisible hand
D) survival of the fittest theory
28) A critical function of the government in facilitating the operation of a market economy is
A) producing goods and services for low income households.
B) setting up and enforcing private property rights.
C) ensuring an equal distribution of income to all citizens.
D) controlling the market prices of food items.
29) The ability to exercise control over one’s own resources within the confines of the law refers
to
A) the free market.
B) one’s property rights.
C) entrepreneurship.
D) having an absolute advantage.
30) The primary purpose of patents and copyrights is to
A) provide owners with large profit forever.
B) protect firms from being taken advantage of by competing firms.
C) protect domestic firms from foreign competition.
D) encourage the expenditure of funds on research and development to create new products.
31) If property rights are not well enforced, all of the following are likely to occur except
A) fewer goods and services will be produced.
B) economic efficiency will be reduced.
C) an economy will produce inside its production possibilities frontier.
D) a significant number of people will be willing to risk their funds by investing them in local
businesses.
32) A successful market economy requires well defined property rights and
A) balanced supplies of all factors of production.
B) an independent court system to adjudicate disputes based on the law.
C) detailed government regulations.
D) a safety net to ensure that those who cannot participate in the market economy can earn an
income.
33) All of the following are considered intellectual property except
A) books.
B) films.
C) software.
D) shares fo stock.
34) A guild is
A) a group of independent producers competing with each other.
B) an organization of producers that limits the amount of a good produced.
C) a group of nations who agree not to compete with each other.
D) a nation that is a free market benchmark.
35) In 18th century Europe, governments gave guilds legal authority to limit production of
goods. This authority obstructed the market mechanism because the guild’s actions prevented the
forces of ________ from coordinating the self-interested decisions of producers and consumers.
A) absolute advantage
B) demand and supply
C) opportunity cost
D) nature
36) When a celebrity has the desire to have his image protected following his death, this is best
described as an example of the protection of
A) an invention.
B) a patent.
C) a trademark.
D) intellectual property.
37) In the desire to have a celebrity’s image protected to prevent it from being used in ways he
would not approve, a celebrity’s estate
A) will probably not be successful, since there are no laws regulating this kind of use in the
United States.
B) will have to be granted a patent declaring the celebrity’s image a new product, and this will
give the estate protection for 7 years.
C) can rely on U.S. laws that protect intellectual property rights to prevent the unauthorized use
of his image.
D) will most likely be more successful in developing countries than in high-income countries,
since property regulations are better enforced in developing countries.
38) The payment received by suppliers of entrepreneurial skills is called profit.
39) In the circular flow model, households demand resources such as labor services in the
product market.
40) In economics, the term “free market” refers to a market where no sales tax is imposed on
products sold.
41) In a free market there are virtually no restrictions, or at best few restrictions, on how a good
or service can be produced or sold.
42) A stand of redwood trees is not an example of a factor of production but the harvested and
processed redwood is a factor of production.
43) The idea underlying Adam Smith’s “invisible hand” is that people tend to behave in ways that
go unnoticed in society.
44) In a simple circular flow diagram, who supplies factors of production in markets and who
buys these factors of production? Who supplies goods and services in markets and who buys
these goods and services?
45) List the four broad categories of factors of production.
46) Define the term “property rights.” Explain why the lack of well defined and enforceable
property rights is detrimental to the smooth functioning of a market system.
47) Why are music, television, and movie companies concerned about their products being
posted to Internet websites such as YouTube?
48) Adam Smith, the father of modern economics wrote in his book, An Inquiry into the Nature
and Causes of the Wealth of Nations, “It is not from the benevolence of the butcher, the brewer,
or the baker, that we expect our dinner but from their regard to their own interest.” Explain what
he meant by that statement and how such behavior promotes the wealth of a nation.