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Chapter 03: Economic Decision Makers
True / False
1. The movement of households from rural to urban settings reduced the degree of specialization in household production.
a.
True
b.
False
True
2. As the real wage increases, the opportunity cost of working in the home increases.
a.
True
b.
False
True
3. Personal income in the United States is primarily determined by selling labor services.
a.
True
b.
False
True
4. The fastest-growing component of U.S. personal consumption is services.
a.
True
b.
False
True
5. Sole proprietorships produce more goods and services than does any other form of business organization.
a.
True
b.
False
False
6. A large number of businesses are organized as sole proprietorships because it is easy for them to acquire large amounts
of financing.
a.
True
b.
False
False
7. The partnership is the least common form of business organization in the United States.
a.
True
b.
False
True
8. A major advantage of the corporate form of business organization is the limited personal liability of the owners.
a.
True
b.
False
True
9. A disadvantage of the corporate form of business organization is that corporate income is taxed twice.
a.
True
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Chapter 03: Economic Decision Makers
b.
False
True
10. The most common form of business organization in the United States is the sole proprietorship.
a.
True
b.
False
True
11. The most common form of business organization in the United States is the partnership.
a.
True
b.
False
False
12. A cooperative, or co–op for short, is a single-owner firm.
a.
True
b.
False
False
13. A major disadvantage of the corporate form of business is limited liability.
a.
True
b.
False
False
14. Household production still exists because it often requires fewer specialized resources than market production does.
a.
True
b.
False
True
15. Household production increases when there is a stronger desire to avoid taxation.
a.
True
b.
False
True
16. Household production consists of households producing goods and services, like meals, cleaning and child care,
instead of firms.
a.
True
b.
False
True
17. An external benefit is a benefit from an activity that falls on a third party which is not involved in the activity.
a.
True
b.
False
True
18. If left to market forces, activities that produce external benefits will be overproduced.
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Chapter 03: Economic Decision Makers
a.
True
b.
False
False
19. Two important roles of government in the economy are to safeguard private property and enforce contracts.
a.
True
b.
False
True
20. To serve the public interest, government sometimes promotes competition by breaking up natural monopolies.
a.
True
b.
False
False
21. A public good is available to all regardless of who pays for it and who does not.
a.
True
b.
False
True
22. Private goods are excludable and nonrival in consumption.
a.
True
b.
False
False
23. When externalities are present, market prices do not reflect all the social costs or benefits of the activity.
a.
True
b.
False
True
24. A positive externality is one in which there is an external benefit bestowed on a third party.
a.
True
b.
False
True
25. Externalities can occur as a result of either production or consumption activities.
a.
True
b.
False
True
26. Imposing a tax on an activity that generates an external benefit will cause participants in the activity to increase the
amount of the activity undertaken.
a.
True
b.
False
False
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Chapter 03: Economic Decision Makers
27. It is difficult to exclude individuals from the use of public goods and services.
a.
True
b.
False
True
28. Public goods are both rival and nonexclusive.
a.
True
b.
False
False
29. Most economists assume that the goal of elected officials is to promote the public interest.
a.
True
b.
False
False
30. Goods and services produced by the government are sold at prices that are set to recover production costs.
a.
True
b.
False
False
31. In recent years, redistribution has been the fastest growing category of federal government outlays.
a.
True
b.
False
True
32. Revenue for the state governments in the United States comes primarily from income taxes.
a.
True
b.
False
False
33. The primary source of revenue for local governments is the property tax.
a.
True
b.
False
True
34. The excise tax on gasoline is based on the ability–to-pay principle of taxation.
a.
True
b.
False
False
35. The personal income tax is based on the benefits-received principle of taxation.
a.
True
b.
False
False
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Chapter 03: Economic Decision Makers
36. Under a regressive income tax system, individuals with higher incomes pay higher marginal tax rates.
a.
True
b.
False
False
37. Federal individual income taxes illustrate the ability-to-pay principle of taxation.
a.
True
b.
False
True
38. Gasoline taxes illustrate the benefits-received principle of taxation.
a.
True
b.
False
True
39. The value of a country’s imports cannot exceed the value of its exports.
a.
True
b.
False
False
40. If the value of the euro increases relative to the U.S. dollar, then French goods will be less expensive in the U.S.
a.
True
b.
False
False
41. Import quotas on sugar entering the United States result in lower sugar prices in the United States.
a.
True
b.
False
False
42. An import quota taxes an import but does not set a limit on how much may be imported.
a.
True
b.
False
False
43. Import restrictions usually benefit domestic producers at the expense of domestic consumers.
a.
True
b.
False
True
Multiple Choice
44. Households act as suppliers when they provide:
a.
goods and services to firms and governments.
b.
resources to firms and governments.
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Chapter 03: Economic Decision Makers
c.
tax payments to governments.
d.
the demand for only what firms supply or make available.
e.
money to firms in exchange for goods and services.
45. Households act as demanders when they demand:
a.
that corporate executives and government officials be held accountable for their actions.
b.
dividends from the stocks they hold.
c.
interest and capital gains from the bonds they hold.
d.
goods and services from firms and governments.
e.
payment for the goods and services they sell to firms and governments.
46. The movement in U.S. population from the farms to urban areas was caused primarily by:
a.
each member of a farm family specializing in a particular set of tasks.
b.
a sharp increase in farm productivity.
c.
a decline in the demand for labor in urban areas.
d.
a sharp decline in the demand for agricultural products.
e.
increased education among married women.
47. In the United States since World War II, there has been:
a.
a dramatic increase in the population living in rural areas.
b.
a decline in the number of women in the labor force.
c.
a decrease in the opportunity cost of working in the home.
d.
more specialization of production within households.
e.
a dramatic increase in the number of married women in the labor force.
48. Which of the following is one of the chief reasons for the increased number of married women in the U.S. workforce?
a.
The marginal cost of working in the labor force has increased.
b.
Jobs provide greater independence and self-worth.
c.
The opportunity cost of household work has increased.
d.
The sunk cost of household appliances has risen to the point where women must work to make payments on
them.
e.
Women spend more time shopping as a result of the increasing division of labor in household production.
49. Which of the following is a result of increased real wages in the United States?
a.
A decrease in the quantity of services demanded by households
b.
An increase in the opportunity cost of remaining employed in the home
c.
A decrease in the opportunity cost of working outside the home
d.
A decline in the number of households providing labor outside the home
e.
Reduced use of labor-saving devices in households
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Chapter 03: Economic Decision Makers
50. One explanation for the increased participation of married women in the U.S. labor force is that:
a.
fewer women are being trained for household work by the public school system.
b.
the rapid growth in the service sector has increased job opportunities for women.
c.
the cost of professional day care has increased.
d.
couples are having more children.
e.
husbands earn more today than they did previously.
51. If real wage decreases, the opportunity cost of working in the home will:
a.
increase.
b.
decrease.
c.
not be affected.
d.
increase as long as worker productivity also rises.
e.
increase only if households want to maintain their standard of living.
52. The increased labor force participation of married women in the United States is most often explained by:
a.
declining productivity in agricultural production.
b.
a rise in average household size.
c.
increased education and an increased demand for labor.
d.
the decreased opportunity cost of working in the home.
e.
declining productivity in household production.
c
53. Harold, a delivery man, washes and irons his own shirts. Sarah, his boss, sends her clothes to a laundry. Which is the
most plausible economic explanation for this difference?
a.
Harold must enjoy ironing more than Sarah does.
b.
Harold must be better at ironing than Sarah is.
c.
The opportunity cost of ironing is greater for Harold.
d.
Harold probably has an absolute advantage in ironing.
e.
Sarah has a higher opportunity cost of washing and ironing her clothes than Harold does.
e
54. The term “utility” means:
a.
satisfaction.
b.
a low-valued good.
c.
productivity.
d.
adaptability.
e.
efficiency.
a
55. The statement “Households maximize utility” means that households:
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Chapter 03: Economic Decision Makers
a.
try to be as useful as possible to the economy.
b.
are only interested in maximizing their earnings.
c.
are assumed to buy useful things before they buy luxuries.
d.
are only interested in acquiring material wealth.
e.
are assumed to do what they think will most increase their satisfaction.
56. The objective of the household is to:
a.
maximize household wealth.
b.
own as much land as possible.
c.
save as much money as possible.
d.
acquire as many goods as possible.
e.
maximize utility.
57. Economists generally assume that:
a.
firms act to maximize the dividends paid to stockholders.
b.
households act to maximize their wealth.
c.
households act to maximize utility.
d.
firms act to maximize revenue.
e.
both households and firms act to minimize expenditures.
58. Roxanne and Eileen live in an apartment building with a laundry room in the basement. Roxanne does her laundry at
home, spending $4 and 5 hours per week. Eileen sends her laundry out, spending $20 and 15 minutes per week
transporting the laundry. On the basis of the information given, which one of the following must be true?
a.
Roxanne earns more labor income than Eileen.
b.
Eileen earns more total income than Roxanne.
c.
Eileen enjoys doing laundry; Roxanne does not.
d.
Eileen has less laundry than Roxanne.
e.
Eileen and Roxanne attach different utilities to time spent doing laundry.
59. Mark and Charles are roommates at college. Each has written a 25-page term paper for the same English class. They
are equally poor typists. Charles types his own paper and gets paid by Mark to type his, too. On the basis of the
information given, which one of the following must be true?
a.
Mark is wealthier than Charles.
b.
Mark needs more time to study than Charles.
c.
Charles hates typing.
d.
Mark and Charles have different utilities for typing but place the same value on time.
e.
Mark’s opportunity cost of typing is higher than Charles’s.
60. Rationality in the household decision-making process means that:
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Chapter 03: Economic Decision Makers
a.
all households make the same decisions.
b.
everyone in the household agrees on all decisions.
c.
households act in their own best interests.
d.
households want to earn as much income as possible.
e.
all households would make the same decisions given the same information on product quality and prices.
c
61. Which resource generates the largest share of household income in the United States?
a.
Labor
b.
Land
c.
Capital
d.
Entrepreneurial ability
e.
Money
a
62. Which of the following is an example of an in-kind transfer?
a.
Welfare payments
b.
Most Social Security benefits
c.
Unemployment compensation payments
d.
Food stamps
e.
Charitable contributions
63. Caleb teaches economics at Happy State University and is paid $50,000 per year. He also provides economic forecasts
for local businesses for which he charges $100 per hour. Which of the following is true?
a.
All of Caleb’s income is salary.
b.
Some of Caleb’s income is salary and some is personal interest.
c.
All of Caleb’s income is proprietor’s income.
d.
Some of Caleb’s income is salary and some is proprietor’s income.
e.
All of Caleb’s income is personal interest.
64. Luigi owns and operates a small restaurant. The income he receives from the restaurant is classified as:
a.
saving.
b.
proprietor’s income.
c.
wages and salaries.
d.
rental income.
e.
dividends.
65. Raghib teaches mathematics at Camford University and receives $40,000 per year. His spouse, Noraini, works as a
self-employed computer programmer and charges $40 per hour. Which of the following is true?
a.
Raghib’s income is personal interest; Noraini’s is wages.
b.
Raghib’s income is a salary; Noraini’s is personal interest.
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Chapter 03: Economic Decision Makers
c.
Both Raghib and Noraini receive proprietor’s income.
d.
Both Raghib and Noraini receive wage or salary income.
e.
Raghib’s income is a salary, and Noraini’s income is proprietor’s income.
e
66. Households supply four basic types of resources. They include all of the following except:
a.
natural resources.
b.
final goods and services.
c.
capital.
d.
entrepreneurial ability.
e.
labor.
67. Which of the following includes the four basic resources supplied by households?
a.
Natural resources, labor, intelligence, capital
b.
Money, labor, natural resources, entrepreneurial ability
c.
Intellectual ability, physical ability, money, natural resources
d.
Labor, capital, intelligence, entrepreneurial ability
e.
Labor, natural resources, entrepreneurial ability, capital
e
68. Household income is spent on all of the following except one. Which is the exception?
a.
Services
b.
Tax payments
c.
Durable goods
d.
Nondurable goods
e.
Dividends
e
69. Which of the following is an example of a durable good?
a.
Food cooked at home
b.
Food eaten at a restaurant
c.
High fashion clothing
d.
Binoculars
e.
Motor oil
70. Which of the following is an example of a durable good?
a.
A strawberry muffin
b.
A cherry pie
c.
A newspaper
d.
A handheld calculator
e.
A pencil
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Chapter 03: Economic Decision Makers
71. Which component of U.S. household spending has grown the most over the past ten years?
a.
Taxes
b.
Savings
c.
Spending on services
d.
Spending on nondurable goods
e.
Spending on durable goods
c
72. Which of the following is the category to which the largest portion of households’ personal income is allocated?
a.
Taxes collected by government
b.
Savings
c.
Purchases of services
d.
Purchases of durable goods
e.
Purchases of nondurable goods
c
73. A cottage industry is one that:
a.
produces rural housing.
b.
takes advantage of the division of labor.
c.
uses highly specialized resources in a complex production process.
d.
produces cottage cheese.
e.
carries out production in workers’ homes.
a
74. Which of the following did not occur during the Industrial Revolution?
a.
Worker productivity increased.
b.
Factories became larger.
c.
Direct supervision of labor decreased.
d.
Division of labor increased.
e.
Fewer stages of production were organized in the household.
c
75. Which of the following did not occur during the Industrial Revolution?
a.
Production became more reliant on highly specialized equipment.
b.
A more efficient division of labor was promoted.
c.
Workers bore much of the costs of production.
d.
The transaction costs of contracting with individual resource owners were reduced.
e.
Technological development increased the productivity of most workers.
c
76. Which of the following is a major advantage of a sole proprietorship?
a.
Separation of ownership and control
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b.
Limited liability for business debt
c.
Transferability of ownership and firm continuity over time
d.
Ease of start-up
e.
Ease of obtaining financing
77. Which of the following is an advantage of a sole proprietorship?
a.
The ability to pool resources
b.
Limited liability
c.
Double tax exemption of the firm’s earnings
d.
Ease of organization
e.
Ease of raising funds
78. One disadvantage of a sole proprietorship as a form of business organization is that:
a.
sole proprietorships cannot lower the transaction costs associated with contracting with resource owners.
b.
sole proprietorships are less efficient than corporations, because they are less specialized in production.
c.
owners of sole proprietorships can lose all their personal assets if the business is sued or fails.
d.
owners of sole proprietorships generally find it difficult to negotiate separation agreements with the other
partners in the firm.
e.
owners of sole proprietorships generally have very little control over how they operate their businesses.
c
79. Brian is the sole proprietor of Long Voyage Software, which generates maps for wilderness trips. He started the
business with an initial investment of $80,000. A faulty map caused one customer to get hopelessly lost. After her rescue
and recuperation, she sued Long Voyage for $5,000,000. Which of the following is true?
a.
The customer can be awarded only $80,000—what the firm has available to pay.
b.
The customer can be awarded $5,000,000 but can get only $80,000.
c.
The customer can be awarded $5,000,000, but Brian personally won’t have to pay more than $80,000.
d.
If $5,000,000 is awarded, Brian will have to pay none of it.
e.
If $5,000,000 is awarded, Brian is personally responsible for paying all of it.
e
80. Suppose you own a proprietorship that is in serious financial difficulty. The assets of the company are $100,000 but
liabilities are $175,000. You also have, however, stock in General Motors worth $200,000. If you file for bankruptcy,
what amount of personal assets do you stand to lose?
a.
$100,000
b.
$75,000
c.
$200,000
d.
$275,000
e.
$375,000
81. Which form of business organization is the most common in the United States?
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Chapter 03: Economic Decision Makers
a.
Sole proprietorship
b.
Partnership
c.
Corporation
d.
Nonprofit organization
e.
S corporation
a
82. Which of the following is true about a sole proprietorship in the United States?
a.
It is the most common form of business organization.
b.
It is responsible for a large portion of the total production of goods and services.
c.
It offers the owner the least personal liability of any form of business organization.
d.
There is no opportunity cost to operating the business.
e.
Only one individual can work in such a firm.
a
83. In terms of the numbers of firms in the U.S. economy, the most common type of firm is the:
a.
corporation.
b.
partnership.
c.
sole proprietorship.
d.
nonprofit organization.
e.
limited partnership corporation.
c
84. Which of the following would not describe two-thirds of the for-profit businesses in the United States as measured by
the sheer number of firms?
a.
Small retail businesses
b.
Small service operations
c.
Part-time home-based businesses
d.
Small farms
e.
Multinational corporations
e
85. Which of the following is most likely to be a partnership?
a.
Uncle Mort’s Red Wrigglers
b.
The accounting firm of Hope and Williams
c.
General Motors
d.
The Boston Symphony Orchestra
e.
The U.S. Post Office
86. All of the following are advantages of partnerships except one. Which is the exception?
a.
They are relatively easy to start.
b.
Their profits are taxed once as personal income.
c.
Their liability is limited by each partner’s share of the business.
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Chapter 03: Economic Decision Makers
d.
They offer a greater opportunity for specialization by the owners.
e.
They enable continuation of the firm if one partner dies.
c
87. Messitt and McNulty spend $50,000 each to form a law partnership. On the first day, someone trips over a potted plant
in their lobby and sues them for $400,000. Which of the following is true?
a.
If a $400,000 judgment is against the partnership, then each partner will have to pay $200,000.
b.
If a $400,000 judgment is against the partnership and if McNulty cannot afford to pay any of it, then Messitt is
liable for $400,000.
c.
Messitt’s liability is limited to $300,000 because she owns three-quarters of the firm.
d.
Each individual partner cannot be sued for more than $200,000.
e.
Only McNulty is personally responsible for the damages because he was the one who put the potted plant in
the office.
88. Suppose you form a legal partnership with your best friend, and she purchases consulting services calling for a
$100,000 fee. Your business is broke, and you never wanted the consultants to work for you—only your partner did. For
how much of this debt are you legally liable?
a.
$25,000
b.
All of the $100,000
c.
The proportion reflected by the proportion of the business owned
d.
Only an amount equal to the assets of the business
e.
$50,000
89. Which form of business organization is the least common in the United States?
a.
Sole proprietorship
b.
Partnership
c.
Corporation
d.
Nonprofit organization
e.
Conglomerate
90. Which of the following lists the three types of firms in the United States from smallest to largest in terms of volume of
sales?
a.
Partnerships, sole proprietorships, corporations
b.
Sole proprietorships, partnerships, corporations
c.
Sole proprietorships, corporations, partnerships
d.
Corporations, partnerships, sole proprietorships
e.
Partnerships, corporations, sole proprietorships
91. Owners of corporations are referred to most frequently as:
a.
entrepreneurs.
b.
lien holders.
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c.
limited partners.
d.
managers.
e.
stockholders.
92. Stockholders share in the profits of a corporation:
a.
in proportion to their years of stock ownership.
b.
in proportion to their ownership of stock.
c.
equally regardless of number of shares owned.
d.
only if they participate in management decisions.
e.
only if they attend stockholders’ meetings.
93. The corporate form of business organization:
a.
is chosen by more firms than any other form of organization in the United States.
b.
gives firm owners limited liability.
c.
generates less than half of the output in the U.S. economy.
d.
combines the limited liability of the partnership with the personal control of the sole proprietorship.
e.
is the least complex form of business organization.
94. You own stock worth an estimated $1 million in the LPL Corporation. In addition, you have personal assets worth
another $2 million. LPL becomes insolvent, with debts exceeding assets by $15 million. Your personal wealth will decline
by:
a.
$0.
b.
$1 million.
c.
$1.5 million.
d.
$3 million.
e.
your proportion of the total outstanding stock shares times $15 million.
95. Which of the following is a disadvantage of a corporation compared to a sole proprietorship?
a.
Limited liability
b.
Difficulty raising start-up money
c.
Lack of profitability
d.
Double taxation of corporate income
e.
Vulnerability in the case of the death of an owner
96. A realized capital gain is:
a.
the difference between the price of a share of stock and what the investor paid for it (i.e., the broker’s fee).
b.
the difference between the original value of a piece of equipment and its depreciated value.
c.
an increase in the net worth of a sole proprietorship or partnership.
d.
an increase in the market value of a share of stock held by an individual.