Name: ______________________ Unit 1 Test Multiple Choice _____ 1) Economics, as a social science, works upon the assumption that the basic economic problem exists because of a) unpredictable human behavior a) scarce resources b) profit maximization c) social costs _____ 2) Economics is primarily concerned with the question of how d) limited human wants may be satisfied through the use of limited resources. e) Unlimited factors of production can be best allocated for different uses. a) Unlimited human wants can be satisfied using limited productive resources. f) Limited government funds should be used to achieve specific social and political goals. _____ 3) Which of the following defines a free good? g) It has a price. b) Its production involves no opportunity cost. a) It is always provided by the government. b) It gives consumers no satisfaction. _____ 4) The statement that “all economic goods are scarce” implies that these goods have c) Opportunity costs d) A limited demand e) A low price f) A high price _____ 5) The opportunity cost to society of constructing a new airport would be a) The cost of government borrowing to finance the construction of the airport b) The money spent on the airport. a) The goods and services that could otherwise have been produced had the airport not been constructed. c) The increased taxation needed to pay the cost of the new airport. _____ 6) The essential defining characteristic of an entrepreneur is that he/she d) Manages other people a) Takes risks e) Is paid a high salary f) Is the head of an organization. _____ 7) Which one of the following is a positive statement? g) The main priority of any government should be to abolish poverty. h) A national minimum wage should be introduced to end the exploitation of low paid workers. i) The distribution of income and wealth in most Latin American countries is extremely unequal. j) Trade Unions/Labor Unions ought to be given greater legal rights to defend their interests of their members. Short Answer 1) Define economics. Economics is a study of producing and exchanging to get the goods and services we want. or Economics if the study of society’s optimal use of scarce resources. 2) What is a social science, and what makes economics a social science? A social science studies human society and the relationships with people and organizations over time. It is difficult to isolate variables because people and societies are so complex. Economics is a social science because it studies how people interact to produce and allocate resources. 3) Identify the three fundamental economic questions. What to produce? How to produce? For whom to produce? Name: ______________________ 4) Describe the difference between a market economy and a command economy. In a market economy, production is driven mostly by individual (or private) decisions. In a command economy, production is determined by the government. Or In a market economy, production is decided by supply and demand, while in a command economy, production is driven by the government. 5) Explain the role of ceteris paribus in economic models. Ceteris paribus means to “hold all other things equal”. Since economics deals with individuals, it is hard to isolate factors and causes. We use the ceteris paribus assumption to create simpler and more functional economic models. 6) Explain the difference between macroeconomics and microeconomics using the term “aggregate”. Microeconomics is the study of economics at the individual (person, firm, industry) level. Macroeconomics is a study of a whole economic system, such as a country. In other words, macroeconomics looks at the aggregate, or total, of all markets (that might be studied at a micro level.) 7) Explain how marginal costs and marginal benefits can help in decision making. Marginal cost is what the cost would be of the next unit consumed. Marginal benefit is the benefit of the next unit consumed. When the marginal cost is less than the marginal benefit, we want the next unit. When the marginal benefit is less than the marginal cost, we don’t want the next unit. 8) Why did the chicken cross the road? Explain your answer using economic reasoning. Lots of variety in answers, so long as there is appropriate terminology use. The chicken crossed the road to maximize his own utility, or happiness. The chicken crossed the road because the opportunity cost, the next best choice he had, was too high. The chicken crossed the road because the marginal benefit of crossing the road outweighed (=was more than) the marginal cost. 9) What is a production possibilities curve (PPC)? A production possibilities curve is an economic model showing the possible use of resources between two products or sectors. A PPC is a model showing the possible output in two sectors or products using available resources. 10) Draw a production possibilities curve (PPC) for capital and consumer goods. Identify points at which production is inefficient, where production is efficient, and where it is not possible at this time. Name: ______________________ 11) Define economic growth. Illustrate this on your PPC, and explain why this shows economic growth. Economic growth is an increase in production. 12) Explain the difference between economic growth and economic development. Economic growth is an increase in production, while economic development is growth which leads to a higher standard of living for the whole population. (Economic growth is quantitative, while economic development is qualitative.) 13) What is sustainable development? In your answer, try to give some specific examples. Sustainable development is when growth leads to a higher standard of living for the population, but does not sacrifice the needs of future generations. For example, sustainable development in Brazil would require some protection of the rainforest for future generations. Sustainable development is development which does protects the interests of future generations. For example, development which doesn’t use up all of a non-renewable resource, such as lumber, minerals, oil, or water. For example, development which does not create huge environmental problems for future generations. 14) What is opportunity cost? Give a specific example in your answer. Opportunity cost if the cost of the next best option/choice. For example, when I came to school today, my opportunity cost was time spent cleaning my home. For example, when I chose to go to soccer practice, my opportunity cost was the time I could have spent studying. For example, the opportunity cost of my new $200 iPod was 10 new CDs. 15) Define the four factors of production and give a specific example of each. 1. Land – “unaltered gifts of nature” – grain, milk, land(on which to put a factory) 2. Labor – the work done by people – plumber, teacher, factory worker 3. Capital – a man-made good used to produce something else – factory, assembly machine 4. Entrepreneurship (Enterprise) – person who brings the other three factors together (takes the the risk, gets the reward) – Bill Gates, Martha Stewart.
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