ECON Practice test 1
1. When economists say that people act rationally in their self interest, they mean that individuals: A) look for and pursue opportunities to increase their utility. B) generally disregard the interests of others. C) are mainly creatures of habit. D) are unpredictable.
2. Joe sold gold coins for $1000 that he bought a year ago for $1000. He says, "At least I didn't lose any money on my financial investment." His economist friend points out that in effect he did lose money, because he could have received a 3 percent return on the $1000 if he had bought a bank certificate of deposit instead of the coins. The economist's analysis in this case incorporates the idea of: A) opportunity costs C) imperfect information. B) marginal benefits that exceed marginal costs. D) normative economics.
3. There is too little of a good thing when its marginal: A) benefit exceeds its marginal cost. B) cost exceeds its marginal benefit.
C) cost equals its marginal benefit. D) benefit is still positive.
4. The economic perspective refers to: A) macroeconomic phenomena, but not microeconomic phenomena. B) microeconomic phenomena, but not macroeconomic phenomena. C) the making of rational decisions in a context of marginal costs and marginal benefits. D) unlimited resources in a context of limited economic wants.
5. Rational behavior suggests that: A) everyone will make identical choices. B) resource availability exceeds economic wants. C) individuals will make different choices because their preferences and circumstances differ. D) an individual's economic goals cannot involve tradeoffs.
6. Economics involves marginal analysis because: A) most decisions involve changes from the present situation. B) marginal benefits always exceed marginal costs. C) marginal costs always exceed marginal benefits. D) much economic behavior is irrational.
7. Economic theories: A) are useless because they are not based on laboratory experimentation. B) that are true for individual economic units are never true for the economy as a whole. C) are generalizations based on a careful observation of facts. D) are abstractions and therefore of no application to real situations.
8. Theoretical economics: A) is also known as policy economics. B) is the process of deriving principles of economics. C) is highly impractical since it does not deal with the real world. D) rejects the scientific method as being inappropriate for the social sciences.
9. Suppose an economist says that "Other things equal, the lower the price of bananas, the greater the amount of bananas purchased." This statement indicates that: A) the quantity of bananas purchased determines the price of bananas. B) all factors other than the price of bananas (for example, consumer tastes and incomes) are assumed to be constant. C) economists can conduct controlled laboratory experiments. D) one cannot generalize about the relationship between the price of bananas and the quantity purchased.
10. Which of the following is associated with macroeconomics? A) an examination of the incomes of Harvard Business School graduates B) an empirical investigation of the general price level and unemployment rates since 1990 C) a study of the trend of pecan prices since the Second World War D) a case study of pricing and production in the textbook industry
11. The problems of aggregate inflation and unemployment are: A) major topics of macroeconomics. C) major topics of microeconomics. B) not relevant to the U.S. economy. D) peculiar to command economies.
12. Which of the following statements pertains to macroeconomics? A) Because the minimum wage was raised, Mrs. Olsen decided to enter the labor force. B) A decline in the price of soybeans caused farmer Wanek to plant more land in wheat. C) The national productivity rate grew by 2.7 percent last year. D) The Pumpkin Center State Bank increased its interest rate on consumer loans by 1 percentage point.
13. Macroeconomics can best be described as the: A) analysis of how a consumer tries to spend income. B) study of the large aggregates of the economy or the economy as a whole. C) analysis of how firms attempt to maximize their profits. D) study of how supply and demand determine prices in individual markets.
14. Microeconomics is concerned with: A) the aggregate or total levels of income, employment, and output. B) a detailed examination of specific economic units that make up the economic system. C) positive economics, but not normative economics. D) the establishing of an overall view of the operation of the economic system.
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15. Microeconomics: A) is the basis for the "after this, therefore because of this" fallacy. B) is not concerned with details, but only with the overall big picture of the economy. C) is concerned with individual economic units and specific markets. D) describes the aggregate flows of output and income.
16. Which of the following is a macroeconomic statement? A) The gross profits of all U.S. businesses were $182 billion last year. B) The price of beef declined by 3 percent last year. C) General Motors' profits increased last year. D) The productivity of steelworkers increased by 1 percent last year.
17. If two variables are inversely related, then as the value of one variable: A) increases, the value of the other may either increase or decrease. B) decreases, the value of the other decreases. C) increases, the value of the other decreases. D) increases, the value of the other increases.
18. When the economist says that economic wants are insatiable, this means that: A) economic resources are valuable only because they can be used to produce consumer goods. B) economic resources--land, labor, capital, and entrepreneurial ability--are scarce. C) these wants are virtually unlimited and therefore incapable of complete satisfaction. D) the structure of consumer demand varies from time to time and from country to country.
19. The science of economics stems from the fact that: A) the production possibilities curve is bowed inward to the origin. B) resources are scarce relative to people's demand for goods and services. C) individuals and institutions behave only in their self-interest. D) historically the production possibilities curve has been shifting toward the origin.
20. The study of economics exists because: A) government interferes with the efficient allocation of scarce resources. B) resources are scarce in relation to economic wants. C) the market system is an obstacle to the efficient use of plentiful resources to satisfy constrained wants. D) resources are overly abundant as compared to wants; thus, an allocation problem exists.
21. Because of their scarcity, the efficient use of resources is: A) an important issue in all economies. B) an important issue only in centrally planned economies. C) an important issue only in market economies. D) not an important issue.
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22. An increase in efficiency suggests that an economy: A) has moved from a point outside of, to a point on, its production possibilities curve. B) has decided to produce more consumer goods and fewer capital goods. C) has moved from a point on, to a point inside, its production possibilities curve. D) is able to get more output from a given amount of inputs.
23. Economics can best be described as the study of: A) how to profitably invest one's income in stocks and bonds. B) how to use scarce productive resources efficiently. C) how government policies affect businesses and labor. D) managing business enterprises for profit.
24. Economics is primarily the study of: A) why resources are scarce. B) how advertising and sales promotion shape consumer wants. C) how to make profitable financial investments. D) how to use scarce resources efficiently.
25. Which of the following is a capital resource? A) a computer programmer B) a corporate bond issued by a computer manufacturer C) silicone (sand) used to make computer chips D) a piece of software used by a firm
26. The four factors of production are: A) land, labor, capital, and money B) land, labor, capital, and entrepreneurial ability C) labor, capital, technology, and entrepreneurial ability D) labor, capital, entrepreneurial ability, and money
27. Which of the following is a land resource? A) a farmer B) an oil drilling rig C) a machine for detecting earthquakes.
D) natural gas
28. The money payments made to owners of land, labor, capital, and entrepreneurial ability are: A) interest, wages, rent, and profits respectively. C) rent, profits, wages, and interest respectively. B) rent, wages, dividends, and interest respectively. D) rent, wages, interest, and profits respectively.
29. A production possibilities curve illustrates: A) scarcity. B) market prices. C) consumer preferences.
D) the distribution of income.
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30. A nation's production possibilities curve is bowed out from the origin because: A) resources are not equally efficient in producing every good. B) the originator of the idea drew it this way and modern economists follow this convention. C) resources are scarce. D) wants are virtually unlimited.
31. Any point inside the production possibilities curve indicates: A) the realization of allocative efficiency. B) that resources are imperfectly shiftable among alternative uses. C) the presence of inflationary pressures. D) that more output could be produced with available resources.
32. The production possibilities curve shows: A) the various combinations of two goods that can be produced when society uses its scarce resources efficiently. B) the minimum outputs of two goods that will sustain a society. C) the various combinations of two goods that can be produced when some resources are unemployed. D) the ideal, but unattainable, combinations of two goods that would maximize consumer satisfactions.
33. The negative slope of the production possibilities curve is a graphical way of indicating that: A) any economy "can have its cake and eat it too." B) to produce more of one product we must do with less of another. C) the principle of increasing opportunity costs applies to only parts of the economy. D) consumers buy more when prices are low than when prices are high.
34. If an economy is operating on its production possibilities curve for consumer goods and capital goods, this means that: A) it is impossible to produce more consumer goods. B) resources cannot be reallocated between the two goods. C) it is impossible to produce more capital goods. D) more consumer goods can only be produced at the cost of fewer capital goods.
35. The production possibilities curve tells us: A) the specific combination of two products that is most desired by society. B) that costs do not change as society varies its output. C) costs are irrelevant in a society that has fixed resources. D) the combinations of two goods that can be produced with society's available resources.
36. If an economy is operating inside its production possibilities curve for consumer goods and capital goods, it: A) can only produce more consumer goods by producing fewer capital goods. B) can only produce more capital goods by producing fewer consumer goods. C) can produce more of both consumer goods and capital goods by using its resources more efficiently. D) must improve its technology to produce more output.
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37. The fact that the slope of the production possibilities curve becomes steeper as we move down along the curve indicates that: A) the principle of increasing opportunity costs is relevant. B) society's resources are limited. C) the opportunity cost of producing each product is constant. D) resources are perfectly shiftable between alternative uses.
38. The idea of opportunity cost: A) applies to consumers, but not to businesses. B) applies to businesses, but not to consumers. C) is relevant to economies of all ideological persuasions. D) would disappear if we were able to eliminate poverty.
39. Allocative efficiency refers to: A) the use of the least-cost method of production. B) the production of the product-mix most wanted by society. C) the full employment of all available resources. D) production at some point inside of the production possibilities curve.
40. Which of the following will shift the production possibilities curve to the right? A) an increase in the unemployment rate from 6 to 8 percent B) a decline in the efficiency with which the present labor force is allocated C) a decrease in the unemployment rate from 8 to 6 percent D) a technological advance that allows farmers to produce more output from given inputs
41. Other things equal, which of the following would shift an economy's production possibilities curve to the left? A) the discovery of a low-cost means of generating and storing solar energy B) the entrance of more women into the labor force C) a law requiring mandatory retirement from the labor force at age 55 D) an increase in the proportion of total output that consists of capital or investment goods
42. Which of the following statements, if any, is correct for a nation that is producing only consumption and capital goods? A) Other things equal, the more consumer goods a nation produces, the greater will be its future growth rate. B) Other things equal, the more capital goods a nation produces, the greater will be its future growth rate. C) There is no general relationship between the current division of output between consumer and capital goods and the future growth rate. D) None of the above statements is correct.
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43. A nation's production possibilities curve might shift to the left (inward) as a result of: A) technological advance. B) increases in the size of the labor force. C) the depletion of its soil fertility due to overplanting and overgrazing. D) investing in more capital goods.
44. Suppose that a university decides to spend $1 million to upgrade personal computers and scientific equipment for faculty rather than spend $1 million to expand parking for students. This example illustrates: A) distorted priorities. B) opportunity costs. C) increasing opportunity costs. D) productive efficiency.
45. If all discrimination in the United States were eliminated, the economy would: A) have a less concave production possibilities curve. B) produce at some point closer to its production possibilities curve. C) be able to produce at some point outside of its production possibilities curve. D) produce more consumer goods and fewer investment goods.
46. The two basic markets shown by the simple circular flow model are: A) capital goods and consumer goods. C) product and resource. B) free and controlled. D) household and business.
47. In the resource market: A) businesses borrow financial capital from households. B) businesses sell services to households. C) households sell resources to businesses. D) firms sell raw materials to households.
48. In the simple circular flow model: A) households are buyers of resources. B) businesses are sellers of final products. C) households are sellers of final products. D) there are real flows of goods, services, and resources, but not money flows.
49. Households and businesses are: A) both buyers in the resource market. B) both sellers in the product market. C) sellers in the resource and product markets respectively. D) sellers in the product and resource markets respectively.
50. The demand curve shows the relationship between: A) money income and quantity demanded. B) price and production costs.
C) price and quantity demanded. D) consumer tastes and the quantity demanded.
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51. Economists use the term demand to refer to: A) a particular price-quantity combination on a stable demand curve. B) the total amount spent on a particular commodity over a stipulated time period. C) an upsloping line on a graph that relates consumer purchases and product price. D) a schedule of various combinations of market prices and amounts demanded.
52. A demand curve: A) shows the relationship between price and quantity supplied. B) indicates the quantity demanded at each price in a series of prices. C) graphs as an upsloping line. D) shows the relationship between income and spending.
53. If Z is an inferior good, a decrease in money income will shift the: A) supply curve for Z to the left. C) demand curve for Z to the left. B) supply curve for Z to the right. D) demand curve for Z to the right.
54. The demand for most products varies directly with changes in consumer incomes. Such products are known as: A) complementary goods. B) competitive goods. C) inferior goods. D) normal goods.
55. Cameras and film are: A) substitute goods.
B) complementary goods.
C) independent goods.
D) inferior goods.
56. A decrease in the price of cameras will: A) cause the demand curve for film to become vertical. B) shift the demand curve for film to the right. C) shift the demand curve for film to the left. D) not affect the demand for film.
57. A normal good is one: A) whose amount demanded will increase as its price decreases. B) whose amount demanded will increase as its price increases. C) whose demand curve will shift leftward as incomes rise. D) the consumption of which varies directly with incomes.
58. If consumer incomes increase, the demand for product X: A) will necessarily remain unchanged. C) will necessarily shift to the right. B) may shift either to the right or left. D) will necessarily shift to the left.
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59. If products A and B are complements and the price of B decreases the: A) demand curves for both A and B will shift to the left. B) amount of B purchased will increase, but the demand curve for A will not shift. C) demand for A will increase and the amount of B demanded will increase. D) demand for A will decline and the demand for B will increase.
60. The demand curve for a product might shift as the result of a change in: A) consumer tastes. B) consumer incomes. C) the prices of related goods. above.
D) all of the
61. An inferior good is: A) one whose demand curve will shift rightward as incomes rise. B) one whose price and quantity demanded vary directly. C) one which has not been approved by the Federal Food and Drug Administration. D) not accurately defined by any of the above statements.
62. The law of supply: A) reflects the amounts that producers will want to offer at each price in a series of prices. B) is reflected in a downsloping supply curve. C) shows that the relationship between producer revenue and quantity supplied is negative. D) reflects the income and substitution effects of a price change.
63. Other things equal, if the price of a key resource used to produce product X falls, the: A) product supply curve of X will shift to the right. C) product supply curve of X will shift to the left. B) product demand curve of X will shift to the right. D) product demand curve of X will shift to the right.
64. A competitive market will: A) achieve an equilibrium price. disorder.
B) produce shortages.
C) produce surpluses.
D) create
65. If there is a shortage of product X: A) fewer resources will be allocated to the production of this good. B) the price of the product will rise. C) the price of the product will decline. D) the supply curve will shift to the left and the demand curve to the right, eliminating the shortage.
66. A product market is in equilibrium: A) when there is no surplus of the product. B) when there is no shortage of the product. C) when consumers want to buy more of the product than producers offer for sale. D) where the demand and supply curves intersect.
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67. Toothpaste and toothbrushes are substitute goods. A) True B) False
68. A government tax per unit of output reduces supply. A) True B) False
69. Which of the following is not a characteristic of the market system? A) private property C) government ownership of the major industries B) freedom of enterprise D) competition in product and resource markets
70. Which of the following is an example of a capital good? A) a Federal government bond. C) a bag of potato chips B) a share of General Motors stock D) a Boeing 777 airplane
71. If an economy is operating on its production possibilities curve, an increase in the production of capital goods: A) necessarily involves an increase in the division of labor. B) is in conflict with the concept of consumer sovereignty. C) necessitates production of fewer consumer goods. D) will impair future productive efficiency.
72. Specialization--the division of labor--enhances productivity and efficiency by: A) allowing workers to take advantage of existing differences in their abilities and skills. B) avoiding the time loss involved in shifting from one production task to another. C) allowing workers to develop skills by working on one, or a limited number, of tasks. D) all of the above means.
73. Barter: A) is the major means of exchange in centrally planned economies. B) accounts for over 30 percent of the dollar volume of all exchange in the U.S. economy. C) entails the exchange of goods for goods. D) is used to circumvent the problem of a lack of coincidence of wants among potential buyers and sellers.
74. Normal profit is: A) a cost because any excess of total receipts over total costs will go to the businessperson. B) a cost because they represent payments made for the resources which the businessperson owns and supplies in his or her own enterprise. C) not a cost because a firm can avoid this payment by temporarily closing down. D) not a cost of production because it need not be realized for a firm to retain entrepreneurial ability.
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75. Economic profit is: A) a cost because it is really a part of wage costs. B) a cost because it accrues to the entrepreneur. C) not a cost because it cannot be calculated. D) not an economic cost because it need not be realized for a business to acquire and retain entrepreneurial ability.
76. Economic profits in an industry suggests the industry: A) can earn more profits by increasing product price. B) should be larger to better satisfy consumer demand. C) has excess production capacity. D) is the size that consumers want it to be.
77. The economic function of profits and losses is to: A) bring about a more equal distribution of income. B) signal that resources should be reallocated. C) eliminate small firms and reduce competition. D) tell government which industries need to be subsidized.
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Answer Key
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. A A A C C A C B B B A C B B C A C C B B A D B D D B D D A A D A B D D C A C B D C B C B B C C B C C
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51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77.
D B D D B B D B C D D A A A B D B A C D C D C B D B B
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