ECON 2301 – Exam I

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#1) The economic way of thinking will help you A) make decisions in financing your home. B) decide whether the U.S. government should encourage or discourage immigration. C) make better decisions concerning your education. D) all of the above
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D) all of the above
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2) Economics is best defined as the A) study of how people make choices to satisfy their wants. B) study of individual self-interests. C) study of how government can most efficiently raise funds by taxation. D) process by which goods are sold in free markets.
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A) study of how people make choices to satisfy their wants.
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3. Economic resources are A. all the items that people would purchase if they had limited wants. B. all the unlimited items that people would purchase with limited income. C. items of value that are used to make other things that satisfy people’s wants. D. the total planned expenditures throughout the nation.
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C. items of value that are used to make other things that satisfy people’s wants.
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4. Macroeconomics is the study of A) aggregate economic variables. B) output in particular industries. C) prices in particular industries. D) all of the above.
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A) aggregate economic variables.
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5. Microeconomics is the study of A) the behavior of the economy as a whole. B) how rising prices affect the level of employment in the economy. C) how individuals and firms make decisions. D) the effect that money has in the economic system.
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C) how individuals and firms make decisions.
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6. Macroeconomics is concerned with A) individual business firms. B) specific industries. C) individual consumers. D) a nation’s entire economy.
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D) a nation’s entire economy.
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7. Microeconomics examines the A) total household expenditures. B) behavior of the economy as a whole. C) aggregate business spending. D) decision making undertaken by individual households.
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D) decision making undertaken by individual households.
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8) The way that a society uses to allocate resources to satisfy human wants is called A) an economic system. B) an assumption. C) realism. D) a physical science.
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A) an economic system.
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8. What is the type of economic system that relies on one central authority to make economic decisions? A) Free market B) Price system C) Command and control D) Mixed economic system
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C) Command and control
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9. What is the type of mechanism that answers the basic economic questions through a decentralized decision making process? A) Market system B) Dictatorship C) Command and control D) Mixed economic system
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A) Market system
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10. Under a pure price system, the decision of resource allocation is made by A) the head of the government. B) a queen or king. C) individuals who own the resources. D) no one.
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C) individuals who own the resources.
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11. In a market system, the what, how and for whom questions in economics are determined by A) those who are not in the market. B) buyers and sellers together. C) the central authority. D) no one.
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B) buyers and sellers together.
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12. A mixed economic system is best described as an economy with a mix of A) state and federal governments. B) domestic and foreign buyers. C) free markets and government control. D) for-profit organizations and not-for-profit organizations.
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C) free markets and government control.
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13. When studying individuals’ economic behavior, economists assume that A) individuals understand the rationale for all their actions. B) individuals act as if they were rational. C) only educated people act as if they were rational. D) self-interest is of limited relevance in predicting an individual’s actions.
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B) individuals act as if they were rational.
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14. In economics, the concept that individuals are motivated by self-interest and respond predictably to opportunities for gain is known as A) rational self-interest. B) altruism. C) sufficiency. D) empiricism.
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A) rational self-interest.
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15. Economists assume people behave rationally, which means that people A) never make a mistake. B) do not intentionally make decisions that make themselves worse off. C) have the necessary information to always make correct decisions. D) always understand the consequences of their decisions.
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B) do not intentionally make decisions that make themselves worse off.
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16. The potential rewards that are available to an individual if a particular activity is undertaken are known as A) premiums. B) gifts. C) incentives. D) intrinsic values.
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C) incentives.
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17. Incentives are A) potential rewards available if a particular activity is undertaken. B) ineffective as a device to get people to behave in a certain fashion. C) inappropriate ways to obtain a certain kind of behavior. D) useless when people behave rationally.
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A) potential rewards available if a particular activity is undertaken.
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18. Rational self-interest means A) always increasing your wealth. B) pursuing what makes you better off. C) pursuing activities that maximize income. D) always pursuing activities that are consistent with your faith.
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B) pursuing what makes you better off.
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19. Holding all variables constant but one and assessing the impact of the one variable that has changed is an example of using A) the ceteris paribus assumption. B) an economic model based on unrealistic assumptions. C) a flawed economic model. D) an untestable proposition.
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A) the ceteris paribus assumption.
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20. Which of the following is an example of an application of the ceteris paribus assumption? A) An analysis of how price changes affect how much of a good people will purchase when all other factors are held constant B) An analysis of how people purchase more goods when prices decline and income increases C) After reading an article on the dangers of high-fat diets, an individual buys less red meat when prices increase D) An analysis of how worker productivity increases when a firm invests in new machines and training programs
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A) An analysis of how price changes affect how much of a good people will purchase when all other factors are held constant
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21. Why is economics called an empirical science? A) because economics has been used to both create and destroy empires B) because economics uses impressions to evaluate the usefulness of its models C) because economics relies on real-world data to determine the usefulness of a model D) because economics utilizes intuition rather than data to evaluate a model’s worth
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C) because economics relies on real-world data to determine the usefulness of a model
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22. An appropriate test of the effectiveness of an economic model is A) the number of variables contained within the model. B) the model’s ability to predict future economic activity. C) the number of economists who have worked on the model. D) the number of assumptions which the economist has made.
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B) the model’s ability to predict future economic activity.
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23. The hypothesis that people are nearly, but not fully rational, cannot possibly fully examine every available choice, and utilize simple rules of thumb in making decisions is known as the A) irrationality hypothesis. B) ceteris paribus hypothesis. C) individual aggregation hypothesis. D) bounded rationality hypothesis.
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D) bounded rationality hypothesis.
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24. According to proponents of behavioral economics, because every possible choice cannot be considered, an individual will tend to fall back on methods of making decisions that are simpler than trying to sort through every single possibility, known as A) rules of thumb. B) rational options. C) irrational choices. D) normative decisions.
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A) rules of thumb.
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25. “All Americans should have access to health care” is an example of A) a positive statement. B) a microeconomic argument. C) a factual statement. D) a normative statement.
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D) a normative statement.
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1. Scarcity is caused by A) unlimited wants running up against limited economic resources. B) lazy workers. C) mechanical breakdowns at factories. D) shortages.
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A) unlimited wants running up against limited economic resources.
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2. Scarcity implies that people must A) be miserable. B) be selfish. C) make choices. D) not be selfish.
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C) make choices.
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3. The conversion of resources into consumer goods or services is called A) human capital. B) production. C) opportunity cost. D) absolute advantage.
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B) production.
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4. If the quantity desired of something exceeds the amount available at zero price, that item is called A) a service. B) an economic good. C) an intangible good. D) a bad.
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B) an economic good.
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5. At a zero price, which of the following conditions is TRUE for an economic good? A) Its quantity supplied exceeds its quantity demanded. B) Its quantity demanded exceeds its quantity supplied. C) Its quantity demanded equals its quantity supplied. D) Scarcity disappears.
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B) Its quantity demanded exceeds its quantity supplied.
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6. The most basic concept in economics is A) wealth. B) income. C) scarcity. D) spending.
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C) scarcity.
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7. Economic goods are A) abundant goods, about which we must constantly make decisions about their best use. B) all imaginable items from which individuals derive satisfaction or happiness. C) goods that are scarce, for which the quantity demanded exceeds the quantity supplied at a zero price. D) goods that are scarce, for which the quantity demanded exceeds the quantity supplied at any price.
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C) goods that are scarce, for which the quantity demanded exceeds the quantity supplied at a zero price.
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8. Scarcity exists because A) the majority of people in the world are poor. B) people are too greedy and refuse to share what they have with others. C) human wants exceed what can be produced with the limited resources available. D) not enough new technology is being used to eliminate scarcity.
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C) human wants exceed what can be produced with the limited resources available.
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9. Scarcity and shortages differ in that A) scarcity is caused by natural disasters and shortages are caused by mistakes people make. B) scarcity is a condition of human life while shortages are usually temporary phenomena related to an imbalance between the amount desired and the amount produced. C) scarcity is a type of shortage but shortage is a broader concept. D) shortages apply to resource markets while scarcity applies to product markets.
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B) scarcity is a condition of human life while shortages are usually temporary phenomena related to an imbalance between the amount desired and the amount produced.
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10. A man-made resource such as a building or a machine is an example of which resource? A) Entrepreneurial ability B) Labor C) Physical capital D) Human capital
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C) Physical capital
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11. A person goes to college to become an engineer. This is an example of an A) investment in physical capital. B) investment in human capital. C) increase in entrepreneurship. D) increase in labor.
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B) investment in human capital.
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12. In economics, physical capital includes A) money. B) bank accounts. C) machinery. D) shares of stock.
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C) machinery.
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13. Economic bads are items A) for which the produced quantity is less than the amount desired at a positive price. B) for which the desired quantity is less than what nature provides at a zero price. C) that individuals desire but which receive social disapproval. D) that receive social approval but which governments dislike.
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B) for which the desired quantity is less than what nature provides at a zero price.
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14. The value of the best alternative sacrificed to obtain something you want is referred to as A) explicit cost. B) opportunity cost. C) marginal cost. D) sunk cost.
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B) opportunity cost.
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15. In the above figure, the opportunity cost of moving from producing 50 guitars and 50 ukuleles to producing 25 guitars and 75 ukuleles is A) 25 guitars. B) 75 ukuleles. C) 25 ukuleles. D) 50 guitars.
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A) 25 guitars.
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16. In the above figure, as more ukuleles are produced, the opportunity cost in terms of guitars is A) decreasing. B) increasing. C) constant. D) zero.
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B) increasing.
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17. The production possibilities curve represents the maximum feasible production combinations resulting from A) the mix of current resources that utilizes all available inputs using current technology. B) a fixed amount of demand by consumers. C) the lack of trade-offs in production. D) the lack of technology used in production.
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A) the mix of current resources that utilizes all available inputs using current technology.
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18. Using the above table, what is the opportunity cost of moving from alternative C to alternative D? A) 60 loaves of bread B) 2 loaves of bread C) 30 loaves of bread D) 1/2 loaf of bread
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A) 60 loaves of bread
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19. Using the above table, what is the opportunity cost of moving from alternative C to alternative B? A) 1/2 a pizza pie B) 60 pizza pies C) 90 pizza pies D) 30 pizza pies
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D) 30 pizza pies
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20. People always face trade-offs because A) they always have more than one use for their time and money. B) they buy goods with money. C) trading takes place in a market economy. D) they can make themselves better off through trade.
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A) they always have more than one use for their time and money.
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21. The production possibilities curve represents A) the total amount of stocks and bonds that exist in the economy. B) the trade-off between human capital and physical capital that exists. C) all possible combinations of total output that can be produced. D) society’s needs.
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C) all possible combinations of total output that can be produced.
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22. A technological improvement can cause the production possibilities curve to shift outward because A) it increases costs and contributes to lower production rates. B) maximum feasible outputs of both goods increase. C) production will fall, but jobs will be saved. D) it causes increases in unemployment.
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B) maximum feasible outputs of both goods increase.
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23. Why is efficiency desirable? A) It results in an equal distribution of income. B) It results in zero unemployment. C) It makes best use of the finite resources we have. D) It is the most politically popular solution.
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C) It makes best use of the finite resources we have.
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24. The trade-off between current consumption and the production of capital goods is also a trade-off between A) the future cost for capital goods and future cost of consumption goods. B) having fewer needs and more wants in the future. C) satisfying the needs of the poor and the wants of the wealthy. D) current consumption and future consumption.
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D) current consumption and future consumption.
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25. Comparative advantage is A) when a country can produce a good at a lower opportunity cost compared to other countries. B) when a country can produce all goods more quickly than any other country. C) when the production possibilities curve shifts outward to the right. D) only for individuals and not countries.
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A) when a country can produce a good at a lower opportunity cost compared to other countries.
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26. The ability to produce a good at a lower opportunity cost that others is known as A) comparative advantage. B) absolute advantage. C) specialization. D) marginal cost production.
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A) comparative advantage.
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27. When two countries specialize in the production of different goods and trade with each other, it is most likely each country will A) export the goods in which it has a comparative advantage. B) export the goods in which it has an absolute advantage. C) import the goods in which it has a comparative advantage. D) import the goods in which it has an absolute advantage.
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A) export the goods in which it has a comparative advantage.
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28. The reason that most of the coffee that is consumed in the United States comes from Colombia is that A) Colombia has an absolute advantage in producing coffee relative to the United States. B) Colombia has a comparative advantage in producing coffee relative to the United States. C) coffee cannot be grown in the United States. D) government trade disincentives regarding Colombian coffee make such trade possible.
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B) Colombia has a comparative advantage in producing coffee relative to the United States.
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29. In economics, international trade is based on the existence of A) absolute advantage between countries. B) relative advantage between countries. C) comparative advantage between countries. D) output advantage between countries.
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C) comparative advantage between countries.
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30. International trade between two nations increases the standard of living of both nations due to A) specialization and gains from absolute advantage. B) specialization and gains from comparative advantage. C) high tariffs. D) political intervention.
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B) specialization and gains from comparative advantage.
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1. The law of demand states that: A. price and quantity demanded are inversely related. B. the larger the number of buyers in a market, the lower will be product price. C. price and quantity demanded are directly related. D. consumers will buy more of a product at high prices than at low prices.
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A. price and quantity demanded are inversely related.
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2. 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.
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D. a schedule of various combinations of market prices and amounts demanded.
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3. The relationship between quantity supplied and price is _____ and the relationship between quantity demanded and price is _____. A. direct, inverse B. inverse, direct C. inverse, inverse D. direct, direct
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A. direct, inverse
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4. When the price of a product increases, a consumer is able to buy less of it with a given money income. This describes: A. the cost effect. B. the inflationary effect. C. the income effect. D. the substitution effect.
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C. the income effect.
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5. When the price of a product rises, consumers shift their purchases to other products whose prices are now relatively lower. This statement describes: A. an inferior good. B. the rationing function of prices. C. the substitution effect. D. the income effect.
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C. the substitution effect.
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6. Which of the following would not shift the demand curve for beef? A. a widely publicized study that indicates beef increases one’s cholesterol B. a reduction in the price of cattle feed C. an effective advertising campaign by pork producers D. a change in the incomes of beef consumers
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B. a reduction in the price of cattle feed
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7. A rightward shift in the demand curve for product C might be caused by: A. an increase in income if C is an inferior good. B. a decrease in income if C is a normal good. C. a decrease in the price of a product that is a close substitute for C. D. a decrease in the price of a product that is complementary to C.
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D. a decrease in the price of a product that is complementary to C.
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8. If X is a normal good, a rise in money income will shift the: A. supply curve for X to the left. B. supply curve for X to the right. C. demand curve for X to the left. D. demand curve for X to the right.
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D. demand curve for X to the right.
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9. College students living off-campus frequently consume large amounts of ramen noodles and boxed macaroni and cheese. When they finish school and start their careers, their consumption of these goods frequently declines. This suggests that ramen noodles and boxed macaroni and cheese are: A. inferior goods. B. normal goods. C. complementary goods. D. substitute goods.
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A. inferior goods.
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10. Refer to the above diagram. A decrease in supply is depicted by a: A. move from point x to point y. B. shift from S1 to S2. C. shift from S2 to S1. D. move from point y to point x.
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C. shift from S2 to S1.
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11. A leftward shift of a product supply curve might be caused by: A. an improvement in the relevant technique of production. B. a decline in the prices of needed inputs. C. an increase in consumer incomes. D. some firms leaving an industry.
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D. some firms leaving an industry.
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12. An improvement in production technology will: A. increase equilibrium price. B. shift the supply curve to the left. C. shift the supply curve to the right. D. shift the demand curve to the left.
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C. shift the supply curve to the right.
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13. Suppose product X is an input in the production of product Y. Product Y in turn is a substitute for product Z. An increase in the price of X can be expected to: A. decrease the demand for Z. B. increase the demand for Z. C. have no effect on the demand for Z. D. decrease the supply of Z.
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B. increase the demand for Z.
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14. One reason that the quantity of a good demanded increases when its price falls is that the: A) price decline shifts the supply curve to the left. B) lower price shifts the demand curve to the left. C) lower price shifts the demand curve to the right. D) lower price increases the real incomes of buyers, enabling them to buy more.
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D) lower price increases the real incomes of buyers, enabling them to buy more.
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15. Refer to the above data. Equilibrium price will be: A. $4. B. $3. C. $2. D. $1.
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C. $2.
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16. Refer to the above data. If price was initially $4 and free to fluctuate, we would expect: A. quantity supplied to continue to exceed quantity demanded. B. the quantity of wheat supplied to decline as a result of the subsequent price change. C. the quantity of wheat demanded to fall as a result of the subsequent price change. D. the price of wheat to rise.
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B. the quantity of wheat supplied to decline as a result of the subsequent price change.
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17. If a product is in surplus supply, its price: A. is below the equilibrium level. B. is above the equilibrium level. C. will rise in the near future. D. is in equilibrium.
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B. is above the equilibrium level.
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18. At the equilibrium price: A. quantity supplied may exceed quantity demanded or vice versa. B. there are no pressures on price to either rise or fall. C. there are forces that cause price to rise. D. there are forces that cause price to fall.
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B. there are no pressures on price to either rise or fall.
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19. Refer to the above diagram. A price of $20 in this market will result in: A. a shortage of 50 units. B. a surplus of 50 units. C. a surplus of 100 units. D. a shortage of 100 units.
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D. a shortage of 100 units.
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20. If we say that a price is too high to clear the market, we mean that: A. quantity demanded exceeds quantity supplied. B. the equilibrium price is above the current price. C. quantity supplied exceeds quantity demanded. D. the price of the good is likely to rise.
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C. quantity supplied exceeds quantity demanded.
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21. If the supply and demand curves for a product both decrease, then equilibrium: A. quantity must fall and equilibrium price must rise. B. price must fall, but equilibrium quantity may either rise, fall, or remain unchanged. C. quantity must decline, but equilibrium price may either rise, fall, or remain unchanged. D. quantity and equilibrium price must both decline.
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C. quantity must decline, but equilibrium price may either rise, fall, or remain unchanged.
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22. In the above market, economists would call a government-set minimum price of $40 a: A. price ceiling. B. price floor. C. equilibrium price. D. fair price.
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A. price ceiling.
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23. Refer to the above diagram. Rent controls are best illustrated by: A. price A. B. quantity E. C. price C. D. price B.
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A. price A.
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24. An effective price floor on wheat will: A. force otherwise profitable farmers out of business. B. result in a shortage of wheat. C. result in a surplus of wheat. D. clear the market for wheat.
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C. result in a surplus of wheat.
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25. Price ceilings and price floors: A. cause surpluses and shortages respectively. B. make the rationing function of free markets more efficient. C. interfere with the rationing function of prices. D. shift demand and supply curves and therefore have no effect on the rationing function of prices.
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C. interfere with the rationing function of prices.
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1. An economic system in which relative prices change to reflect changes in supply and demand for different commodities is known as a A. socialist system. B. communist system. C. queuing system. D. market system.
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D. market system.
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2. In a market system, which component conveys information about what is relatively scarce and what is relatively abundant? A. The number of producers B. The number of consumers C. Prices D. The amount of government regulation
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C. Prices
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3. The signaling aspect of the market system refer to A. legal requirements for contracts and exchanges. B. the price of the good to the consumer and producer. C. the voluntary character of the exchange. D. transaction costs of carrying out exchanges.
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B. the price of the good to the consumer and producer.
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4. The rationing function of prices means that A. government is responsible for setting the prices of basic foods. B. all goods and services are produced by large firms. C. businesses determine what goods consumers should purchase. D. buyers and sellers synchronize their decisions through the price system.
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D. buyers and sellers synchronize their decisions through the price system.
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5. Hospitals announce that there are not enough nurses available to keep them fully staffed. Economically speaking, what does this announcement mean? A. The market wage for trained nurses is currently above the equilibrium wage. B. There is currently a surplus of nurses in this market. C. The market wage for nurses will eventually rise to the market clearing wage. D. The market will adjust very rapidly to correct this imbalance because anyone can be a nurse without any training.
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C. The market wage for nurses will eventually rise to the market clearing wage.
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6. Relative scarcities are indicated by A. supply and demand being out of equilibrium. B. surpluses. C. excess demand and excess supply. D. relative prices.
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D. relative prices.
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7. What would happen in the market for bread if its demand increased but the price was NOT allowed to change? A. There would be a surplus of bread. B. There would be a shortage of bread. C. The supply of bread would increase. D. The supply of bread would decrease.
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B. There would be a shortage of bread.
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8. If the government imposed a price ceiling on gasoline above this good’s current market clearing price, there would be A. a shortage of gasoline. at the ceiling price. B. a surplus of gasoline at the ceiling price. C. an increase in the price of gasoline. D. no change in the price of gasoline.
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D. no change in the price of gasoline.
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9. An effective price ceiling occurs when A. the government sets a maximum price for a good above the equilibrium price. B. the government sets a minimum price for a good above the equilibrium price. C. the government sets a minimum price for a good below the equilibrium price. D. the government sets a maximum price for a good below the equilibrium price.
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D. the government sets a maximum price for a good below the equilibrium price.
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10. An effective rent control will A. lead to a surplus of housing units. B. keep rents below the competitive market level. C. keep rents above the competitive market level. D. be set at the price where quantity supplied equals quantity demanded.
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B. keep rents below the competitive market level.
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11. In the United States, government-imposed price supports are most often associated with A. agricultural products. B. industrial products. C. consumer electronics. D. commercial building products.
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A. agricultural products.
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12. An example of a quantity restriction is A. the minimum wage. B. an import quota. C. rent controls. D. price supports in agriculture
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B. an import quota.
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13. A supply restriction that restricts the amount of a good that can be imported is a(n) A. price floor. B. price ceiling. C. black market. D. import quota.
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D. import quota.
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14. ) An unexpected import restriction imposed on mangoes by the USDA A) will reduce the price of mangoes in the United States. B) will increase the price of mangoes in the United States. C) will discourage American producers of mangoes. D) will reduce the price of mango juice in the United States.
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B) will increase the price of mangoes in the United States.
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15. When consumers would have been willing to pay higher prices at various quantities consumed than the market clearing price, the differences are called A. consumer surplus. B. monopoly profits. C. opportunity cost. D. deadweight loss.
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A. consumer surplus.
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16. If Niki is willing to pay up to $5 for an ice-cream bar but she actually pays $2 for it. The consumer surplus of the ice-cream bar for Niki A. is $2. B. is $3. C. is $7. D. cannot be determined without information about the market structure.
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B. is $3.
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17. When producers would have been willing to accept lower prices at various quantities produced than the market clearing price, the differences are called A. producer surplus. B. monopoly profits. C. opportunity cost. D. deadweight loss.
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A. producer surplus.
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18. The total gains from trade within a price system is A) the area beneath the market demand curve and above the market clearing price plus the area above the market supply curve and beneath the market clearing price. B) the area beneath the market supply curve and above the market clearing price plus the area above the market demand curve and beneath the market clearing price. C) the area beneath the market demand curve and above the market clearing price minus the area beneath the market supply curve and beneath the market clearing price. D) always equal to zero.
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A) the area beneath the market demand curve and above the market clearing price plus the area above the market supply curve and beneath the market clearing price.
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19. The total amount of consumer surplus and producer surplus is at its maximum when A. consumers and producers are allowed to trade at the market clearing price. B. the government imposes a price floor that is higher than the market clearing price. C. the government imposes a price ceiling that is lower than the market clearing price. D. free market exchanges do not exist.
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A. consumers and producers are allowed to trade at the market clearing price.
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20. As compared to the market clearing price, the total amount of consumer surplus and producer surplus is A) greater for a government-imposed price floor that is higher than that market clearing price. B) greater for a government-imposed price ceiling that is lower than that market clearing price. C) the same as a government-imposed price floor that is higher than that market clearing price. D) smaller for a government-imposed price ceiling that is lower than that market clearing price.
answer

D) smaller for a government-imposed price ceiling that is lower than that market clearing price.
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1. Market failure occurs when A) a good is too expensive for the market to provide. B) an unrestrained market economy leads to too few or too many resources going to a specific economic activity. C) one good is superior to another and drives it out of the market. D) the stock market experiences a very large loss.
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A) a good is too expensive for the market to provide.
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2. Which of the following statements is NOT true about the price system? A) The price system allows resources to flow from low-valued uses to high-valued uses. B) The price system encourages the production of public goods. C) Individuals have freedom to purchase what they want. D) The price system allows for economic efficiency.
answer

B) The price system encourages the production of public goods.
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3. In its most ideal form, a price system allows A) firms to act in such a way that they eliminate scarcity. B) consumers to satisfy all their wants. C) resources to move from lower-valued uses to higher-valued uses through voluntary exchange. D) government policy makers to allocate resources to the uses which they consider to be in the best interests of society.
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C) resources to move from lower-valued uses to higher-valued uses through voluntary exchange.
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4. A negative externality such as pollution can be corrected by A) a subsidy to producers. B) a tax on producers. C) a subsidy to consumers. D) a stimulus to production.
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B) a tax on producers.
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5. According to the above figure, if steel mills ignore the cost of pollution, the equilibrium quantity of steel will most likely be A) Q1. B) Q2. C) Q2 – Q1. D) none of the above.
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A) Q1.
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6. A government subsidy is typically used A) to correct a negative externality. B) to provide a government-inhibited good. C) to reduce inflation. D) to correct a positive externality.
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D) to correct a positive externality.
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7. Public goods are A) rival and exclusive. B) rival, but not exclusive. C) exclusive, but not rival. D) neither exclusive nor rival.
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D) neither exclusive nor rival.
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8. In the United States, the idea that the federal government should undertake actions to stabilize business activity A) was established in the Declaration of Independence. B) is a relatively new idea that developed in the years during and after the Great Depression. C) has been around since the early 1700s. D) developed during World War I.
answer

B) is a relatively new idea that developed in the years during and after the Great Depression.
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9. An important characteristic of private goods is A) the nonexclusion principle. B) the principle of rival consumption. C) the principle of joint consumption. D) the principle of conspicuous consumption.
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B) the principle of rival consumption.
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10. By definition, a government-sponsored good A) is a good that is deemed socially desirable. B) is a good that should be available only to upper-income groups. C) is always provided at a zero price. D) does not affect society’s general welfare.
answer

A) is a good that is deemed socially desirable.
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11. Social Security and Medicare are clear examples of A) capitalism. B) market-determined services. C) market failures and externalities. D) governmental intervention in the market.
answer

D) governmental intervention in the market.
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12. According to your text, which of the following represents the largest source of tax receipts for the Federal government? A) sales taxes B) individual income taxes C) corporate income taxes D) property taxes
answer

B) individual income taxes
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13. Government payment of a per-unit subsidy for medical care causes the out-of-pocket price that consumers pay for care to be A) less than the price that producers receive for providing care. B) greater than the price that producers receive for providing care. C) greater than the market clearing price without the subsidy. D) equal to zero.
answer

A) less than the price that producers receive for providing care.
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14. According to your text, one reason for flat or falling achievement scores even in the face of substantially higher education subsidies may be that A) the additional funds are being siphoned off by dishonest school board members. B) some of the funds are going to social services rather than to enhance learning activities. C) students are so unmotivated that no amount of spending will ever improve scores. D) most parents do not support the schools or their children’s educational activities.
answer

B) some of the funds are going to social services rather than to enhance learning activities.
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15. One reason the Medicare system costs so much is A) the amount of medical services is determined by the equilibrium of supply and demand. B) the supply of medical services does not respond to price changes. C) supply and demand analysis does not apply. D) beneficiaries are entitled to receive services for which the per-unit cost exceeds their own personal out-of-pocket payment.
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D) beneficiaries are entitled to receive services for which the per-unit cost exceeds their own personal out-of-pocket payment.
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16. Government spending as a percent of national income A) peaked during the Reagan administration. B) peaked during World War II. C) has been steadily climbing since 1850. D) has been almost constant this century.
answer

B) peaked during World War II.
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17. The largest spending category for state governments is A) welfare. B) health care. C) education. D) highway construction.
answer

C) education.
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18. All of the following are assumptions of both market and public-sector decision making EXCEPT: A) Decisions are based on majority rule. B) Decisions are motivated by individuals’ self-interest. C) Opportunity costs exist in decisions. D) Choices reflect incentives faced by decision makers.
answer

A) Decisions are based on majority rule.
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19. Scarcity A) affects both market and public sector decision making. B) affects market, but not public sector decision making. C) affects public sector, but not market decision making. D) is really not an issue in such a wealthy nation as the United States.
answer

A) affects both market and public sector decision making.
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20. The market and public sector are similar in that A) there is competition amongst the participants in both sectors. B) the resources used in both sectors are scarce. C) the participants in both sectors react to incentives. D) All of the above are true.
answer

D) All of the above are true.
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1. The government budget constraint implies that A) government borrowings = government spending+ transfers – taxes and user charges. B) government borrowings = taxes and user charges + government spending – transfers C) government spending = transfers – taxes and user charges – government borrowing. D) government spending = government borrowing – transfers – taxes and user charges
answer

A) government borrowings = government spending+ transfers – taxes and user charges.
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2. The main source of government funding is A) user fees. B) taxes. C) borrowing. D) transfer payments.
answer

B) taxes.
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3. The marginal tax rate shows A) the percentage of income which a typical family pays in tax. B) the average rate of taxation in the economy. C) the deductions which are permitted for child care and medical expenses. D) the extra tax due on an extra dollar of income.
answer

D) the extra tax due on an extra dollar of income.
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4. Suppose the tax rate on the first $10,000 of income is 0 percent; 10 percent on the next $20,000; 20 percent on the next $20,000; 30 percent on the next $20,000; and 40 percent on income over $70,000. Family A has an income of $120,000 and Family B an income of $55,000. What is the tax bill of each? A) $48,000 for A and $16,500 for B B) $32,000 for A and $6600 for B C) $32,000 for A and $7500 for B D) $34,000 for A and $7500 for B
answer

C) $32,000 for A and $7500 for B
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5. An example of a regressive tax is the A) corporate income tax. B) personal income tax. C) Social Security tax. D) state inheritance tax.
answer

C) Social Security tax.
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6. The average tax rate can be calculated by which of the following formulas? A) The change in taxes due divided by the change in taxable income B) The change in taxable income divided by the change in taxes due C) Total taxes due divided by total taxable income D) Total taxable income divided by total taxes due
answer

C) Total taxes due divided by total taxable income
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7. The federal income tax code of the United States is A) progressive. B) proportional. C) regressive. D) progressive for individuals but proportional for married couples.
answer

A) progressive.
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8. The tax base is A) the minimum amount of tax revenue that government must collect each year. B) the maximum amount of tax revenue that government must collect each year. C) the sum of all incomes earned in the United States. D) the value of all goods, services, incomes, or wealth subject to taxation.
answer

D) the value of all goods, services, incomes, or wealth subject to taxation.
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9. Suppose you purchased 100 shares of stock in 2010 for $25 a share and you sell them today for $50 a share. If the capital gains tax is 28 percent, your tax liability is A) $70. B) $700. C) $2500. D) indeterminate without knowing the inflation rate.
answer

B) $700.
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10. Corporate profits are A) taxed at too low a rate. B) taxed only when a stockholder sells his or her shares of stock. C) taxed twice—once by the corporate tax system, and again by personal tax system when they are paid to stockholders as dividends. D) taxed three times—once by the corporate tax system, again by the personal tax system, and again as capital gains.
answer

C) taxed twice—once by the corporate tax system, and again by personal tax system when they are paid to stockholders as dividends.
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11. The distribution of tax burdens among various groups in society is referred to as A) sectioning. B) regressive placement. C) zero-base budgeting. D) tax incidence.
answer

D) tax incidence.
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12. Which of the following is an argument that the incidence of corporate taxation falls entirely on consumers? A) Corporations pass their tax burdens on to consumers by charging higher prices equal to the amount of the tax. B) Corporations pass their tax burdens on to consumers because consumers ultimately work for the corporations. C) Corporations always evade taxes so that consumers ultimately bear the tax burdens as taxpayers. D) Most taxes on consumers are collected by corporations through sales taxes.
answer

A) Corporations pass their tax burdens on to consumers by charging higher prices equal to the amount of the tax.
question

13. Which of the following forms of taxation accounts for the largest share of taxes received by state and local governments? A) sales, excise, and gross receipts taxes B) personal and corporate income taxes C) license and permit fees D) property taxes
answer

A) sales, excise, and gross receipts taxes
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14. Local government expenditures depend on which taxes? A) Revenues from licenses and permits B) Local property, sales, and excise taxes C) Capital gains taxes D) Social Security taxes
answer

B) Local property, sales, and excise taxes
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15. The earnings that a corporation saves for investment in other productive activities are A) capital gains. B) tax incidence. C) transfers in kind. D) retained earnings.
answer

D) retained earnings.
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16. A current concern about Social Security is that A) funds set aside by past generations to pay benefits for future generations are growing too rapidly and may trigger inflation. B) promised benefit payouts are growing more rapidly than likely sources of revenues, indicating a future inability to keep the system operating. C) continued political bickering between the president and Congress could lead to an end to any funding of the program. D) the payroll taxes used to fund the program are being eliminated as part of an effort to generate employment increases, thus leaving the program bankrupt.
answer

B) promised benefit payouts are growing more rapidly than likely sources of revenues, indicating a future inability to keep the system operating.
question

17. Ultimately, the real burden of paying for Social Security benefits will be paid for by A) taxes levied on workers. B) Social Security trust fund bonds. C) new federally issued Treasury bills. D) a new tax levied on businesses.
answer

A) taxes levied on workers.
question

18. Which of the following statements is TRUE of static tax analysis? A) A government receives lower tax revenues by raising the tax rate. B) A government receives higher tax revenues by raising the tax rate. C) A government cannot change it tax revenues by changing the tax rate. D) A change in the tax rate can raise or lower tax revenues, depending on other factors.
answer

B) A government receives higher tax revenues by raising the tax rate.
question

19. Static tax analysis assumes that A) an increase in a tax rate may lead to a decrease in the tax base. B) an increase in a tax rate will lead to an increase in the tax base. C) an increase in a tax rate will leave the tax base unchanged. D) the tax base will always remain unchanged.
answer

C) an increase in a tax rate will leave the tax base unchanged.
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20. How would the market for coffee be affected if the government charged an excise tax of $1.00 on each unit of coffee sold? A) There would be a shortage of coffee. B) The demand for coffee would increase. C) The demand for coffee would decrease. D) The supply curve would shift up vertically by $1.00.
answer

D) The supply curve would shift up vertically by $1.00.
question

21. The demand and supply of a product is given in the above table. A unit tax of $2 is imposed on the product. The equilibrium quantity for this product after the tax is imposed is equal to A) 30 units. B) 25 units. C) 20 units. D) 15 units.
answer

C) 20 units.
question

22. Using the above table, a unit tax of $2 is imposed on the product. The equilibrium price of this product after the tax is imposed is A) $5. B) $4. C) $3. D) $2.
answer

C) $3.
question

23. Using the above table, a unit tax of $2 is imposed on the product. How much of the tax is paid by the producer? A) $2. B) $1. C) $3. D) unable to determine.
answer

B) $1.
question

24. A state tax assessed specifically on cigarettes is an example of A) an excise tax. B) a consumption tax. C) a social tax. D) a tariff.
answer

A) an excise tax.
question

25. If a new unit excise tax is levied on bottles of wine, the A) demand for wine shifts to the left. B) demand for wine shifts to the right. C) supply of wine shifts to the right. D) supply of wine shifts to the left.
answer

D) supply of wine shifts to the left.

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