Econ chap 1 & 2

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Opportunity cost can best be defined as the
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value of what must be given up in order to acquire an item.
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Rational choice requires that opportunity cost be
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considered as part of making a decision.
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Some college students think that because a college degree greatly increases their earning potential there is no opportunity cost of attending college. How would an economist look at the matter?
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There is still an opportunity cost, even if it is justified by higher future earnings.
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Consider the following information regarding a person’s decision to go to college: college tuition is $20,000 per year, room and board is $10,000 per year, and books and materials are $2,000 per year. Suppose that instead of going to college this person could have earned $18,000 working in a store. An economist would calculate the cost of going to college as
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$50,000
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The term opportunity cost refers to the
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value of what is forgone when a choice is made.
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Which of the following is an example of an externality?
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Tom’s smoking affecting his roommate’s health.
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Which of the following is an example of a fiscal policy initiative?
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Reduction in taxes.
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The opportunity cost to you of an action is
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the value to you of the next best action you could have taken.
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Opportunity cost is the
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cost of the best option forgone as a result of choosing an alternative.
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During a war, a government will often draft people, most of whom are presently employed, into the army. An economist, computing the real cost of the war, would be sure to include which of the following items?
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the value of the civilian goods no longer produced by the new soldiers
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The opportunity cost of any good or service is the
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value of the next best alternative.
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Throughout the 1980s, accounting departments in U.S. universities were unable to fill many available faculty positions. This fact suggests that the salaries offered by these departments
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were below the market price for qualified accountants.
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The principle of comparative advantage explains how
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two nations may engage in mutually beneficial trade, even though one of them is more productive than the other.
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Suppose Tammy grew up on a farm and is very good at plowing. In addition suppose she is a popular country singer who earns $4,000 per performance. If her husband Bob can plow (but not as well as Tammy) but he can’t carry a tune, then it would be most efficient if
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Tammy specialized in singing and Bob in plowing.
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The United States produces both automobiles and computers more efficiently than Mexico. Nevertheless, it is possible that both nations would benefit from trade in these items. The reason for this is
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the law of comparative advantage.
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The law of comparative advantages explains why
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nations trade with each other, regardless of their relative levels of economic development.
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If trade between two countries is voluntary, one can expect that
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both countries expect to gain something
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When economists are critical of government regulations that prohibit free individuals from making certain kinds of contracts, for example, to purchase a good or service, they will usually invoke the concept of
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mutual gains from voluntary trade.
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If a decision maker uses marginal analysis, then the relevant costs are the
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additional costs of a particular activity or product.
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Standby passengers on airlines who pay low rates for seats benefit from the low price. How are the airlines affected?
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They benefit as long as the additional revenue from the passengers exceeds the marginal cost.
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When a teacher in a private school points out to her high school principal that since there are empty seats in all classrooms, the cost of additional students is really zero, she is using the
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principle of marginal analysis.
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An externality is defined as
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a social cost that affects parties external to a transaction.
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Which of the following is an example of an undesirable side effect of the operation of the market mechanism?
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negative externalities
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In Egypt, in 1970, the Aswan Dam was completed. By preventing the annual flood of the Nile (thereby providing millions of acres of arable land) and by providing electricity, the dam was expected to raise the living standard of the Egyptian people-and it has. However, it has also led to a rise in the water table which causes Egypt’s limestone structures, including the pyramids, to absorb more salt water and to suffer serious erosion from crystallized salts. Combined with air pollution and traffic vibration, this erosion is turning the pyramids to dust. Economists analyze this type of problem with the concept of
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an externality.
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A large factory pours its toxic wastewater into a nearby river, and as a result, the residents of a downstream community experience high rates of illness and birth defects. The economic problem illustrated by this example is
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externalities.
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When interdiction efforts manage to stem the flow of illegal drugs into the United States, assuming no change in demand, the price of these substances rises. This price increase leads to more crime as addicts attempt to maintain their now more-expensive habits. Economists call this side-effect of the drug business
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an externality
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The use of chlorofluorocarbons in refrigerators and air conditioners is alleged to cause the destruction of the ozone layer that surrounds the earth. This layer protects humans from ultraviolet radiation, which causes skin cancer. Industry has been prohibited from using these substances in aerosol cans, but the government has been reluctant to ban their use altogether because of the serious economic consequences. Economists analyze such problems and refer to them as
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externalities.
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Rent control is usually justified on the grounds that it protects moderate- to low-income families from the burden of rapidly rising rents and from eviction if they are unable to pay. It also prevents landlords from reaping windfalls as property values rise. Opponents note that rent controls usually lead to a reduced supply of rental housing and shortages. The proponents of rent controls support them primarily on the grounds of
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equality
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Because there is a trade-off between total output and equality of income distribution
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policies designed to equalize distribution may adversely affect the size of output.
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In terms of the competing claims of equality and efficiency, in the United States we have
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chosen greater wage inequality for lower unemployment.
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In contrast to the United States, the European Union has chosen
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less wage inequality for higher unemployment.
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In the United States, the fact that the gap between the rich and the poor has been increasing is often justified by economists on the grounds that greater
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inequality is an undesirable consequence of greater efficiency.
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The 1981 tax reform act reduced taxes on high-income individuals. Many economists believed that high tax rates would deter high-income individuals from working and investing, thus slowing the growth of income. This illustrates the issue of
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the equality-efficiency trade-off.
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An article in a recent economics periodical asks the question: “Is low inflation worth it?” By “it,” the article probably means
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unemployment.
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In the short run, efforts to reduce the unemployment rate are likely to cause
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an increase in the inflation rate.
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If a government enacts a rent control to protect apartment tenants, the result is likely going to be
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a decrease in rents with a shortage of apartments.
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If a government enacts a price floor on agricultural products to protect wheat farmers, the result is likely going to be
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an increase in price with a surplus of wheat.
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If a voluntary trade takes place,
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both parties will benefit from the transaction.
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The dramatic increase in the standard of living since the Industrial Revolution
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has not meant unlimited abundance for societies or persons.
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Probably the most important factor affecting material well-being is
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growth in productivity
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Economics
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is a broad-ranging discipline
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Which of the following statements is true?
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Abstraction forms an important part of economic analysis.
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Economics is a social science in the sense that it
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rigorously examines human behavior
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For the typical student, taking an introductory course in economics should
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help the student learn to rationally analyze social problems.
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Tools used by economists include
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All of the above are correct
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Economics is a social science rather than a “hard” science like physics because
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economists study human behavior, which is affected by an unpredictable and vast range of influences.
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Abstraction can be thought of as
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omitting unimportant details in order to understand complex phenomena.
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The process of focusing on only the most important factors to explain a phenomenon is called
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abstraction
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“Assume that all individuals have perfect information about prices now and in the future, that they have identical tastes, that all markets are competitive, and that there is no government.” This statement is indicative of how economists
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abstract for analytic purposes
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A theory can best be defined as
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a deliberate simplification of factual relationships that attempts to explain how those relationships work.
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To an economist, theory can be thought of as
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explanation of mechanisms behind observed phenomena
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Which of the following statements is correct?
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A theory may result from a tested and confirmed hypothesis.
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During one winter quarter at Frozen U., snow falls every Friday night. Students assume that, on their campus, Fridays cause snow. This hypothesis
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assumes that correlation implies causation
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Economists and others use economic theory
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as a partial basis for public policy recommendations.
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Economic theory
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is a deliberate simplification of factual relationships
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A theory is an abstraction used often by economists to
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explain why things work the way they do
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Economic theory is a necessity, not a luxury. This statement is true because theory
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provides a structure for organizing and analyzing data
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Policy-oriented economists seek to develop theories to
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explain how things work so policies can be formulated.
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In the 19th century, Russian peasants noticed that during cholera epidemics there were lots of doctors around; in an attempt to eliminate cholera, they killed all the doctors. This is an example of
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mistaking correlation with causation
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An economic model can be defined as
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a representation of a theory or a part of a theory.
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Economists use models in order to
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All of the above are correct
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Why do economists tend to create models in diagrammatic form?
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It is easier than building models out of physical objects.
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A useful economic model
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may make some unrealistic assumptions in order to simplify a complex reality
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Economic models
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are used to describe cause-and-effect relationships
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Economists are often perceived as disagreeing with each other. Is this the way things really are
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No, economists agree on much more than is commonly supposed.
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Which of the following is one source of disagreement between economists?
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All of the above are correct.
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Economic analysis and policy are made more difficult by
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inadequate and imperfect information
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An economist might be hired to answer which of the following questions?
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All of the above are correct.
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In the fall of 1992, candidate Bill Clinton’s campaign office had a large sign which read, “It’s the economy, stupid.” This was meant to say that
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economic problems were the most important in the campaign.
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The purpose of economic science is to
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develop principles by which to rank alternative uses of scarce resources
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Two advisors to the president have given their policy recommendations, and they are in disagreement. Why do these economists disagree?
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All of the above are reasons for disagreements among economists
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Graphs are useful because of the way they
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All of the above are correct.
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A diagram is a good example of a(n)
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abstraction
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The beginning point of a graph (the 0,0 point) is known as
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the origin.
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Suppose that a curve has a slope equal to zero at some point A. To the right of A, the curve may
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All of the above are correct
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The slope of a curved line differs from that of a straight line in that
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the numerical value of the slope of a curved line is different at every point, but is the same at every point for a straight line.
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If an economic curve has a negative slope, then one variable
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falls as the other rises
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The tangent at point A on a curve has a positive slope. Therefore, the curve has a
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positive slope at point A
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When variable A rises by 10 units, variable B rises by 15 units. The slope of the line describing this relationship is
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either 2/3 or 1.5, depending on which variable goes on which axis of the graph.
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The slope of a downward-sloping straight line can be calculated as the distance from the
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vertical intercept of the line to the origin divided by the distance from the origin to the horizontal intercept of the line
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A horizontal line has a slope of
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zero
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The slope of the line in Figure 1-1 is
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0.5.
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Which of the following mathematical expressions represents the equation of a straight line with a slope of zero at all points on a graph with Y on the vertical axis and X on the horizontal axis?
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Y = a
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A vertical line has a slope of
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infinity
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A line that rises at a 45 degree angle has a slope of
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1.
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The slope of a curved line at a particular point is
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defined as the slope of the straight line that is tangent to the curve at that point.
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It is possible to represent three dimensions on a two-dimensional graph by using
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a contour map.
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A contour map illustrates which of the following?
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the way that three variables are correlated
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People generally purchase less of a commodity as its price increases. This implies that the relationship between quantity purchased and the price of the commodity must have a
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negative slope.
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A ____ is a graph whose axes show the quantities of two inputs that are used to produce some output
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production indifference map
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The United States economy is
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largest in the world.
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How does the U.S. economy rank in size?
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first in economic output
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The United States has the largest economy in the world because
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both b and c are correct.
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Inputs, or factors of production, include
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all of the above
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On a world scale, how populous is the U.S. economy
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third
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The working population of the United States is approximately
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150 million
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If California were a separate economy, it would be the ____ largest economy on earth.
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eighth
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Capitalism and free enterprise are common, and the United States
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has gone further in that direction than almost any other country
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Government ownership of property and resources in the United States is
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relatively rare; the United States is mostly privatized
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The United States produces ____ of what it consumes, and consumes ____ of what it produces
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most, most
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In 2013, about what percentage of goods and services sold in the United States was imported?
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16%
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As of 2013, annual imports to the U.S. were approximately ____ and annual exports from the U.S. were approximately ____.
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$2.7 trillion; $2.3 trillion
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Which of the following is the most closed economy?
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the United States
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Which of the following is the most open economy?
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the Netherlands
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Which of the following is the most closed economy?
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the United States
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Gross Domestic Product in 2013 was almost five times larger than it was in 1960 but it is important to note that
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the population grew substantially over the same time period.
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According to the data on real U.S. GDP
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economic growth has been irregular, with periodic downturns
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Economic progress is best measured by
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the growth rate of GDP per capita
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Along with changes in the level of economic activity, measured by GDP, what other economic variable tends to rise and fall as a consequence?
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unemployment
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Why does unemployment tend to change when the level of output changes?
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Labor is an input, and if output falls, employers need fewer workers to make it, so the employment falls
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Economic fluctuations are defined as
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alternating periods of significant GDP growth and decline.
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Which of the following is true about the United States?
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Recessions have occurred periodically in U.S. history
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One of the most important changes in the composition of the labor force in the United States has been
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the major increase in the number of women who work outside the home.
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In the United States, most workers
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produce services rather than goods
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Most American workers
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are employed in the service-producing sector
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Which of the following areas employed more workers in 2013?
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educational and health services
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All industrialized countries have become “service economies.” Which factor helps explain this shift?
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Information age and labor saving innovation in manufacturing.
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Which factor of production accounts for the highest percentage of the income that the production process generates in the US?
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Labor
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The average hourly wage (excluding benefits) in the United States is currently
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$20.00
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For those workers who are given fringe benefits such as health insurance and pensions, the additional income this amounts to over and above the average hourly wage is approximately
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30-40%
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How do the wages in the United States compare to those in northern Europe?
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they are similar
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The payments to owners of capital include
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interest and profits.
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Most Americans
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overestimate corporate profits.
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The typical American family spends about ____ percent of its budget on goods, and the remainder on services.
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34
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Nonconsumption spending accounts for roughly what percent of total output of goods and services?
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40%
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The United States has approximately
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28 million businesses.
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According to Robert Reich, secretary of Labor in the Clinton administration,
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it is almost impossible to define the nationality of a multinational company.
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In the United States each year, approximately
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10% of all businesses fail.
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A firm that does business all over the world is called a(n)
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multinational corporation
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An industry can be defined as
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the group of all firms that sell a product.
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Government plays a role in which type of economy?
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all economies
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The role of government in a market economy includes all of the following except
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extensive ownership of productive resources.
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Comparing the United States to other economies, the United States is one of the ____ economy in the world.
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most privatized
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Which of the following illustrates government acting as a referee?
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enforcing contract provisions between buyer and seller
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As Americans have become more health conscious, rules about food labels have become more complex and stringent. This is an example of government acting as
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referee.
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Which of the following is a valid reason to consider government regulation?
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Seeking some social objective that markets do not achieve.
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When government defines and enforces property rights, this is an example of government as
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referee
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Antitrust laws are designed to
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preserve competition.
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America’s antitrust laws are used to protect competition against possible encroachment by monopoly. This is an example of government as
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regulator of businesses.
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The federal government spends approximately
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$4 trillion
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The largest single portion of the federal budget is devoted to
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Social Security and unemployment compensation
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The largest single portion of state and local budgets is devoted to
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Education
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Compared to people in other nations, people in the United States pay
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lower taxes.
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A transfer payment is a sum of money
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given by government without a good or service in exchange.
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The concept of government as redistributor is
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approved by many, but questioned by many as well
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A central government collected taxes totaling $120 billion in the previous year. It’s expenditure during the year was roughly the same. This is an example of a
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balanced budget
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The government redistributes income to the poor, primarily through
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both a and b.
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Progressive income taxes are designed to
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make the distribution of income more equal.
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Annual incomes of James, Jack, and Stanley are $30,000, $50,000, and $80,000 and their tax rates are 10%, 20%, and 30% respectively. Which tax structure is this an example of?
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Progressive tax
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A mixed economy is one in which
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there is some public influence over free markets
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The United States is a fairly good example of
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a mixed economy.
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All of the following are associated with a mixed economy except
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homogenization.
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In a mixed economy
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there is some government influence over the workings of the free market

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