Flashcards on Test on Exam 1 –

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In order to prosper, what must entrepreneurs do?
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Undertake projects that create wealth and increase the value of resources.
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If an economy operates at a point within its production possibilities curve, which of the following is true?
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It is not efficiently using all of its resources.
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A local restaurant offers an “all you can eat” Sunday brunch for $12. Susan eats four servings but leaves half of a fifth helping uneaten. Why?
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Her marginal value of food has fallen to zero.
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For a college student who wishes to calculate the true costs of going to college, the costs of room and board
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should be counted only to the extent that they are more expensive at college than elsewhere.
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What is the opportunity cost of an action?
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The value of the best opportunity that must be sacrificed in order to take the action.
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Which of the following is true In an informed and voluntary exchange?
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Both parties receive something they value more than what they gave up.
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Which of the following is true regarding private ownership?
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With private ownership, owners are held accountable for using their resources in a manner that harms the resources of others.
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When price is the rationing criterion, individuals have a strong incentive to
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provide services to others in exchange for income.
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The law of demand refers to the
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inverse relationship between the price of a good and the willingness of consumers to buy it.
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When economists say the demand for a product has increased, they mean the
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demand curve has shifted to the right.
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At a price of $5, Sam buys 10 units of a product; when the price increases to $6, Sam buys 8 units. Which of the following is correct about Sam’s behavior?
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Sam’s quantity demanded has decreased, and his demand has not changed.
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According to the invisible hand principle, competitive markets generally
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bring the self-interest of individuals into harmony with the efficient allocation of resources, even though centralized planning of economic activities is absent.
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Economic debates that focus on the distribution of a nation’s income are generally associated with which basic economic question?
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For whom will the goods be produced?
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Land used to grow alfalfa could also be used to grow hay. Which of the following is true when the farmer plants hay and the market price of alfalfa rises?
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The opportunity cost of producing hay increases.
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Which of the following most clearly distinguishes between positive and normative economics?
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Positive economics is the study of the facts; normative economics is concerned with what ought to be.
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The fallacy of composition is the incorrect view that
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if something is true for an individual, then it must also be true for the group.
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Which of the following would reduce the price of DVD players and increase the quantity sold?
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an increase in the supply of DVD players
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In a competitive market economy, a resource in short supply will be allocated
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to those firms that can make the most profitable use of it.
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If you were a government official that wanted to raise the equilibrium price of milk, which of the following actions would you take?
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Encourage farmers to produce less milk.
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Economic analysis suggests that gains from specialization and exchange
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will be realized if individuals are allowed to pursue goals that are in their own self-interest.
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According to the law of comparative advantage,
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individuals and nations gain when they specialize in producing those items for which they are the low opportunity cost producers and exchange for other desired goods they can’t produce as cheaply.
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If there is both an increase in the supply of a good and a decrease in demand for a good, which of the following will definitely occur?
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The price of the good will decrease.
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Suppose demand decreases and supply increases. Which of the following will happen?
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Equilibrium quantity will rise, fall, or stay the same while equilibrium price will decrease.
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In which statement(s) are “supply” and “quantity supplied” used correctly? (I) “An increase in the price of computers will increase the quantity supplied of computers.” (II) “A technological advance that lowers the cost of producing computers will increase the supply of computers.”
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in both statements I and II
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According to the law of supply, which of the following is true?
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More of a good will be offered by suppliers as the price rises.
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The highest valued alternative that must be given up in order to choose an option is called
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opportunity cost.
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What is positive economics?
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Postulates about relationships among economic variables that are potentially refutable by real-world events.
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What are the three major categories of resources?
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Human resources, physical resources, and natural resources.
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What is the fallacy of composition?
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The error that if something is true for an individual, then it must also be true for the group.
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Modern economics as a field of study is usually thought to have begun with
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Adam Smith and the writing of The Wealth of Nations.
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As defined by economists, what is capital?
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Man-made resources used to produce other goods and services.
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What are the basic ingredients in any economic decision?
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Scarcity and choice.
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Which of the following is the best definition of economics?
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An analysis of how individuals and societies deal with the problem of scarcity
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The benefit (or satisfaction) that an individual expects to derive from an activity is called
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utility.
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What does the term ceteris paribus mean?
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All variables except those specified are constant.
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The economic principle that states that individuals or nations can gain by specializing in the production of goods that they produce cheaply and exchanging for other desired goods that they could only produce at a higher cost is
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the law of comparative advantage.
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A point outside the production possibilities curve represents a combination of goods that is
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unattainable.
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What is the opportunity cost of choosing an alternative?
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The value of the highest valued alternative forgone as the result of the choice.
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Which of the following is true of the production possibilities curve?
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It assumes a fixed level of technology.
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In economics, what are transaction costs?
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The time, effort, and other resources needed to search out and negotiate an exchange.
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Which basic principle does the production possibilities curve illustrate?
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If all the resources of an economy are being used efficiently, more of one good can be produced only if less of another good is produced.
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Why is specialization in production beneficial?
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It permits people to expand production and achieve rates of output that would otherwise be unattainable.
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Which of the following is true when there is excess demand for a product in a market?
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Price must be below the equilibrium price.
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The curve that shows the relationship between the price of a good and the quantity that consumers are willing to purchase at each price is the
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demand curve.
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When the quantity demanded and quantity supplied in a market are equal, the market is said to be in
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equilibrium.
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In his book The Wealth of Nations, which famous economist argued that economic activity was directed by an “invisible hand”?
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Adam Smith
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When there is excess supply of a product in a market, which of the following is true?
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Price must be above the equilibrium price.
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Which of the following is true if equilibrium is present in a market?
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Quantity demanded equals quantity supplied.
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The total economic cost of producing a good or service is called the
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opportunity cost of production.
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Each point on the demand curve indicates
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the quantity demanded at that price.
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When does a shortage occur?
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When price is less than equilibrium price.
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Economics is primarily the study of
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the allocation of scarce resources in an effort to satisfy wants that are virtually unlimited.
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The most fundamental concept in economics is that
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changes in incentives influence behavior in a predictable way–people will be less likely to choose an option as it becomes more expensive.
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Because information is costly to acquire, how does the cost change decision making?
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People will rationally choose not to become fully informed when making decisions.
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Which of the following best describes the economic way of thinking?
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A set of basic concepts that helps one understand human choices.
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Which of the following is true about economic thinking?
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Changes in personal costs and benefits will exert a predictable influence on the choices of people.
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A restaurant offers an “all you can eat” lunch buffet for $12. Jim has eaten three servings and is trying to decide whether or not to go back for a fourth. The economic way of thinking suggests that Jim should go back for the fourth serving if and only if
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his marginal benefit of the additional serving is greater than zero.
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Modern economics as a field of study is usually thought to have begun with which of the following?
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Adam Smith and the writing of The Wealth of Nations.
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How is the value of a good determined?
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It depends on many factors, including who uses it and under what circumstances.
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Economists use the term ceteris paribus to indicate which of the following?
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Other things are assumed to be constant.
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Which of the following activities describes the opportunity cost of watching a play in a theater?
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the value of the highest valued alternative that must be forgone because of the time and money required to watch the play
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If Sean sells Tom a tennis racket for $50, we would expect
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both parties to gain from this transaction.
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Given freedom of movement for both goods and resources, if Florida producers specialize in oranges and Georgia producers specialize in peaches, it would be reasonable to conclude that
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Florida has a comparative advantage in producing oranges.
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Using a production possibilities curve, a technological advance that increases the amount of output for both goods while using the same amount of inputs would be illustrated by which of the following?
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An outward shift of the curve.
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Which of the following activities describes the opportunity cost of attending an economics class?
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the value of the highest valued alternative that must be forgone because of attending the class
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A form of economic organization that relies primarily on private ownership of productive assets, freedom of exchange, and market prices to allocate goods and resources is often called
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capitalism
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Which of the following most accurately states the economic significance of exchange?
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Exchange creates value by moving goods from parties who value them less to parties who value them more.
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A system of economic organization in which the ownership and control of productive capital assets rests with the state and in which resources are allocated through central planning and political decision making is called
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socialism
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Other things constant, which of the following would you expect to increase the output growth rate of a country?
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An increase in the rate of investment as a share of total output
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The law of comparative advantage explains which of the following?
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Specialization and exchange will make it possible for trading partners to expand their combined output.

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