Test 3

Flashcard maker : Lily Taylor
According to the law of supply,
more of a good will be offered by suppliers as the price rises.
Which of the following is true of profits and losses?
Profits direct entrepreneurs toward production of goods that are highly valued relative to their cost, while losses direct them away from wealth-reducing activities.
Which of the following is most likely to lead to expansions in output and higher income levels per person?
a high rate of investment
Other things constant, which of the following would you expect to increase the output growth rate of a country?
an increase in the rate of investment as a share of total output
In a free market economy, innovative products or services will ultimately be judged
by the consumer’s willingness to purchase the product or service.
The economic way of thinking is
a set of basic concepts that helps one understand human choices
Which one of the following statements most accurately indicates the basic motivation for behavior?
Individuals are motivated by a variety of forces; however, changes in personal benefits and costs affect behavior only when individuals are motivated by selfishness.
In voluntary exchange, if the seller of a product gains,
the buyer will also gain; mutual gain provides the foundation for exchange.
Which of the following most clearly performs the function of a “middleman”?
eBay
When price is the rationing criterion, individuals have a strong incentive to
provide services to others in exchange for income.
According to the law of supply
when the price of a good or service increases, producers will supply more of it.
In a market economy, when a consumer is willing to buy and a producer is willing to supply an additional unit, this indicates that
the consumer values the unit as much or more than the per unit cost of production.
Which of the following does the law of demand specifically imply?
If the product price increases, quantity demanded will decrease.
In which statement(s) are “demand” and “quantity demanded” used correctly?
(I) “An increase in the price of coffee will reduce the quantity demanded of coffee.”
(II) “An increase in the price of coffee will reduce the demand for cream used in coffee.”
In both statements I and II
Governmental policies designed to “protect” a specific industry through the use of taxes, licensing requirements, or tariffs generally result in
reductions in the gains from trade.
A country should import a good or a service
if other countries can provide the imported item cheaper than it could be produced domestically.
When people specialize in the production of goods and services they can provide at a low cost
they can trade those goods for revenues and use the revenues to purchase goods that would have been costly to produce for themselves.
If food is more important than recreation, then why would a person spend money on recreation?
As people consume more food, the value of an additional dollar spent on food will eventually decline and fall below that of a dollar spent on recreation.
People are willing to pay more for a diamond than for a bottle of water because
the marginal benefit of an extra diamond far exceeds the marginal benefit of an extra bottle of water.
If a firm is unable to cover the cost of the resources employed by the firm (including the opportunity cost of resources owned by the firm), the firm will
go out of business in the long run because it is making losses.
In order to prosper, entrepreneurs must
undertake projects that create wealth and increase the value of resources.
If the construction of a bridge project creates benefits of $20 billion while the cost is $15 billion to construct, this indicates the project
should be built
When a minimum wage law forces employers to pay wages above the market equilibrium for unskilled workers, then
unemployment among unskilled workers will rise.
Regulations, subsidies, and tax breaks that favor specific industries, regions, or groups
often have unintended consequences that affect taxpayers and consumers as a whole.
In a market economy, when the government uses subsidies to keep a company in business even though it is unprofitable, the result will be
continuation of the employment of resources in an unproductive and inefficient manner.
When equilibrium is present in a market,
quantity demanded equals quantity supplied.
The price of a good will tend to rise when
there is excess demand for the good.
In the invisible hand principle, the word “invisible” refers to the
directions provided by prices in competitive markets, which are largely taken for granted.
What is the “invisible hand” that coordinates the actions of individuals referred to by Adam Smith?
market prices
How does the invisible hand principle explain why self-interested individuals will generally pursue activities that benefit others?
The pursuit of profit and income gives individuals a strong incentive to provide goods and services that are highly valued by others
The link between helping others and earning income provides a strong incentive for young people to
acquire skills and invest in education that will increase their ability to provide valuable goods and services to others.
Young people who want to earn moderate-to-high incomes should
acquire skills and invest in education that will increase their ability to provide valuable goods and services to others.
The law of demand refers to the
inverse relationship between the price of a good and the quantity demanded.
Which of the following statements most clearly reflects the concept of opportunity costs?
“You can’t have your cake and eat it too.”
The opportunity cost of building a civic center in your hometown would be the
highest valued bundle of other goods and services that must be forgone because of the civic center construction.
Are jobs the key to economic progress and the achievement of high income levels?
No, it is not just employment, but employment that expands production of goods and services that others value highly relative to cost.
Individuals are most likely to prosper in an economy that
rewards employment that expands production of goods and services that others value highly relative to cost.
If the price of a good or service is below the equilibrium price
consumers will want to purchase more than producers are willing to supply.
If there is an excess demand for corn
corn prices will tend to increase.
Markets coordinate output decisions by pushing price
upward when there is a shortage.
Which of the following will most likely occur when government price controls fix the price of a good above market equilibrium?
A surplus of the good will develop.
If a government-imposed price floor legally sets the price of milk above market equilibrium, which of the following will most likely happen?
There will be a surplus of milk.
When it comes to scarce resources, governments can
shift the cost of resources, but they cannot avoid them.
Which of the following results because the desire for goods and services is far greater than the production capacity of an economy?
scarcity
According to economic reasoning, you should follow Nike’s advice and “Just Do It” when
the additional benefits are greater than the additional costs.
The price of an airline ticket from Denver to Chicago costs $450. A bus ticket costs $150. Traveling by plane takes 2 hours compared with 32 hours by bus. Other things constant, Erica would gain by choosing air travel if, and only if, she values her time at more than
$10 per hour.
A highly charitable person, such as Mother Theresa, will be influenced by
both changes in benefits and costs.
Susan is trying to decide whether to quit her $20,000 per year job so she can return to college next year as a full time student. If she goes to college next year, her books and supplies will cost $500, tuition will cost $3,000, and her other expenses (transportation, housing, and food) will increase by $2,000. What is Susan’s opportunity cost of attending college next year?
$25,500
Which of the following students would be most likely to drop out of college before completing their degree?
an outstanding baseball player in his junior year that just received a $500,000 offer from a professional team
Incentives matter
to all human beings regardless of environment.
The economic way of thinking indicates that individuals
seek the lowest cost method of achieving their objectives.
The economizing problem is essentially one of deciding how to make the best use of
limited resources to satisfy virtually unlimited wants.
The basic task of economics is to
explain the forces that underlie human decision making
What do economists mean when they state that a good is scarce?
The amount of the good that people would like exceeds the supply freely available from nature.
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
demand curve.
The supply curve graphically illustrates
the quantity of a good or service producers are willing to supply at alternative prices.
Which of the following is true of exchange?
Exchange permits trading partners to expand their total output of goods and services as the result of greater specialization in areas where each has a comparative advantage.
Specialization in goods and services one can produce at a low cost makes it possible for trading partners to produce a larger joint output. This is called
the law of comparative advantage.
Which of the following most accurately states the function of middlemen?
Middlemen reduce transaction costs
Which of the following most accurately states the economic significance of voluntary exchange?
Exchange creates value because it makes it possible for the trading partners to expand total output as the result of specialization and division of labor.
If the price of a good or service is higher than the equilibrium price
producers are likely to produce more than consumers are willing to purchase.
Which of the following coordinates the choices of buyers and sellers, bringing quantity demanded and quantity supplied into balance?
the market price
If equilibrium is present in a market,
quantity demanded equals quantity supplied.
In order to be successful in a market economy, entrepreneurs must
combine resources in a manner that increases their value.
Other things constant, which of the following would most likely cause the supply of garden hoses to decrease?
An increase in the price of plastic used to make garden hoses.
If a business is losing money on the goods it is producing, this indicates that
the resources would be used more productively producing other things.
If an economic action generates more costs than benefits, this indicates that the action
should not be undertaken from an efficiency standpoint.
A movement along a demand curve
is the result of a change in the price of the good.
Government spending programs that create jobs are often popular because
the created jobs are highly visible, while the secondary effects of lost jobs in other areas, higher interest rates, and higher future taxes are less visible.
A minimum wage that is set above a market’s equilibrium wage will result in
an excess supply of labor, that is, unemployment.
When competition is present and property rights protected and enforced, market prices will
encourage self-interested individuals to develop skills that are expected to be valuable in the future.
When there is excess supply of a product in a market,
the market price will tend to fall.
Profit can be defined as the
difference between the sales revenue of a business firm and the opportunity cost of the resources required to produce the goods supplied by the firm.
Adam Smith believed that if people were free to pursue their own interests,
the public interest would be served quite well.
The invisible hand principle indicates that competitive markets can help promote the efficient use of resources
even when market participants care only about their own self interests rather than about the overall efficiency of resource use.
When government imposes price controls in a market,
non-price factors become more important in the rationing of the good.
Which of the following would most likely increase the supply of beef?
Lower prices of grains used to feed cattle.
In a free market economy, current consumption, saving and investment decisions
shape the future course of the national economy.
“Mediocre economists often consider only the immediate direct effects of a change, whereas a good economist will also consider indirect effects that may only become observable over time.” This statement most clearly emphasizes
the importance of secondary effects.
Which of the following is a predictable, secondary effect of a sharp increase in gasoline prices?
Producers will increase the production of fuel-efficient cars.
According to the law of supply, producers are
willing to supply larger amounts of a good as its price increases.
Which of the following is most consistent with the basic postulate of economics: changes in incentives exert a predictable impact on human behavior?
People will buy less gas if the price of gas increases by $0.50 per gallon
Which of the following most accurately illustrates the impact of price incentives?
Consumers will adjust the amount they purchase in response to changes in prices
When gas prices rise sharply, as they did in 2007-2008, the “incentives matter” postulate of economics indicates that
consumers will adjust their driving habits, eventually reducing the quantity demanded for gas
With the passage of time and advancements in technology, scarce resources
are transformed into goods and services more efficiently, but still remain scarce
Goods are scarce because
the desire for goods is far greater than their availability from nature
“There is no such thing as a free lunch.” This statement best reflects the fact that
an opportunity cost is always present when scarce resources are used to produce a good.
The opportunity cost of an action is
the value of the best opportunity that must be sacrificed in order to take the action
If a society is going to get the most value from its resources, spending on an activity should be expanded only when
the marginal benefits derived from the spending are greater than or equal to the marginal costs
The law of comparative advantage explains why
specialization and exchange will make it possible for trading partners to expand their joint output
The time and resources needed to search out, negotiate, and consummate trades are referred to as
transaction costs.
Which of the following scenarios would most likely result in decreased transaction costs?
A developing country invests in a highway system that will open up trucking routes
Governmental policies designed to “protect” a specific industry through the use of taxes, licensing requirements, or tariffs generally result in
reductions in the gains from trade
The law of demand indicates that as the price of a good decreases,
buyers will purchase more of it.
When a firm is earning economic profit, this indicates the firm is
increasing the value of the resources that it is using
The exchange rate of the dollar relative to other currencies is determined by market forces. When equilibrium is present in the exchange rate market,
the purchases of Americans from foreigners will be equal to the sales of Americans to foreigners.
In recent years, the average per capita income of the most economically free quartile of countries in the Economic Freedom of the World index was
approximately 8 times that of the countries in the bottom quartile.

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