2. 1. The opportunity cost of an activity is
a. zero if you choose the activity voluntarily.
b. the amount of money spent on the activity.
c. the value of the best alternative not chosen.
d. the sum of benefits from all of the
sacrificed alternatives.
C. All decision making is based on opportunity
cost. The cost to you of any decision is that
which you give up in the best alternative
endeavor.
2
3. 2. The measure of the opportunity cost of going to
college includes the costs of tuition, books, and
a. housing.
b. housing and food.
c. earnings foregone by working less.
C. If you are not working because you are a full
time student, a part of the cost of your
education is the money foregone by not
working at the highest paying job you qualify
for and you realistically could have obtained.
If you are working part time, or at a job that
pays you less because of your school schedule,
your opportunity cost is the difference
between what you are making and what you
could have made if it were not for your school 3
4. 3. The net benefit of an activity is the
a. value of benefits to others in the economy
b. sum of all the benefits from that activity
c. non-monetary benefits from that activity
d. total benefits minus the total costs of that
activity
D. The term net means the difference
between costs and benefits. Because there
are costs and benefits in every activity you
will engage in, you will either experience a
net benefit or a net loss.
4
5. 4. Rational choices must be based on
a. complete knowledge and correct
information.
b. the least amount of information possible.
c. self-interest.
d. expected opportunity cost.
D. All decisions are based on expectations of
the gains and costs of that decision. For every
decision you make you ask yourself
(sometimes unconsciously) “what will I have
to give up for making this decision and how
much will I gain?”
5
6. 5. The opportunity cost of an activity
a. depends on the individual’s subjective
values and opinions.
b. is the same for everyone.
c. must be calculated and known before
undertaking the activity.
A. Opportunity cost is a very personal thing,
it differs from person to person. For
example, should you paint your house or
hire someone to paint it? If you can make
$20 an hour and pay someone $8 an hour,
you should hire the work out. However, if
you can only make $7 an hour, it is better
to paint the house yourself. 6
7. 6. Your opportunity cost when choosing a
particular activity
a. can be easily and accurately calculated
b.cannot even be estimated
c. does not change over time
d. varies, depending on time and
circumstances
D. For example, the opportunity cost of
cleaning your bedroom is higher on a sunny
day then it would be on a rainy day. There are
more things you can do outside when the sun
is shining than you can do when it is raining.
7
8. 8. The law of comparative advantage states that
the person who should produce a good is the
person who
a. has the lowest opportunity cost of
producing that good
b. can produce that good using the fewest
resources
c. will produce that good using the most
expensive resources
A
8
9. 9. Comparative advantage
a. leads to all of the following
b. leads to the most efficient allocation of
resources and the greatest combined output
c. eliminates specialization, so that each
person produces for all of his own needs
independently
B. Should a country produce those goods that
it is best at producing? Not necessarily. For
example, let’s suppose Americans were
better than any anyone else at producing
hand made wicker baskets, should we spend
our time and energy producing baskets? No,
because that time and energy would be better
spent in the technology area, like computers. 9
10. 10. Ann and Bob are business partners. Ann
can type one page every 5 minutes, and she
can complete one page of accounting every 15
minutes. Bob can type one page or complete
one page of accounting every 10 minutes.
Which statements are true?
a. Bob has a comparative advantage in both
activities.
b. Bob has an absolute advantage in both
activities.
c. Ann should type and Bob should do the
accounting.
C. Ann has higher opportunity costs of doing
the accounting than Bob, and Bob has higher
opportunity costs of doing the typing. 10
11. 11. What is rent seeking?
a. Happens when people are looking for a
place to rent
b. Businesses financially support politicians
to gain favor
c. Happens when landlords advertise for
renters
d. the direct exchange of goods, without the
use of money
B Big business can often get more bang for
their buck by giving money to politicians to
influence legislation that would favor them in
the market place rather than spending the
money on a better product. 11
12. 12. What is crony capitalism?
a. Occurs when cronies participate in the free
enterprise system
b. A system where success in business
depends on close relationships between
business and government
c. An economic system that is totally free of
government interference
d. An economic system which is highly
regulated
B. Instead of the government regulating and
overseeing the business sector the government
becomes a partner of big business.
12
13. 13. Because of specialization and comparative
advantage, most people
a. consume only what they produce
themselves
b. consume the products produced by their
family and friends
c. consume the products of many other
specialists
C. Because of specialization and the fact that
people pursue activities that they have a
comparative advantage in, means that we do
not have to be self sufficient. By specializing
and then buying from one another, our
standard of living increases. 13
14. 14. What is moral hazard?
a. Occurs when businesses are insulated from
risk and therefore are encouraged to take big
risks.
b. Happens when there is a break down of
morals in society.
c. Is a term which signifies the difficulty of
staying moral in a modern society.
d. Can only occur when people have the
freedom of choice.
a. This term goes along with the concept of rent
seeking. When business are always bailed out
and do not incur losses when investments go
bad, they will be encouraged to make high
risk investments. 14
15. 15. The “division of labor” refers to
a. discrimination in labor markets
b. separating a job into smaller tasks
completed by different people
c. one worker who divides his time among
different jobs and duties
d. defining a job according to the
appropriate sex
B. One of the characteristics of a modern
industrial society is a greater specialization of
labor. This is one reason why productivity
and a resultant higher standard of living is
possible than in less developed economies.
15
16. 16. Specialization of labor
a. increases productivity without creating
any problems
b. reduces productivity, and is usually
eliminated by business firms
c. can create problems of boredom and
repetitive motion injuries
d. prevents the introduction of more
sophisticated and efficient production
techniques
C. On an individual basis, the division of
labor has the downside of boredom and
physical and emotional type problems.
16
17. 17. When business are bailed out of losing
situations, where does the government get the
money?
a. taxes.
b. debt
c. The money is created
d. All of the above
D. These are the three places the
government gets money.
17
18. 18. If the government increases its spending but
gets the money by borrowing, we do not pay
for it now but pay for it later when we pay the
money back?
a. true
b. false
c. can’t tell
d. Depends on who lends the money
B. A dollar spent today is paid for today
regardless of where it comes from. We either
pay for it in terms of higher taxes, higher
interest rates, or inflation.
18
19. 21. “Efficiency” refers to
a. producing output using the least amount
of labor
b. producing output using the least amount
of capital
c. producing as far inside the production
possibilities frontier as possible
d. getting the maximum possible output
from available resources
D. A country is being most efficient when it
uses its resources the best way possible.
19
20. 22. If all resources are used efficiently to
produce goods and services, the nation will
find itself producing
a. inside its production possibilities frontier
b. somewhere on its production possibilities
frontier
c. outside of its production possibilities
frontier
d. at one extreme of its production
possibilities frontier
B. If a country uses its resources inefficiently
it will operate inside its production
possibilities curve.
20
21. 27. Opportunity cost is constant if
a. resources are equally adaptable to the
production of all goods
b. each resource is specialized in the
production of one particular good
c. larger and larger sacrifices must be made
to gain equal successive amounts of a good
d. all resources are used fully and efficiently
A. This is an unrealistic assumption but is
sometimes made. For example, if you were a
farmer, this would mean that an acre of land
will yield the same amount no matter what
crop you plant in the acreage. The land is
equally suited for both crops being considered.21
22. 37. The set of mechanism and institutions
that resolve the basic economic questions
is called the
a. economic system
b. production possibilities dilemma
c. business resolution device
d. absolute advantage determination
A. All countries have to have some mechanism
to decide what to produce, how to produce,
and who gets what and how much. The
economic system, whether it be a free market
system or a command system, is the
mechanism countries use to answer these
questions. 22
23. 38. If newspaper and magazine publishers
switch from human typesetting to
computerized typesetting, they are changing
their answer to which economic question?
a. What to produce?
b. How to produce?
c. For whom will commodities be produced?
d. Why will commodities be produces?
B. The typesetting chosen is a matter of
preference, they are alternatives in how
to produce.
23
24. 39. Pure capitalism and command economies
represent
a. two extremely different ways of answering
the basic economic questions
b. two names describing exactly the same way
of answering the basic economic questions
c. the only two ways of answering the basic
economic questions
d. the most efficient ways to answer the basic
economic questions
A. A command economy is one where the
central government makes all of the
economic decisions. Capitalism is a system
where the decisions are made by private
individuals that have as their motive, profit.
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25. 40. Which of the following does not distinguish
between different types of economic systems?
a. laws about resource ownership
b. the extent of government involvement in
the economy
c. whether or not the basic economic
questions must be answered
d. what process is used to allocate resources
and products
C. No matter the economic system, the basic
economic questions must be answered.
25
26. 41. Which of the following is a characteristic of
a pure command economy?
a. all resources are privately owned
b.economic activity is coordinated by the
price system
c. competitive markets guide resources to
their highest-valued uses
d. centralized economic planning is used to
answer basic economic questions
D. Communism is an example of a pure
command economy.
26
27. 42. Which of the following is a characteristic of
pure capitalism?
a. all resources are owned communally
b. economic activity is coordinated by
government decision makers
c. the price system is used to guide resources
to their highest-valued uses
C. Because individuals are making decisions to
maximize their welfare and profit,
consumers will purchase at the lowest price
possible and suppliers will sell at the highest
price possible. The market is at equilibrium
where the two parties reach an agreement. 27
28. 43. The “invisible hand” described by Adam
Smith refers to the
a. allocative role of markets and market
forces
b. importance of government intervention
and central planning
c. actions of successful entrepreneurs in
directing the economy
d. role of monopolized industries in leading
the nation
A. This interaction between buyers and sellers
in a free market described in the previous
slide is an example of the “invisible hand.”
28
29. 44. Problems with pure capitalism include
which of the following?
a. people have no incentive to direct resources
to their highest-valued use
b. the active government involvement in
controlling the economy may not be in the
best interest of the individuals involved
c. public goods, while desirable, may not be
produced
C. This is why we have modified capitalistic
system; we have modified it in an attempt to
rectify some of its weaknesses. We support a
government that taxes us and then uses the
tax money to support things that would not
exist in a purely free enterprise system. 29
30. 45. Problems with a pure command economy
include which of the following?
a. property rights cannot be enforced
b. public goods, while desirable, may not be
produced
c. the lack of a legal system makes it
impossible to create contracts
d. large, diverse economies may be extremely
difficult for central authorities to analyze
and control
D. Command economies may have some
advantages, but one of the big disadvantages
is the fact that large complex and diversified
economies are difficult to analyze and control
by any one central authority. 30
31. 46. With regard to pure capitalistic economies
and pure command economies,
a. all real-world societies are purely
capitalistic
b. all real-world societies are pure command
c. all real-world societies are purely
capitalistic or purely command
d. real-world societies are usually a mixture
of command and capitalism
D. Even our own American system, even
though it is primarily a free market system,
has some aspects of a command system in it.
31
32. 47. A mixed capitalist economy occurs when
a. decisions are based primarily on religion or
custom
b. all resources are publicly owned and
economic planning is centralized
c. all resources are privately owned and
prices are used to coordinate economic
activity
d. resources are both publicly and privately
owned and some markets are regulated
D. Some economists call our type of economic
system a mixed economic system because we
have aspects of both systems.
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