Multiple Choice Questions

Source: G. Mankiw, Principles of Economics

1. The word economy comes from the Greek word for (a) environment. (b) one who participates in a market. (c) one who manages a household. (d) conservation. 2. Economics deals primarily with the concept of (a) poverty. (b) scarcity. (c) change. (d) power. 3. Economics is dened as (a) the study of business. (b) the study of how society manages its scarce resources. (c) the study of central planning. (d) the study of government regulation. 4. The scientic method can best be dened as (a) the use of modern electronic testing equipment in understanding the world. (b) the use of controlled experiments in understanding the way the world works. (c) the dispassionate development and testing of theories about how the world works. (d) nding evidence to support preconceived theories about how the world works. 5. Sir Isaac Newtons development of the theory of gravity after observing an apple fall from a tree is an example of: (a) controlled experiments used to develop scientic theories. (b) being in the right place at the right time. (c) an idea whose time had come. (d) the interplay between observation and theory in science. 6. The use of theory and observation is more dicult in economics than in sciences such as physics due to (a) the diculty in actually performing an experiment in an economic system. (b) the diculty in devising an economic experiment. (c) the diculty in evaluating an economic experiment. (d) all of the above. 7. Because it is dicult for economists to use experiments to generate economic data, (a) they do without. (b) they use whatever data the world gives them. (c) they make up the data. 1

(d) they ask policymakers to conduct experiments for them. 8. Eciency means that (a) society is getting the most it can from its scarce resources. (b) society is conserving resources in order to save them for the future. (c) societys goods and services are distributed fairly among societys members. (d) society has lessened its dependence on foreign energy sources. 9. A good denition of equity would be (a) everyone receiving the same income. (b) fairness. (c) eciency. (d) eliminating extreme auence. 10. An incentive is . . . (a) a common market failure. (b) something that encourages you to work harder, start a new activity etc. (c) the start of an organization or institution. (d) the trade o between equity and eciency. 11. The opportunity cost of an item is (a) the number of hours needed to earn money to buy it. (b) what you give up to get that item. (c) always less than the dollar value of the item. (d) always equal to the dollar value of the item. 12. A marginal change is (a) a long-term trend. (b) a large, signicant adjustment. (c) a change for the worse. (d) a small incremental adjustment. 13. A rational decisionmaker takes an action only if (a) the marginal benet is greater than the marginal cost. (b) the marginal benet is less than the marginal cost. (c) the average benet is greater than the average cost. (d) the marginal benet is greater than both the average cost and the marginal cost. 14. Trade between the United States and Thailand (a) is a losing proposition for Thailand because U.S. workers are more productive. (b) is a losing proposition for the U.S. because Thailand has cheaper labor. (c) is like a sports contest: one side wins and the other side loses. (d) benets both the United States and Thailand. 15. Economists make assumptions (a) to diminish the chance of wrong answers. (b) to make certain that all necessary variables are included. (c) because all scientists make assumptions. (d) to make the world easier to understand. 16. Which of the following is the most accurate statement about economic models? 2

(a) Economic models attempt to mirror reality exactly. (b) Economic models are useful, but should not be used for policy-making. (c) Economic models cannot be used in the real world because they omit details. (d) Economic models omit many details to allow us to see what is truly important. 17. The foundation stones from which economic models are built are (a) economic policies. (b) the legal system. (c) assumptions. (d) statistical forecasts. 18. The art of scientic thinking involves (a) deciding which assumptions to make. (b) understanding every scientic eld - physics, biology and economics. (c) knowing how the major organs of the human body work. (d) being able to mathematically express natural forces. 19. What is the goal of theories? (a) to provide an interesting, but not useful, framework of analysis (b) to help scientists understand how the world works (c) to demonstrate that the developer of the theory is capable of logical thinking (d) to provoke stimulating debate in scientic journals 20. Factors of production are (a) inputs into the production process. (b) weather, social, and political conditions that aect production. (c) the physical relationships between economic inputs and outputs. (d) the mathematical calculations rms make to determine production. 21. In the circular-ow diagram shown, which arrow shows the ow of the factors of production?

(a) A (b) B (c) C (d) D

22. In the circular-ow diagram, (a) rms are sellers in the resource market and the product market. (b) households are sellers in the resource market. (c) rms are buyers in the product market. (d) spending on goods and services ow from rms to households. 23. In the circular-ow diagram, (a) spending on goods and services ow from rms to households. (b) goods and services ow from households to rms. (c) factors of production ow from rms to households. 3

(d) income from factors of production ows from rms to households. 24. In the circular-ow diagram shown, which arrow shows the ow of spending by households?

(a) A (b) B (c) C (d) D 25. An economy is said to be ecient if (a) it is possible to produce more of all goods. (b) it is possible to produce more of one good without producing less of another. (c) it is not possible to produce more of one good without producing less of another. (d) it is not possible to produce more of one good at any cost. 26. On the production possibilities frontier shown, which point or points are NOT possible for this economy to produce?

(a) D (b) E, F (c) A, B, C (d) D, E, F

27. The opportunity cost of obtaining more of one good is shown on the production possibilities frontier as (a) the amount of the other good which must be given up. (b) the price of an additional unit produced. (c) the amount of resources which must be devoted to its production. (d) the money which must be spent for it. 28. Which of the following concepts is NOT illustrated by the production possibilities frontier? (a) eciency (b) opportunity cost (c) equity (d) tradeos 29. In the table showing the production possibilities, what is the opportunity cost of increasing the production of toys from 450 to 600? Cars 50 40 30 20 10 0 Toys 0 250 450 600 700 750 (a) 30 cars (b) 20 cars (c) 10 cars (d) 0 cars

30. For economists, positive statements are 4

(a) descriptive, making a claim about how the world is. (b) optimistic, putting the best possible interpretation on things. (c) armative, justifying existing economic policy. (d) prescriptive, making a claim about how the world ought to be. 31. Normative statements are (a) descriptive, making a claim about how the world is. (b) statements about the normal condition of the world. (c) prescriptive, making a claim about how the world ought to be. (d) statements which establish production goals for the economy. 32. Which of the following is an example of a positive statement? (a) If welfare payments increase, the world will be a better place. (b) Prices rise when the government prints too much money. (c) Ination is more harmful to the economy than unemployment. (d) Improved equity is more important than the reduced eciency. 33. Which of the following is an example of a normative statement? (a) If the price of a product decreases, quantity demanded increases. (b) Reducing tax rates on the wealthy would be good for the country. (c) If the national saving rate were to increase, so would the rate of economic growth. (d) All of the above are normative statements. 34. Which of the following is NOT correct? (a) Trade allows for specialization. (b) Trade is good for nations. (c) Trade is based on absolute advantage. (d) Trade allows individuals to consume outside of their individual production possibilities curve. 35. If the equation of a production possibility frontier is Meat = 20 4 Potatoes the opportunity cost of 1 kg of Potatoes are (a) 20 kg of Meat (b) 20 kg of Potatoes (c) 4 kg of Meat (d) 4 kg of Potatoes 36. Refer to the table shown. Hours needed to make 1 kg of: Meat Potatoes Farmer 10 5 Rancher 4 1 kg produced in 20 hours: Meat Potatoes 2 4 5 20

For the Farmer, the opportunity cost of 1 kg of meat is (a) 8 hours of labor. (b) 4 hours of labor. (c) 2 kg of potatoes. (d) 1/2 kg of potatoes.

37. Refer to the table shown. Hours needed to make 1 kg of: Meat Potatoes Farmer 10 5 Rancher 4 1

kg produced in 20 hours: Meat Potatoes 2 4 5 20

The Farmer has an absolute advantage in (a) only meat. (b) only potatoes. (c) both goods. (d) neither good.

38. A countrys consumption possibilities frontier can be outside its production possibilities frontier . . . (a) with trade. (b) by allocating resources dierently. (c) by producing a greater variety of goods and services. (d) by lowering unemployment in the country. 39. Trade can make everybody better o because it . . . (a) leads to interdependence. (b) increases labor costs. (c) allows people to specialize according to comparative advantage. (d) reduces absolute costs of production. 40. If this is the production possibility frontier of country Blue, what is the opportunity cost of one kg sh? Fish 3 2 1 0 0 1 2 3 Blue 4 Meat (a) 1/2 kg meat (b) 1 kg meat (c) 2 kg meat (d) 4 kg meat

41. Who has an absolute advantage in the production of sh? Fish 4 3 2 1 0 0 1 2 3 Blue 4 Meat Red (a) Red (b) Blue (c) both, Red and Blue (d) neither Red nor Blue

42. Who has an comparative advantage in the production of sh?

Fish 4 3 2 1 0 0 1 2 3 Blue 4 Meat Red (a) Red (b) Blue (c) both, Red and Blue (d) neither Red nor Blue

43. Who has an comparative advantage in the production of sh? Fish 4 3 2 1 0 0 1 2 3 44. Refer to the tables shown.
Hours needed to make one unit of: Cars Airplanes 40 160 50 150 Amount produced in 2400 hours: Cars Airplanes 60 15 48 16

Red

(a) Red (b) Blue (c) both, Red and Blue

Blue

(d) neither Red nor Blue

4 Meat

U.S. Japan

The opportunity cost of 1 car for Japan is (a) 4 airplanes. (b) 3 airplanes. 45. Refer to the tables shown.
Hours needed to make one unit of: Cars Airplanes 40 160 50 150 Amount produced in 2400 hours: Cars Airplanes 60 15 48 16

(c) 1/3 airplane. (d) 1/4 airplane.

U.S. Japan

The opportunity cost of 1 airplane for Japan is (a) 4 cars. (b) 3 cars. 46. Refer to the tables shown.
Hours needed to make one unit of: Cars Airplanes 40 160 50 150 Amount produced in 2400 hours: Cars Airplanes 60 15 48 16

(c) 1/3 car. (d) 1/4 car.

U.S. Japan

The opportunity cost of 1 airplane for the U.S. is (a) 4 cars. (b) 3 cars. (c) 1/3 car. (d) 1/4 car.

47. Refer to the tables shown.

Hours needed to make one unit of: Cars Airplanes 40 160 50 150 Amount produced in 2400 hours: Cars Airplanes 60 15 48 16

U.S. Japan

The U.S. has a comparative advantage in . . . , and Japan has a comparative advantage in . . . (a) airplanes, airplanes (b) cars, airplanes (c) airplanes, cars (d) neither good, cars

48. Absolute advantage is found by (a) comparing opportunity costs. (b) calculating the dollar cost of production. (c) comparing the productivity of one nation to that of another. (d) rst determining which country has a comparative advantage. 49. A production possibilities frontier will be linear and not bowed out if (a) no tradeos exist. (b) the tradeo between the two goods is always at a constant rate. (c) unemployment is zero. (d) resources are allocated eciently. 50. Trade is based on (a) absolute advantage. (b) comparative advantage. (c) production costs. (d) relative dollar prices.