1. Tutorial Chapter 1 The Economic Problem

2. 1. 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.”

3. 2. When is a good or service scarce?
a. It is rare and hard to come by.
b. There is not enough of it available for everybody who wants it for free.
c. There is plenty available for everyone who wants it.
d. There is a shortage.
B. Scarcity means that there is not enough of something so that everyone who wants it cannot have it for free. In this case, how do we decide who gets? Everything that is scarce will have a price, the price determines who gets and who does not get.

4. 3. Human wants and desires are
a. eventually satisfied in any society.
b. constant from one time period to the next.
c. virtually unlimited.
d. limited and scarce.
C. In our analysis of economics we assume that when given a choice, you want more rather than less. Each time you make a choice between alternatives, the choice made is the one that you believe will increase your total welfare.

5. 4. Scarcity is an economic problem
a. only in capitalist economies.
b. only in command economies.
c. only in poor countries.
d. in every country and in every household.
D. The only way not to have scarcity is for everyone to have everything they want for free, an impossible situation.

6. 5. Economic analysis would be unnecessary if there were no
a. taxes.
b. government.
c. scarcity.
d. money.
C. All of economic analysis revolves around the fact that we live in a world of scarce resources. Therefore, the problem becomes, how do we meet people’s wants and needs in this world of scarcity?

7. 6. Because resources are scarce,
a. opportunity costs are zero.
b. people must make choices among alternatives.
c. all human wants and desires can be satisfied.
d. resource prices are flexible.
B. No matter what economic system people live in, all people’s in every society are faced with the problem of scarcity.

8. 7. Economics deals with the problems caused by
a. scarce resources and unlimited wants.
b. scarce resources and limited wants.
c. abundant resources and unlimited wants.
d. abundant resources and limited wants.
A. No matter what political system people live under there will always be people who want more than the economy can provide them for free.

9. 8. Resources are divided into the following broad categories:
a. men, money, and machines.
b. saving, spending, investment, and capital.
c. human, technological, and government.
d. land, labor, capital, and entrepreneurial ability.
D. The four resources to grow an economy are land, labor, capital, and in a free market, entrepreneurship. In a command system, the fourth resource would be the government.

10. 9. In economics, “land” refers
a. only to plots of ground on the surface of the earth.
b. to the specific area of the earth in a country or region.
c. to rural regions as distinguished from urban areas.
d. to any and all natural resources.
D. A land resource is anything from the earth. Some examples of a land resource are: timber, fresh water, fertile land, copper, iron ore, gold, silver, and anything else that can be used from the earth that can be used to produce goods and services.

11. 10. Physical and mental human effort in the attempt to solve the economic problem is defined in economics as
a. labor.
b. manpower.
c. productivity.
d. performance.
A. The labor that we are talking about here is directed and productive labor. Labor that is directed to the production of goods and services helps build a productive economy.

12. 11. Labor is ultimately derived from
a. capital.
b. technology.
c. natural resources.
d. time.
D. This is particularly true when it comes to skilled labor. It takes time to acquire the knowledge and skills to be productive in this high tech economy we live in.

13. 12. In economics, “capital” refers to
a. money.
b. stocks, bonds, and other financial assets.
c. the seat of government.
d. machines, buildings, and tools.
D. Capital are those resources which can be used to produce goods and services.

14. 13. Which of the following is not an example of “capital”?
a. the copy machine which duplicated this exam.
b. an economics professor’s knowledge of economics.
c. the building in which this class is located.
d. the amount of tuition which you paid for this class.
D. The copy machine and the school building are productive tangible things. The knowledge to work with capital is called human capital. But the tuition you pay is neither capital or human capital.

15. 14. An entrepreneur is
a. an intermediary between buyers and sellers in the marketplace.
b. the organizer who seeks profitable opportunities and is willing to accept risks.
c. a business organization involved in using inputs to produce output.
d. the administrator who runs an enterprise without accepting any risk of financial loss.
B. Someone has to decide what and how to produce goods, in a command economy it is the government, in a free market, it is the entrepreneur.

16. 15. The driving force which directs and grows the economy in a free market economy is
a. physical capital.
b. technological ability.
c. entrepreneurship.
d. human labor.
C. Anyone can be an entrepreneur, it does not necessarily take a lot of money. Entrepreneurship is an attitude more than anything else. If you have dreams of owning your own business and have a plan to start and develop that business into a profitable venture, and take action on your dreams, you are an entrepreneur.

17. 16. In a production process, profit is the payment received by the
a. capital.
b. labor
c. technology.
d. entrepreneur.
D. The reward to someone to take risks in a business venture is called profit.

18. 17. Profit is also known as
a. rent.
b. mark-up.
c. the monetary aggregate.
d. the residual claimed by the entrepreneur.
D. Residual is that which is left over. When one tallies up the total revenue and the total costs as a result of a business venture, if there is something left over, that something is called profit. If there is a deficit, a loss is incurred.

19. 18. Unlike a service, a good
a. is desirable.
b. uses resources to satisfy wants.
c. is physical and tangible.
d. is abundant and free.
C. The word ‘good’ is a term economists use to signify something physical and tangible that is useful.

20. 19. Adam Smith believed that
a. a strong central government promoted economic efficiency and growth.
b. a republic would always foster economic freedom and growth.
c. everyone would benefit from international trade and minimal government.
d. a pure democracy was the best form of government.
C. Adam Smith, the father of modern day economics, believed that the invisible hand of self interest would guide a free market economy to prosperity and growth.

21. 20. Which of the following is a trait of an entrepreneur?
a. They own and sell resources
b. They are risk takers
c. produce goods and services
d. all of the above
D. Without the influence of the entrepreneur a free market system could not function, if the entrepreneur is not the driving force, then the government takes over by default.

22. 21. Which of the following traits are you demonstrating because you are a student?
a. You have learned the lesson of delayed gratification
b. You are a risk taker
c. You have learned that to have more time and money in the future you have to give up time and money
d. All of the above
D. You are demonstrating some of the traits of an entrepreneur by the fact that you are in college.

23. 22. The labor market is an example of a
a. government market.
b. classified market.
c. communication market.
d. resource market.
D. Labor is one of the four resources. The market that labor is bought and sold is therefore called the resource market.

24. 23. The economic behavior of individual decision makers and the determination of price and output in specific markets are both studies in
a. microeconomics.
b. macroeconomics.
c. positive economics.
d. normative economics.
A. Microeconomics is the study of the decision making process of economics.

25. 24. In macroeconomics, we analyze the
a. workings of individual markets.
b. overall performance of the economy as a whole.
c. arrangements through which specific products are exchanged.
d. influences on the decision making of particular households.
B. Macroeconomics is the study the economy in the large, it’s like if you were flying over the economy and able to see how all the different parts fit together.

26. 25. The assumption of rational self-interest means that economic decision makers
a. have no concern for the welfare of others.
b. consider the welfare of others to be more important than their own happiness.
c. know with certainty which choice will have the best result.
d. make reasonable decisions based on their expectations of results.
D. In order to make predictions as what people will do when faced with choices, we have to assume that they will act rationally.

27. 26. In a free market
a. there is always strife.
b. nothing is constant, everything is in flux.
c. economic slumps are inevitable.
d. All of the above
D. In our attempt to avoid inequities, slumps, and anything else we find objectionable we often make the situation worse, not better. We cannot thwart the market.

28. 27. Rational economic decision makers will make a change only if
a. the change is free of risk.
b. there are no costs involved.
c. their expectations are correct.
d. expected marginal benefit exceeds expected marginal cost.
D. Marginal benefit is measured by how much benefit one receives from the last act; marginal cost is a measure of the cost of that last act. One will chose to do something if the marginal benefit of the last act is greater than the marginal cost of that last act.

29. 28. When economic choice involves adjustment to the existing situation, marginal analysis
a. has no practical applications or real-world uses.
b. eliminates incorrect decisions and bad choices.
c. means comparing the additional costs and additional benefits of an activity before deciding.
C. People make decisions based on the margin. For example, a person will buy a soda pop only if the expected pleasure received is greater than the value placed on the money that has to be given up to purchase the drink.

30. 29. Economic information
a. is scarce and costly to acquire.
b. is available for free to any decision maker.
c. is not required for rational decision making.
d. must be complete before any decision is made.
A. The government and businesses spend an enormous amount of resources on acquiring information.

31. 30. The price mechanism
a. gives incentives to the supplier
b. determines the distribution of income
c. will provide the skilled worker with a good income
d. All of the above
D. The price mechanism can only work if we allow prices to fluctuate in accordance to market forces, the more we impede this free flow of prices the less smooth the economic system operates.

32. 31. The purpose of our Constitution is to make sure
a. the federal government has enough power to regulate the economy.
b. there is an equal distribution of income.
c. power remains decentralized.
C. The largest threat to our personal freedom is centralized power. Our Constitution divides the power base among different parts of government.

33. 32. The “ceteris paribus” assumption means
a. “after all other changes have been taken into consideration.”
b. “all economic decision makers behave according to rational self-interest.”
c. “marginal benefit equals marginal cost.”
d. “holding all other variables constant.”
D. Economists can make predictions only if one variable changes and everything else stays the same. For example, people will buy more Cadillac cars when the price goes down, assuming that their incomes or the price of other luxury cars do not change.

34. 33. In a free market profits are maximized when
a. prices are kept as high as possible.
b. costs and prices both decline.
c. the government controls prices.
B. A good example of this principle is Wal-Mart. Wal-Mart has prospered by lowering its costs and then lowering its prices to increase its sales volume.

35. 34. What causes unemployment?
a. A shortage of goods and services.
b. Consumer’s greed.
c. Greed on the part of business owners.
d. A surplus of goods and services on the market.
D. That one thing that will cause business owners to lay off employees is when they are producing, or purchasing wholesale, more units than they are selling retail.

36. 35. The difference between positive economic statements and normative economic statements is that
a. positive statements are based on opinion and normative statements are based on fact.
b. positive statements are true and normative statements are often false.
c. positive statements are based on fact and normative statements are based on opinion.
C. Positive economics is the study of what actually happens. For example, to predict that people will buy more Cadillac cars when the price goes down is an example of positive economics. To say that people should not waste money on luxury is normative economics.

37. 36. The increase in the size and expense of national government worldwide has had a very negative side effect. That side effect is
a. an increase in debt worldwide.
b. smaller government.
c. a fall in the value of the dollar.
d. None of the above
A. Large and increasing debts on the part of almost all governments worldwide is causing severe economic problems worldwide and limits our ability to solve the problems.

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