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Exam 1 Ch -2 Sample Spring 2008 1. For economists, the word "utility" means: A) versatility and flexibility. B) rationality. C) pleasure and satisfaction. D) purposefulness. 2. When entering a building, Sam diverts his path to go through an open door rather than make the physical effort to open the closed door that is directly in his path. This is an example of: A) irrational behavior. B) a lazy person. C) marginal benefit-marginal cost analysis. D) programmed learning. 3. The assertion that "There is no free lunch" means that: A) there are always tradeoffs between economic goals. B) all production involves the use of scarce resources and thus the sacrifice of alternative goods. C) marginal analysis is not used in economic reasoning. D) choices need not be made if behavior is rational. 4. In deciding whether to study for an economics quiz or go to a movie, one is confronted by the idea(s) of: A) scarcity and opportunity costs. B) money and real capital. C) complementary economic goals. D) full production. 5. The economizing problem is: A) the need to make choices because economic wants exceed economic means. B) how to distribute resources equally amongst all members of society. C) that people's means often exceed their wants. D) that people do not know how to rationally allocate resources. 6. The alternative combinations of two goods which a consumer can purchase with a given money income is shown by: A) a production possibilities curve . B) a demand curve. C) consumer expenditure line. D) a budget line. Use the following to answer questions 7-9: 7. Refer to the budget line shown in the diagram above. If the consumer's money income is $20, the: Exam 1 Ch -2 Sample Spring 2008 A) B) C) D) prices of C and D cannot be determined. price of C is $2 and the price of D is $4. consumer can obtain a combination of 5 units of both C and D. price of C is $4 and the price of D is $2. 8. Refer to the budget line shown in the diagram above. If the consumer's money income is $20, which of the following combinations of goods is unattainable? A) 4 units of C, and 6 units of D. B) 5 units of C, and no units of D. C) 1 unit of C, and 8 units of D. D) 2 units of C, and 6 units of D . 9. Refer to the budget line shown in the diagram above. The absolute value of the slope of the budget line is: A) MUC/MUD. B) one-half. C) PD/PC. D) PC/PD. 10. The four factors of production are: A) land, labor, capital, and money B) land, labor, capital, and entrepreneurial ability C) labor, capital, technology, and entrepreneurial ability D) labor, capital, entrepreneurial ability, and money 11. Money is not an economic resource because: A) money, as such, is not productive. B) idle money balances do not earn interest income. C) it is not scarce. D) money is not a free gift of nature. 12. The main function of the entrepreneur is to: A) make routine pricing decisions. B) innovate. C) purchase capital. D) create market demand. 13. The process of producing and accumulating capital goods is called: A) money capital. B) depreciation. C) investment. D) consumption. 14. The production possibilities curve illustrates the basic principle that: A) the production of more of any one good will in time require smaller and smaller sacrifices of other goods. B) an economy will automatically obtain full employment of its resources. C) if all the resources of an economy are in use, more of one good can be produced only if less of another good is produced. D) an economy's capacity to produce increases in proportion to its population size. 15. A production possibilities curve shows: A) that resources are unlimited. B) that people prefer one of the goods more than the other. Exam 1 Ch -2 Sample Spring 2008 C) the maximum amounts of two goods that can be produced assuming the full use of available resources. D) combinations of capital and labor necessary to produce specific levels of output. 16. Assume that a change in government policy results in greater production of both consumer goods and investment goods. We can conclude that: A) the economy was not employing all of its resources before the policy change. B) the economy's production possibilities curve has been shifted to the left as a result of the policy decision. C) this economy's production possibilities curve is convex (bowed inward) to the origin. D) the law of increasing opportunity costs does not apply in this society. Use the following to answer questions 17-18: 17. Refer to the above production possibilities curve . At the onset of the Second World War the United States had large amounts of idle human and property resources. Its economic adjustment from peacetime to wartime can best be described by the movement from point: A) c to point b. B) b to point c. C) a to point b. D) c to point d. 18. Refer to the above production possibilities curve . At the onset of the Second World War the Soviet Union was already at full employment. Its economic adjustment from peacetime to wartime can best be described by the movement from point: A) c to point b. B) b to point c. C) a to point b. D) c to point d. 19. The law of increasing opportunity costs states that: A) if society wants to produce more of a particular good, it must sacrifice larger and larger amounts of other goods to do so. B) the sum of the costs of producing a particular good cannot rise above the current market price of that good. C) if the sum of the costs of producing a particular good rises by a specified percent, the price of that good must rise by a greater relative amount. D) if the prices of all the resources used to produce goods increase, the cost of producing any particular good will increase at the same rate. 20. The optimal point on a production possibilities curve is achieved where: A) the smallest physical amounts of inputs are used to produce each good. B) each good is produced at a level where marginal benefits equal marginal costs. Exam 1 Ch -2 Sample Spring 2008 C) large amounts of capital goods are produced relative to consumer goods. D) large amounts of consumer goods are produced relative to capital goods. 21. Refer to the above diagram for athletic shoes. The optimal output of shoes is: A) Q1. B) Q2. C) Q3. D) greater than Q3. 22. Which of the following would be most likely to shift the production possibilities curve to the right? A) a sudden and substantial expansion of consumer wants B) an improvement in the literacy level and general level of education C) a decline in the size of the population and labor force D) shifting resources from the production of capital goods to the production of consumer goods. 23. Which of the following will enable a nation to obtain a combination of consumer goods and capital goods outside its production possibilities curve ? A) full employment. B) international specialization and trade. C) full production. D) productive efficiency. 24. Some agricultural sub-Saharan nations of Africa have overfarmed and overgrazed their land to the extent that significant portions of it have turned into desert. This suggests that: A) the concavity of the production possibilities curve s of such nations has increased. B) the production possibilities curve s of such nations have shifted inward. C) the production possibilities curve s of such nations have shifted outward. D) these nations are operating at some point outside of their production possibilities curve s. 25. Which of the following is a fundamental characteristic of the market system? A) property rights. B) central planning by government. C) unselfish behavior. D) government-set wages and prices. 26. Broadly defined, competition involves: A) private property and freedom of expression. Exam 1 Ch -2 Sample Spring 2008 B) independently acting buyers and sellers and freedom to enter or leave markets. C) increasing opportunity costs and diminishing marginal utility. D) capital goods and division of labor. 27. Well-defined property rights: A) discourage investment and growth. B) discourage hard work. C) impede exchange. D) encourage owners to maintain or improve their property. 28. Economic profits in an industry suggest the industry: A) can earn more profits by increasing product price. B) should be larger to better satisfy consumers' desire for the product. C) has excess production capacity. D) is the size that consumers want it to be. 29. An increase in consumer desire for strawberries is most likely to: A) increase the number of strawberry pickers needed by farmers B) reduce the supply of strawberries. C) reduce the number of people willing to pick strawberries. D) reduce the need for strawberry pickers. 30. The most efficient combination of resources in producing any output is the combination that: A) comes closest to using the same quantities of land, labor, capital, and entrepreneurial ability. B) can be obtained for the smallest money outlay. C) uses the smallest total quantity of all resources. D) conserves most on the use of labor. 31. The market system's answer to the fundamental question "What will be produced?" is essentially: A) "Goods and services that are profitable." B) "Low cost goods and services." C) "Goods and service that can be produced using large amounts of capital." D) "Goods and services that possess lasting value." 32. The market system's answer to the fundamental question "How will the goods and services be produced?" is essentially: A) "With as much machinery as possible." B) "Using the latest technology." C) "By exploiting labor." D) "At least-cost production." 33. The advent of DVDs threatens to eventually demolish the market for videocassettes. This is an example of: A) creative destruction. B) derived demand. C) capital accumulation. D) the difference between normal and economic profits. 34. The invisible hand refers to the: A) fact that the U.S. tax system redistributes income from rich to poor. B) notion that, under competition, decisions motivated by self-interest promote the social interest. C) tendency of monopolistic sellers to raise prices above competitive levels. D) fact that government controls the functioning of the market system. .

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