2010
Fall 1
ECON 2010
Review questions 4, 5
1. The personal distribution of income refers to the:
A. Apportioning of income according to basic resource classes, i.e., wages, rents, interest, and profits
B. Division of income on the basis of industry sources, e.g., agriculture, manufacturing, mining, etc
C. Division of the nation's money income among individual households
D. Division of income between personal taxes, consumption, and saving
2. Which of the following is correct?
A. A person who purchases a corporate bond is borrowing money from a corporation
B. A person who purchases a corporate stock is buying ownership in the corporation
C. A person who purchases a corporate bond is guaranteed to earn dividends from the stock
D. A person who purchases a corporate stock gets the option to buy other shares at lower prices
3. One major advantage of limited liability is that it:
A. Is not subject to a free-rider problem
B. Is not subject to a principal-agent problem
C. Has unlimited profit sharing among the firm's owners
D. Shields the personal assets of owners from liability claims
4. The principal-agent problem in corporations arises from:
A. The fact that the principal objective of most corporations is to make profits and not to contribute to charity
B. A conflict of interest between corporate executives who manage the firm and stockholders who own the firm
C. The view that workers are agents who are not considered to be the principal asset of the corporations for
which they work
D. A perspective that corporations are agents that represent the principal source of power for government and
the national economy
5. What basic economic function is the Federal government performing when it takes policy actions to reduce
unemployment?
A. Regulating business
B. Stabilizing the economy
C. Redistributing income
D. Providing a public good
6. A primary way that government redistributes income is through:
A. Owning natural monopolies
B. Providing positive externalities
C. Making transfer payments
D. Regulating business
2
7. If government intervenes when negative externalities exist in an industry, it should attempt to shift the
industry:
A. Demand curve to the left
B. Supply curve to the left
C. Demand curve to the right
D. Supply curve to the right
8. When externalities cause positive benefits to accrue to third parties, the market will:
A. Underallocate resources to the production of the good
B. Overallocate resources to the production of the good
C. Respond by producing more of the good
D. Increase the firm's revenues
9. Which is characteristic of a public good such as national defense?
A. It is subject to rivalry
B. It is subject to exclusion
C. It is easy to charge people on the basis of how much they use
D. It can benefit an increasing number of people at no additional cost
10. If the level of total spending in the private sector is too low to maintain full employment in an economy,
then government is likely to improve the performance of the economy by:
A. Increasing government spending or decreasing taxes
B. Decreasing government spending or increasing taxes
C. Redistributing income to achieve income equality
D. Reducing spillover costs and increasing spillover benefits
The following data represent a personal income tax schedule. Answer the next question(s) on the basis of this
information.
11. The average tax rate at the $60,000 level of income is:
A. 10.0 percent
B. 11.6 percent
C. 15.0 percent
D. 20.8 percent
12. Refer to the above table. If income increases from $15,000 to $30,000, the marginal tax rate is:
A. 10.0 percent
B. 13.3 percent
C. 18.3 percent
D. 26.6 percent
3
13. If an action results in a negative externality, then the market:
A. Price is below the optimal price to society
B. Price is above the optimal price to society
C. Supply curve is too low
D. Quantity is too low
14. Negative externalities can best be defined as the:
A. Costs associated with private production which are shifted to society as a whole
B. Sum of all private costs in a given society
C. Costs of running all units of government
D. Costs of providing public goods and services
15. A paper plant creates a chemical waste which it dumps it into a nearby river. If this situation applied to most
paper plants in the nation, then you can conclude that:
A. The demand for the paper is greater than the supply of paper
B. The supply of paper is greater than the demand for paper
C. The market price of the paper is too low because the supply of the paper fails to incorporate all Costs of
production
D. The market price of paper is too high because consumers are not able to pay enough money to get pollutionfree paper
16. Which involves positive externalities?
A. Highway congestion
B. Drunken driving
C. Public education
D. Tobacco smoking
17. The economic role of government is critical to a well-functioning economy, but:
A. Government gives more emphasis to the problem of unemployment than the problem of inflation
B. In some cases the free-rider problem outweighs double taxation in determining policy
C. Government tends to focus on antitrust policy rather than regulatory policy
D. In some cases the costs of government actions may outweigh the benefits
18. When a nation is specializing in the production of a product for which it is the least-cost producer compared
to other nations, it is:
A. Achieving full employment of resources in the nation
B. Specializing according to its comparative advantage
C. Creating a coincidence of wants for the money economy
D. Maximizing exchange between business and household sectors
19. When a nation has a comparative advantage in some product this means that:
A. The terms of trade with other nations that make the product are based on which nation will win a trade war
B. It can produce that product at a lower domestic opportunity cost than can a potential trading partner
C. If there are similar costs of production for making a product in different nations, the one with the largest
domestic market will be most efficient
D. It can compare the cost of producing a product and make a deal using money as a medium of exchange
4
20. Assume that Nation X can produce either 40 notepads or 80 pens, and that Nation Y can produce either 10
notepads or 40 pens.
A. Nation X has a comparative advantage in producing pens
B. Nation Y has a comparative advantage in producing notepads
C. Nation X has a comparative advantage in producing notepads
D. Nation Y is the high-cost producer of pens
21. Assume Nation that A's production possibilities is either 30 units of bricks or 50 units of wheat. Nation B's
production possibilities is 20 units of bricks and 40 units of wheat. Which of the following is true?
A. Nation A is the least-cost producer of wheat
B. The high-cost producer of bricks is Nation A
C. The opportunity cost of wheat production is lower in Nation B
D. According to the principle of comparative advantage, Nation B should specialize in the production of bricks
Answer the following question(s) on the basis of the data given for two regions, East and West, of a
hypothetical world. The nations have the production possibilities for units of food and clothing given below.
22. Refer to the above data. In East, the comparative cost of 1 unit of:
A. Food is 4 units of clothing
B. Food is .5 units of clothing
C. Clothing is 4 units of food
D. Clothing is .5 units of food
23. Refer to the above data. Which of the following is true?
A. For West, the cost of 5 units of clothing is 10 units of food
B. For West, the cost of 15 units of food is 5 units of clothing
C. For East, the cost of 8 units of food is 8 units of clothing
D. For East, the cost of 4 units of clothing is 6 units of food
24. Refer to the above data. Which statement about the two nations is correct based on the principle of
comparative advantage?
A. East should specialize in the production of food
B. West has a comparative advantage in the production of clothing
C. West has a comparative advantage in the production of food
D. West should specialize in the production of clothing
25. Two nations, Alpha and Beta, can both produce steel. Alpha has a comparative advantage in the production
of steel if it:
A. Is wealthier than Beta
B. Is poorer than Beta
C. Has a higher domestic opportunity cost of producing steel than Beta
D. Has a lower domestic opportunity cost of producing steel than Beta
5
Two nations, ECON and OMICS, each produce goods A and B. The table gives points on each nation's
possibility curve.
26. Based on the data in the above table, you can conclude that:
A. OMICS has a comparative advantage in the production of A
B. ECON has a comparative advantage in the production of A
C. ECON has a comparative advantage in the production of B
D. Neither ECON nor OMICS has a comparative advantage
27. Refer to the above table. For OMICS, the opportunity cost of producing an additional unit of A is:
A. 1 unit of B
B. 2 units of B
C. 3 units of B
D. 4 units of B
28. The U.S. dollar and Singapore dollar exchange rate is $1.00 (U.S.) for $1.80 (Singapore). Then a Singapore
coffee maker at $90 dollars would cost an American consumer how many U.S. dollars?
A. $40
B. $50
C. $60
D. $70
29. If the U.S. dollar and Mexican peso exchange rate shows that one peso is worth $0.12, then an American
computer that costs $1,500 would be worth how many Mexican pesos?
A. 125 pesos
B. 1,250 pesos
C. 12,500 pesos
D. 25,000 pesos
30. If the exchange rate for the euro changes from $1 = 0.81 euro to $1 = 1.14 euro, then the:
A. Euro has appreciated in value
B. Dollar has appreciated in value
C. Dollar has depreciated in value
D. Supply of euros has increased
6
31. At an exchange rate of 1 pound = $2.00, an American product is sold for 50 pounds in Britain. What will be
the British price if the exchange rate for a British pound rises to $3?
A. 100.0 pounds
B. 50.0 pounds
C. 33.3 pounds
D. 24.5 pounds
The table shows four different currencies and how much of each currency can be purchased with a U.S. dollar.
32. Refer to the above table. Which statement is correct about the change from year 1 to year 2?
A. The U.S. dollar appreciated against the Mexican peso
B. The U.S. dollar depreciated against the British pound
C. The U.S. dollar appreciated against the Japanese yen
D. The U.S. dollar appreciated against the euro
The following table shows the foreign currency per U.S. dollar near the end of January of each year listed.
33. Refer to the above table. From 2005 to 2006, what happened to the value of the Japanese yen and the value
of the U.S. dollar?
A. The Japanese yen appreciated and the U.S. dollar depreciated
B. The Japanese yen depreciated and the U.S. dollar depreciated
C. The Japanese yen depreciated and the U.S. dollar appreciated
D. The Japanese yen appreciated and the U.S. dollar appreciated
34. Refer to the above table. In 2004, what would be the U.S. dollar cost of one euro?
A. $0.81
B. $1.14
C. $1.23
D. $1.62
7
The following table gives hypothetical data on the dollar price of Euros.
35. Refer to the above table. Suppose that the Germans decide to import more products from the United States.
All else being equal, the dollar price of a euro would be expected to:
A. Increase and the dollar to depreciate
B. Decrease and the dollar to depreciate
C. Increase and the dollar to appreciate
D. Decrease and the dollar to appreciate
36. Tariffs on an imported product:
A. Benefit domestic producers of the product
B. Benefit domestic consumers of the product
C. Benefit foreign producers of the product
D. Hurt foreign consumers of the product
37. Governments often intervene in international trade to:
A. Shift a nation's production possibilities
B. Increase revenues from export subsidies
C. Protect domestic industries from foreign competition
D. Improve the performance of multinational corporations
38. Tariffs and quotas on an imported product:
A. Benefit both domestic producers and consumers of the product
B. Benefit both foreign producers and consumers of the product
C. Benefit foreign producers and hurt foreign consumers of the product
D. Benefit domestic producers and hurt domestic consumers of the product
39. Licensing requirements, excessive regulations, unreasonable quality standards, and other actions taken by
nations to impede imports are:
A. Import quotas
B. Protective tariffs
C. Nontariff barriers
D. Export subsidies
40. Which would be an example of a nontariff or non quota barrier?
A. The voluntary restraint agreement that limits imports of autos to the United States from Japan
B. A limit on the import of textile products from China
C. The use of extensive custom checks on product quality
D. A $5.00 per case tax on imported wine
8
Review questions 4, 5 Key
1. C
2. B
3. D
4. B
5. B
6. C
7. B
8. A
9. D
10. A
11. C
12. B
13. A
14. A
15. C
16. C
17. D
18. B
19. B
20. C
21. C
22. B
23. B
24. C
25. D
26. B
27. C
28. B
29. C
30. B
31. C
32. A
33. C
34. C
35. D
36. A
37. C
38. D
39. C
40. C