Chapter 1/Ten Principles of Economics ? 13

83. Which of the following principles is not one of the four principles of individual decisionmaking?

a. People face tradeoffs.

b. Trade can make everyone better off. c. People respond to incentives.

d. Rational people think at the margin. ANS: B DIF: 1 REF: 1-1, 1-2 TOP: Tradeoffs, Trade, Marginal changes MSC: Definitional 84. Which of the following is a principle concerning how people interact?

a. Markets are usually a good way to organize economic activity. b. Rational people think at the margin. c. People respond to incentives. d. All of the above are correct. ANS: A DIF: 2 REF: 1-1, 1-2 TOP: Markets MSC: Interpretive

85. Which of the following statements exemplifies a principle of individual decisionmaking?

a. Trade can make everyone better off.

b. Governments can sometimes improve market outcomes. c. The cost of something is what you give up to get it. d. All of the above are correct. ANS: C DIF: 2 REF: 1-1, 1-2 TOP: Opportunity cost MSC: Interpretive

86. Which is the most accurate statement about trade?

a. Trade can make every nation better off.

b. Trade makes some nations better off and others worse off.

c. Trading for a good can make a nation better off only if the nation cannot produce that good itself. d. Trade helps rich nations and hurts poor nations. ANS: A DIF: 2 REF: 1-2 TOP: Trade MSC: Interpretive 87. The principle that \

a. families.

b. states within the United States. c. nations.

d. All of the above are correct. ANS: D DIF: 1 REF: 1-2 TOP: Trade MSC: Applicative 88. Which of the following statements about trade is false?

a. Trade increases competition.

b. With trade, one country wins and one country loses.

c. Bulgaria can benefit, potentially, from trade with any other country.

d. Trade allows people to buy a greater variety of goods and services at lower cost. ANS: B DIF: 2 REF: 1-2 TOP: Trade MSC: Interpretive

89. Senator Smart, who understands economic principles, is trying to convince workers in her district that trade with

other countries is beneficial. Senator Smart should argue that trade can be beneficial a. only if it allows us to obtain things that we couldn't make for ourselves. b. because it allows specialization, which increases total output. c. to us if we can gain and the others involved in the trade lose.

d. in only a limited number of circumstances because others are typically self-interested. ANS: B DIF: 2 REF: 1-2 TOP: Trade MSC: Interpretive

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90. Benefits from trade would not include

a. the ability of people and nations to specialize.

b. a greater variety of goods and services becoming available. c. less competition. d. lower prices. ANS: C DIF: 2 REF: 1-2 TOP: Trade MSC: Interpretive

91. Trade between the United States and India

a. benefits both the United States and India.

b. is a losing proposition for the United States because India has cheaper labor.

c. is a losing proposition for India because capital is much more abundant in the U.S. than in India. d. is a losing proposition for India because U.S. workers are more productive. ANS: A DIF: 2 REF: 1-2 TOP: Trade MSC: Interpretive 92. Canada can benefit from trade

a. only with nations that can produce goods Canada cannot produce. b. only with less developed nations.

c. only with nations outside of North America. d. with any nation. ANS: D DIF: 2 REF: 1-2 TOP: Trade MSC: Interpretive

93. If Japan chooses to engage in trade, it

a. will only benefit if it trades with countries that produce goods Japan cannot produce. b. cannot benefit if it trades with less developed countries. c. should first attempt to produce the good itself. d. can benefit by trading with any other country. ANS: D DIF: 2 REF: 1-2 TOP: Trade MSC: Interpretive

94. If the United States decides to trade with Mexico, we know that

a. Mexico will benefit, but trade with a less developed country could not benefit the United States. b. it will not benefit Mexico because workers in the United States are more productive. c. Mexico and the United States can both benefit.

d. it will not benefit either country because their cultural differences are too vast. ANS: C DIF: 2 REF: 1-2 TOP: Trade MSC: Interpretive

95. Which of the following statements about markets is most accurate?

a. Markets are usually a good way to organize economic activity.

b. Markets are usually inferior to central planning as a way to organize economic activity. c. Markets fail and are therefore not an acceptable way to organize economic activity.

d. Markets are a good way to organize economic activity in developed nations, but not in less developed nations. ANS: A DIF: 1 REF: 1-2 TOP: Markets MSC: Interpretive

96. Which of the following statements does not apply to a market economy?

a. Firms decide whom to hire and what to produce.

b. No one is looking out for the economic well-being of society as a whole.

c. Households decide which firms to work for and what to buy with their incomes.

d. Government policies are the primary forces that guide the decisions of firms and households. ANS: D DIF: 2 REF: 1-2 TOP: Market economy MSC: Interpretive

Chapter 1/Ten Principles of Economics ? 15

97. In a market economy, who makes the decisions that guide most economic activity?

a. firms only

b. households only

c. firms and households d. government ANS: C DIF: 1 REF: 1-2 TOP: Markets MSC: Definitional

98. The decisions of firms and households are guided by prices and self-interest in a

a. command economy.

b. centrally-planned economy. c. market economy.

d. All of the above are correct. ANS: C DIF: 1 REF: 1-2 TOP: Market economy MSC: Definitional 99. In a market economy, economic activity is guided by

a. the government. b. corporations. c. central planners.

d. self-interest and prices. ANS: D DIF: 1 REF: 1-2 TOP: Market economy MSC: Definitional

100. The term used to describe a situation in which markets fail to allocate resources efficiently is called

a. economic meltdown. b. market failure. c. disequilibrium.

d. the effect of the invisible hand. ANS: B DIF: 1 REF: 1-2 TOP: Market failure MSC: Definitional

101. In an economy in which decisions are guided by prices and individual self-interest, there is

a. the potential to achieve efficiency in production.

b. a strong need for government intervention in the market.

c. less efficiency than would be observed in a centrally-planned economy.

d. more need for a strong legal system to control individual greed than would be needed in a centrally-planned

economy.

ANS: A DIF: 2 REF: 1-2 TOP: Market economy MSC: Interpretive 102. Prices direct economic activity in a market economy by

a. influencing the actions of buyers and sellers.

b. reducing scarcity of the goods and services produced. c. eliminating the need for government intervention.

d. allocating goods and services in the most equitable way. ANS: A DIF: 2 REF: 1-2 TOP: Market economy MSC: Interpretive

103. A friend of yours asks you why market prices are better than government-determined prices. Because you understand

economic principles, you say that market-determined prices are better because they generally reflect a. the value of a good to society, but not the cost of making it. b. the cost of making a good to society, but not its value.

c. both the value of a good to society and the cost of making it. d. neither the value of a good to society nor the cost of making it. ANS: C DIF: 2 REF: 1-2 TOP: Markets, Prices MSC: Interpretive

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104. Which of the following firms is most likely to have market power?

a. a fast food restaurant in a college town b. a wheat farm in Kansas

c. the last gas station in New Mexico for 100 miles d. a shoe store in Kentucky ANS: C DIF: 2 REF: 1-2 TOP: Market power MSC: Interpretive 105. An example of a firm with market power is a

a. delicatessen in New York. b. cable TV provider in St. Louis. c. clothing store in Los Angeles. d. family farm in Illinois. ANS: B DIF: 2 REF: 1-2 TOP: Market power MSC: Interpretive

106. One advantage market economies have over centrally-planned economies is that market economies

a. provide an equal distribution of goods and services to households.

b. establish a significant role for government in the allocation of resources. c. solve the problem of scarcity. d. are more efficient. ANS: D DIF: 2 REF: 1-2 TOP: Market economy MSC: Interpretive

107. Which of the following statements best characterizes a basic difference between market economies and

centrally-planned economies?

a. Society relies more upon prices to allocate resources when the economy is centrally-planned than when it is

market-based.

b. The self-interest of households is reflected more fully in the outcome of a centrally-planned economy than in the

outcome of a market economy.

c. Government plays a larger role in the economic affairs of a market economy than in the economic affairs of a

centrally-planned economy. d. None of the above are correct. ANS: D DIF: 2 REF: 1-2 TOP: Market economy MSC: Interpretive 108. The collapse of communism in the Soviet Union and Eastern Europe took place mainly in the

a. 1960s. b. 1970s. c. 1980s. d. 1990s. ANS: C DIF: 1 REF: 1-2 TOP: Communism MSC: Definitional 109. The economy of the former Soviet Union is best described as a

a. primitive economy. b. market economy. c. hybrid economy.

d. centrally-planned economy. ANS: D DIF: 1 REF: 1-2 TOP: Market economy MSC: Definitional

110. Prior to the collapse of communism, communist countries worked on the premise that economic well-being could be

best attained by

a. a market economy.

b. a strong reliance on prices and individuals’ self-interests.

c. a system of large, government-operated, privately-owned firms. d. the actions of government central planners. ANS: D DIF: 2 REF: 1-2 TOP: Communism MSC: Interpretive