Chapter 1/Ten Principles of Economics ? 17
111. Which of the following observations was made famous by Adam Smith in his book The Wealth of Nations?
a. There is no such thing as a free lunch.
b. People buy more when prices are low than when prices are high.
c. No matter how much people earn, they tend to spend more than they earn.
d. Households and firms interacting in markets are guided by an \
outcomes.
ANS: D DIF: 1 REF: 1-2 TOP: Invisible hand MSC: Definitional 112. The term \
a. Adam Smith. b. David Ricardo. c. Karl Marx.
d. Benjamin Franklin. ANS: A DIF: 1 REF: 1-2 TOP: Invisible hand MSC: Definitional 113. The \
a. advertising. b. prices.
c. central planning.
d. government regulations. ANS: B DIF: 2 REF: 1-2 TOP: Invisible hand MSC: Interpretive
114. The idea that only the government can organize economic activity in a way that promotes economic well-being for a
country as a whole
a. is a basic principle regarding individual decisionmaking.
b. amounts to a denial of one of the basic principles regarding interactions among people. c. supports the idea that the \d. was promoted by the economist Adam Smith in a well-known 1776 book. ANS: B DIF: 2 REF: 1-2 TOP: Markets MSC: Interpretive
115. Adam Smith argued that in a market system, when people act in their own self-interest, they typically
a. help only themselves. b. harm others.
c. help others, but not as much as they would have if they were not self-interested. d. help others even more than when they deliberately try to help others. ANS: D DIF: 2 REF: 1-2 TOP: Invisible hand MSC: Interpretive
116. The invisible hand's ability to coordinate the decisions of the firms and households in the economy can be hindered
by
a. government actions that distort prices. b. increased competition in markets. c. enforcement of property rights.
d. too much attention paid to efficiency. ANS: A DIF: 2 REF: 1-2 TOP: Invisible hand MSC: Interpretive 117. When the \
a. only the values that society places on those products. b. only the costs to society of producing those products.
c. both the values that society places on those products and the costs to society of producing those products. d. none of the above; when the \
government in a manner that is thought to be \
ANS: C DIF: 2 REF: 1-2 TOP: Invisible hand, Markets MSC: Interpretive
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118. Adam Smith's book The Wealth of Nations was published in
a. 1692. b. 1776. c. 1816. d. 1936. ANS: B DIF: 1 REF: 1-2 TOP: Invisible hand MSC: Definitional
119. Both The Wealth of Nations and the Declaration of Independence share the point of view that
a. every person is entitled to life, liberty, and the pursuit of happiness.
b. individuals are best left to their own devices without the government guiding their actions. c. the government plays a central role in organizing a market economy.
d. because of human nature a strong legal system is necessary for a market system to survive. ANS: B DIF: 2 REF: 1-2 TOP: Invisible hand MSC: Interpretive 120. The invisible hand works to promote general well-being in the economy primarily through
a. government intervention. b. the political process.
c. people’s pursuit of self-interest. d. altruism. ANS: C DIF: 1 REF: 1-2 TOP: Invisible hand MSC: Interpretive 121. Taxes adversely affect the allocation of resources in society because
a. they do not always fall more heavily on the rich than on the poor. b. the taxes collected are not enough to finance government spending. c. not everyone pays taxes.
d. they distort prices and thus distort the decisions of households and firms. ANS: D DIF: 2 REF: 1-2 TOP: Taxes MSC: Interpretive 122. A primary function of prices in a market economy is to provide participants with
a. relevant economic information. b. relevant spending limits.
c. an equitable distribution of goods and services. d. All of the above are correct. ANS: A DIF: 2 REF: 1-2 TOP: Market economy, Prices MSC: Interpretive 123. When the government prevents prices from adjusting naturally to supply and demand,
a. it stabilizes the economy by reducing market uncertainties. b. it adversely affects the allocation of resources.
c. the improvement in equity justifies the reduction in efficiency. d. the improvement in efficiency justifies the reduction in equity. ANS: B DIF: 2 REF: 1-2 TOP: Prices, Government MSC: Applicative
124. With respect to the attainment of an efficient allocation of resources, which of the following statements is correct?
a. Markets are always a good way to organize economic activity. b. Markets are often a good way to organize economic activity. c. Markets are seldom a good way to organize economic activity. d. Markets are never a good way to organize economic activity. ANS: B DIF: 1 REF: 1-2 TOP: Markets MSC: Interpretive
Chapter 1/Ten Principles of Economics ? 19
125. For markets to work well, there must be
a. market power. b. a central planner. c. property rights.
d. abundant, not scarce, resources. ANS: C DIF: 2 REF: 1-2 TOP: Markets, Property rights MSC: Interpretive
126. One reason we need government, even in a market economy, is that
a. there are insufficient quantities of externalities in the absence of government. b. property rights become too entrenched in the absence of government.
c. the invisible hand seldom leads to an efficient allocation of resources in any market. d. the invisible hand, while powerful, is not perfect. ANS: D DIF: 2 REF: 1-2 TOP: Market economy, Government MSC: Interpretive
127. The basic principles of economics suggest that
a. markets are seldom, if ever, a good way to organize economic activity.
b. government should become involved in markets when trade between countries is involved.
c. government should become involved in markets when those markets fail to produce efficient or equitable
outcomes.
d. All of the above are correct. ANS: C DIF: 1 REF: 1-2
TOP: Markets, Government, Trade MSC: Interpretive
128. One necessary role of government in a market economy is to
a. impose taxes on those goods and services that are most desired by consumers. b. maintain welfare programs for the poor.
c. provide services such as mail delivery and garbage collection. d. enforce property rights. ANS: D DIF: 2 REF: 1-2
TOP: Government, Property rights MSC: Interpretive 129. The government enforces property rights by
a. requiring property owners to pay property taxes. b. providing police and courts. c. forcing people to own property.
d. providing public parks and recreation facilities. ANS: B DIF: 2 REF: 1-2
TOP: Government, Property rights MSC: Interpretive
130. To say that government intervenes in the economy to promote efficiency is to say that government is attempting to
a. create a more fair distribution of income.
b. change the way in which the economic pie is divided. c. enlarge the economic pie. d. All of the above are correct. ANS: C DIF: 2 REF: 1-2 TOP: Efficiency, Government MSC: Interpretive 131. A company that formerly produced software went out of business because too many potential customers bought
illegally-produced copies of the software instead of buying the product directly from the company. This instance serves as an example of a. market power. b. market failure.
c. inadequate enforcement of property rights. d. the invisible hand at work. ANS: C DIF: 2 REF: 1-2 TOP: Property rights MSC: Interpretive
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132. A rationale for government involvement in a market economy is as follows:
a. Markets sometimes fail to produce a fair distribution of economic well-being. b. Markets sometimes fail to produce an efficient allocation of resources. c. Property rights have to be enforced. d. All of the above are correct. ANS: D DIF: 1 REF: 1-2 TOP: Government, Markets MSC: Interpretive 133. The term market failure refers to
a. a situation in which the market on its own fails to allocate resources efficiently. b. an unsuccessful advertising campaign which reduces demand for a product. c. a situation in which competition among firms becomes ruthless. d. a firm which is forced out of business because of losses. ANS: A DIF: 1 REF: 1-2 TOP: Market failure MSC: Definitional
134. Which of the following is not generally regarded as a legitimate reason for the government to intervene in a market?
a. to promote efficiency b. to promote equity
c. to enforce property rights
d. to protect an industry from foreign competition ANS: D DIF: 2 REF: 1-2 TOP: Government, Markets MSC: Interpretive 135. Causes of market failure include
a. externalities and market power.
b. market power and incorrect forecasts of consumer demand. c. externalities and foreign competition.
d. incorrect forecasts of consumer demand and foreign competition. ANS: A DIF: 2 REF: 1-2 TOP: Market failure MSC: Interpretive
136. Which of the following statements is not true?
a. In the presence of a market failure, government action will always improve on the market outcome. b. In the presence of a market failure, government action can sometimes improve on the market outcome.
c. In the presence of a market failure, government action might not improve on the market outcome because some
leaders are not fully informed about the effects of their actions.
d. In the presence of a market failure, government action might not improve on the market outcome because
sometimes public policies simply reward the politically powerful.
ANS: A DIF: 2 REF: 1-2
TOP: Market failure, Government MSC: Interpretive 137. Market failure can be caused by
a. low consumer demand.
b. government intervention and price controls. c. externalities and market power. d. high prices and foreign competition. ANS: C DIF: 2 REF: 1-2 TOP: Market failure MSC: Interpretive
138. The term \
a. means the same thing as \
b. refers to the dissolution of a market when firms decide to quit producing a certain product. c. refers to the failure of a market to produce an efficient allocation of resources.
d. refers to government's failure to enforce the property rights of households or firms that participate in a certain
market.
ANS: C DIF: 2 REF: 1-2 TOP: Market failure MSC: Interpretive