Understanding Economics International Edition, 14th Edition by Russell S. Sobel – Test Bank

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Understanding Economics International Edition, 14th Edition by Russell S. Sobel – Test Bank

Macroeconomics Chapter 2 B—Some Tools of the Economist

MULTIPLE CHOICE

Use the figure to answer the following question.

Figure 2-11

225.In Figure 2-11, which shows the production possibilities curve,

a.	A is efficient.
b.	B is inefficient.
c.	C is unattainable.
d.	all of the above are true.

ANS: D PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Productivity and growth TOP: Production Possibilities Curve

KEY: Bloom’s: Application MSC: Coursebook

226.Dr. Jones, a dentist, is choosing between driving and flying from Pittsburgh to New York City. If Jones drove, she would have to close her office four hours earlier than if she flew by airplane. Her expected income (after taxes) from her practice is $50 per hour. Assuming all other factors are equal, if Jones was a rational decision maker, she would drive if the price differential (air cost minus driving) was greater than

a.	$50.
b.	$100.
c.	$150.
d.	$200.

ANS: D PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Productivity and growth TOP: Production Possibilities Curve

KEY: Bloom’s: Application MSC: Coursebook

227.According to the law of comparative advantage,

a.	each producer should strive toward self-sufficiency in order to maximize the total production of the economy.
b.	each product should be produced by the lowest opportunity cost producer in order to maximize output.
c.	one should never compare one’s abilities with those of another.
d.	each product should be produced by the individual who can produce more of that product than any other individual.

ANS: B PTS: 1 DIF: Easy NAT: BUSPROG: Analytic

STA:DISC: Gains from trade, specialization and trade

TOP: Trade, Output, and Living Standards KEY: Bloom’s: Comprehension

MSC: Coursebook

228.”The economic wealth of this country was built primarily by some individuals profiting from a transaction, whereas others were harmed by that transaction.” This statement indicates the speaker

a.	fails to comprehend the idea that all voluntary trades benefit both parties involved.
b.	fails to comprehend the fallacy of composition.
c.	fails to understand the significance of the production possibilities curve.
d.	uses the economic way of thinking. The statement is essentially correct.

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Gains from trade, specialization and trade TOP: Trade Creates Value

KEY: Bloom’s: Application MSC: Coursebook

229.(I)  When individuals engage in a voluntary exchange, both parties are made better off.

(II)  By channeling goods and resources to those who value them most, trade creates value and increases the wealth created by a society’s resources.

a.	I is true; II is false.
b.	I is false; II is true.
c.	Both I and II are true.
d.	Both I and II are false.

ANS: C PTS: 1 DIF: Easy NAT: BUSPROG: Analytic

STA: DISC: Gains from trade, specialization and trade TOP: Trade Creates Value

KEY: Bloom’s: Application MSC: Coursebook

The following question(s) relate(s) to the material in the addendum to Chapter 2. Use the production possibilities data for Lebos and Slavia below to answer the question(s).

Table 2-4

Lebos	Slavia
Food	Clothing	Food	Clothing
0	8	0	8
2	6	1	6
4	4	2	4
6	2	3	2
8	0	4	0

230.Refer to Table 2-4. Which of the following is correct?

a.	In Lebos, the opportunity cost of producing one unit of food is equal to one unit of clothing.
b.	In Slavia, the opportunity cost of producing one unit of food is equal to two units of clothing.
c.	The opportunity cost of producing food in Lebos is less than the opportunity cost of producing food in Slavia.
d.	All of the above are correct.

ANS: D PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Productivity and growth TOP: Production Possibilities Curve

KEY: Bloom’s: Application MSC: Coursebook

231.Refer to Table 2-4. Which of the following is correct?

a.	Lebos has the comparative advantage in both goods.
b.	Slavia has the comparative advantage in food.
c.	Lebos has the comparative advantage in food.
d.	Lebos has the comparative advantage in clothing.

ANS: C PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Productivity and growth TOP: Production Possibilities Curve

KEY: Bloom’s: Application MSC: Coursebook

232.The process by which new products and methods of production are continuously replacing old ones is known as:

a.	opportunity cost.
b.	the production possibilities frontier.
c.	creative destruction.
d.	the fallacy of composition.

ANS: C PTS: 1 DIF: Easy NAT: BUSPROG: Analytic

STA: DISC: Productivity and growth TOP: Production Possibilities Curve

KEY: Bloom’s: Knowledge MSC: Coursebook

233.Keri decided to sleep in today rather than attend her 9 a.m. economics class. According to economic analysis, her choice was

a.	irrational, because economic analysis suggests you should always attend classes that you have already paid for.
b.	irrational, because oversleeping is not in Keri’s self-interest.
c.	rational if Keri has not missed any other classes.
d.	rational if Keri values sleep more highly than the benefit she expects to receive from attending the class.

ANS: D PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA:DISC: Scarcity, tradeoffs, and opportunity cost

TOP:Production Possibilities CurveKEY:Bloom’s: Application

MSC:On-line Practice

234.If a motorist is stranded in front of a pay phone and has only dollar bills, and he ends up buying a quarter from a passerby for $1,

a.	the stranded motorist must not understand that four quarters are worth $1.
b.	economic theory is unable to explain this transaction.
c.	both parties have gained from this exchange.
d.	the passerby was made better off and the motorist worse off.

ANS: C PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Gains from trade, specialization and trade TOP: Trade Creates Value

KEY:Bloom’s: ApplicationMSC:On-line Practice

235.When private ownership rights are well-defined and enforced, owners

a.	can ignore the wishes of others, without bearing the cost.
b.	have little incentive to take care of things.
c.	can do anything they want with their property.
d.	can be held accountable for damage to others through misuse of their property.

ANS: D PTS: 1 DIF: Easy NAT: BUSPROG: Analytic

STA: DISC: The role of government TOP: The Importance of Property Rights

KEY:Bloom’s: KnowledgeMSC:On-line Practice

236.The production possibilities curve illustrates the basic principle that

a.	an economy’s capacity to produce increases in proportion to its population.
b.	if the resources of an economy are being used efficiently, more of one good can be produced only if less of another is produced.
c.	an economy will automatically seek the output at which all of its resources are fully employed.
d.	the distribution of income among households is the major determinant of the economic welfare of a nation.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Productivity and growth TOP: Production Possibilities Curve

KEY:Bloom’s: KnowledgeMSC:On-line Practice

237.Which of the following attributes of trade explain why it is important for economic prosperity?

a.	Trade moves goods from people who value them less to people who value them more.
b.	Trade makes it possible to produce a larger output as a result of lower per unit costs that often accompany large-scale production.
c.	Trade makes it possible to produce a larger output as a result of gains from division of labor and specialization.
d.	All of the above.

ANS: D PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA:DISC: Gains from trade, specialization and trade

TOP: Trade, Output, and Living Standards KEY: Bloom’s: Knowledge

MSC:On-line Practice

238.The size of a country’s “economic pie” is thought of as the total dollar value of all goods and services produced during some period of time. The economic pie

a.	is a fixed total waiting to be divided up among people.
b.	determines how much wealth an individual can obtain.
c.	is variable, not fixed, across time periods.
d.	depends solely upon the natural resources of a country.

ANS: C PTS: 1 DIF: Easy NAT: BUSPROG: Analytic

STA: DISC: The role of money TOP: Human Ingenuity and the Creation of Wealth

KEY:Bloom’s: KnowledgeMSC:On-line Practice

239.In a market economy,

a.	a larger income for one person means a smaller one for another.
b.	the government answers all the basic economic questions.
c.	a larger income for one person means it is possible for others to earn more too.
d.	economic output shrinks as we discover better ways of doing things.

ANS: C PTS: 1 DIF: Easy NAT: BUSPROG: Analytic

STA: DISC: The role of money TOP: Human Ingenuity and the Creation of Wealth

KEY:Bloom’s: ApplicationMSC:On-line Practice

240.According to the law of comparative advantage, a particular task is performed most efficiently by the individual with the lowest

a.	wage rate.
b.	tax liability.
c.	net worth.
d.	opportunity cost.

ANS: D PTS: 1 DIF: Easy NAT: BUSPROG: Analytic

STA:DISC: Gains from trade, specialization and trade

TOP: Trade, Output, and Living Standards KEY: Bloom’s: Knowledge

MSC:On-line Practice

241.A production possibilities curve graphically represents the maximum quantities of two products produced when all resources in the economy are being used efficiently. If an economy operates at a point inside its production possibilities curve,

a.	it lacks the resources necessary to produce at full employment.
b.	it is utilizing some resources inefficiently.
c.	it does not confront the problem of scarce goods relative to unlimited wants.
d.	it does not exist in the real world since it is impossible for an economy to operate inside its production possibilities curve.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Productivity and growth TOP: Production Possibilities Curve

KEY:Bloom’s: ApplicationMSC:On-line Practice

242.Given freedom of movement for both goods and resources, if Florida producers specialize in oranges and Georgia producers specialize in peaches, then it would be reasonable to conclude that

a.	the opportunity cost of growing oranges is higher in Florida than in Georgia.
b.	Georgia has a comparative advantage in producing peaches.
c.	Florida has a comparative advantage in producing peaches.
d.	total output will be expanded when Georgia allocates more resources to producing oranges and Florida allocates more resources to producing peaches.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Gains from trade, specialization and trade TOP: Trade Creates Value

KEY:Bloom’s: ApplicationMSC:On-line Practice

243.The law of comparative advantage indicates that

a.	a group of people will reduce their output when each good or service is supplied by the low opportunity cost producer.
b.	trading partners lose when they can acquire a good through trade cheaper than they can produce it.
c.	trade is most effective when people trade only among those in their own nation.
d.	a group of people can increase their output when each good or service is supplied by the low opportunity cost producer.

ANS: D PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA:DISC: Gains from trade, specialization and trade

TOP: Trade, Output, and Living Standards KEY: Bloom’s: Application

MSC:On-line Practice

244.Kelly is an architect and she is trying to decide whether to hire Mike, a draftsman, to assist with her work. Kelly could hire Mike at $20 per hour but it would take him three times as long to complete a task as it takes Kelly. Kelly is able to earn $90 per hour and has more architectural jobs than she is able to handle. Which of the following is true?

a.	Kelly should not hire Mike because it would be faster for her to do the work herself.
b.	Kelly should do the drafting work herself because she has the lower opportunity cost.
c.	Mike should be hired at the $20 per hour wage rate.
d.	Mike should be hired, but only if he is paid more than $30 per hour.

ANS: C PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA:DISC: Gains from trade, specialization and trade

TOP: Trade, Output, and Living Standards KEY: Bloom’s: Application

MSC:On-line Practice

245.An airline ticket from Baltimore to Miami costs $525. A bus ticket is $325. Traveling by plane will take 5 hours, compared with 25 hours by bus. Thus, the plane costs $200 more but saves 20 hours of time (Hint: Note how we are “thinking at the margin” here by looking at the changes). Other things constant, an individual will gain by choosing air travel if, and only if, each hour of her time is valued at more than

a.	$10 per hour.
b.	$13 per hour.
c.	$20 per hour.
d.	$105 per hour.

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA:DISC: Gains from trade, specialization and trade

TOP: Trade, Output, and Living Standards KEY: Bloom’s: Application

MSC:On-line Practice

246.Which of the following is NOT true of opportunity cost?

a.	Opportunity costs are subjective because they depend upon how the decision-maker values his or her options.
b.	Opportunity costs are only the monetary costs of lost options.
c.	Opportunity costs are the highest-valued alternative sacrificed in order to choose an option.
d.	Only the decision-maker can determine his or her opportunity costs for any particular action.

ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Scarcity, tradeoffs, and opportunity cost TOP: What Shall We Give Up?

KEY:Bloom’s: KnowledgeMSC:On-line Practice

247.Middlemen, such as grocers, stockbrokers, and realtors

a.	specialize in reducing transactions costs.
b.	provide nothing of value to either the buyer or the seller.
c.	have no effect on economic output in society.
d.	do not exist in capitalist economies.

ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic

STA: DISC: Gains from trade, specialization and trade TOP: Trade Creates Value

KEY:Bloom’s: KnowledgeMSC:On-line Practice

ESSAY

248.A popular video program used to teach economics to primary school children defines opportunity cost as “what you give up to get something.” In light of your understanding of opportunity cost, how would you modify this definition?

ANS:

The video program always gives the children two choices; the choice forgone, therefore, is the opportunity cost. For children of this age and reasoning ability, this is probably a good approach. We know, however, that more than one option is relinquished once a decision has been made. A choice to take a 9 a.m. economics class will mean that you cannot take English, French, math, biology, or philosophy at that time. Our understanding of opportunity cost reveals that it is only the highest valued alternative forgone.

PTS:1DIF:ModerateNAT:BUSPROG: Analytic

STA:DISC: Gains from trade, specialization and trade

TOP: Trade, Output, and Living Standards KEY: Bloom’s: Analysis

MSC:Critical Thinking

249.After the terrorist attacks on September 11, 2001, the United States began devoting substantial resources toward the War on Terrorism, homeland security, and relief efforts. Use the production possibilities curve to demonstrate how this might affect the production of other goods in the United States.

ANS:

Increased resources devoted toward these efforts must come away from the production of other goods, reducing the production of these other goods.

PTS:1DIF:ModerateNAT:BUSPROG: Analytic

STA: DISC: Productivity and growth TOP: Production Possibilities Curve

KEY:Bloom’s: AnalysisMSC:Critical Thinking

250.An economics professor points to a student in the front row and announces that “sitting in class is the thing you value most during this time period.” Is the professor correct? Why or why not?

ANS:

If the student is rational (and this is an assumption made in economics), he allocates time to its highest valued use. By attending class, the student has revealed that this activity was valued most during that time period. If this were not true, the student wouldn’t be there.

PTS:1DIF:ModerateNAT:BUSPROG: Analytic

STA:DISC: Scarcity, tradeoffs, and opportunity cost

TOP: Trade, Output, and Living Standards KEY: Bloom’s: Application

MSC:Critical Thinking

251.Explain the idea of capital investment by using the story of Robinson Crusoe. What is sacrificed, and what is gained?

ANS:

For Robinson Crusoe, engaging in capital investment involves producing tools now that would increase his consumption possibilities in the future. Examples might include making a net for fishing or constructing a tool that enables him to pick fruit faster. By engaging in these activities, he will not be able to use the time to fish and pick fruit for immediate consumption. He sacrifices consumption and gains the ability to consume more fish and more fruit in the future.

PTS:1DIF:ModerateNAT:BUSPROG: Analytic

STA: DISC: Productivity and growth TOP: Production Possibilities Curve

KEY:Bloom’s: ApplicationMSC:Critical Thinking

252.The president of a large public university proclaims, “If we can get the state government to fund our new football stadium, it will not cost us anything.” Evaluate this view from an economic perspective.

ANS:

While it may not directly affect the university’s budget, the cost will be borne by taxpayers. Also, there will be opportunity costs brought about by diverting stadium funding from roads, hospitals, or primary schools. We also should not ignore the fact that the state may reduce its funding of the university in other areas, such as student financial aid, to compensate for the cost of the football stadium.

PTS:1DIF:ChallengingNAT:BUSPROG: Analytic

STA: DISC: Scarcity, tradeoffs, and opportunity cost TOP: What Shall We Give Up?

KEY:Bloom’s: AnalysisMSC:Critical Thinking

253.Mark and John are 10-year-old twins who do not get along. They have opened separate lemonade stands and are competing with each other, selling lemonade on their block. Their mother observes that Mark is very good at making lemonade and John is an excellent young salesman. She suggests they both could make more money if they worked together. John counters that two stands will always make more money than one. Who is right? Why?

ANS:

The mother makes the point that gains from trade are possible and that the law of comparative advantage should apply. If the two stands operate separately, Mark might make quite a bit of lemonade but be unable to sell it. John might sell all he makes, but this is probably not very much. By working together, the two should be able to sell more lemonade than is possible if they operate two stands independently.

PTS:1DIF:ModerateNAT:BUSPROG: Analytic

STA:DISC: Gains from trade, specialization and trade

TOP: Trade, Output, and Living Standards KEY: Bloom’s: Analysis

MSC:Critical Thinking

254.A department store buys a wool coat for $120 and sets its retail price at $300. The coat costs $85 to produce. When the coat doesn’t sell, the store marks the price down to $200, then $100, and finally $70. At $70, Amy buys the coat. What was the coat’s true value? Why?

ANS:

Since the coat sold for $70, we would have to say that this is its value. In economics, the value of a product is assigned when a trade is made. Retail prices, costs of production, etc. are not relevant when assigning value. Goods are valued based on what individuals will give for them.

PTS:1DIF:ModerateNAT:BUSPROG: Analytic

STA:DISC: Gains from trade, specialization and trade

TOP: Trade, Output, and Living Standards KEY: Bloom’s: Analysis

MSC:Critical Thinking

255.Jim values his car at $2,000, and Kelly values it at $5,000. Can value be created in this situation? How? Suppose Jim refuses to sell for less than $6,000. Is value destroyed? Why or why not?

ANS:

Value can be created in this situation. Jim can sell the car at more than $2,000, and Kelly can buy it at $5,000 or less. For example, suppose the car sells for $3,000. Jim has given up a good worth $2,000 to him in exchange for $3,000. He is better off by $1,000, a value created by the exchange. Similarly, Kelly is $2,000 better off because she has something that is worth $5,000 to her, and she only had to relinquish $3,000 to acquire it. If Jim refuses to sell the car, no value will be created, but none will be destroyed either. While a possible gain is forgone, no one is made any worse off by a transaction not taking place.

PTS:1DIF:ModerateNAT:BUSPROG: Analytic

STA: DISC: Productivity and growth TOP: Production Possibilities Curve

KEY:Bloom’s: AnalysisMSC:Critical Thinking

256.Market economies are often criticized for how they answer the basic question, “For whom are goods produced?” This criticism usually comes from people who believe that the distribution of income is not “fair.” Is there some way to separate production from distribution so that we can leave production just as it is but make the distribution of income “fairer”?

ANS:

Unfortunately, there is no way to totally separate the act of production from the way income is distributed. We know that incentives matter, and tying income to production gives people the incentive to produce. Fairness is a normative concept, and reasonable people will disagree over what distribution of income is more fair. Since incentives matter, any attempt to change the distribution of income is likely to destroy some of the incentives for production.

PTS:1DIF:ModerateNAT:BUSPROG: Analytic

STA: DISC: Gains from trade, specialization and trade TOP: Trade Creates Value

KEY:Bloom’s: AnalysisMSC:Critical Thinking

257.It can be said that, ultimately, consumers are the driving force in answering the three basic economic questions. Explain the consumer’s role in providing these answers.

ANS:

What will be produced is determined by businesses, but they know that the only way to succeed is to offer products consumers find desirable. What they produce is determined by what consumers want. How the goods will be produced is determined by firms that continually seek lower costs of production. Since consumers are price conscious, they will buy the product that carries the lowest price, ceteris paribus. Firms that lower production costs can lower prices and attract more consumers. The goods are consumed by people who desire them and have the ability to pay. Since income is derived from production, those who produce more of what consumers value will have higher incomes. The consumer is at the heart of all three basic economic questions.

PTS:1DIF:ModerateNAT:BUSPROG: Analytic

STA: DISC: Utility and consumer choice TOP: Economic Organization

KEY:Bloom’s: AnalysisMSC:Critical Thinking