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    Economic theory

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    1. When economic choice involves an adjustment to an existing situation, marginal analysis (Points: 1)
    has no practical applications or real-world uses
    eliminates incorrect decisions and bad choices
    involves comparing the additional costs and additional benefits of an activity before deciding
    involves examining only the total costs and total benefits of an activity before deciding

    2. Macroeconomics is the study of (Points: 1)
    the behavior of large firms in the marketplace
    the economic behavior of individual decision makers
    the behavior of the economy as a whole
    how to use the fewest natural resources to produce goods and services

    3. Economic theory (Points: 1)
    expresses normative values
    invents imaginative and interesting stories
    predicts the behavior of a specific economic decision maker after an economic change
    predicts the average behavior of a group of similar economic decision makers after an economic change

    4. One might commit the fallacy of composition by concluding that (Points: 1)
    statements that are true during prosperity are necessarily true during depression
    what is good for the individual is necessarily good for the group
    an event that precedes another is necessarily the cause of the latter
    intentions need not coincide with actions

    5. Someone who commits the fallacy of composition is likely to assume that (Points: 1)
    the simplest model is the best predictor
    event B, which follows event A, was caused by event A
    event B, which follows event A, was not necessarily caused by event A
    what is true for the individual is also true for the group

    6. The opportunity cost of an activity is (Points: 1)
    zero if you choose the activity voluntarily
    the amount of money spent on the activity
    the value of the best alternative not chosen
    the sum of benefits from all of the sacrificed alternatives
    the difference between the benefits and the costs of that activity

    7. Division of labor increases productivity because (Points: 1)
    tasks can be assigned according to individual tastes and abilities
    workers who repeatedly perform the same tasks become bored
    each worker must learn each of the numerous tasks in the total production process
    specialization of labor allows for the introduction of cheaper, less sophisticated production techniques
    managers can force workers to produce goods that are valued more highly than the costs of producing them.

    8. When drawing a production possibilities frontier, all of the following are usually assumed except one. Which is the exception? (Points: 1)
    The quantity of resources is rapidly growing.
    Technology is fixed.
    Resources can be shifted between production of the two goods.
    The production possibilities frontier is drawn for a particular time period.
    Resources are fully and efficiently employed.

    9. The production possibilities frontier can be used to show all of the following except one. Which is the exception? (Points: 1)
    scarcity
    opportunity cost
    the law of increasing opportunity cost
    efficiency
    the best combination of goods and services for an economy

    10. The economic question of what will be produced is (Points: 1)
    primarily answered by the government in a system of pure capitalism
    primarily answered by markets in a command economy
    faced by all economies regardless of their wealth
    does not have to be answered by economies possessing great wealth
    cannot be illustrated by the economic concept of the production possibilities frontier

    11. Households act as demanders when they demand (Points: 1)
    that corporate executives and government officials be held accountable for their actions
    dividends from the stocks they hold
    interest and capital gains from the bonds they hold
    goods and services from firms and the government

    12. Which component of U.S. household spending has grown the most over the past ten years? (Points: 1)
    taxes
    savings
    spending on services
    spending on nondurable goods

    13. Owners of corporations are referred to most frequently as (Points: 1)
    entrepreneurs
    limited partners
    managers
    stockholders

    14. Externalities are defined as (Points: 1)
    any transaction external to the firm
    costs or benefits that fall on third parties
    policies that firms undertake to sell products outside the country
    managers' dealings with stockholders outside the firm

    15. Market activity differs from government activity because (Points: 1)
    markets generally force prices to below-cost levels
    governments never charge for the services they provide
    markets do not use voluntary exchange mechanisms
    markets provide a direct link between benefits and costs

    16. The effect of a decrease in the price of personal computers, other things constant, is likely to be best represented by which of the following? (Points: 1)
    a leftward shift of the demand curve
    a movement leftward along the demand curve
    a rightward shift of the demand curve
    a movement rightward along the demand curve

    17. A decrease in demand for a good could mean that (Points: 1)
    consumers are willing to buy larger quantities of the good at each price
    the demand curve has shifted to the left
    consumers are willing to pay a higher price for each quantity of the good
    the demand curve has undergone a parallel shift to the right

    18. Which of the following will cause the demand curve for a good to shift to the left? (Points: 1)
    an increase in the price of the good
    a decrease in the price of the good
    a decrease in the price of a complementary good
    an expectation of a future price decline

    19. If a certain type of clothing becomes more fashionable, we would expect that its price (Points: 1)
    will increase and quantity will decrease
    will decrease and quantity will remain constant
    and quantity will both decrease
    and quantity will both increase

    20. A surplus occurs whenever (Points: 1)
    current price is greater than equilibrium price
    quantity supplied exceeds quantity demanded at the equilibrium price
    quantity demanded is greater than quantity supplied
    the problem of scarcity of a good is solved
    some buyers would be willing and able to pay even more for it than they have to at equilibrium

    21. Economists (Points: 1)
    believe that tastes are the major influence on consumers' income expectations
    have observed that tastes vary with changes in the number of consumers
    recognize that tastes have an important impact on demand
    can say a great deal about the origin of tastes

    22. Elasticity measures (Points: 1)
    whether a price increase causes quantity demanded to increase or decrease
    the strength of an economy's tendency to recover from recession
    the responsiveness of decision makers to changes in prices, income, or other variables
    the profitability of investment in an industry

    23. Demand is unit elastic whenever (Points: 1)
    price elasticity has an absolute value of 1
    price elasticity has an absolute value greater than 1
    price elasticity has an absolute value less than 1
    price elasticity is negative

    24. If the demand for swordfish is price elastic and the price of swordfish increases, then (Points: 1)
    the quantity of swordfish demanded will increase
    the total revenue from swordfish sales will decrease
    the total revenue from swordfish sales will increase
    the total revenue from swordfish sales will not change

    25. The more broadly a good is defined, (Points: 1)
    the more substitutes it has so the more elastic is its demand
    the fewer substitutes it has so the more elastic is its demand
    the more substitutes it has so the less elastic is its demand
    the fewer substitutes it has so the less elastic is its demand

    26. Which of the following tends to make demand for a good more elastic? (Points: 1)
    A reduction in the number of substitutes for the good.
    Consumers have a long time to adjust to a price change.
    The amount spent on the good is a small proportion of the consumer's budget.
    The good is broadly defined.

    27. For which of the following goods is the value of income elasticity most likely to be negative? (Points: 1)
    macaroni and cheese
    champagne
    airline tickets
    clothes

    28. When a firm is experiencing diminishing marginal returns, marginal cost is (Points: 1)
    rising
    falling
    constant
    rising at first, then falling

    29. If labor is a firm's only variable input, marginal cost ultimately depends on (Points: 1)
    fixed cost
    how much profit is made
    the price of the good produced
    how much output each worker produces

    30. If a firm shuts down in the short run and produces no output, its total cost will be (Points: 1)
    zero
    equal to total variable cost
    equal to total fixed cost
    equal to explicit costs only

    31. The short-run average variable cost curve (Points: 1)
    is always downward-sloping
    is a horizontal line intersecting the vertical axis
    slopes downward at low rates of output, then slopes upward at higher rates of output
    starts above the origin and always slopes upward

    32. Economies of scale occur where (Points: 1)
    long-run average cost falls as new firms enter the industry
    short-run average cost falls as new firms enter the industry
    long-run average cost falls as one firm expands plant size
    short-run average cost falls as one firm expands plant size

    33. Which of the following is not characteristic of perfect competition? (Points: 1)
    many buyers and sellers
    brand name advertising
    standardized products
    fully informed buyers and sellers

    34. For a perfectly competitive firm operating at the profit-maximizing output level in the short run, (Points: 1)
    MR = TR
    MC = price
    MC = ATC
    MC = AVC

    35. The short-run supply curve of a perfectly competitive firm is (Points: 1)
    its average fixed cost curve
    the part of its marginal cost curve rising above the average variable cost curve
    the part of its marginal cost curve below the average variable cost curve
    marginal product curve

    36. The entry of new firms into a competitive industry in the long run has the effect of (Points: 1)
    driving up long-run equilibrium price
    eliminating economic profits
    reducing equilibrium quantity
    making the demand curve facing each firm more inelastic

    37. Long-run equilibrium for a perfectly competitive firm occurs when (Points: 1)
    P = MC = MR = ATC
    MC = MR = AFC = ATC
    MC = MR = P > ATC
    P > MC > MR > ATC

    38. A constant-cost industry is one (Points: 1)
    that faces constant average costs in the short run
    that experiences economies of scale
    that experiences stable demand
    whose cost curves do not change as new firms enter

    39. As a monopolist increases the quantity of output produced, what happens to price (P) and marginal revenue (MR)? (Points: 1)
    P decreases, but MR is constant
    both P and MR decrease, but P falls faster than MR
    both P and MR decrease, but MR falls faster than P
    P is constant, but MR decreases

    40. A monopolist (Points: 1)
    can charge whatever price it wants
    charges more than almost any consumer is willing to pay
    is constrained by marginal cost in setting price
    is constrained by demand in setting price

    41. For a monopolist that produces in the short run and does not price discriminate, price always has to be (Points: 1)
    equal to marginal cost at the profit-maximizing quantity
    equal to marginal revenue at the profit-maximizing quantity
    greater than marginal cost at the profit-maximizing quantity
    less than marginal cost at the profit-maximizing quantity

    42. An important difference between a perfectly competitive firm and a monopolist is that (Points: 1)
    the perfectly competitive firm tends to be larger
    only the monopolist attempts to maximize profit
    only the perfectly competitive firm maximizes profit
    the perfectly competitive firm faces a horizontal demand curve and the monopolist faces a downward-sloping demand curve

    43. Unlike firms in a perfectly competitive industry, monopolists have control over (Points: 1)
    the price they charge for the product
    the quantity of output they produce
    the prices they pay for resources
    the quantities of various resources which are used
    improvements in technology

    44. A monopolist is (Points: 1)
    a single seller of a product with no close substitutes
    a single seller of a product with many close substitutes
    one of a large number of small firms that produce a homogeneous good
    one of a small number of large firms that produce a differentiated good

    45. The term monopolistic competition (Points: 1)
    denotes an industry with one seller of many differentiated products
    is an alternate expression for monopoly
    denotes an industry with many sellers of homogeneous products
    denotes an industry with many sellers of differentiated products

    46. Which of the following characteristics distinguishes oligopoly from other market structures? (Points: 1)
    production of differentiated outputs
    interdependence among firms in the industry
    a downward-sloping demand curve
    production of homogeneous outputs

    47. Interdependent decision making on price, quality, or advertising is characteristic of (Points: 1)
    perfect competition
    monopolies
    oligopolies
    monopolistic competition

    48. Collusion occurs when (Points: 1)
    a firm chooses a level of output to maximize its own profit
    firms get together to maximize joint profits
    firms refuse to follow their price leaders
    firms petition their U.S. senators for favors

    49. The term strategy in terms of game theory refers to (Points: 1)
    the relationship between price and marginal cost
    the relationship between individual firm demand curves and the market demand curve
    each firm's game plan in making decisions
    the interrelationship between price and marginal revenue

    50. Which oligopoly model was developed to explain price wars in an industry? (Points: 1)
    natural oligopolies
    cartels
    price leadership by a dominant firm
    game theory

    51. Resource owners will supply additional units of a resource as long as doing so (Points: 1)
    decreases their opportunity cost
    increases their income
    increases their utility
    decreases their income taxes

    52. Resource price differentials that do not trigger the reallocation of resources are known as (Points: 1)
    temporary differentials
    market differentials
    conditional differentials
    permanent differentials

    53. If a firm is experiencing diminishing marginal returns, (Points: 1)
    total output decreases as all resources are increased
    total output decreases as all resources are decreased
    total output decreases as one variable resource is increased, other things constant
    additional increments of output diminish as one variable resource is increased, other things constant

    54. If the wage is below the marginal revenue product, then a profit-maximizing firm will (Points: 1)
    employ more workers
    employ fewer workers
    see an increase in its demand for labor
    see an increase in its supply of labor

    55. The difference between the average earnings of eye surgeons and those of janitors is an example of (Points: 1)
    a temporary differential
    a permanent differential
    a resource price difference that will cause a reallocation of resources to different uses
    a temporary difference that will be eliminated through the reallocation of resources to different uses

    56. Market work includes activities such as (Points: 1)
    practicing your golf game
    studying for an economics exam
    teaching a college economics course
    picking up empty cans for the bottle deposit

    57. Which of the following suggests that people have no control over the number of hours they work? (Points: 1)
    Most workdays last from 8 a.m. to 5 p.m.
    People make use of the opportunity for overtime.
    People make use of the opportunity to moonlight.
    People make use of early retirement options.

    58. Other things equal, the supply of labor will be greater to a job that (Points: 1)
    requires advanced education and training
    requires most working hours be on weekends
    requires hard physical labor
    allows the employee greater discretion in the use of time

    59. A labor union is a group of (Points: 1)
    employees who join together to improve their working conditions
    firms that join together to hire workers
    firms that work together to negotiate better prices in the market
    farmers who work together to receive better prices for their agricultural products

    60. An appeal to consumers to purchase union-made products represents an attempt to (Points: 1)
    increase the supply of union labor
    increase the demand for union labor
    decrease the supply of union labor
    decrease the quantity demanded of union labor

    61. If a regulator sets the price equal to the natural monopolist's marginal cost, (Points: 1)
    the monopoly will experience a loss
    the monopoly will earn a profit
    the monopoly will earn zero profit
    consumers will be worse off than they would be if the firm's profit maximization activities were unregulated

    62. Which act of Congress declared tying contracts, exclusive dealing, and price discrimination illegal? (Points: 1)
    the Wheeler-Kefauver Act
    the Sherman Antitrust Act
    the Clayton Act
    the Wheeler-Lea Act

    63. Which of the following most accurately describes the type of mergers that the antitrust laws are intended to prohibit? (Points: 1)
    mergers that tend to reduce competition
    horizontal mergers
    both vertical and horizontal mergers
    conglomerate mergers

    64. Because of the rise of global competition and free trade, (Points: 1)
    antitrust policy serves no purpose
    antitrust policy may be less necessary than previously thought
    U.S. industrial concentration poses more of a threat to consumers
    U.S. markets are becoming less contestable

    65. A good that is nonrival but exclusive is called (Points: 1)
    a private good
    a public good
    a quasi-private good
    an external good

    66. Competing-interest legislation involves (Points: 1)
    concentrated costs and widespread benefits
    both widespread costs and widespread benefits
    both concentrated costs and concentrated benefits
    widespread costs and concentrated benefits

    67. Attempts by special-interest groups to gain favorable treatment from government are called (Points: 1)
    utility maximizing
    profit seeking
    rent seeking
    profit maximizing

    68. Rent seeking (Points: 1)
    is the attempt to find apartments in a rent-controlled city
    only makes sense in a monopolistically competitive industry
    is a zero-sum game because the public's loss is the rent seeker's gain
    is the expenditure of resources to obtain favorable treatment from government

    69. When consumption of a good or service produces benefits or costs that are not reflected in the market price for the good, this is known as a(n) (Points: 1)
    externality
    common pool problem
    nonexcludable resource
    public good

    70. Pollution and other negative externalities arise because (Points: 1)
    there are no enforceable property rights to open-access resources
    legislators cannot agree on what to do about them
    they are the price consumers are willing to pay for production of goods and services
    private property rights to pollute are controlled by businesses

    71. In the U.S., people tend to discard items rather than repair them because (Points: 1)
    Americans are lazy
    of the high opportunity cost of time
    it is costly to use land for waste disposal
    high wages in the waste disposal industry discourages repairs

    72. If education creates positive externalities, (Points: 1)
    private markets provide less than the socially optimal quantity of education
    private markets provide more than the socially optimal quantity of education
    the marginal private benefit curve is higher than the marginal social benefit curve
    the marginal private cost curve is higher than the marginal social cost curve

    73. If firms expect greater demand for their products, invest in more capital and hire more labor, (Points: 1)
    there will likely be an increase in inflation and a rise in taxation
    the business cycle is likely to be moving from peak to trough
    their behavior may encourage the very prosperity that they expect
    government will probably have to spend more and tax less to offset the economic impacts of these business decisions

    74. The aggregate supply curve has (Points: 1)
    a negative slope
    a positive slope
    a zero slope (a horizontal line)
    an infinite slope (a vertical line)

    75. An increase in government spending, other things constant, would cause a (Points: 1)
    leftward shift of the aggregate supply curve
    rightward shift of the aggregate supply curve
    leftward shift of the aggregate demand curve
    rightward shift of the aggregate demand curve

    76. Stagflation refers to (Points: 1)
    a simultaneous reduction in output and the price level
    a simultaneous increase in output and the price level
    a decline in the price level accompanied by increases in real output and employment
    an increase in the price level accompanied by decreases in real output and employment

    77. Supply-side economists argue that a cut in personal income tax rates would (Points: 1)
    decrease government revenues
    increase government revenues
    have no impact on government revenues
    increase unemployment

    78. Which of the following does not contribute to an improved standard of living? (Points: 1)
    increases in the amount and quality of available resources
    better technology
    lower prices for the necessities of life
    improvements in the "rules of the game"

    79. Long-term growth in production can be explained by (Points: 1)
    an improvement in the quality of resources available
    a gradual but consistent rise in the price level
    a rapid and accelerating increase in the price level
    a trade surplus that leads to the accumulation of gold

    80. Which of the following would increase labor productivity? (Points: 1)
    a decrease in amount of capital per unit of labor
    technological change
    a decrease in the unemployment rate
    an increase in the number of inexperienced workers entering the labor force

    81. Applied research (Points: 1)
    is designed to answer particular questions
    is more open-ended than basic research
    contributes less to visible output changes than does basic research
    is research done by a firm to market a good

    82. In GDP measurement, consumer spending includes (Points: 1)
    spending by businesses on labor resources
    spending by government on office buildings
    spending by individual households on automobiles and durables
    exchanges in business inventories

    83. Which of the following statements about exports and imports is true? (Points: 1)
    Both imports and exports are added to a nation's GDP.
    Both imports and exports are subtracted from a nation's GDP.
    Imports are added to a nation's GDP; exports are subtracted.
    Exports are added to a nation's GDP; imports are subtracted.

    84. Aggregate income is defined as (Points: 1)
    the sum of income earned by all laborers in the world economy
    the sum of income earned by all workers in the private sector
    the total income of all individuals who contribute resources to the market production of output
    total income after all income taxes but before paying other payroll taxes

    85. Which of the following is a leakage from the circular flow? (Points: 1)
    investment
    imports
    government purchases
    government borrowing

    86. To accurately measure the growth rate of output between two years, one should use (Points: 1)
    gross domestic product
    net domestic product
    real net investment
    real gross domestic product

    87. The labor force consists of all (Points: 1)
    the people in the economy who are not retired
    people in the economy over 16 years of age
    the adults in the economy between 18 and 65 years old who are able to work
    the noninstitutionalized population over 16 in the economy who hold jobs or are looking for them

    88. People who are not currently employed, but say they want a job, are counted as unemployed only if they (Points: 1)
    have previously held a job
    are actively seeking employment
    are willing to accept a reasonable offer
    are between 16 and 65 years of age

    89. Suppose U = the number of adults who are unemployed; E = the number of adults who are employed; and NLF = the number of adults not in the labor force. Which expression would equal the unemployment rate? (Points: 1)
    U/(E + NLF)
    U/E
    U/(U + E)
    U/(E + NLF)

    90. Which of the following is true regarding labor force participation rates in the United States since the 1950s? (Points: 1)
    The rates for both men and women have risen.
    The rate for women has fallen; that for men has risen.
    The rate for men has fallen; that for women has increased.
    The rates for both men and women have fallen.

    91. When workers are over-qualified for their current jobs or can find only part-time work, we say they are (Points: 1)
    discouraged workers
    not in the labor force
    overemployed
    underemployed

    92. Federal spending (including transfer payments), as a percent of GDP, (Points: 1)
    has remained largely unchanged over the last 50 years
    has exceeded 10 percent only in wartime periods
    is less than half of state and local government spending
    has increased since 1921

    93. Because of automatic stabilizers, government budget deficits are (Points: 1)
    positive during both expansions and contractions
    negative during both expansions and contractions
    smaller during expansions and larger during contractions
    zero if averaged out over the entire business cycle

    94. One explanation for persistent federal budget deficits is that officials are not required to (Points: 1)
    honor the Constitution
    balance the budget
    raise taxes
    run for reelection

    95. The equilibrium interest rate is determined by (Points: 1)
    the supply of money alone
    both the supply of and demand for money
    the demand for money alone
    Congress

    96. If there is a decrease in the supply of money, which one of the following is most likely to happen? (Points: 1)
    the demand for money will increase
    planned investment spending will increase
    interest rates will rise
    aggregate expenditure will increase

    97. If the Fed sells government securities to banks, eventually we expect (Points: 1)
    short-run aggregate supply to increase
    interest rates to increase
    the price level to increase
    aggregate demand to increase

    98. International trade is most likely to occur whenever (Points: 1)
    one of the trading nations is self-sufficient
    all of the trading nations are self-sufficient
    one of the trading nations gains from trade
    each of the trading nations gains from trade

    99. Which of the following factors is the most significant in determining the pattern of international trade? (Points: 1)
    absolute advantage
    diplomatic expertise
    comparative advantage
    overpowering military strength

    100. The world price of a good is (Points: 1)
    the price paid by consumers in all nations
    the price at which it is traded internationally
    the price paid in U.S. dollars
    the price paid in foreign currency

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    Solution Preview

    Per BrainMass policy, we will not provide answers without explanations. Some of these answers are based on definitions of the words, but those that are not are explained. Please make sure you fully understand them before proceeding.

    1. When economic choice involves an adjustment to an existing situation, marginal analysis (Points: 1)
    involves comparing the additional costs and additional benefits of an activity before deciding

    Marginal analysis is useful, but it cannot completely remove incorrect decisions and bad choices

    2. Macroeconomics is the study of (Points: 1)
    the behavior of the economy as a whole

    3. Economic theory (Points: 1)
    predicts the average behavior of a group of similar economic decision makers after an economic change

    4. One might commit the fallacy of composition by concluding that (Points: 1)
    what is good for the individual is necessarily good for the group

    5. Someone who commits the fallacy of composition is likely to assume that (Points: 1)
    what is true for the individual is also true for the group

    6. The opportunity cost of an activity is (Points: 1)
    the value of the best alternative not chosen

    7. Division of labor increases productivity because (Points: 1)
    tasks can be assigned according to individual tastes and abilities

    8. When drawing a production possibilities frontier, all of the following are usually assumed except one. Which is the exception? (Points: 1)
    The quantity of resources is rapidly growing.

    9. The production possibilities frontier can be used to show all of the following except one. Which is the exception? (Points: 1)
    the best combination of goods and services for an economy

    The PPF cannot tell us which combination to choose because it only provides information about the costs of choices

    10. The economic question of what will be produced is (Points: 1)
    faced by all economies regardless of their wealth

    11. Households act as demanders when they demand (Points: 1)

    goods and services from firms and the government

    12. Which component of U.S. household spending has grown the most over the past ten years? (Points: 1)

    spending on services

    While other components of household spending have fallen, services has increased steadily, largely due to healthcare services

    13. Owners of corporations are referred to most frequently as (Points: 1)

    stockholders

    14. Externalities are defined as (Points: 1)
    costs or benefits that fall on third parties

    15. Market activity differs from government activity because (Points: 1)

    markets provide a direct link between benefits and costs

    16. The effect of a decrease in the price of personal computers, other things constant, is likely to be best represented by which of the following? (Points: 1)
    a movement rightward along the demand curve

    17. A decrease in demand for a good could mean that (Points: 1)
    the demand curve has shifted to the left

    All other answers would result in greater demand.

    18. Which of the following will cause the demand curve for a good to shift to the left? (Points: 1)
    an expectation of a future price decline

    A shift to the left indicates a decline in demand. Changes in price cause movements along the curve, not a shift in the curve. When the price of a complementary good falls, the demand for the good would increase, not decrease. Thus, only the last answer is left.

    19. If a certain type of clothing becomes more fashionable, we would expect that its price (Points: 1)

    and quantity will both increase

    An outward shift in the demand curve leads to greater prices and quantities demanded.

    20. A surplus occurs whenever (Points: 1)
    quantity supplied exceeds quantity demanded at the equilibrium price

    21. Economists (Points: 1)
    recognize that tastes have an important impact on demand

    22. Elasticity measures (Points: 1) ...

    Solution Summary

    Multiple choice questionson economic theory

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