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The three major economic factors of production are natural, human, and capital


1. The three major economic factors of production are natural, human, and capital. Which of the following groups best illustrates these factors?

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A. farmers, teachers, and investors.

B. rent, wages, and interest.

C. gold, bankers, and corporate stocks.

D. iron ore, bricklayers, and money.

E. water, secretaries, and desks.

2. The Toscano Pizza Company faces a demand for its pizzas which obeys the “law of demand.” Thus, if the owner lowers the priceshe charges per pizza, the number of pizzas sold would:

A. rise as would her total revenues.

B. rise, but her total revenues would fall.

C. rise, while her total revenues could rise, fall, or even stay the same.

D. fall as would her total revenues.

E. fall, while her total revenues could rise, fall, or even  stay the same.

3. Suppose some good was available in unlimited quantities to everybody. Which of the following would be true?

A. The price of the good would be equal to zero.

B. The value of the good would be equal to zero.

C. The opportunity cost of using a unit of the good would be

equal to zero.

D. Both A and C are true.

E. A, B, and C are all true.

4. Instead of doing yardwork for $1.00 an hourfor her neighbor, Mindy sets up a lemonade stand. In three hoursshe is able to sell 100cups of lemonade at five centseach. If the ingredients (the lemonade mix, sugar, water, and cups) cost her a total of $3.00and she obtained all her capital inputs (a table, pitcher, spoon, and sign) for free from a company called “M.O.M.”, then her economic profits were:

A. $5.00.

B. $2.00.

C. $1.00.

D. $0 (that is, she “broke even”).

E. -$1.00 (that is, she suffered economic losses).

5. What provides the bestassurance that firms in an industry will produce efficiently and earn no economic profits in the long run?

A. Having many firms in the industry.

B. Government regulation of the industry.

C. The existence of large economies to scale.

D. An absence of major barriers to entry in the industry.

E. Economic rivalry among existing firms in the industry.

6. What effect would a decrease in the price of silicon chips (used to produce computers) and a decrease in the price of user-friendly software have on the price and production of personal computers?

Price Production

A. increase increase

B. indeterminable increase

C. decrease indeterminable

D. decrease decrease

E. increase decrease

7. Which of the following could cause supply to decreasein the short run?

A. A labor union representing the workers who produce this good is able to negotiate higher wages for its members.

B. More producers enter this industry.

C. The price of a close substitute for this good falls.

D. A large group of consumers decide to boycott this good due to the political beliefs of some of the producers.

E. A technological breakthrough in the production of this good lowers the cost of producing it.

8. Which of the following represents a long-run adjustment?

A. A supermarket hires two additional checkout people.

B. A steel manufacturer cuts back on its purchases of taconite pellets.

C. A food processor sells the real assets of one of its branch plants.

D. The demand for tea falls in response to a fall in the price of coffee.

E. A farmer uses an extra dose of fertilizer on his crop.

9. A newspaper reports, “Coffee growers in Brazil and Columbia organizedto consider world coffee supply levels.” If this group should decide to act in a concertedeffort for the benefit of the group as a whole, the likely result is:

A. Increased coffee production and prices.

B. Decreased coffee production and increased prices.

C. Increased prices with no change in coffee production.

D. Increased coffee production and decreased prices.

E. Coffee production and prices at competitive levels.

10. Forming and maintaining collusiveagreements among firms is easier given all other things equal when:

A. The number of firms involved is large.

B. The firms involved produce differentiated products.

C. The demand for the product produced is stable.

D. The firms face different cost situations.

E. There are ample opportunities to make secret price concessions to selected buyers.

11. Duff Firewood Supply, a competitive private logging firm, is currently maximizing its profits. Its total costs are $1100 of which $100 are fixed costs(insurance on its equipment). It is currently producing and selling 20 cordsof wood at the going market price of $60.Suppose, due to its filing of a claim, its insurance premiums are raised to $300. Then the firm should in the short run:

A. increase its production of cords.

B. decrease its production of cords.

C. continue producing 20 cords.

D. increase its price.

E. shut down its operations.

12. Property(or “unearned”)income (that is, profits, interest, and rents) account for approximately what percent of total national income?

A. 90% B. 70% C. 50% D. 20% E. 10%

13. Assume labor is the only variable input and that an additional input of labor increases total output per day from 20 to 28 units. If the product produced sells for $6per  unit, the additional worker should be hired as long as the prevailing daily wage rate is less than:

A. $6 C. $48 E. $144

B. $24 D. $120

14. Which type of merger creates the greatest threat of increasedmonopoly power?

A. Conglomerate.

B. Horizontal.

C. Vertical.

D. Diagonal.

E. Multi-national.

15. Assuming that the market for a good is in equilibrium, the initial effect of an increase in demand is:

A. the generation of a surplus of the good.

B. the generation of a shortage of the good.

C. a shift in the supply of the good.

D. an increase in the price of the good.

E. a decrease in the price of the good.

16. Which of the following would most likely be considered a free goodby an economist?

A. Your high-school education.

B. Network television programs received in your home.

C. Whales.

D. The “prize” in a Cracker-Jack box or in a box of cereal.

E. None of these.

17. Which of the following would be considered a productive economic resource?

A. IBM stocks. C. Gold bullion. E. AT&T bonds.

B. $100 in cash. D. A savings account.

18. When two or more individuals join together to form a business where their liability is notlimited to the

business’ assets, their business is called a:

A. Corporation.

B. Co-op.

C. Partnership.

D. Merger.

E. Cartel.

19. Which of the following is necessary for perfectly-competitive markets to exist?

A. Economies of scale in production.

B. Advertising.

C. Barriers to entry for new entrepreneurs.

D. Firms with products which are perfect (identical) substitutes for each other.

E. A few firms each with a large market share.

20. What might cause the demandfor a good to increase?

A. A decrease in consumers’ income (due perhaps to a tax increase).

B. New research indicates there is a strong link between  use of this good and heart disease.

C. The price of a close substitute for this good rises.

D. A large group of consumers decide to boycott this good due to the political beliefs of some of the producers.

E. Technological breakthroughs in the production of this good dramatically lower the cost of producing it.

21. Public goodstend to be underproduced in a pure market economy because:

A. They cost more to produce than private goods.

B. They are over-advertisized relative to private goods.

C. Individuals have an incentive to understate their true demand for them.

D. Suppliers have an incentive to restrict their production in order to secure higher prices (and profits).

E. Only government can provide these goods.

22. What is the opportunity costof buying a new car?

A. The value of other goods and services you could have purchased with the money you spent on the car.

B. The price you paid for the car.

C. The cost of operating and maintaining the car.

D. The difference between the price of the car and the price of a used car.

E. The difference between what the car costs now and what a similar car like it will cost a year from now.

23. Which of the following is notcharacteristic of oligopolies?

A. Large expenditures on advertising and product development.

B. The existence of significant barriers to entry.

C. “Price-setting” through informal price leadership


D. Considerable concentration of the means of production.

E. Extensive price competition to gain market shares.

24. In the simple circular flow modelof a market economy:

A. households earn income in the product (or goods and

services) markets.

B. firms (or businesses) are suppliers in the resource

(or factors of production) markets.

C. households are demanders in all markets and firms are

suppliers in all markets.

D. firms earn their revenues in the product markets.

E. only product markets are considered.

25. Which of the following are capitalas defined by economists?

A. stocks and bonds.

B. water and air.

C. gold and silver.

D. computers and wrenches.

E. cabins and boats.

26. Suppose Mindy’s happiness could be measured in units called

“utils.” If one shirt gives her 20 utilsof happiness, then

what amount of utils is it possible for two shirts to give

her without violating the usual assumptions economists make

about people’s wants and desires?

A. 15. B. 20. C. 30. D. 40. E. 45.

27. An industry has one firm producing 40% of the industry’s

total output, two firms producing 20% each, and four firms

producing 5% each. The four-firm concentration ratiofor

this industry is:

A. 85%. B. 20%. C. 15%. D. 70%. E. 50%.

28. The law of demandessentially says that:

A. the price of a good is the most important determinant of

its demand.

B. as a person’s income rises, so does his/her demand for


C. as the price of a good falls, people tend to buy more of

the good.

D. the amount of a good purchased each year depends mainly

on the size of the population.

E. the quantity of a good demanded and its price tend to

move in the same direction.

29. “US companies are taking advantage of falling oil prices

resulting from increased world output by switching to oil

for fuel. This is expected to depress coal prices and

output.In terms of conventional demand and supply analysis,

statement is best described as a:

A. shift in the demand curves for both oil and coal.

B. movement along the demand curves for both oil and coal.

C. shift in the demand curve for oil and a movement along

the demand curve for coal.

D. movement along the demand curve for oil and a shift in

the demand curve for coal.

E. change in prices, but not a change in demand for either

oil or coal.

30. Which of the following is notusually considered to be a

barrierfor new resources to enter into an industry?

A. economies of scale.

B. extensive brand-loyalty on the part of consumers.

C. the existence of patent rights.

D. control of vital inputs (including technological “knowhow”).

E. the existence of fairly standardized products.

31. Externalitiesare the resultof:

A. a misallocation of resources by markets.

B. the existence of monopoly or economic power.

C. undefined or unenforced property rights.

D. illegal or covert market transactions.

E. governmental restraints of trade.

32. From the perspective of efficiency, if the production of

more widgets reduces the quality of the environment, more

widgets should:

A. not be produced.

B. be produced since they would add to the economy’s gross

domestic product.

C. be produced as long as their value exceeds the value of

the lost environmental quality and other resources used.

D. be produced only if the producers of them install

equipment to ensure that the quality of the environment

is not reduced.

E. not be demanded by society.

33. Car manufacturers offering rebatesto purchasers is an

example of:

A. sellers responding to a surplus on the market.

B. buyers responding to a surplus on the market.

C. sellers responding to a shortage on the market.

D. buyers responding to a shortage on the market.

E. non-price competition between sellers.

34. Which of the following would nothelp unions meet boththeir

objectives of higher wages and more employmentof members?

A. collective bargaining which leads to a higher than

equilibrium wage.

B. increases in members’ productivity.

C. increases in the demand for the products produced by

union members.

D. decreases in immigration quotas.

E. increased entry requirements into the labor market (such

as competency tests, longer apprenticeships, etc.).

35. Which of the following would likely in the short runlead to

an increase in the priceof VCRs?

A. the elimination of all import restraints on VCRs.

B. a technological improvement which lowers the cost of

producing VCR’s.

C. the entry of more VCR producers into the industry.

D. a decrease in the price of purchasing video tapes of

recent movies.

E. a recession.

36. Which of the following statements is false about the

income received from the selling or leasing of property

resources (that is, land, capital, and natural resources)?

A. It accounts for well over half of all income earned in

the United States each year.

B. The majority of it is received by a very small

proportion (less than 2%) of the U.S. population.

C. Individuals in socialistic economies can not generally

earn income from this source.

D. It is referred to as “unearned” income by the Internal

Revenue Service of the U.S.

E. It is viewed as a cost by those using these resources.

37. A college education usually leads to higher future wages


A. the extra cost of obtaining a college degree limits the

number of people with such a background.

B. people with a college degree tend to be less productive


C. the demand for people with college degrees is low

relative to the supply.

D. the minimum wage that employers can pay workers with a

college degree is set higher by the government.

E. going to college teaches people how to make more money.

38. Interest rates on loans tend to be lower the:

A. shorter the period to maturity.

B. greater the risk of default (non-repayment).

C. the lower the amount of the loan.

D. greater the expected rate of inflation.

E. none of the above.

39. Suppose A is currently a low-wage area and B is a high-wage

area. In the long run (assuming resources are fairly mobile)

one would expect all of the following except:

A. The supply of labor will increase in B.

B. The demand for labor will increase in A.

C. Wages will rise in A.

D. Workers will migrate to B.

E. Employment levels will fall in A.

40. A shortageof good A:

A. indicates that its current price is too high.

B. is a possible result of a government-imposed price


C. could be eliminated by an decrease in the price of A.

D. can only be eliminated by producing more of good A.

E. indicates that government intervention into the market

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