Chapter 1
Introducing the Economic Way of Thinking
1. Which of the following illustrates the concept of scarcity?
a. More clean air is wanted than is available in large polluted metropolitan areas such as Mexico City.
b. There is usually more than one use of your "free" time in the evening.
c. There are many competing uses for the annual budget of your city, county, or state.
d. All of the above answers are correct.
ANS
a. Incorrect. While this is true—more clean air is wanted than is available in polluted urban areas—there is a better answer.
b. Incorrect. While this is true—there are many alternative things you could be doing in the evening—there is a better answer.
c. Incorrect. While this is true—there are many alternative services that local or state government can provide, such as schools, public safety, parks, and road maintenance—there is a better answer.
d. Correct. All of the statements given reflect scarcity.
2. Which of the following are factors of production?
a. The outputs generated by the production process transforming land, labor, and capital into goods and services.
b. Resources restricted to the land, such as natural resources that are unimproved by human economic activity.
c. Land (natural resources), labor (human capital, entrepreneurship), and capital (constructed inputs such as factories).
d. Just labor and capital in industrialized countries, where natural resources are no longer used to produce goods and services.
ANS
a. Incorrect. The factors of production are inputs, not outputs.
b. Incorrect. This answer leaves out labor and capital inputs.
c. Correct. The factors include land, labor, and capital.
d. Incorrect. Natural resources are used in all economies and must be imported if they are not present in adequate amounts.
3. Which of the following is not an example of a capital input?
a. A person's skills and abilities, which can be employed to produce valuable goods and services.
b. Factories and offices where goods and services are produced.
c. Tools and equipment.
d. Computers used by a company to record inventory, sales, and payroll.
ANS
a. Correct. This is the labor resource, and thus is not an example of a capital input.
b. Incorrect. This is a type of capital.
c. Incorrect. This is a type of capital.
d. Incorrect. This is a type of capital.
4. Which of the following is the best definition of economics?
a. Economics is the study of how to manage corporations to generate the greatest return on shareholder investment.
b. Economics is the study of how to manage city and county government to generate the greatest good to its citizens.
c. Economics is the study of how society chooses to allocate its scarce resources.
d. Economics is the study of how to track revenues and costs within a business.
ANS
a. Incorrect. This is an element of business administration.
b. Incorrect. This is an element of public administration.
c. Correct. At the heart of economics is the idea that the condition of scarcity requires that allocation choices be made.
d. Incorrect. This is an element of accounting.
5. Which of the following best illustrates the application of the model-building process to economics?
a. On a Sunday morning talk show, two economists with differing political agendas argue about the best way to solve the Social Security problem on a Sunday morning talk show.
b. A labor economist notices that unemployment tends to be higher among teenagers than more experienced workers, develops a model, and gathers data to test the hypotheses in the model.
c. A Ph.D. student in economics develops a plausible mathematical model of an industry for his dissertation, but there is no data to test the model..
d. Economists come to believe that some economic models are true simply because prominent leading economists say they are true.
ANS
a. Incorrect. There is no development of a testable model here.
b. Correct. The scientific method is based on developing models to explain the observable, and then test the hypotheses in the model using data gathered from the field.
c. Incorrect. A valid model must be supported by the data.
d. Incorrect. The scientific method evaluates the truth of a model by confronting the model with data.
6. Which of the following represents causality rather than association?
a. In years that fashion dictates wider lapels on men's jackets, the stock market grows by at least 5 percent.
b. Interest rates are higher in years ending with a 1 or a 6.
c. Unemployment falls when the AFC champion wins the Super Bowl.
d. Quantity demanded goes up when price falls because lower prices increase consumer purchasing power, and because some consumers of substitute goods switch.
ANS
a. Incorrect. There is no indication that one caused the other.
b. Incorrect. There is no indication that one caused the other.
c. Incorrect. There is no indication that one caused the other.
d. Correct. Economic theory can be used to predict an increase in quantity demanded as a causal effect of a price drop.
7. Which of the following correctly describes the ceteris paribus assumption?
a. If we increase the price of a good, reduce consumer incomes, and lower the price of substitutes, and if quantity demanded is observed to fall, we know that the price increase caused that decline in quantity demanded.
b. If the federal government increases government spending, and the Federal Reserve Bank lowers interest rates, we know that the increase in government spending caused unemployment to fall.
c. If a company reduces its labor costs, negotiates lower materials costs from its vendors, and advertises, we know that the reduced labor costs are why profits are higher.
d. If we decrease the price of a good and observe that there is an increase in the quantity demanded, holding all other factors that influence this relationship constant.
ANS
a. Incorrect. We cannot determine that price caused the decline in quantity since more than one factor changed.
b. Incorrect. We cannot determine that price caused the decline in quantity since more than one factor changed.
c. Incorrect. We cannot determine that price caused the decline in quantity since more than one factor changed.
d. Correct. Ceteris paribus requires that we hold other factors constant so that we can isolate the effects of a change in a single factor and be confident that it
caused the observable effect.
8. The condition of scarcity
a. cannot be eliminated.
b. prevails in poor economies.
c. prevails in rich economies.
d. All of the above answers are correct.
ANS
a. Incorrect. Scarcity is a fact of life throughout the world.
b. Incorrect. Scarcity is a fact of life throughout the world.
c. Incorrect. Scarcity is a factor of life throughout the world.
d. Correct. Answers a. – c. are correct.
9. Which of the following best describes an entrepreneur?
a. A person who works as an office clerk at a major corporation.
b. A person who combines the factors of production to produce innovative products.
c. A special type of capital.
d. Wealthy individuals who provide savings that stimulates the economy.
ANS
a. Incorrect. An entrepreneur is a person with the creative ability to generate profit by employing various combinations of land, labor, and capital in a firm.
b. Correct. An entrepreneur is a person with the creative ability to generate profit.
c. Incorrect. An entrepreneur is a special type of labor.
d. Incorrect. An entrepreneur is a person who creates innovative products.
10. Which of the following is true about renewable natural resources?
a. They are a type of land resource (for example, oil, coal, and natural gas) that has a fixed stock.
b. They are a type of capital resource (for example, irrigation networks and wastewater treatment plants) that utilize water.
c. They are a type of capital resource (for example, air filtration systems in buildings) that renew and refresh polluted air from the outside.
d. They are a type of land resource (for example, forests, range-lands, and marine fisheries) that naturally regenerate and thus can tolerate a sustained harvest, but can be depleted from excessive harvest.
ANS
a. Incorrect. These are nonrenewable natural resources.
b. Incorrect. This is capital, not the land resource, of which renewable natural resources are a part.
c. Incorrect. This is capital, not the land resource, of which renewable natural resources are a part.
d. Correct. Renewable natural resources can generate a sustainable flow of timber, forage, and fish without harming the stock, unless harvest rates are too high.
11. Because of scarcity,
a. it is impossible to satisfy every desire and choices must be made.
b. the available supply of time, goods, and resources is greater than human wants.
c. every desire is fulfilled.
d. there are no limits on the economy's ability to satisfy unlimited wants.
ANS
a. Correct. Scarcity limits the desires we can satisfy.
b. Incorrect. Scarcity means that human wants are forever greater than the available supply of time, good, and resources.
c. Incorrect. Scarcity limits the desire we can satisfy.
d. Incorrect. There are always limits on the economy's ability to satisfy unlimited wants.
12. Which of the following represents positive economics?
a. Policy A is fair.
b. Outcome B is the best objective to achieve.
c. If policy A is followed, then outcome B results.
d. All of the above are positive economic analysis.
ANS
a. Incorrect. Positive economics deals with facts or events that are testable.
b. Incorrect. The word “best” means this is a normative statement based on value judgment.
c. Correct. The fact that policy A results in outcome B is a verifiable positive statement.
d. Incorrect. Only answer ( c ) is a verifiable positive statement.
13. Which of the following is the last step in the model-building process?
a. Collect data and test the model.
b. Develop a model based on simplified assumptions.
c. Identify the problem.
d. formulate an assumption.
ANS
a. Correct. In the third step, the economist gathers data to test the theory.
b. Incorrect. The second step is for the economist to build a model.
c. Incorrect. The first step in applying the scientific method is to define the problem.
d. Incorrect. The second step includes formulating an assumption.
14. Which of the following is not a type of economic analysis?
a. Positive
b. Resources
c. Normative
d. none of the above is a type of economic analysis.
ANS
a. Incorrect. Positive economics is an analysis limited to statements that are verifiable.
b. Correct. Resources are a category of inputs used to produce goods and services.
c. Incorrect. Normative economics is an analysis based on value judgments.
d. Incorrect. Positive economics is an analysis limited to statements that are verifiable.
15. Which word or phrase indicates that an economist is using positive economics?
a. Good
b. Bad
c. If-then
d. Should
ANS
a. Incorrect. This word must be supported by a value judgment and therefore indicates that an economist is using normative economics.
b. Incorrect. This word must be supported by a value judgment and therefore indicates that an economist is using normative economics.
c. Correct. This is an example of a testable statement and therefore indicates that an economist is using positive economics.
d. Incorrect. This word must be supported by a value judgment and therefore indicates that an economist is using normative economics.
16. Which of the following would eliminate scarcity as an economic problem?
a. Moderation of people’s competitive instincts.
b. Discovery of new sufficiently large new energy reserves.
c. Resumption of steady productivity growth.
d. None of the above.
ANS
a. Incorrect. Scarcity is a conclusion in which human wants are forever greater than the available supply.
b. Incorrect. Scarcity is a conclusion in which human wants are forever greater than the available supply.
c. Incorrect. Scarcity is a conclusion in which human wants are forever greater than the available supply.
d. Correct. Answers a. – c. are incorrect.
17. Which resource is not an example of capital?
a. Equipment
b. Machinery
c. Physical plants
d. Stocks and bonds
ANS
a. Incorrect. Trucks, desks, and other equipment are examples of capital.
b. Incorrect. Machinery such as a printing press is an example of capital.
c. Incorrect. Physical plants such as factories are examples of capital.
d. Correct. Stocks or bonds are financial capital. In the study of economics, the word "capital" does not refer to money assets.
18. Which of the following is the second step in the model-building process?
a. Collect data and test the model.
b. Develop a model based on simplified assumptions.
c. Identify the problem.
d. Include all possible variables that affect the model.
ANS
a. Incorrect. In the third step, the economist gathers data to test the theory.
b. Correct. The second step is for the economist to build a model.
c. Incorrect. The first step in applying the scientific method is to define the problem.
d. Incorrect. A model only includes the most relevant variables.
19. Which of the following is a type of economic analysis?
a. Positive
b. Resources
c. Association
d. None of the above is a type of economic analysis.
ANS
a. Correct. Positive economics is an analysis limited to statements that are verifiable.
b. Incorrect. Resources are a category of inputs used to produce goods and services.
c. Incorrect. Association refers to two events that occur together without one necessarily having caused the other.
d. Incorrect. Positive economics is an analysis limited to statements that are verifiable.
20. Which of the following careers could result from majoring in economics?
a. Management
b. Banking
c. Government
d. All of the answers above are correcct.
ANS
a. Incorrect. Most economics majors work for business firms.
b. Incorrect. The financial analysis skills learned in economics help in a banking career.
c. Incorrect. Federal, state, and local governments hire people with economics training.
d. Correct. Answers (a) – (c) are possible careers for economics majors.
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