Basic Economics Understanding Test

Essentials of Economics Chapter 2
1. When economists want to describe how much an economy can produce with a given amount of resources, they use a model known as a. the positive model. b. the normative model. c. comparative advantage. d. the production possibilities frontier. 2. Economists typically depict the production possibilities frontier as a bowed curve rather than as a straight line in order to show that a. the opportunity cost of producing a good rises as more is produced. b. the opportunity cost of producing a good declines as more is produced. c. resources used in production of one good cannot be used in production of another. d. opportunity cost is always present. 3. Those points lying beyond the production possibilities frontier a. are inefficient. b. represent outcomes in which resources would be unemployed. c. represent outcomes unattainable with the current level of technology and resources. d. represent outcomes that are attainable with the current level of technology and resources, but are less desirable than those on the frontier. 4. What is measured along the horizontal axis in a graph of the production possibilities frontier? a. The amount of labor input b. The amount of capital input c. The quantity of one good produced d. The quantity of one good exported
5. What is measured along the vertical axis in a graph of the production possibilities frontier? a. The amount of labor input b. The amount of capital input c. The quantity of one good produced d. The quantity of one good exported
6. If a country specializes according to its own comparative advantage and then trades with other nations, a. it will operate at a point inside its production possibilities frontier. b. its production possibilities frontier will shift or rotate outward. c. its production possibilities frontier will shift or rotate inward. d. its production possibilities frontier will eventually shift inward, due to the loss of jobs. 7. The result of free trade between nations is that a. wealthy countries benefit; developing nations lose. b. developing nations benefit; wealthy countries lose. c. the worldwide level of unemployment increases. d. goods will be produced by the nation which enjoys a comparative advantage in that endeavor. 8. The bowed-out shape of the production possibilities frontier reflects a. an inefficient economy. b. economic growth. c. increasing opportunity cost. d. the circular flow of the economy. 9. Suppose you hear an economist make an assertion that, between the two countries, France has a comparative advantage in the production of chocolate and that Italy has a comparative advantage in the production of wine. Which of the following statements is another way of stating the same idea expressed in the assertion? a. French chocolate is better tasting than Italian chocolate. b. French wine is better tasting than Italian wine. c. France can produce chocolate at a lower opportunity cost than Italy can. d. France can produce wine at a lower opportunity cost than Italy can.
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10. What name is given to the form of exchange in which individuals trade goods and services directly, without money serving as a medium of exchange? a. Barter b. Comparative advantage c. Circular exchange d. Market exchange
11. What are the two sectors represented in a simple circular-flow diagram of the economy? a. Unions and management b. Households and firms c. Business and government d. Profit and not-for-profit 12. What is traded in factor markets? a. Agricultural products b. Mineral products c. Exports and imports d. Land, labor, capital, and human capital 13. As an economy moves from point to point along its production possibilities frontier, what is changing? a. The amount of resources available in the economy b. The productivity of the resources available in the economy c. The allocation of resources within the economy d. The size of the labor force 14. Which of the following statements is TRUE? a. A country cannot have a comparative advantage in producing a particular good unless it first has an absolute advantage in producing that good. b. Comparative advantage in producing a certain item arises from being the first country to manufacture that item. c. A country cannot have comparative advantage in producing a certain item
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if it incurs an increasing opportunity cost in producing the item. d. All countries can gain from trade if they all specialize in production according to comparative advantage.
15. Suppose that in Australia, it takes 2 hours of labor to harvest 10 bushels of apples and 4 hours of labor to harvest 10 bushels of tomatoes. Further, suppose that a worker in Brazil can harvest 10 bushels of apples in 4 hours or 10 bushels of tomatoes in 5 hours. Which of the following statements is TRUE? a. Of these two countries, Brazil has a comparative advantage in producing tomatoes. b. Of these two countries, Brazil has a comparative advantage in producing apples. c. Brazil has an absolute advantage in producing both goods. d. In trade between these two countries, Australia would gain and Brazil would lose. 16. Which of the following is a normative statement? a. An increase in the price of cameras will decrease the number of cameras sold. b. A decrease in the price of digital cameras will decrease the demand for camera film. c. A camera makes a good wedding gift. d. The United States imports most of its cameras from Asia. 17. Why do economists use models? a. To distinguish between positive and normative statements b. To solve disagreements about the desirable extent of income equality c. To choose the correct political opinion among many competing ones d. To make forecasts 18. What is one thing that economists generally agree on? a. The effects of tariffs and import quotas b. The desirability of a value-added tax c. The relative merits of different political candidates d. The desirability of Washington, DC, as a place to live 19. If an economist argues that everyone gains from trade, what reasoning is most likely underlying her argument?
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a. That trading with other countries does not affect the number or the type of remaining domestic jobs. b. That trading with other countries enriches those who work in the shipping industry, and that shipping is a key sector of the economy. c. That production according to the principle of comparative advantage lowers overall costs and therefore allows everyone to have a higher standard of living. d. That export industries are the most important part of the economy. 20. Suppose that one person working in Mexico can produce either 20 yards of cloth or 80 baskets, and that one person working in Turkey for the same length of time can produce either 15 yards of cloth or 30 baskets.Which of the following statements is then TRUE? a. Between these two countries, Turkey has the absolute advantage in both goods. b. Turkey has a comparative advantage in cloth; Mexico has a comparative advantage in baskets. c. Turkey has a comparative advantage in baskets; Mexico has a comparative advantage in cloth. d. In both countries, the opportunity costs of producing cloth and baskets are the same.
Answers: For your reference 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. D A C C C B D C C A 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. B D C D A C D A C B

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What is measured along the horizontal and vertical axes of a production possibilities frontier graph?

What does the bowed-out shape of the production possibilities frontier curve represent?

Essentials of Economics Chapter 2

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