Multiple Choice Tutorial

Chapter 2
Economic Tools and
Economic Systems

1
1. The opportunity cost of an activity is
a. zero if you choose the activity voluntarily.
b. the amount of money spent on the activity.
c. the value of the best alternative not chosen.
d. the sum of benefits from all of the sacrificed
alternatives.

C. All decision making is based on opportunity

cost. The cost to you of any decision is that
which you give up in the best alternative
endeavor.

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2. The measure of the opportunity cost of going to
college includes the costs of tuition, books, and
a. housing.
b. housing and food.
c. earnings foregone by working less.
C. If you are not working because you are a full
time student, a part of the cost of your
education is the money foregone by not
working at the highest paying job you qualify
for and you realistically could have obtained.
If you are working part time, or at a job that
pays you less because of your school schedule,
your opportunity cost is the difference
between what you are making and what you
could have made if it were not for your school 3
3. The net benefit of an activity is the
a. value of benefits to others in the economy
b. sum of all the benefits from that activity
c. non-monetary benefits from that activity
d. total benefits minus the total costs of that
activity
D. The term net means the difference
between costs and benefits. Because there
are costs and benefits in every activity you
will engage in, you will either experience a
net benefit or a net loss.
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4. Rational choices must be based on
a. complete knowledge and correct
information.
b. the least amount of information possible.
c. self-interest.
d. expected opportunity cost.
D. All decisions are based on expectations of
the gains and costs of that decision. For every
decision you make you ask yourself
(sometimes unconsciously) “what will I have
to give up for making this decision and how
much will I gain?”
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5. The opportunity cost of an activity
a. depends on the individual’s subjective
values and opinions.
b. is the same for everyone.
c. must be calculated and known before
undertaking the activity.
A. Opportunity cost is a very personal thing,
it differs from person to person. For
example, should you paint your house or
hire someone to paint it? If you can make
$20 an hour and pay someone $8 an hour,
you should hire the work out. However, if
you can only make $7 an hour, it is better
to paint the house yourself. 6
6. Your opportunity cost when choosing a
particular activity
a. can be easily and accurately calculated
b.cannot even be estimated
c. does not change over time
d. varies, depending on time and
circumstances
D. For example, the opportunity cost of
cleaning your bedroom is higher on a sunny
day then it would be on a rainy day. There are
more things you can do outside when the sun
is shining than you can do when it is raining.
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7. Sunk costs
a. are the most important consideration in
rational decision making
b. should be ignored when making economic
choices
c. are incurred only if you choose that
activity
d. may be recovered if you do not choose that
activity
B. Sunk cost are costs that have to be paid
regardless. For example, if you pay $6 to get
into a movie and decide half way through the
movie that you do not like it, the $6 expense
is the same whether you stay or leave. 8
8. The law of comparative advantage states that
the person who should produce a good is the
person who
a. has the lowest opportunity cost of
producing that good
b. can produce that good using the fewest
resources
c. will produce that good using the most
expensive resources
A. If you make $7 an hour and have to pay
someone $8 an hour to paint your house, you
have a comparative advantage of painting the
house yourself. However, if you make $20 an
hour, you do not have a comparative
advantage in painting the house yourself. 9
9. Comparative advantage
a. leads to all of the following
b. leads to the most efficient allocation of
resources and the greatest combined output
c. eliminates specialization, so that each
person produces for all of his own needs
independently
B. Should a country produce those goods that
it is best at producing? Not necessarily. For
example, let’s suppose Americans were better
than any anyone else at producing hand
made wicker baskets, should we spend our
time and energy producing baskets? No,
because that time and energy would be better
spent in the technology area, like computers. 10
10. Ann and Bob are business partners. Ann can
type one page every 5 minutes, and she can
complete one page of accounting every 15
minutes. Bob can type one page or complete
one page of accounting every 10 minutes.
Which statements are true?
a. Bob has a comparative advantage in both
activities.
b. Bob has an absolute advantage in both
activities.
c. Ann should type and Bob should do the
accounting.
C. Ann has higher opportunity costs of doing
the accounting than Bob, and Bob has higher
opportunity costs of doing the typing. 11
11. Barter is
a. illegal in the United States
b. an efficient system of exchange
c. most useful when there is much
specialization and international trade
d. the direct exchange of goods, without the
use of money
D. If you trade with someone one good for
another good, you are engaging in barter.

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12. A medium of exchange must be
a. approved by the government
b. socially acceptable in return for all goods
and services
c. easy to reproduce
d. used to eliminate specialization and the
division of labor
B. Money is used as a medium of exchange
because it is used to purchase goods and
services; this mean that barter is not
necessary.
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13. Because of specialization and comparative
advantage, most people
a. consume only what they produce themselves
b. consume the products produced by their
family and friends
c. consume the products of many other
specialists

C. Because of specialization and the fact that

people pursue activities that they have a
comparative advantage in, means that we do
not have to be self sufficient. By specializing
and then buying from one another, our
standard of living increases. 14
14. Fast food is faster and cheaper than a similar
meal you could prepare for yourself. Which of
the following does not explain that fact?
a. meal preparation has been divided into many
separate tasks
b. larger-scale production allows the
introduction of more efficient machines
c. workers gain productivity at a task over time
d. workers are more productive when they are
being paid
D. The fact that workers are paid to prepare
your meal does not make fast food cheaper
than preparing your own meal.
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15. The “division of labor” refers to
a. discrimination in labor markets
b. separating a job into smaller tasks
completed by different people
c. one worker who divides his time among
different jobs and duties
d. defining a job according to the
appropriate sex
B. One of the characteristics of a modern
industrial society is a greater specialization of
labor. This is one reason why productivity
and a resultant higher standard of living is
possible than in less developed economies.
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16. Specialization of labor
a. increases productivity without creating
any problems
b. reduces productivity, and is usually
eliminated by business firms
c. can create problems of boredom and
repetitive motion injuries
d. prevents the introduction of more
sophisticated and efficient production
techniques
C. On an individual basis, the division of
labor has the downside of boredom and
physical and emotional type problems.
17
17. The economic model of society’s production
possibilities frontier
a. attempts to explain the immense complexity
of the real economy
b. illustrates that although resources are
scarce for individuals, there is no problem of
scarcity for society as a whole
c. is based on unrealistic assumptions and
therefore has no value as an economic tool.
d. is based on simplifying assumptions, but is
still useful for illustrating scarcity,
opportunity cost, and economic growth.
D. The production possibilities model greatly
simplifies the real world, but is still useful.
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18. On a given society’s production possibilities
frontier, which of the following is assumed to
be variable?
a. all of the following
b. qualities of resources
c. technology
d. quantities of commodities produced

D. The production possibilities analysis shows

the relationship between two goods, one is
presented on the vertical axis, the other on
the horizontal axis. Each axis shows the
quantities of the good portrayed.
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19. Which of the following is most appropriately
measured along one axis of the production
possibilities frontier?
a. quantity of a produced good
b. price of a produced good
c. quantity of natural resources
d. state of technology

A. Same as the previous question.

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20. The production possibilities frontier
identifies
a. the maximum possible combinations of
two goods which society can use during a
given time period
b. the maximum possible combinations of
two resources which society can use
during a given time period
c. society’s preferences for goods and
services produced
A. It is called production possibilities because
the curve shows the greatest combinations
that are possible with the given constraints.
21
21. “Efficiency” refers to
a. producing output using the least amount
of labor
b. producing output using the least amount
of capital
c. producing as far inside the production
possibilities frontier as possible
d. getting the maximum possible output from
available resources

D. A country is being most efficient when it

uses its resources the best way possible.
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22. If all resources are used efficiently to produce
goods and services, the nation will find itself
producing
a. inside its production possibilities frontier
b. somewhere on its production possibilities
frontier
c. outside of its production possibilities
frontier
d. at one extreme of its production possibilities
frontier
B. If a country uses its resources inefficiently
it will operate inside its production
possibilities curve.
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 23. Points inside the production possibilities
frontier represent
a. full and efficient use of all resources
b. inefficiency or unemployment (or both)
c. currently unattainable combinations of
outputs
d. currently unattainable combinations of
resources
B. When a country is operating inside its
production possibilities frontier it can
produce more by simply becoming more
efficient. But it cannot produce beyond its
production possibilities frontier because it
does not have the resources to do so. 24
24. Points outside the boundary of the
production possibilities frontier represent
a. unemployment of resources
b. inefficient use of resources
c. combinations which are attainable only if
all resources are used fully and efficiently
d. currently unattainable combinations of
outputs
D. By increasing its resources or by improving
its technology a country can push out its
production possibilities frontier and
therefore have more of both goods.
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25. Any movement along the production
possibilities frontier involves the production of
a. more of both goods
b. more of on good and less of the other
c. less of both goods
d. more resources

B. This is an example of opportunity cost and

decision making. If a country is operating on
its production possibilities curve, it cannot
have more of one good without giving up
units of the other.
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 26. On a production possibilities frontier, the
opportunity cost of one more unit of a
commodity per time period is
a. the monetary price of the commodity
b. the amount of the other commodity which
must be sacrificed
c. the amount of unemployed resources which
must be used
B. If the vertical axis measures guns and the
horizontal axis measure butter, if a country is
operating on its production possibilities frontier,
the opportunity cost of having more guns is to
units of butter that has to be given up.
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27. Opportunity cost is constant if
a. resources are equally adaptable to the
production of all goods
b. each resource is specialized in the
production of one particular good
c. larger and larger sacrifices must be made to
gain equal successive amounts of a good
d. all resources are used fully and efficiently
A. This is an unrealistic assumption but is
sometimes made. For example, if you were a
farmer, this would mean that an acre of land
will yield the same amount no matter what crop
you plant in the acreage. The land is equally
suited for both crops being considered. 28
28. The law of increasing opportunity cost
a. does not relate to the shape of the
production possibilities frontier
b. states that the production possibilities
frontier has a constant positive slope
c. states that the slope of the production
possibilities frontier becomes steeper as we
move to the right on the graph
C. This is a more realistic assumption. For
example, different plants require different
optimal growing conditions. If all land is used
for one crop, to plant a second crop, the best
acre will be chosen; each additional planted
acre will be less and less suited for the plant.
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29. The slope of the production possibilities
frontier represents
a. efficiency
b. unemployment
c. opportunity cost
d. change in resources

C. Opportunity costs of choosing between one

option and the other is portrayed on the
production possibilities curve.

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30. A straight-line production possibilities
frontier
a. could never exist under ordinary
circumstances
b. illustrates the law of increasing opportunity
cost
c. means that no economic growth has
occurred
d. implies constant opportunity cost
D. This would mean that the alternative
crops considered require identical
growing conditions.
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31. The production possibilities frontier will shift
if there is a change in
a. technology
b. unemployment
c. product prices
d. society’s preferences for commodities

A. A change in technology means a change in

costs. An increase in costs will shift the
curve inward, a decrease in costs will shift
the curve outward.

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33. An outward shift in the production
possibilities frontier
a. reflects economic stability
b. reflects economic growth
c. reflects economic decline
d. does not relate to the state of the economy

B. Economic growth occurs when a country

can have more of both products being
considered. A shifting outward of the curve
will allow the country to have more of both
products being considered.
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34. Which of the following would not shift the
production possibilities frontier outward?
a. increased education and training of the
labor forces
b. increased production of machines and tools
c. discovery of new oil resources
d. elimination of inefficiency

D. If a country is on its production possibilities

frontier it is already operating at the most
efficient level possible.

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35. The production possibilities frontier
represents scarcity with
a. points inside the curve
b. a straight-line frontier
c. points outside the curve
d. prices of products and resources
C. The production possibilities curve is a
picture of limits. Because resources are
scarce, a country cannot operate outside
of its production possibilities frontier.

35
36. Which of the following cannot be determined
from a nation’s position on a graph of its
production possibilities frontier?
a. whether or not it is producing efficiently
b. whether or not it has unemployed resources
c. the opportunity cost of each good illustrated
d. the prices of each good illustrated

D. The production possibilities analysis is a

picture of possibilities with given resources,
the prices of the two goods being considered
in irrelevant.
36
 37. The set of mechanism and institutions
that resolve the basic economic questions is
called the
a. economic system
b. production possibilities dilemma
c. business resolution device
d. absolute advantage determination
A. All countries have to have some mechanism
to decide what to produce, how to produce,
and who gets what and how much. The
economic system, whether it be a free market
system or a command system, is the
mechanism countries use to answer these
questions. 37
38. If newspaper and magazine publishers switch
from human typesetting to computerized
typesetting, they are changing their answer to
which economic question?
a. What to produce?
b. How to produce?
c. For whom will commodities be produced?
d. Why will commodities be produces?
B. The typesetting chosen is a matter of
preference, they are alternatives in how
to produce.
38
39. Pure capitalism and command economies
represent
a. two extremely different ways of answering
the basic economic questions
b. two names describing exactly the same way
of answering the basic economic questions
c. the only two ways of answering the basic
economic questions
d. the most efficient ways to answer the basic
economic questions
A. A command economy is one where the
central government makes all of the
economic decisions. Capitalism is a system
where the decisions are made by private
individuals that have as their motive, profit.
39
40. Which of the following does not distinguish
between different types of economic systems?
a. laws about resource ownership
b. the extent of government involvement in
the economy
c. whether or not the basic economic questions
must be answered
d. what process is used to allocate resources
and products
C. No matter the economic system, the basic
economic questions must be answered.

40
41. Which of the following is a characteristic of a
pure command economy?
a. all resources are privately owned
b.economic activity is coordinated by the price
system
c. competitive markets guide resources to
their highest-valued uses
d. centralized economic planning is used to
answer basic economic questions
D. Communism is an example of a pure
command economy.
41
42. Which of the following is a characteristic of
pure capitalism?
a. all resources are owned communally
b. economic activity is coordinated by
government decision makers
c. the price system is used to guide resources
to their highest-valued uses
C. Because individuals are making decisions to
maximize their welfare and profit, consumers
will purchase at the lowest price possible and
suppliers will sell at the highest price
possible. The market is at equilibrium where
the two parties reach an agreement. 42
43. The “invisible hand” described by Adam
Smith refers to the
a. allocative role of markets and market forces
b. importance of government intervention and
central planning
c. actions of successful entrepreneurs in
directing the economy
d. role of monopolized industries in leading
the nation

A. This interaction between buyers and sellers

in a free market described in the previous
slide is an example of the “invisible hand.”
43
44. Problems with pure capitalism include which
of the following?
a. people have no incentive to direct resources
to their highest-valued use
b. the active government involvement in
controlling the economy may not be in the
best interest of the individuals involved
c. public goods, while desirable, may not be
produced
C. This is why we have modified capitalistic
system; we have modified it in an attempt to
rectify some of its weaknesses. We support a
government that taxes us and then uses the
tax money to support things that would not
exist in a purely free enterprise system. 44
45. Problems with a pure command economy
include which of the following?
a. property rights cannot be enforced
b. public goods, while desirable, may not be
produced
c. the lack of a legal system makes it
impossible to create contracts
d. large, diverse economies may be extremely
difficult for central authorities to analyze
and control
D. Command economies may have some
advantages, but one of the big disadvantages
is the fact that large complex and diversified
economies are difficult to analyze and control
by any one central authority. 45
46. With regard to pure capitalistic economies
and pure command economies,
a. all real-world societies are purely
capitalistic
b. all real-world societies are pure command
c. all real-world societies are purely
capitalistic or purely command
d. real-world societies are usually a mixture of
command and capitalism
D. Even our own American system, even
though it is primarily a free market system,
has some aspects of a command system in it.
46
47. A mixed capitalist economy occurs when
a. decisions are based primarily on religion or
custom
b. all resources are publicly owned and
economic planning is centralized
c. all resources are privately owned and prices
are used to coordinate economic activity
d. resources are both publicly and privately
owned and some markets are regulated

D. Some economists call our type of economic

system a mixed economic system because we
have aspects of both systems.
47
 48. In the United States, government directly
accounts for approximately what proportion of
all economic activity?
a. one-hundredth (1/100 = 1%)
b. one-twentieth (1/20 = 5%)
c. one-third (1/3 = 33%)
d. two-thirds (2/3 = 67%)
C. The federal government spends one out of every
four dollars, all governments (federal, state and
local) spend one out of every three dollars.
Consequently, we, as taxpayers, pay one out of
every three dollars of our income as taxes.
48
49. One of the most centrally planned economies
in the world today is found in
a. the United States
b. Germany
c. Canada
d. Cuba

D. Cuba is one of the last remaining

communistic economies left in the world.

49
 The Production Possibilities Frontier
A B
(millions of units per year)
51 Consumer goods C
D H
52
E
53 G
F
Capital goods
(millions of units per year)
50
50. Which of the following points represent
inefficiency in Exhibit 2-1?
a. A
b. E
c. H
d. G

D. G is inside the production possibilities

frontier; by becoming more efficient this
economy could have more of both consumer
goods and capital goods.

51
51. Which of the following points is unattainable
in Exhibit 2-1?
a. A
b. E
c. H
d. G
C. H is outside of the production
possibilities frontier. Unless this country
improves or increases its resources, it
cannot obtain level H.

52
52. What is the opportunity cost of moving from
point C to point E in Exhibit 2-1?
a. GC units of capital plus GE units of
consumer goods
b. GC units of capital minus GC units of
consumer goods
c. CE units of capital goods and consumer
goods
d. CG units of consumer goods
D. CG shows how many units of consumer
goods would have to be given up to have GE
more units of capital goods.
53
 Shifts in the Economy’s PPF
Panel D: Increase in resources or
technology that benefits capital goods
Consumer goods

PPF PPF'
Capital goods 54
53. Which of the following would shift the
Production Possibilities Frontier (PPF) from
PPF to PPF’ in Exhibit 2-2?
a. improved technology in the production of
consumer goods
b. both of the following
c. a reduction in inefficiency
d. improved technology in the production of
capital goods
D. Improved technology would increase
productivity pushing the PPF curve outward.

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END

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