Test Bank For Basic Economics 14th Edition by Frank V. Mastrianna

TEST BANK CHAPTER 3 The U.S. Economic System EXAMINATION QUESTIONS Multiple Choice d 1. Every society faces some basic economic choices such as b. private property rights interfere with the operation of the market system c. the market system functions best when the rights of private property are protected d. none of the above a. b. c. d. c 2. a. b. c. d. what to produce which resources to use who gets to have what share of the output all of the above An economic system is said to be a market economy if there is substantial central planning traditional economy if it relies on extensive market trading market economy if it relies on self- interested behavior and incentives command economy if it relies on long- standing practices a 6. characteristic of capitalism but not of communism? a. private property b. wage payments c. technological development d. use of capital equipment b 3. what to produce are made primarily by a. the government b. individuals and firms c. firms in consultation with the government d. a central planning committee In a market economy, decisions about c 4. system is that a. it is too careful in conserving society’s A problem with the use of the market resources b. it does not stimulate people to work hard and to be efficient c. it results in an unequal distribution of property and income d. all of the above b 9. capital goods are owned mainly by a. the federal government b. individuals and firms c. local governments d. state governments a 10. In a market economy, businesses are encouraged to produce because of a. the profit motive b. altruism c. government direction 143 c 5. system and private property is a. as the market system expands, private The relationship between the market property declines in that society Which one of the following is a b 7. is determined primarily by a. needs of people b. consumer demand c. decisions of management d. government regulation In a market economy, the use of resources b 8. part of the productive resource, land? a. raw materials b. intellectual power c. water resources d. atmospheric conditions Which of the following is considered not Under the U.S. market system, land and d. civic duty CHAPTER THREE  The U.S. Economic System c. corporation d 11. Profit is the excess of revenue over and above payment for a. wages b. rent c. interest d. all costs of production a 12. The stronger that consumer demand is for a good or service, other things being equal, a. the higher its price b. the lower its price c. the more stable its price d. the less stable its price a 13. The primary means of rationing goods and services in a market system is through a. the pricing system b. rationing coupons c. government allocation d. food stamps d 14. Under a market system, an individual’s income is ultimately determined through a. education b. training c. productivity d. the pricing system d 15. The high salaries paid to sports superstars in the United States are determined by a. government regulations b. league regulations c. joint decisions by the club owners d. consumer demand b 16. In a market economy, a resource is compensated according to a. the needs of its owner b. its contribution to the final product c. social priority d. government direction a 17. The most prevalent form of business enterprise in the U.S. is the a. sole proprietorship b. partnership d. cooperative b 18. The basic legal forms of business organization in the United States are the a. corporation, sole proprietorship, and acquisition b. sole proprietorship, corporation, cooperative, and partnership c. partnership, cooperative, corporation, and subsidiary d. sole proprietorship, corporation, partnership, and acquisition b 19. Which of the following is not one of the basic legal forms of business organization in the United States? a. corporation b. syndicate c. sole proprietorship d. partnership a 20. The form of business organization with the most flexibility of management is the a. sole proprietorship b. partnership c. corporation d. cooperative c 21. When two or more individuals own a business that does not have a legal existence separate from that of the individuals, it is known as a a. joint proprietorship b. multi-owner corporation c. partnership d. cooperative d 22. The major advantage of the sole proprietorship is its a. ability to raise funds b. lack of distinction between business and owner c. provision of continuity in the business in case of death d. flexible management a 23. The owner of a sole proprietorship has a. unlimited liability: if the firm goes bankrupt, the owner is liable for all debts 144 b. unlimited liability: if the firm goes bankrupt, the owner is liable for the amount of the investment c. limited liability: if the firm goes bankrupt, the owner does not have to pay d. unlimited liability: if the firm goes bankrupt, the owner is liable for the amount of the fixed assets only c 24. Which form of business organization has the advantage of being a legal person in itself? a. sole proprietorship b. partnership c. corporation d. oligopoly d c c b d d c d. law firms 30. Which of the following is not a basic tenet of economic liberalism? a. self-interest b. free trade c. competition d. government regulation 31. According to economic liberalism, the regulating force of the economy is a. self-interest b. laissez-faire c. competition d. the government 32. Government intervention becomes necessary when self-interest leads to a. increased profits b. laissez-faire c. the undermining of competition d. the law of diminishing returns 33. Privatization results in a. a return to economic liberalism b. a reduction in government economic functions c. guaranteed improvement in consumer service d. diminishing returns 34. Which of the following is not among the United States’ economic goals? a. full employment b. stable prices c. healthy economic growth d. equal distribution of income 35. A traditional economy is based on a. government regulation b. self-sufficiency c. barter d. both (b) and (c) 36. The use of a central planning board or commission to answer the fundamental economic questions is typical of what kind of economy? a. traditional b. supply c 25. a. its weakness at raising funds b. its inability to limit the financial liability of the owners c. the double taxation of its profits d. its lack of continuity in the event of a stockholder’s death b 26. a. double taxation b. limited liability of the stockholders c. no taxes d. limited life d 27. A corporation can raise funds by a. selling stock in the corporation b. issuing bonds c. borrowing from the bank d. all of the above a 28. In a cooperative form of business enterprise, a shareholder is entitled to a. one vote b. vote on the basis of number of shares owned c. no dividends d. tax exemption on profit b 29. In the United States, marketing cooperatives are most prevalent in a. manufacturing b. agriculture c. the accounting profession Corporations have the advantage of CHAPTER THREE  The U.S. Economic System A major disadvantage of a corporation is 145 c. command d. market c 37. An economy in which a central authority makes most of the economic decisions is known as a a. market economy b. laissez-faire economy c. command economy d. traditional economy a 38. Money that can be used to purchase capital goods is known as a. financial capital b. profit c. liquid capital d. interest d 39. Rivalry among firms and individuals for sales to consumers a. is the natural regulator that makes a market system work b. is known as competition c. regulates the allocation of resources in a market system d. all of the above b 40. An economy that contains both perfect and imperfect competition and both regulated and nonregulated industries is known as a a. traditional economy b. mixed economy c. market economy d. conglomerate economy d 41. The shifting or returning of government economic functions to individuals and firms in the economy is known as a. liberalization b. intervention c. competition d. privatization b 42. Full employment describes the condition in which a. 100 percent of the civilian labor force is employed b. 95 to 96 percent of the civilian labor force is employed c. there is no frictional unemployment d. unemployment is 10 percent or less c 43. U.S. prices are considered stable only when the Consumer Price Index a. falls b. moves 10 percent or less in a year’s time c. moves 2 percent or less in a year’s time d. remains unchanged a 44. If the United States produces the same level of output each year, instead of increasing it, a. the unemployment rate will rise b. the unemployment rate will remain unchanged c. the unemployment rate will fall d. there will be full employment c 45. The Gramm-Rudman-Hollings Act calls for the U.S. government to pursue a. full employment b. balance-of-payments equilibrium c. a balanced budget d. stable prices d 46. Which of the following is considered a command economy? a. communism b. socialism c. fascism d. all of the above a 47. Which of the following economic systems abolishes all private property? a. communism b. socialism c. fascism d. all of the above CHAPTER THREE  The U.S. Economic System 146 TRUE OR FALSE T 48. F 49. T 50. T 51. F 52. T 53. F 54. F 55. T 56. F 57. F 58. T 59. T 60. T 61. F 62. T 63. T 64. T 65. T 66. T 67. F 68. F 69. A considerable degree of government control of production and distribution exists in a command economy. The profit motive is one characteristic of a command economy. Competition serves as a regulator in a market economy. In a market economy, prices serve as a rationing mechanism. In a market economy, resources are allocated by the government. In a market system, the government enforces laws ensuring that private enterprises and conditions of competition will prevail. The most common type of business in the United States is the corporation. The vast majority of U.S. businesses have more than 500 employees each. The biggest disadvantage of a sole proprietorship is the lack of distinction between the business and the owner. In a partnership, each partner’s liability is limited to his or her contribution to the partnership. The board of directors has unlimited financial liability for the debts of the corporation. A corporation can raise money by selling stock or bonds. In a cooperative type of enterprise, a shareholder has only one vote regardless of the number of shares held. In the United States, marketing cooperatives are most commonly found in the agriculture industry. There are no government-regulated markets in the U.S. economy. The U.S. economy is a mixture of perfect and imperfect competition and regulated and nonregulated industries. Self-interest is a major tenet of economic liberalism. Laissez-faire is a policy of government nonintervention in the economy. Laissez-faire is a policy of no government intervention in the economic activities of individuals and businesses. Government intervention in the U.S. economy includes legislation such as antitrust laws, labor laws, and safety regulations. Full employment is considered to have been achieved only when everybody in the economy has a job. An economic growth rate of 3 percent would be considered unhealthy for the U.S. economy. CHAPTER THREE  The U.S. Economic System 147 T 70. F 71. F 72. T 73. F 74. F 75. T 76. T 77. CHAPTER THREE  The U.S. Economic System A stable unemployment rate requires that the U.S. economy grow each year in order to absorb new workers who enter the labor force. The former Soviet Union was an example of a traditional economy. The United States had a surplus balance of trade during most of the 1990s. Deciding what to produce and allocating goods and services are functions of all types of economic systems. Socialism combines monopoly, capitalism, private property, and a strong dictatorial central government. A major advantage of a partnership is the legal separation of personal and partnership assets. In a corporate form of business enterprise, both profits and dividends are subject to income tax. In determining what and how much to produce, the market economy works in a democratic manner based on dollar votes. DISCUSSION QUESTIONS 78. What are some differences between a command economy and a market economy? Under a market economy, the decision of what to produce, how much to produce, and who gets what are made by free market forces and competition. Prices and wages are also determined by market forces. In a command economy, all these decisions, including prices, are decided by the state. 79. How does price serve as a rationing mechanism in a market economy? Explain. Because most goods and services are relatively scarce, they have to be rationed somehow. Those who have the purchasing power and are willing to pay the price can obtain a good or service. Others, who do not think the product is worth the price or do not possess the purchasing power to buy the good, will do without it. 148 80. What are the five main economic goals of the United States? The five major goals of the U.S. economy are (1) full employment—that is, unemployment of 5 percent or less; (2) stable prices—that is, inflation of 2 percent or less; (3) a healthy rate of economic growth—that is, real growth of 3 percent or more; (4) a balanced federal budget; and (5) equilibrium in the U.S. international balance of payments—that is, a stable international value of the U.S. dollar. TEST BANK CHAPTER 5 Production, Cost, and Profit EXAMINATION QUESTIONS Multiple Choice b 1. A production function is a. a technique for determining the most profitable rate of output b. the relationship between a combination of inputs and a quantity of output c. an important factor in determining the shape of the long-run supply curve d. all of the above c 2. The marginal product refers to the impact of which unit of a productive resource? a. average product falls b. average product is zero c. average product increases d. average product is unaffected a. b. c. d. first middle last average b 8. attract a given productive resource away from its best alternative use is the a. resource cost b. opportunity cost c. overhead cost d. variable cost is a. b. c. d. the average product marginal input total product marginal product d 9. up are The addition to total output resulting from d 3. using one more unit of a productive resource As units of input are added to the a. explicit costs b. historical costs c. outlay costs d. implicit or opportunity costs b 10. The marginal cost curve crosses the average total cost curve at the a. highest level of average total cost b. lowest level of average total cost c. point where the ATC equals the AVC d. point where the ATC equals the AFC b 11. The principle that pulls down the average cost (ATC), and then, as output continues to expand, pulls it up, is a. lower prices and then higher prices b. rising and then diminishing marginal returns b 4. productive process, the marginal product a. b. c. d. increases decreases remains the same declines then rises a 5. productive process, the average product a. rises and then declines b. declines and then rises c. remains the same d. is always greater than the marginal product As units of input are added to the a 6. average product, When marginal product is less than 156 c 7. value of the wage you could have earned elsewhere is a. an explicit cost b. an accounting cost c. an implicit cost d. not a cost If you are a sole proprietor of a firm, the The amount of payment necessary to Those costs implied by alternatives given c. lower average fixed cost and then higher average fixed cost b. interest rates c. exchange rates d. rental rates 18. Total fixed cost is frequently referred to as a. overhead b. depreciation c. opportunity cost d. marginal cost 19. As output increases, total fixed cost a. increases b. remains constant c. rises and then falls d. falls and then rises 20. Which of the following is the best example of variable cost? a. depreciation on a building b. property taxes c. wages d. rent paid for one’s building 21. As output increases, average fixed cost a. remains constant b. decreases c. rises and then falls d. falls and then rises 22. Total cost is equal to a. TFC + TVC b. TFC – TVC c. TFC/TVC d. TVC/TFC 23. Average total cost is equal to a. AFC + AVC b. AFC/total output c. AFC/AVC d. AVC/AFC 24. As output increases, the AVC a. increases b. decreases c. remains the same d. falls and then rises 25. As output increases, the ATC a. increases b. decreases c. remains constant d. lower resource prices and then higher resource prices a b c b a a d d c 12. a. marginal product is falling b. marginal product is rising c. marginal product is below it d. total product is rising d 13. An example of an implicit cost is a. rent b. taxes c. wages d. forgone interest when investing one’s savings in one’s own business Average product falls any time c 14. The principle which states that as more and more units of a variable resource are added to a set of fixed resources, the resulting additions to output eventually become increasingly smaller, is the principle of a. increasing production b. functioning production c. diminishing marginal returns d. increasing returns to scale c 15. For the principle of diminishing marginal returns to hold, a. all resources must vary b. at least one resource should remain fixed c. only one resource should vary d. a minimum of three input resources is necessary b 16. The vertical distance between the total cost curve and the total variable cost curve reflects a. profit per unit b. total fixed cost c. marginal cost d. the principle of diminishing marginal returns b 17. The opportunity cost of using one’s own savings in operating a business can be determined by using a. wage rates CHAPTER FIVE  Production, Cost and Profit 157 d. falls and then rises a 32. The ATC rises whenever the a. upward pull of the AVC is greater than the downward pull of the AFC b. upward pull of the AFC is greater than the downward pull of the AVC c. AVC is equal to the AFC d. MC is above the AVC d 33. Average revenue (AR) is equal to a. total revenue/output b. total revenue minus total cost c. price per unit d. both (a) and (c) c 34. The increase in total revenue that results from the sale of one additional unit of output is known as a. average revenue b. total revenue c. marginal revenue d. variable revenue b 35. Under perfectly competitive conditions, marginal revenue is a. greater than average revenue b. equal to average revenue c. less than average revenue d. equal to the average variable a 36. Total profit is equal to a. total revenue minus total cost b. total revenue minus explicit cost c. total revenue minus variable cost d. total revenue minus marginal cost d 37. At the point of maximum profit, marginal revenue equals a. variable cost b. fixed cost c. average total cost d. marginal cost c 38. A firm’s break-even point occurs where a. marginal revenue equals marginal cost b. marginal revenue equals average variable cost c. total revenue equals total cost d. total revenue equals total variable cost a 26. all, then the ATC curve would be a. the same as the AVC curve b. horizontal c. positive and linear d. none of the above d 27. Marginal cost is a. the increase in total cost per additional unit of output b. the increase in total cost per additional unit of input c. the decrease in total cost from producing one less unit d. both (a) and (c) b 28. Marginal cost can be determined best by observing changes in a. average total cost b. total variable cost c. total fixed cost d. total cost/marginal product If a firm did not have any fixed costs at d 29. a. continually increases b. continually decreases c. increases, reaches a minimum and then declines d. decreases, reaches a maximum and then rises c 30. By looking at the marginal cost and marginal revenue curves, you can find out a. if this firm should shut down b. if this is a profitable business c. at what output the firm would maximize profits or minimize losses d. all of the above b 31. Marginal cost crosses the As output increases, marginal cost a. AVC curve AVC curve b. ATC curve curve c. AFC curve curve d. ATC curve ATC curve at the highest point of the at the lowest point of the ATC at the lowest point of the AFC at the highest point of the CHAPTER FIVE  Production, Cost and Profit 158 b 39. Whenever marginal revenue exceeds marginal cost, a. profit declines if output increases b. profit increases if output increases c. losses increase if output increases d. marginal revenue must be rising d 40. If a firm is in the short run, a. all its resources are variable b. it is planning its output for six months c. it is not possible for a firm to be efficient d. at least one of the firm’s resources cannot be varied b 41. In the short run, if a firm is suffering a loss, it should a. always shut down to prevent further losses b. continue to operate as long as it can recover variable cost c. continue to operate as long as it can recover fixed cost d. continue to operate if marginal cost is below average total cost a 42. When at least one productive resource is fixed, the firm is producing a. in the short run b. in the long run c. only one type of product d. at least two products a 43. In the long run, a. all the firm’s resources are variable b. some of the firm’s resources are variable c. none of the firm’s resources are variable d. the time period exceeds one year c c c a c d b. $8,000 c. $10,000 d. $20,000 46. If the accounting profit equals $200,000 and implicit costs equal $40,000, the economic profit equals a. $240,000 b. $200,000 c. $160,000 d. $40,000 47. To arrive at a logical determination of a firm’s optimum output, economists assume that the firm seeks to a. maximize output b. minimize cost c. maximize profit or minimize loss d. maximize price 48. If the AVC is $12, the AFC is $4, the AR is $20, and output is 6,000 units, the total profit is a. $72,000 b. $48,000 c. $24,000 d. negative $96,000 49. The concept of minimizing the number of physical units of the inputs needed for a given amount of output is known as a. technical efficiency b. the principle of diminishing marginal returns c. economic efficiency d. decreasing returns to scale 50. The concept of choosing the least-cost combination of resources for a given amount of output is known as a. technical efficiency b. the principle of diminishing marginal returns c. economic efficiency d. decreasing returns to scale 51. If a firm adds one more worker and total output increases from 100 to 120, the marginal product of labor equals a. 220 b 44. either a medium-sized or a large plant, the situation must be one of a. increasing returns to scale b. decreasing returns to scale c. constant returns to scale d. none of the above c 45. If the selling price of a product is $10, the average total cost is $8, and total sales are 5,000 units, the total profit will be a. $5,000 If a small plant is more efficient than CHAPTER FIVE  Production, Cost and Profit 159 T 59. T 60. F 61. F 62. F 63. F 64. T 65. T 66. F 67. The production function relates outputs to 55. A graph of total fixed cost a. is a downward sloping line b. is a straight horizontal line c. is an upward sloping line d. has a U-shape 56. The return to the entrepreneur for organizing, producing, and risk-taking in the operation of the business is a. rent b. equal to total revenue c. equal to total cost d. total profit 57. The amount of profit necessary to keep the entrepreneur operating is known as a. normal profit b. economic profit c. variable profit d. explicit profit d 58. Unlike a firm in pure competition, a monopolist may be able to a. block the entry of new firms into the industry b. continue to earn economic profits in the long run c. earn economic profits in the short run d. both (a) and (b) inputs. CHAPTER FIVE  Production, Cost and Profit b. 120 b c. 100 d. 20 b 52. If output changes in fixed proportion to a change in all of a firm’s productive resources, the firm has d a. constant marginal returns b. constant returns to scale c. decreasing marginal returns d. decreasing returns to scale a 53. Marginal cost is the a. change in total cost resulting from producing one more unit of output a b. change in total fixed cost resulting from producing one more unit of output c. total cost when one more unit of output is produced d. total fixed cost when one more unit of output is produced d 54. If the firm produces one more unit of output and total cost rises from $1,000 to $1,050, marginal cost is a. $1,050 b. $1,000 c. $2,050 d. $50 TRUE OR FALSE The marginal product is the increase in output per additional unit of input. The marginal product decreases, reaches a minimum, and then rises as output increases. As long as the marginal product is falling, the average product falls. The average product decreases any time the marginal product is decreased. The average product can be calculated for any unit of input by dividing the total product by the marginal product. If all inputs are increased by 25 percent and output by 35 percent, increasing returns to scale exist. Implicit cost is an opportunity cost of doing business. Opportunity cost and implicit cost are both explicit costs. 160 T 68. F 69. F 70. F 71. F 72. CHAPTER FIVE  Production, Cost and Profit Marginal cost is the change in total cost that results from producing one less or one more unit of output. As output increases, marginal cost increases, reaches a maximum, and then falls. So long as marginal cost is rising, average variable cost must rise. The principle of diminishing marginal returns is applicable only to the use of labor as a productive resource. The principle of diminishing marginal returns says that as more and more units of a variable resource are added to a set of fixed resources, the resulting additions to output will become increasingly smaller and, eventually, larger. T F 74. F 75. T 76. F 77. T 78. T 79. T 80. F 81. F 82. F 83. F 84. F 85. T 86. T 87. T 88. T 89. F 90. T 91. 73. The major factor accounting for diseconomies of scale is management inefficiency. In a mature industry, all firms operate with constant returns to scale. On a cost/output graph, the average fixed cost is constructed as a straight horizontal line. Marginal cost crosses the average variable cost and the average total cost at their lowest points. The average fixed cost remains constant even in the long run. Marginal cost is related inversely to the marginal product. The difference between the ATC and the AVC must represent the AFC. Average revenue is synonymous with price. Marginal revenue is the increase in total revenue per additional unit of input. Average revenue times total output equals total profit. Marginal product can never fall below zero. The break-even point on a break-even chart is equivalent to the point where MR = MC on a cost/output graph. It may be beneficial for a firm that is suffering a loss to continue to operate in the short run as long as it is recovering its fixed cost. Any revenue over and above total cost is labeled economic profit. Wages paid are an example of an explicit cost of doing business. Marginal cost is equal to the increase in total cost per unit of input divided by marginal product. Under perfectly competitive conditions, marginal revenue is equal to the price at which a good is sold. Average total cost is equal to total cost divided by marginal product. Normal profit is considered an opportunity cost of operating a business. 161 CHAPTER FIVE  Production, Cost and Profit DISCUSSION QUESTIONS 92. Give some examples of opportunity cost. A prime example is the income students forgo by not working full time while they are attending college. Another example is the interest income a person must forgo if she or he pays cash for an automobile. 93. Compare a football quarterback’s daily and yearly completed pass percentage to a business’s marginal and average product. Just as a quarterback’s daily (marginal) average affects his yearly average, so too does the marginal product of a firm affect its average product. If at midseason, for example, a quarterback is completing 30 percent of his passes and for the day he goes 10 for 20 (that is, he completes 50 percent), his yearly average will rise slightly. If he goes 5 for 25 (25 percent) for the day, his yearly average will fall slightly. 94. Why is the relationship between marginal product and marginal cost an inverse one? Inputs may cost a given amount. The cost of an input is spread over the amount of the marginal product. Therefore, when marginal product is rising, the marginal cost decreases. And when marginal product is falling, the marginal cost increases. 95. Draw two graphs: one showing the relationship of average product, marginal product, and total product; the other showing the relationship of AFC, AVC, and ATC. Then relate the shape of the marginal product to that of the marginal cost. Students can draw these graphs by using Figures 5-1 and 5-2 as references, if necessary. Students should observe that as the marginal product rises, the marginal cost declines; and as the marginal product declines, the marginal cost rises. A similar relationship holds with average product and average variable cost. 162