TEST BANK
Foundations of Business by William M. Pride
7th Edition
TEST BANK
,Foundations of Business 7e William M. Pride;
Chapter 1
End of Chapter Questions
Quiz Yourself
1. Scarcity implies that the allocation decision chosen by society can
a) not make more of any one good.
b) Always make more of any good.
c) Typically make more of one good but at the expense of making less
ofanother.
d) Always make more of all goods simultaneously.
Explanation: Scarcity implies that choices involve trade-offs.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 02 Medium
Gradeable: automatic
Learning Objective: 01-01
Topic: Economics and Opportunity Cost
2. A production possibilities frontier is a simple model of
a) Allocating scarce inputs to the production of alternative outputs.
a) Price and production/consumption in a market.
b) The cost of producing goods.
c) The number of inputs required to produce varying levels of output.
Explanation: The production possibilities frontier shows the quantity of two goods that
can be produced. It implies that scarcity requires that choices be made as to how to use
resources.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 02 Medium
Gradeable: automatic
Learning Objective: 01-01
Topic: Modeling Opportunity Cost Using the Production Possibilities Frontier
,3. The underlying reason that there are unattainable points on a production possibilities
frontier is that there
a. Is government.
b. Are always choices that must be made.
c. Are scarce resources within a fixed level of technology.
d. Is unemployment of resources.
Explanation: The points outside the production possibilities frontier are unattainable. This
means that currently available resources and technology are insufficient to produce
amounts greater than those illustrated on the frontier. On a graph, everything beyond the
frontier is unattainable.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 01 Easy
Gradeable: automatic
Learning Objective: 01-01
Topic: Modeling Opportunity Cost Using the Production Possibilities Frontier
4. The underlying reason production possibilities frontiers are likely to be bowed out
(rather than linear) is because
a. Choices have consequences.
b. There are always opportunity costs.
c. Some resources and people can be better used producing one good
ratherthan another.
d. There is always some level of unemployment.
Explanation: If the production possibilities frontier is not a line but is bowed out away
from the origin, then opportunity cost is increasing. The reason for this is that as we add
more resources to the production of, for example, pizza, we are using fewer resources to
produce soda. Compounding that problem, at each stage as we take the resources away
from soda and put them into pizza, we are moving workers who are worse at pizza
production and better at soda production than those moved in the previous stage. This
means that the increase in pizza production is diminishing and the loss in soda production
is increasing. An economist would call this an example of increasing opportunity cost. If
the production possibilities frontier is a straight line that is not bowed out away from the
origin, then opportunity cost is constant.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 01 Easy
Gradeable: automatic
Learning Objective: 01-02
Topic: Attributes of the Production Possibilities Frontier
,5. Suppose you were modeling the impact of the introduction of computer automation
into manufacturing on a production possibilities frontier (PPF) with two manufactured
goods on their respective axes. It would be more likely that the result would be .
a) Generalized growth with the PPF moving both up and to the right.
b) Specialized growth with the PPF moving both up and to the right.
c) Generalized growth with the PPF just moving up and not to the right.
d) Specialized growth with the PPF just moving up and not to the right.
Explanation: Computer automation is a general improvement in technology so it would
improve all manufacturing. As a result, it would result in generalized growth and move
the PPF both up and to the right.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 01 Easy
Gradeable: automatic
Learning Objective: 01-03
Topic: Economic Growth
6. The optimization assumption suggests that people make
a. Irrational decisions.
b. Unpredictable decisions.
c. Decisions to make themselves as well off as possible.
d. Decisions without thinking very hard.
Explanation: The optimization assumption suggests that the person in question is trying
to maximize some objective. Consumers are assumed to be making decisions that
maximize their happiness subject to a scarce amount of money.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 01 Easy
Gradeable: automatic
Learning Objective: 01-01
Topic: Thinking Economically
,7. Imagine fan feconomist fordering fdonuts fone-by-one. fWhen fdeciding fhow fmany
fdonuts fto forder fthey fwould fpick fthat fnumber f where fthe f enjoyment fof fthe
equals fthe fenjoyment fthey fcould fget ffrom fusing fthe fmoney fon fanother fgood.
a. first fdonut
b. Last/marginal fdonut
c. average/typical fdonut
d. total fnumber fof fdonuts
Explanation: fThe fenjoyment fof fthe flast fslice fis fthe fmarginal fbenefit fof fthat fslice. fIf
fthis fenjoyment fis fmore fthan fthe fenjoyment ffrom fsome falternative, fmore fwill fbe
fconsumed.
AACSB: fReflective fThinking
fAccessibility: fKeyboard
fNavigation fBlooms: fUnderstand
Difficulty: f02 fMedium
fGradeable: f automatic
fLearning fObjective: f01-04
fTopic: fThinking
fEconomically
8. Of fcourse, fall findividual fstudents fare fbetter foff fif fthey fearn fbetter fgrades. fIf
fyou fwere fto fconclude fthat fall fstudents fwould f be f better foff f if feveryone freceived
fan f A, f you fwould
a. have ffallen fvictim fto fthe ffallacy fof fscarcity.
b. be fright.
c. have ffallen fvictim fto fthe ffallacy fof fcomposition.
d. be fmistaking fcorrelation fwith fcausation.
Explanation: fThe ffallacy fof fcomposition fis fthe fmistake fin flogic fthat fsuggests fthat
fthe ftotal f economic f impact fof fsomething f is f always fand fsimply fequal fto fthe fsum fof
fthe f individual fparts.
AACSB: fReflective fThinking
fAccessibility: fKeyboard
fNavigation fBlooms: fUnderstand
Difficulty: f02 fMedium
fGradeable: f automatic
fLearning fObjective: f01-04
fTopic: fThinking
fEconomically
,9. Imagine fyou fwere fto fconclude, fafter fcarefully fexamining fdata fand fusing
fproper fevaluation ftechniques, fthat fa ftax fcredit f for fattending fcollege fbenefits f low
f income fearners f more fthan fa ftax fdeduction f(of fequal ftotal fcost fto fthe fgovernment)
fwould. fYou fwould fhave fengaged f in analysis fto freach fthat fconclusion.
a. negative
b. positive
c. normative
d. creative
Explanation: fEconomists, fand fsocial fscientists fin fgeneral, fdistinguish fviews fof f―the
fway fthings fare‖ ffrom f―the fway fthings fshould fbe,‖ fcalling fthe fformer fpositive
fanalysis fand fthe f latter fnormative fanalysis. fPositive fanalysis f is fa f form fof fanalysis
fthat fseeks fto funderstand fthe fway fthings fare fand fwhy fthey f are fthat fway.
fNormative fanalysis f is f a f form fof fanalysis fthat fseeks fto funderstand fthe fway fthings
fshould f be.
AACSB: fReflective fThinking
fAccessibility: fKeyboard
fNavigation fBlooms: fUnderstand
Difficulty: f02 fMedium
fGradeable: f automatic
fLearning fObjective: f01-04
fTopic: fThinking
fEconomically
, Short fAnswer fQuestions
1. For fyou, fwhat fis fthe fopportunity fcost fof fbuying fa fnew fcar?
The fopportunity fcost fof fpurchasing fthe fnew fcar fis fwhat fyou fwould fhave
fdone fwith fthe f money f(and fperhaps f shopping ftime) f instead. fPerhaps f it
fwould f be frepairing f your fexisting fcar. fMaybe fyou fwould fuse fa fbike, fpublic
ftransportation, for fUber fand fuse fthe fsavings fto fpay fyour ftuition. fWhatever
fthe fnet fsavings fassociated fwith f your fchosen falternative fto fa fnew fcar fis,
fand fwhatever f you fdid fwith fthose fsavings, f is fthe fopportunity fcost.
2. Imagine fyou fdecided fto fstudy fall flast fweek ffor fan fexam finstead fof fdoing
fanything ffun. f What fwould f be fthe fopportunity f cost fof fdoing f so? f Why f might
fthe fopportunity fcost f(defined f in fterms fof f fun f lost) fbe fexpected fto fincrease?
The fopportunity fcost fof fstudying fall fweek fwould fbe fthe flost ffun fthings fyou
fcould f have fdone fwith fthat ftime. fIf f instead fof f studying fall fweek, f you
fstudied fduring fthe ftimes fwhen f you f had fthe f least fopportunities f for f fun
f(perhaps fweekend f mornings fand fweekday fmornings fbetween fclasses), f you
fwould fhave fpreserved fthe fweekend fafternoons fand fweekday fevenings f for
f fun fopportunities. fThe f lost f fun fassociated fwith fthe ffirst ffew fhours fof
fmorning fstudying fwould fbe flow, fbut fthe flost ffun fon fthe fweekend fevenings
fwould f be f much fgreater.
3. Suppose fyou fhear fa fpolitical fcandidate fclaim fcredit for flay fblame ffor fan
feconomic foutcome. fHow fcan fyou ftell fwhether fthe fcandidate fis fcorrect? fWhat
fwould fyou fneed fto fknow?
You fneed fthe fcorrect fcounterfactual f(what fthe fresult fwould fhave fbeen fwith
fbetter factions). fFor finstance, fif fyou fblame fPresident fTrump ffor fthe fCOVID-
19 frecession, fyou fwould fhave fto fargue fthat fsomeone felse fwould fhave
f managed fthe fcrisis fdifferently f and fthat fthe feconomic fconsequence fwould
fhave f been f less. fThe fkey fto fany fsuch fclaim f is fthe f legitimacy fof fthe
fcounterfactual.
4. If fyou fget fa f25 fpercent fpay fincrease, fyou fare fbetter foff. fExplain fwhy fsome
fpeople fwould fnot fbe fbetter foff fall femployers fgave fall fworkers fa f25
fpercent fpay fincrease.
This fis fan fillustration fof fthe ffallacy fof fcomposition. fIf feveryone freceived fa
f25 fpercent fpay f increase, fthat fsituation fwould f likely fcreate fan f increase f in
fprices f associated fwith fthe fproduction fof fthe fgoods fthose fworkers fmade for
fthe fservices fthey fperformed. fThat fwould, fin fturn, freduce fthe fbuying fpower
fof fthe fpay fincrease. fIt f is fpossible f(and fperhaps feven f likely) fthat fthere
fwould f be f no fnet fgain.
5. Suppose fyou fwere fto fanalyze fthe fstate fof fthe feconomy fat fthe fmoment. fYou fsay fto
your ffriends, f―The feconomy fhas fbeen fgrowing fmore fslowly fin fthe flast f10 fyears
fthan fit fdid f in fthe fprevious f20 f years. fThe fgovernment fshould fcut ftaxes fto
fstimulate fthe feconomy.‖ f What fportion fof fthat fstatement f is f―positive‖ fand fwhat
fportion fof fthat fstatement f is f―normative?‖
The fpositive fportion fof fthe fstatement fis fthe ffirst fsentence. fIt fanalyzes fwhat
fhappened. fThe fsecond fsentence fis fnormative. fIt fsuggests fa fcourse fof faction.
Think fabout fThis
Foundations of Business by William M. Pride
7th Edition
TEST BANK
,Foundations of Business 7e William M. Pride;
Chapter 1
End of Chapter Questions
Quiz Yourself
1. Scarcity implies that the allocation decision chosen by society can
a) not make more of any one good.
b) Always make more of any good.
c) Typically make more of one good but at the expense of making less
ofanother.
d) Always make more of all goods simultaneously.
Explanation: Scarcity implies that choices involve trade-offs.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 02 Medium
Gradeable: automatic
Learning Objective: 01-01
Topic: Economics and Opportunity Cost
2. A production possibilities frontier is a simple model of
a) Allocating scarce inputs to the production of alternative outputs.
a) Price and production/consumption in a market.
b) The cost of producing goods.
c) The number of inputs required to produce varying levels of output.
Explanation: The production possibilities frontier shows the quantity of two goods that
can be produced. It implies that scarcity requires that choices be made as to how to use
resources.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 02 Medium
Gradeable: automatic
Learning Objective: 01-01
Topic: Modeling Opportunity Cost Using the Production Possibilities Frontier
,3. The underlying reason that there are unattainable points on a production possibilities
frontier is that there
a. Is government.
b. Are always choices that must be made.
c. Are scarce resources within a fixed level of technology.
d. Is unemployment of resources.
Explanation: The points outside the production possibilities frontier are unattainable. This
means that currently available resources and technology are insufficient to produce
amounts greater than those illustrated on the frontier. On a graph, everything beyond the
frontier is unattainable.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 01 Easy
Gradeable: automatic
Learning Objective: 01-01
Topic: Modeling Opportunity Cost Using the Production Possibilities Frontier
4. The underlying reason production possibilities frontiers are likely to be bowed out
(rather than linear) is because
a. Choices have consequences.
b. There are always opportunity costs.
c. Some resources and people can be better used producing one good
ratherthan another.
d. There is always some level of unemployment.
Explanation: If the production possibilities frontier is not a line but is bowed out away
from the origin, then opportunity cost is increasing. The reason for this is that as we add
more resources to the production of, for example, pizza, we are using fewer resources to
produce soda. Compounding that problem, at each stage as we take the resources away
from soda and put them into pizza, we are moving workers who are worse at pizza
production and better at soda production than those moved in the previous stage. This
means that the increase in pizza production is diminishing and the loss in soda production
is increasing. An economist would call this an example of increasing opportunity cost. If
the production possibilities frontier is a straight line that is not bowed out away from the
origin, then opportunity cost is constant.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 01 Easy
Gradeable: automatic
Learning Objective: 01-02
Topic: Attributes of the Production Possibilities Frontier
,5. Suppose you were modeling the impact of the introduction of computer automation
into manufacturing on a production possibilities frontier (PPF) with two manufactured
goods on their respective axes. It would be more likely that the result would be .
a) Generalized growth with the PPF moving both up and to the right.
b) Specialized growth with the PPF moving both up and to the right.
c) Generalized growth with the PPF just moving up and not to the right.
d) Specialized growth with the PPF just moving up and not to the right.
Explanation: Computer automation is a general improvement in technology so it would
improve all manufacturing. As a result, it would result in generalized growth and move
the PPF both up and to the right.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 01 Easy
Gradeable: automatic
Learning Objective: 01-03
Topic: Economic Growth
6. The optimization assumption suggests that people make
a. Irrational decisions.
b. Unpredictable decisions.
c. Decisions to make themselves as well off as possible.
d. Decisions without thinking very hard.
Explanation: The optimization assumption suggests that the person in question is trying
to maximize some objective. Consumers are assumed to be making decisions that
maximize their happiness subject to a scarce amount of money.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 01 Easy
Gradeable: automatic
Learning Objective: 01-01
Topic: Thinking Economically
,7. Imagine fan feconomist fordering fdonuts fone-by-one. fWhen fdeciding fhow fmany
fdonuts fto forder fthey fwould fpick fthat fnumber f where fthe f enjoyment fof fthe
equals fthe fenjoyment fthey fcould fget ffrom fusing fthe fmoney fon fanother fgood.
a. first fdonut
b. Last/marginal fdonut
c. average/typical fdonut
d. total fnumber fof fdonuts
Explanation: fThe fenjoyment fof fthe flast fslice fis fthe fmarginal fbenefit fof fthat fslice. fIf
fthis fenjoyment fis fmore fthan fthe fenjoyment ffrom fsome falternative, fmore fwill fbe
fconsumed.
AACSB: fReflective fThinking
fAccessibility: fKeyboard
fNavigation fBlooms: fUnderstand
Difficulty: f02 fMedium
fGradeable: f automatic
fLearning fObjective: f01-04
fTopic: fThinking
fEconomically
8. Of fcourse, fall findividual fstudents fare fbetter foff fif fthey fearn fbetter fgrades. fIf
fyou fwere fto fconclude fthat fall fstudents fwould f be f better foff f if feveryone freceived
fan f A, f you fwould
a. have ffallen fvictim fto fthe ffallacy fof fscarcity.
b. be fright.
c. have ffallen fvictim fto fthe ffallacy fof fcomposition.
d. be fmistaking fcorrelation fwith fcausation.
Explanation: fThe ffallacy fof fcomposition fis fthe fmistake fin flogic fthat fsuggests fthat
fthe ftotal f economic f impact fof fsomething f is f always fand fsimply fequal fto fthe fsum fof
fthe f individual fparts.
AACSB: fReflective fThinking
fAccessibility: fKeyboard
fNavigation fBlooms: fUnderstand
Difficulty: f02 fMedium
fGradeable: f automatic
fLearning fObjective: f01-04
fTopic: fThinking
fEconomically
,9. Imagine fyou fwere fto fconclude, fafter fcarefully fexamining fdata fand fusing
fproper fevaluation ftechniques, fthat fa ftax fcredit f for fattending fcollege fbenefits f low
f income fearners f more fthan fa ftax fdeduction f(of fequal ftotal fcost fto fthe fgovernment)
fwould. fYou fwould fhave fengaged f in analysis fto freach fthat fconclusion.
a. negative
b. positive
c. normative
d. creative
Explanation: fEconomists, fand fsocial fscientists fin fgeneral, fdistinguish fviews fof f―the
fway fthings fare‖ ffrom f―the fway fthings fshould fbe,‖ fcalling fthe fformer fpositive
fanalysis fand fthe f latter fnormative fanalysis. fPositive fanalysis f is fa f form fof fanalysis
fthat fseeks fto funderstand fthe fway fthings fare fand fwhy fthey f are fthat fway.
fNormative fanalysis f is f a f form fof fanalysis fthat fseeks fto funderstand fthe fway fthings
fshould f be.
AACSB: fReflective fThinking
fAccessibility: fKeyboard
fNavigation fBlooms: fUnderstand
Difficulty: f02 fMedium
fGradeable: f automatic
fLearning fObjective: f01-04
fTopic: fThinking
fEconomically
, Short fAnswer fQuestions
1. For fyou, fwhat fis fthe fopportunity fcost fof fbuying fa fnew fcar?
The fopportunity fcost fof fpurchasing fthe fnew fcar fis fwhat fyou fwould fhave
fdone fwith fthe f money f(and fperhaps f shopping ftime) f instead. fPerhaps f it
fwould f be frepairing f your fexisting fcar. fMaybe fyou fwould fuse fa fbike, fpublic
ftransportation, for fUber fand fuse fthe fsavings fto fpay fyour ftuition. fWhatever
fthe fnet fsavings fassociated fwith f your fchosen falternative fto fa fnew fcar fis,
fand fwhatever f you fdid fwith fthose fsavings, f is fthe fopportunity fcost.
2. Imagine fyou fdecided fto fstudy fall flast fweek ffor fan fexam finstead fof fdoing
fanything ffun. f What fwould f be fthe fopportunity f cost fof fdoing f so? f Why f might
fthe fopportunity fcost f(defined f in fterms fof f fun f lost) fbe fexpected fto fincrease?
The fopportunity fcost fof fstudying fall fweek fwould fbe fthe flost ffun fthings fyou
fcould f have fdone fwith fthat ftime. fIf f instead fof f studying fall fweek, f you
fstudied fduring fthe ftimes fwhen f you f had fthe f least fopportunities f for f fun
f(perhaps fweekend f mornings fand fweekday fmornings fbetween fclasses), f you
fwould fhave fpreserved fthe fweekend fafternoons fand fweekday fevenings f for
f fun fopportunities. fThe f lost f fun fassociated fwith fthe ffirst ffew fhours fof
fmorning fstudying fwould fbe flow, fbut fthe flost ffun fon fthe fweekend fevenings
fwould f be f much fgreater.
3. Suppose fyou fhear fa fpolitical fcandidate fclaim fcredit for flay fblame ffor fan
feconomic foutcome. fHow fcan fyou ftell fwhether fthe fcandidate fis fcorrect? fWhat
fwould fyou fneed fto fknow?
You fneed fthe fcorrect fcounterfactual f(what fthe fresult fwould fhave fbeen fwith
fbetter factions). fFor finstance, fif fyou fblame fPresident fTrump ffor fthe fCOVID-
19 frecession, fyou fwould fhave fto fargue fthat fsomeone felse fwould fhave
f managed fthe fcrisis fdifferently f and fthat fthe feconomic fconsequence fwould
fhave f been f less. fThe fkey fto fany fsuch fclaim f is fthe f legitimacy fof fthe
fcounterfactual.
4. If fyou fget fa f25 fpercent fpay fincrease, fyou fare fbetter foff. fExplain fwhy fsome
fpeople fwould fnot fbe fbetter foff fall femployers fgave fall fworkers fa f25
fpercent fpay fincrease.
This fis fan fillustration fof fthe ffallacy fof fcomposition. fIf feveryone freceived fa
f25 fpercent fpay f increase, fthat fsituation fwould f likely fcreate fan f increase f in
fprices f associated fwith fthe fproduction fof fthe fgoods fthose fworkers fmade for
fthe fservices fthey fperformed. fThat fwould, fin fturn, freduce fthe fbuying fpower
fof fthe fpay fincrease. fIt f is fpossible f(and fperhaps feven f likely) fthat fthere
fwould f be f no fnet fgain.
5. Suppose fyou fwere fto fanalyze fthe fstate fof fthe feconomy fat fthe fmoment. fYou fsay fto
your ffriends, f―The feconomy fhas fbeen fgrowing fmore fslowly fin fthe flast f10 fyears
fthan fit fdid f in fthe fprevious f20 f years. fThe fgovernment fshould fcut ftaxes fto
fstimulate fthe feconomy.‖ f What fportion fof fthat fstatement f is f―positive‖ fand fwhat
fportion fof fthat fstatement f is f―normative?‖
The fpositive fportion fof fthe fstatement fis fthe ffirst fsentence. fIt fanalyzes fwhat
fhappened. fThe fsecond fsentence fis fnormative. fIt fsuggests fa fcourse fof faction.
Think fabout fThis
