Exam (elaborations) TEST BANK FOR Economics 14th Canadian Edition By Christopher T.S. Ragan

Exam (elaborations) TEST BANK FOR Economics 14th Canadian Edition By Christopher T.S. Ragan Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following statements provides the best definition of economics? A) The study of the most equitable distribution of scarce resources. B) The study of the use of scarce resources to satisfy unlimited human wants. C) The study of the production of goods and services. D) The study of the productive capacity of a nation's factors of production. E) The study of production and increasing its efficiency. 1) Answer: B Explanation: A) B) C) D) E) 2) Society's resources are often divided into broad categories. They are A) goods and services. B) factors of consumption. C) land, labour, and capital. D) population and natural resources. E) tangible commodities and intangible commodities. 2) Answer: C Explanation: A) B) C) D) E) 3) Consider the following list: a worker with training in video gaming technology, 10 hectares of arable land in southern Ontario, a fishing trawler in Nova Scotia, an ice-cream truck at a park in Quebec. Each of these is an example of A) a factor of production. B) a capital resource. C) a commodity. D) goods and services. E) an economic service. 3) Answer: A Explanation: A) B) C) D) E) 1 4) A basic underlying point in economics is that A) people have unlimited wants in the face of limited resources. B) there are unlimited resources. C) governments should satisfy the needs of the people. D) people have limited wants in the face of limited resources. E) governments should never interfere in the workings of a market economy. 4) Answer: A Explanation: A) B) C) D) E) 5) Which of the following best describes the study of economics? A) how to plan an economy B) how to limit human wants so that scarce resources are sufficient C) why resources are scarce D) the allocation of scarce resources among alternative uses E) how to distribute income as equally as possible 5) Answer: D Explanation: A) B) C) D) E) 6) Economics can best be described as A) the study of how a society ought to allocate its resources. B) the study of the use of scarce resources to satisfy unlimited human wants. C) the application of sophisticated mathematical models to address social problems. D) a normative science. E) the study of how to reduce inflation and unemployment. 6) Answer: B Explanation: A) B) C) D) E) 7) Scarcity is likely to be A) a problem that will be solved by the proper use of available resources. B) unique to the twentieth century. C) a problem that will always exist. D) a result of the work ethic. E) eliminated with a better understanding of economics. 7) Answer: C Explanation: A) B) C) D) E) 2 8) The concept of scarcity in economics usually refers to a condition A) where society is not employing all of its available resources in an efficient manner. B) where people's wants can never be satisfied by the available resources. C) that afflicts only poor countries. D) where too many frivolous goods and services are produced at the expense of socially desirable goods and services. E) where production is efficient, but distribution is inefficient. 8) Answer: B Explanation: A) B) C) D) E) 9) Which of the following statements best describes the underlying feature in most economic problems? A) People have unlimited wants in the face of limited resources. B) There are unlimited resources. C) Our country is rich; we just don't realize it. D) People have limited wants in the face of limited resources. E) Governments should never interfere in the workings of a market economy. 9) Answer: A Explanation: A) B) C) D) E) 10) Because resources are scarce, individuals are required to A) make choices among alternatives. B) use resources inefficiently. C) sacrifice production but not consumption. D) improve distribution but not production. E) improve production but not distribution. 10) Answer: A Explanation: A) B) C) D) E) 3 FIGURE 1-1 With a budget of $200 million, the government can choose to purchase 4 helicopters or repair 200 km of highway. 11) Refer to Figure 1-1. For the government, the opportunity cost of one search and rescue helicopter is A) 0 kilometres of highway repair. B) 50 kilometres of highway repair. C) 100 kilometres of highway repair. D) 150 kilometres of highway repair. E) 200 kilometres of highway repair. 11) Answer: B Explanation: A) B) C) D) E) 12) Refer to Figure 1-1. For the government, the opportunity cost of one kilometre of highway repair is A) 1 search and rescue helicopter. B) 1/2 of a search and rescue helicopter. C) 1/10 of a search and rescue helicopter. D) 1/50 of a search and rescue helicopter. E) 1/100 of a search and rescue helicopter. 12) Answer: D Explanation: A) B) C) D) E) 4 13) Refer to Figure 1-1. If the government chooses to allocate all $200 million to highway repair, we can say that A) the opportunity cost of the highway repair is uncertain. B) the opportunity cost of the highway repair is $0. C) the opportunity cost of the highway repair is 4 search and rescue helicopters. D) there is no opportunity cost involved because the government has achieved its objectives. E) there is no opportunity cost involved because the government stayed within its budget. 13) Answer: C Explanation: A) B) C) D) E) 14) Refer to Figure 1-1. Which of the following combinations of kilometres of highway repair and helicopters is unaffordable, given the government's budget of $200 million? A) B B) D C) E D) F E) G 14) Answer: E Explanation: A) B) C) D) E) 5 With a budget of $500 000, a school board can choose to purchase 20 000 textbooks or 2000 laptop computers (or some intermediate combination) for use in classrooms. Figure 1-2 15) Refer to Figure 1-2. For the school board, what is the opportunity cost of one additional laptop computer? A) 0 textbooks B) 1/10 of a textbook C) 10 textbooks D) 20 textbooks E) 2000 textbooks 15) Answer: C Explanation: A) B) C) D) E) 16) Refer to Figure 1-2. For the school board, what is the opportunity cost of one additional textbook? A) 2000 laptops B) 1000 laptops C) 1/100 of a laptop D) 1/1000 of a laptop E) 1/10 of a laptop 16) Answer: E Explanation: A) B) C) D) E) 6 17) Refer to Figure 1-2. Suppose the school board chooses to allocate all $500 000 to the purchase of laptop computers. What is the opportunity cost of this entire purchase? A) The opportunity cost is 2000 laptops. B) The opportunity cost is 20,000 textbooks. C) The opportunity cost is uncertain. D) The opportunity cost is $0. E) There is no opportunity cost because the purchase was made within the available budget. 17) Answer: B Explanation: A) B) C) D) E) 18) Refer to Figure 1-2. Which of the following combinations of textbooks and laptops is unaffordable, given the school board's budget of $500 000? A) A B) B C) C D) D E) E 18) Answer: D Explanation: A) B) C) D) E) 19) Refer to Figure 1-2. What is the price of a textbook in this example? A) $25 B) $40 C) $50 D) $100 E) $250 19) Answer: A Explanation: A) B) C) D) E) 20) Refer to Figure 1-2. What is the price of a laptop computer in this example? A) $25 B) $40 C) $50 D) $100 E) $250 20) Answer: E Explanation: A) B) C) D) E) 7 The table below illustrates that, in one day, Tristan can produce either 12 fishing lures or mow 3 lawns, while Thomas can produce either 6 fishing lures or mow 6 lawns. Fishing Lures Mowed Lawns Tristan 12 3 Thomas 6 6 TABLE 1-1 21) Refer to Table 1-1. What is Tristan's opportunity cost of producing one fishing lure? A) one mowed lawn B) 3 mowed lawns C) 1/3 of a mowed lawn D) 1/4 of a mowed lawn E) 4 mowed lawns 21) Answer: D Explanation: A) B) C) D) E) 22) Refer to Table 1-1. What is Thomas's opportunity cost of producing one fishing lure? A) 5 lures B) 1 mowed lawn C) 1/6 of a lure D) 1/6 of a mowed lawn E) there is no opportunity cost 22) Answer: B Explanation: A) B) C) D) E) 23) Refer to Table 1-1. What is Tristan's opportunity cost of producing one mowed lawn? A) one fishing lure B) 3 fishing lures C) 4 fishing lures D) 6 fishing lures E) 12 fishing lures 23) Answer: C Explanation: A) B) C) D) E) 8 24) Refer to Table 1-1. What is Thomas's opportunity cost of producing one mowed lawn? A) 0 fishing lures B) 1/6 fishing lure C) one fishing lure D) 6 fishing lures E) 12 fishing lures 24) Answer: C Explanation: A) B) C) D) E) 25) Refer to Table 1-1. If Tristan and Thomas want to maximize their joint output from one day of work, how should they specialize their production? A) Tristan produces 3 mowed lawns; Thomas produces 6 mowed lawns B) Tristan produces 6 lures; Thomas produces 6 lures C) Tristan produces 6 lures and 3 mowed lawns D) Tristan produces 12 lures; Thomas produces 6 mowed lawns E) Tristan produces nothing, Thomas produces 6 lures and 6 mowed lawns 25) Answer: D Explanation: A) B) C) D) E) 26) Refer to Table 1-1. Which of the following statements about Tristan's and Thomas's opportunity costs is correct? A) Tristan has a higher opportunity cost of producing mowed lawns. B) Thomas has a higher opportunity cost of producing mowed lawns. C) Tristan has a higher opportunity cost of producing fishing lures. D) Thomas has a higher opportunity cost of producing fishing lures. E) Both A and D are correct. 26) Answer: E Explanation: A) B) C) D) E) 9 Madeleine allows herself $100 per month for purchasing coffee. The diagram below illustrates the choices available to her. FIGURE 1-3 27) Refer to Figure 1-3. For Madeleine, the opportunity cost of one regular coffee is A) 1/4 of a regular coffee. B) 20 lattes. C) 4 lattes. D) 1/4 of a latte. E) 80 lattes. 27) Answer: D Explanation: A) B) C) D) E) 28) Refer to Figure 1-3. For Madeleine, the opportunity cost of one latte is A) 1/4 of a regular coffee. B) 1/4 of a latte. C) 8 regular coffees. D) 80 regular coffees. E) 4 regular coffees. 28) Answer: E Explanation: A) B) C) D) E) 10 29) Refer to Figure 1-3. If Madeleine chooses to allocate all $100 to buying lattes, we can say that her opportunity cost in one month is A) zero because she bought what she desired. B) zero because she stayed within her budget. C) 80 cups of regular coffee. D) 40 cups of regular coffee. E) 20 cups of regular coffee. 29) Answer: C Explanation: A) B) C) D) E) 30) Refer to Figure 1-3. Which of the following combinations of regular coffees and lattes is affordable over the one-month period, given Madeleine's budget? A) 15 lattes and 30 coffees B) 16 lattes and 16 coffees C) 8 lattes and 50 coffees D) 4 lattes and 66 coffees E) 20 lattes and 80 coffees 30) Answer: B Explanation: A) B) C) D) E) 11 The table below shows that, in one day, Claire can complete either 3 chemistry or 2 biology lab reports, while Sam can complete either 4 chemistry or 3 biology lab reports. Chemistry Lab Reports Biology Lab Reports Claire 3 2 Sam 4 3 TABLE 1-2 31) Refer to Table 1-2. What is Claire's opportunity cost of completing 1 chemistry lab report? A) 23 of a biology lab report B) 1 12 biology lab reports C) 34 of a biology lab report D) 2 biology lab reports E) 3 biology lab reports 31) Answer: A Explanation: A) B) C) D) E) 32) Refer to Table 1-2. What is Sam's opportunity cost of completing 1 chemistry lab report? A) 4 of a biology lab report B) 3 of a biology lab report C) 23 of a biology lab report D) 43 of a biology lab report E) 34 of a biology lab report 32) Answer: E Explanation: A) B) C) D) E) 12 33) Refer to Table 1-2. What is Sam's opportunity cost of completing 3 biology lab reports? A) 0 chemistry lab reports B) 1 chemistry lab reports C) 2 chemistry lab reports D) 3 chemistry lab reports E) 4 chemistry lab reports 33) Answer: E Explanation: A) B) C) D) E) 34) Refer to Table 1-2. What is Sam's opportunity cost of completing 2 biology lab reports? A) 1 13 chemistry lab reports B) 34 of a chemistry lab report C) 23 of a chemistry lab report D) 2 23 chemistry lab reports E) 4 chemistry lab reports 34) Answer: D Explanation: A) B) C) D) E) 35) Refer to Table 1-2. Which of the following statements about Claire's and Sam's opportunity costs is correct? A) Claire has a higher opportunity cost for completing 1 biology lab report. B) Sam has a higher opportunity cost for completing 1 biology lab report. C) Claire has a higher opportunity cost for completing 1 chemistry lab report. D) Sam has a lower opportunity cost for completing 1 chemistry lab report. E) Claire and Sam have equal opportunity costs. 35) Answer: A Explanation: A) B) C) D) E) 13 36) Scarcity arises from limited resources. For this reason, all economic choices involve A) a value judgement. B) pride. C) an opportunity cost. D) complementary ends. E) greed. 36) Answer: C Explanation: A) B) C) D) E) 37) The opportunity cost of going to college or university for four years is A) equal to the wage rate a person will earn after graduation. B) the least valued alternative one forfeits to attend. C) the cost of tuition and books and four years of lost wages from employment. D) the cost of tuition, residence fees and books. E) zero. 37) Answer: C Explanation: A) B) C) D) E) 38) Suppose there are only three alternatives to attending a "free" social event: read a novel (you value this at $10), go to work (you could earn $20), or watch videos with some friends (you value this at $25). The opportunity cost of attending the social event is A) $10. B) $20. C) $25. D) $45. E) $55. 38) Answer: C Explanation: A) B) C) D) E) 39) The opportunity cost of producing good A is defined to be A) the money cost of the factors of production used in good A. B) the retail price of good A. C) the cheapest method of producing good A. D) what must be sacrificed of other goods to get an additional unit of good A. E) the cost of having to get by using something else in place of good A. 39) Answer: D Explanation: A) B) C) D) E) 14 40) Suppose that one unit of labour can produce either 5 units of wool or 2 pineapples. What is the opportunity cost of producing 1 pineapple? A) 5 units of wool B) 2 units of wool C) 2/5 unit of wool D) 5/2 units of wool E) zero 40) Answer: D Explanation: A) B) C) D) E) 41) A small landscaping firm purchases a tractor that, in one day, is capable of drilling 60 fence-post holes or removing 12 tree stumps (or some intermediate combination). For this landscaper, what is the opportunity cost of removing one extra tree stump? A) 1/12th of the cost of the tractor B) 1/5 of the cost of the tractor C) drilling 12 fence-post holes D) drilling 5 fence-post holes E) there is no opportunity cost 41) Answer: D Explanation: A) B) C) D) E) 42) Suppose that a bakeshop with 5 employees can produce both pies and cakes. In one day, if all resources are devoted to baking pies, the shop can produce 125 pies; if all resources are devoted to baking cakes, the shop can produce 50. What is the shop's opportunity cost of producing any one cake? A) 0.4 pies B) 0.25 pies C) 2.5 pies D) 0.4 cakes E) 2.5 cakes 42) Answer: C Explanation: A) B) C) D) E) 43) Suppose that a bakeshop with 5 employees can produce both pies and cakes. In one day, if all resources are devoted to baking pies, the shop can produce 125 pies; if all resources are devoted to baking cakes, the shop can produce 50. What is the shop's opportunity cost of producing any one pie? A) 125 pies B) 0.4 cakes C) 2.5 pies D) 0.4 pies E) 50 cakes 43) Answer: B Explanation: A) B) C) D) E) 15 44) Katie and Hugh are producing pies and jars of pickles. Katie can produce either 200 jars of pickles or 100 pies per month. Hugh can produce either 800 jars of pickles or 200 pies per month. Which of the following statements is correct? A) Katie's opportunity cost of producing 1 jar of pickles is 2 pies. B) Katie's opportunity cost of producing 1 jar of pickles is 1/2 of a pie. C) Hugh's opportunity cost of producing 1 jar of pickles is 4 pies. D) Hugh's opportunity cost of producing 1 pie is 1/4 jar of pickles. E) Hugh's and Katie's opportunity costs of producing are the same. 44) Answer: B Explanation: A) B) C) D) E) 45) Suppose Andrea has a job that pays her $25 000 per year (after taxes). She is considering quitting her job and going to university full time for four years. Tuition fees and books will cost $12 000 per year. Living expenses in either situation will cost $10 000 per year. What is the opportunity cost of Andrea's four-year university degree? A) $88 000 B) $100 000 C) $120 000 D) $148 000 E) $188 000 45) Answer: D Explanation: A) B) C) D) E) 46) It has been observed that university enrollment in Canada is higher during periods of high unemployment. A possible explanation for this is that A) when prospects for getting a job are poor, the opportunity cost of getting a job is lower. B) when prospects for getting a job are poor, the opportunity cost of doing nothing is higher. C) during periods of high unemployment, tuition fees are reduced. D) during periods of high unemployment, the opportunity cost is no longer relevant. E) when prospects for getting a job are poor, the opportunity cost of going to university is lower. 46) Answer: E Explanation: A) B) C) D) E) 16 47) Chantal has a full-time job as a geological engineer and earns an annual after-tax salary of $85 000. She decides to leave her job for 6 months to scuba dive on the Great Barrier Reef in Australia, and incurs costs of $7500 for course equipment and certification, $2500 for airfare, and $12 000 for regular living expenses in Australia (equal to her living expenses at home). What is Chantal's opportunity cost for this 6-month, unpaid leave of absence? A) $12 000 B) $22 000 C) $42 000 D) $52 500 E) $65 000 47) Answer: D Explanation: A) B) C) D) E) 48) During economic recessions, the opportunity cost of going to university ________ because the wages a student can expect to earn working in the best alternative ________. A) increases; decrease B) decreases; increase C) increases; increase D) decreases; decrease E) remains the same; remain the same 48) Answer: D Explanation: A) B) C) D) E) 49) A country's production possibilities boundary shows that A) when a society combines its resources efficiently, it cannot produce more of one good without producing less of the other good. B) when a society combines its resources inefficiently, it cannot produce more of one good without producing less of the other good. C) when a society combines its resources efficiently, it is always possible to produce more of all goods. D) all points inside the boundary are preferred to all points on the boundary. E) the supply for goods always exceeds the demand. 49) Answer: A Explanation: A) B) C) D) E) 17 50) Consider a production possibilities boundary showing the possible combinations of military goods and civilian goods that a country can produce. Suppose that the country is currently at a point on the boundary. If the production of military goods is increased, the production of civilian goods will necessarily A) decrease. B) remain the same. C) increase. D) increase at a decreasing rate. E) increase at a increasing rate. 50) Answer: A Explanation: A) B) C) D) E) 51) A point lying inside the production possibilities boundary is one at which A) there is no scarcity. B) the opportunity cost of producing more output is negative. C) it is not possible to produce more output with existing resources. D) the economy has run out of resources. E) more output could be produced with existing resources. 51) Answer: E Explanation: A) B) C) D) E) 52) If a country's production possibilities boundary is drawn as a straight (downward-sloping) line it indicates A) decreasing opportunity cost of producing more of either good. B) the use of the scarce resources in an economy. C) constant opportunity cost of producing more of either good. D) an unfair distribution of resources in an economy. E) increasing opportunity cost of producing more of either good. 52) Answer: C Explanation: A) B) C) D) E) 18 The diagram below shows two production possibilities boundaries for Country X. FIGURE 1-4 53) Refer to Figure 1-4. The production possibilities boundaries are drawn concave to the origin. What does this shape of the PPB demonstrate? A) the decreasing opportunity cost of producing more of either good B) the scarcity of resources in the economy C) the constant opportunity cost of producing more of either good D) the unfair distribution of resources in the economy E) the increasing opportunity cost of producing more of either good 53) Answer: E Explanation: A) B) C) D) E) 54) Refer to Figure 1-4. If Country X, constrained by the production possibilities boundary PPB1, is producing the combination of goods indicated at point F, it can produce more consumer goods by moving to one of the points A) A or E. B) D or E C) A, B, or C. D) A or B, but not C. E) A, B, C, D, or E. 54) Answer: C Explanation: A) B) C) D) E) 19 55) Refer to Figure 1-4. If Country X is currently producing at point A, it could move to point B if A) the cost of producing capital goods were to increase. B) some resources were switched from the capital goods industries to the consumer goods industries. C) the cost of producing consumer goods were to increase. D) some resources were switched from the consumer goods industries to the capital goods industries. E) Country X is no longer able to produce the quantity of capital goods at point A. 55) Answer: B Explanation: A) B) C) D) E) 56) Refer to Figure 1-4. If Country X were producing at point C, A) the opportunity cost of moving to point B is to give up some consumption goods. B) the opportunity cost of moving to point A is zero. C) the opportunity cost of moving to point A is to give up some capital goods. D) this is the maximum output possible from given resources. E) it is not possible to move to any point on PPB1 or PPB2 without technological progress. 56) Answer: B Explanation: A) B) C) D) E) 57) Refer to Figure 1-4. At point B, A) the price of capital goods is higher than the price of consumer goods. B) Country X is producing too many consumer goods and too few capital goods. C) the price of consumer goods is equal to the price of capital goods. D) the opportunity cost of producing an extra unit of capital goods is higher than at point A. E) the opportunity cost of producing an extra unit of consumer goods is higher than at point A. 57) Answer: E Explanation: A) B) C) D) E) 58) Refer to Figure 1-4. If Country X, constrained by the production possibilities boundary PPB1, is currently producing at point A, it can produce more capital goods by moving to point A) F. B) E. C) D. D) C. E) B. 58) Answer: A Explanation: A) B) C) D) E) 20 59) Refer to Figure 1-4. Suppose that Country X is currently producing at point E. Country X could achieve production at point D if A) the given resources were fully employed. B) the given resources were more efficiently employed. C) sufficient improvements in technology occurred in either the capital goods industry or the consumer goods industries. D) firms reduced output of capital goods. E) the prices of capital goods and consumption goods fell. 59) Answer: C Explanation: A) B) C) D) E) 60) Refer to Figure 1-4. A shift of the production possibilities boundary from PPB1 to PPB2 implies A) a movement from full employment to some unemployment. B) that if point E is the new choice of outputs, productivity has increased in the consumer goods industry. C) that technology in the capital goods industries has improved. D) an inevitable decrease in total output. E) that technology in the consumer goods industry has improved. 60) Answer: C Explanation: A) B) C) D) E) 61) Refer to Figure 1-4. Growth in the country's productive capacity is illustrated by A) a point like D outside the boundary. B) a movement from a point inside the boundary such as C to the boundary. C) the movement between points on a given boundary. D) a single point such as A on the boundary. E) an outward shift of the boundary, for example from PPB1 to PPB2. 61) Answer: E Explanation: A) B) C) D) E) 21 FIGURE 1-5 62) Refer to Figure 1-5. Suppose that the relevant production possibilities boundary is the one labelled B. This boundary implies that A) the concept of opportunity cost is not at work in this economy. B) the opportunity cost of producing either capital goods or consumer goods does not depend on how much of each good is produced. C) consumer goods are preferred to capital goods. D) in this society the resources are not efficiently employed. E) capital goods are preferred to consumer goods. 62) Answer: B Explanation: A) B) C) D) E) 63) Refer to Figure 1-5. Which production possibilities boundaries are consistent with increasing opportunity costs? A) boundary A only B) boundaries A and B C) boundary C only D) boundaries B and C E) boundaries A, B, and C 63) Answer: C Explanation: A) B) C) D) E) 22 64) Refer to Figure 1-5. Which production possibilities boundaries exhibit decreasing opportunity costs? A) boundary B only B) boundaries A and C C) boundaries A and B D) boundary A only E) boundary C only 64) Answer: D Explanation: A) B) C) D) E) 65) If there is always a three-for-one trade-off between the production of goods X and Y, then the production possibilities boundary for X and Y is A) a downward-sloping curve convex to the origin. B) semi-circular. C) a downward-sloping straight line. D) a downward-sloping straight line that is broken at one point. E) a downward-sloping curve concave to the origin. 65) Answer: C Explanation: A) B) C) D) E) 66) On a diagram of a production possibilities boundary, the concept of scarcity is illustrated by the A) points on the boundary. B) area within the boundary. C) distance from the origin to the boundary. D) negative slope of the boundary. E) unattainable points outside the boundary. 66) Answer: E Explanation: A) B) C) D) E) 23 67) On a diagram of a production possibilities boundary, the concept of opportunity cost is illustrated by the A) distance from the origin to the boundary. B) negative slope of the boundary. C) boundary being concave to the origin. D) unattainable points outside the boundary. E) area bounded by the two axes and the boundary. 67) Answer: B Explanation: A) B) C) D) E) 68) A straight-line production possibilities boundary differs from a concave boundary in which of the following ways? A) The straight-line boundary illustrates constant opportunity costs, whereas the concave boundary illustrates increasing opportunity costs. B) The concave boundary illustrates constant opportunity costs, whereas the straight-line boundary illustrates decreasing opportunity costs. C) The straight-line boundary does not show scarcity, whereas the concave boundary does. D) The straight-line boundary shows opportunity cost, whereas the concave boundary does not. E) A straight-line boundary is associated with a command economy, whereas a concave boundary is associated with a free-market economy. 68) Answer: A Explanation: A) B) C) D) E) 69) Consider Canada's production possibilities boundary. Suppose a scientific breakthrough leads to a lower-cost method of producing battery-operated cars in Canada. The likely effect would be to move Canada's current production A) to a point beyond its new production possibilities boundary. B) to a point inside its new production possibilities boundary. C) possibilities boundary outward. D) possibilities boundary inward. E) above the level of U.S. production. 69) Answer: C Explanation: A) B) C) D) E) 24 70) Consider Canada's production possibilities boundary. Suppose fire destroys many millions of hectares of valuable Canadian forest. The effect on the Canadian economy would be best illustrated by ________ the production possibilities boundary. A) a movement inside B) a movement along C) a movement to a point beyond D) a shift outward of E) an inward shift of 70) Answer: E Explanation: A) B) C) D) E) 71) Consider Canada's production possibilities boundary. During the nineteenth and early twentieth centuries, millions of people immigrated to western Canada. The effect on the Canadian economy was to A) move it beyond its new production possibilities boundary. B) move it inside its new production possibilities boundary. C) shift its production possibilities boundary inward. D) shift its production possibilities boundary outward. E) move it along an unchanged production possibilities boundary. 71) Answer: D Explanation: A) B) C) D) E) 72) In recent years, several large Canadian-owned mining and resource companies have been sold to foreign owners. The immediate effect on Canada's production possibilities boundary is A) a shift outward. B) a shift inward. C) no change. D) a movement along. E) a movement to a point beyond the boundary. 72) Answer: C Explanation: A) B) C) D) E) 25 73) A move from inside the production possibilities boundary to the boundary itself could be caused by A) the employment of previously idle resources. B) a reallocation of resources from military to civilian goods. C) technological progress. D) an increase in the labour supply. E) an improvement in the government's ability to control its spending. 73) Answer: A Explanation: A) B) C) D) E) 74) Consider a production possibilities boundary showing the quantity of military goods and the quantity of civilian goods on the two axes. A movement along the production possibilities boundary could be caused by A) the employment of previously idle resources. B) the reallocation of resources between military and civilian goods. C) the growth of productive capacity. D) an increase in the labour supply. E) technological progress. 74) Answer: B Explanation: A) B) C) D) E) 26 The downward-sloping line in the diagram below shows the combinations of health care and education expenditures that the government can afford with a given amount of tax revenue. FIGURE 1-6 75) Refer to Figure 1-6. The levels of health and education expenditures at point C A) are less than at point D. B) are equal to those of point A and point B. C) are more cost-effective than those at points A, B, and D. D) could be achieved if the prices of health and/or education increased. E) are not attainable with the government's current budget. 75) Answer: E Explanation: A) B) C) D) E) 76) Refer to Figure 1-6. If the government's spending on health and education is given by point B, a move to point A must involve A) less spending on health. B) zero opportunity cost. C) less spending on education. D) less spending in total. E) more spending on education. 76) Answer: C Explanation: A) B) C) D) E) 27 77) Refer to Figure 1-6. Suppose the government's current spending is shown by point D. In this case, A) the government is not spending its total budget. B) more education expenditures can be achieved only by sacrificing some health expenditures. C) more health expenditures can be achieved only by sacrificing some education expenditures. D) the government should spend its total budget so as to get to point B, since more health spending and more education spending are both clearly desirable. E) the prices of education and health care have increased beyond the government's ability to pay. 77) Answer: A Explanation: A) B) C) D) E) 78) Consider the production possibilities boundary (PPB) of an economy. Economic growth is illustrated by A) the negative slope of the PPB. B) an outward shift of the PPB. C) a movement onto the PPB. D) a movement along the PPB. E) the movement to a point outside of the PPB. 78) Answer: B Explanation: A) B) C) D) E) 79) Suppose drought destroys many millions of acres of valuable Canadian farmland. The effect on the Canadian economy would be to move A) it along its production possibilities boundary. B) its production possibilities boundary inward. C) it beyond its production possibilities boundary. D) its production possibilities boundary outward. E) None of the above. There would be no change in Canada's production possibilities boundary. 79) Answer: B Explanation: A) B) C) D) E) 28 80) Suppose there are only two goods produced in our economysnowplows and helicopters. If there is always a two-for-one tradeoff between the production of these two goods (in terms of opportunity cost), then the production possibilities boundary between snowplows and helicopters is A) a downward-sloping curve convex to the origin. B) circular. C) a downward-sloping straight line. D) a downward-sloping straight line with slope equal to -1. E) a downward-sloping curve concave to the origin. 80) Answer: C Explanation: A) B) C) D) E) 81) A modern economy like Canada's is largely organized by A) governments at all levels coordinating the activities of firms and citizens. B) individuals forming cooperative enterprises and labour unions. C) individuals following their own self interest, doing what seems best for themselves. D) benevolent individuals pursuing the public interest. E) the self-interested behaviour of a small number of individuals. 81) Answer: C Explanation: A) B) C) D) E) 82) An insight first fully developed by Adam Smith is that A) without benevolence production would not occur. B) all individuals are motivated solely by self-interest. C) self-interest, not benevolence, is the foundation of economic order. D) self-interest undermines effective economic order. E) individual self-interest is the only necessary force for social order. 82) Answer: C Explanation: A) B) C) D) E) 29 83) In the Canadian economy, most decisions regarding resource allocation are made by A) consumers and producers interacting in the price system. B) the various levels of government. C) negotiation between unions and firms. D) business firms only. E) legal contract. 83) Answer: A Explanation: A) B) C) D) E) 84) The famous economist who first described the division of labour was A) Karl Marx. B) Milton Friedman. C) David Ricardo. D) John Maynard Keynes. E) Adam Smith. 84) Answer: E Explanation: A) B) C) D) E) 85) Which of the following statements about specialization and trade are correct? A) They developed only in the twentieth century. B) They exist only in capitalist economies. C) They arose as humans changed from nomadic and self-sufficient food gatherers to settled food producers. D) They developed only where government and political institutions were stable. E) They occur only in the private sector. 85) Answer: C Explanation: A) B) C) D) E) 86) If an economy exhibits the specialization of labour, we know that A) a barter economy is more suitable. B) most production is artisanal in nature. C) each worker is self-sufficient. D) job security is ensured. E) different individuals are producing different products. 86) Answer: E Explanation: A) B) C) D) E) 30 87) Which of the following statements best describes a barter system of exchange? A) It involves the trading of goods directly for other goods. B) It requires the use of money. C) It does not involve the double coincidence of wants. D) It developed late in history. E) It is the most efficient form of exchange. 87) Answer: A Explanation: A) B) C) D) E) 88) Specialization of labour led to greater efficiency in the allocation of resources because of A) greater reliance on self-sufficiency. B) the use of barter. C) the principle of comparative advantage. D) an increase in total work effort. E) the opportunity cost of labour increased. 88) Answer: C Explanation: A) B) C) D) E) 89) A greater specialization of labour leads to which of the following major results? A) the overall output of the economy declines B) there is an increased need for government to intervene in the marketplace C) the circular flow of income contracts D) there is a greater need for trade E) each worker must become more self-sufficient 89) Answer: D Explanation: A) B) C) D) E) 90) A farmer selling tomatoes and corn at a roadside, and a currency trader in Hong Kong, are each participating in A) barter. B) a market. C) an involuntary transaction. D) flexible manufacturing. E) international trade. 90) Answer: B Explanation: A) B) C) D) E) 31 91) Which of the following has most contributed to the globalization of the economy? A) the decreased importance of agriculture B) reductions in transportation and communication costs C) the shift toward a market economy in China D) tariffs and trade barriers E) the decline in the relative importance of manufacturing 91) Answer: B Explanation: A) B) C) D) E) 92) Which of the following results from the introduction of money for use in transactions? A) exchange becomes easier and this promotes the specialization of labour B) an increased use of barter C) the specialization of labour becomes more difficult D) self-sufficiency is assured E) society is able to satisfy all wants 92) Answer: A Explanation: A) B) C) D) E) 93) The barter system of exchange is inefficient because A) "fair" values cannot be defined without the use of money. B) bargaining power is unequal between rich and poor. C) the double coincidence of wants may not exist. D) markets do not exist. E) exchange partners need to know each other. 93) Answer: C Explanation: A) B) C) D) E) 32 94) Which of the point(s) below is (are) true of money? i) Money eliminated the need for barter. ii) Money allowed for specialization of labour and expansion of trade. iii) Money allowed for the development of a market economy. iv) Money allowed one to save current production for future use. A) Only i). B) Only i) and ii). C) Only i) and iv). D) Only i), ii), and iv). E) All of the points are true. 94) Answer: E Explanation: A) B) C) D) E) 95) Money facilitates trade and specialization by A) allowing an efficient barter system to develop. B) increasing the value of gold. C) eliminating the need for barter. D) reducing the shift of resources between uses. E) providing employment for coin makers. 95) Answer: C Explanation: A) B) C) D) E) 96) With reference to the circular flow of income, how is the allocation of resources largely decided? A) by central authorities only B) by central authorities and firms only C) by firms and households acting independently D) by political parties and firms only E) by individuals only 96) Answer: C Explanation: A) B) C) D) E) 33 97) The key decision makers in a market economy are A) households, firms, and government. B) individual citizens, non-profit organizations, and the Bank of Canada. C) governments and all institutions under government control. D) large corporations and labour organizations. E) corporations and governments. 97) Answer: A Explanation: A) B) C) D) E) 98) Economists usually assume that households and firms, respectively, maximize A) income and sales. B) savings and profits. C) wages and revenues. D) utility and profits. E) expenditures and profits. 98) Answer: D Explanation: A) B) C) D) E) 99) In general, which of the following statements is an accurate description of economists' assumptions about households? Households A) make consistent decisions, maximize utility, and are the principal owners of the factors of production. B) do not make consistent decisions, maximize satisfaction, and are the principal owners of the factors of production. C) make consistent decisions, maximize profits, and are the principal users of the factors of production. D) do not make consistent decisions, maximize profits, and are the principal users of the factors of production. E) make consistent decisions, maximize savings, and are the principal users of the factors of production. 99) Answer: A Explanation: A) B) C) D) E) 34 100) Which of the following is illustrated by the circular flow of income? A) the flows of expenditures and income in a household B) that firms own the factors of production C) the interaction of households and firms through the factors and goods markets D) that the flow of payments moves in the same direction as the flow of goods E) that there is no relationship between goods markets and factor markets 100) Answer: C Explanation: A) B) C) D) E) 101) Which of the following represents a typical "real" flow (as opposed to a financial flow) in the circular flow of income? A) goods going from producers to consumers B) factor services going from producers to consumers C) goods going from consumers to producers D) money payments going from consumers to producers E) money payments going from producers to consumers 101) Answer: A Explanation: A) B) C) D) E) 102) If some income earned by households is not spent on output, or if some income earned by firms is not spent on factor services, the circular flow of income will A) stop. B) run over. C) expand. D) contract. E) explode. 102) Answer: D Explanation: A) B) C) D) E) 103) An economic system that relies primarily upon custom and habit in economic decision making is a A) market system. B) traditional system. C) command system. D) mixed system. E) communist system. 103) Answer: B Explanation: A) B) C) D) E) 35 104) In practice, the term "centrally planned economy" refers to an economy in which A) the government makes ALL production and consumption decisions. B) the mix of market and command principles is heavily weighted towards the latter. C) all commodities are rationed. D) the military is in control of the government. E) economic decisions are made in the geographic centre of the country. 104) Answer: B Explanation: A) B) C) D) E) 105) Karl Marx argued that A) centrally planned economies could provide a more equitable distribution of total output than capitalist economies. B) technological change was not important in improving living standards. C) a free-market system would produce a low level of total output. D) benevolence, not self-interest, produced an effective economic order. E) the unfettered market system driven by self-interest leads to the best social outcome. 105) Answer: A Explanation: A) B) C) D) E) 106) When discussing types of economic systems the Canadian economy is best described as A) primarily a public ownership economy. B) primarily free-market decision making. C) traditional. D) a command economy. E) a mixed economic system. 106) Answer: E Explanation: A) B) C) D) E) 36 107) With regard to various economic systems, most economists agree that A) the mix of market and command principles that exists in Canada is the best. B) the optimal mix of market and command systems remains constant over time. C) most production and consumption decisions are more efficiently coordinated by markets than through central planning. D) government intervention in the economy is only justified in time of war. E) command economies have been very successful in distributing income in socially just ways. 107) Answer: C Explanation: A) B) C) D) E) 108) Which countries have mostly public ownership of resources? A) United States and Canada B) Cuba and North Korea C) France and Germany D) Sweden and Norway E) Brazil and Argentina 108) Answer: B Explanation: A) B) C) D) E) 109) Behaviour in free-market economies is A) determined by a central authority. B) based primarily on custom and habit. C) mostly directed by self interest. D) mostly affected by elements of tradition and government command. E) random and unpredictable. 109) Answer: C Explanation: A) B) C) D) E) 110) In command economies, economic behaviour is A) largely determined by a central authority. B) based primarily on custom and habit. C) directed by individual self interest. D) largely affected by elements of tradition and market incentives. E) random and unpredictable. 110) Answer: A Explanation: A) B) C) D) E) 37 111) In mixed economies, economic behaviour is A) largely determined by a central authority. B) based primarily on custom and habit. C) directed only by self interest. D) affected by elements of tradition, government command, and market incentives. E) random and unpredictable. 111) Answer: D Explanation: A) B) C) D) E) 112) In traditional economies, economic behaviour is A) largely determined by a central authority. B) based primarily on custom and habit. C) directed only by self interest. D) affected by elements of tradition, government command, and market incentives. E) random and unpredictable. 112) Answer: B Explanation: A) B) C) D) E) 113) Complex economic plans for many economic sectors are most associated with a A) free-market system. B) mixed market system. C) command economy. D) feudal system. E) traditional economy. 113) Answer: C Explanation: A) B) C) D) E) 114) Most modern economies in the world today A) have pure market exchange. B) are similar to feudal systems. C) are mostly run by government decree. D) have a mix of traditional, command and market elements. E) are complex systems that defy description and analysis. 114) Answer: D Explanation: A) B) C) D) E) 38 115) In the current Canadian economy, the majority of choices on how resources are allocated are made by A) consumers and firms through the price system. B) the various levels of government. C) negotiation between unions and firms. D) business firms only. E) legal contracts. 115) Answer: A Explanation: A) B) C) D) E) 116) Comparison of economic systems indicates that A) most nations have either a purely socialist economy or a purely capitalist economy. B) most countries have mixed economies. C) socialist economies are clearly superior in producing consumer goods. D) capitalist economies are clearly superior in distributing income. E) all countries have largely traditional economies. 116) Answer: B Explanation: A) B) C) D) E) 117) Many economies in central and Eastern Europe, including the countries of the former Soviet Union, are still in the process of moving from a command economy to a market economy. In the first years of this transition, most of these countries experienced sharp drops in output and reductions in living standards. Economists generally see this as A) the failure of the market system. B) the triumph of capitalism over communism. C) an indication of the extreme difficulty of transition from one type of economic system to another. D) an indication that these economies should return to being command economies. E) the difficulty of corruption in non-market economies. 117) Answer: C Explanation: A) B) C) D) E) 39 118) In a pure market economy, the role of government is limited to provision of : i) a basic legal and institutional structure. ii) intervention in the allocation of resources in some areas of the economy. iii) redistribution of income. iv) stabilization of economic conditions generally. Which of the above points is true? A) Only i). B) Only i) and ii). C) Only i) and iv). D) Only i), ii), and iv). E) All of the points are provided by government in a pure market economy. 118) Answer: A Explanation: A) B) C) D) E) 119) Income redistribution in a mixed economy A) is supported by all individuals. B) rarely occurs. C) is only accomplished through government intervention. D) risks reducing individual incentives to work and produce. E) is not allowed. 119) Answer: D Explanation: A) B) C) D) E) 120) In a modern mixed economy the government ensures that key institutions are in place to facilitate voluntary transactions between economic agents. These key institutions are A) labour and capital markets. B) the House of Commons and the Senate. C) the Department of Finance and the Bank of Canada. D) securities regulators and the court system. E) private property and freedom of contract. 120) Answer: E Explanation: A) B) C) D) E) 40 Answer Key Testname: UNTITLED1 1) B 2) C 3) A 4) A 5) D 6) B 7) C 8) B 9) A 10) A 11) B 12) D 13) C 14) E 15) C 16) E 17) B 18) D 19) A 20) E 21) D 22) B 23) C 24) C 25) D 26) E 27) D 28) E 29) C 30) B 31) A 32) E 33) E 34) D 35) A 36) C 37) C 38) C 39) D 40) D 41) D 42) C 43) B 44) B 45) D 46) E 47) D 48) D 49) A 50) A 41 Answer Key Testname: UNTITLED1 51) E 52) C 53) E 54) C 55) B 56) B 57) E 58) A 59) C 60) C 61) E 62) B 63) C 64) D 65) C 66) E 67) B 68) A 69) C 70) E 71) D 72) C 73) A 74) B 75) E 76) C 77) A 78) B 79) B 80) C 81) C 82) C 83) A 84) E 85) C 86) E 87) A 88) C 89) D 90) B 91) B 92) A 93) C 94) E 95) C 96) C 97) A 98) D 99) A 100) C 42 Answer Key Testname: UNTITLED1 101) A 102) D 103) B 104) B 105) A 106) E 107) C 108) B 109) C 110) A 111) D 112) B 113) C 114) D 115) A 116) B 117) C 118) A 119) D 120) E 43 Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Disagreements over positive statements A) cannot arise because positive statements are facts. B) are best handled by an appeal to the facts. C) arise from the failure to distinguish between a positive and a normative statement. D) are basically devoid of any emotion. E) never occur. 1) Answer: B Explanation: A) B) C) D) E) 2) A positive statement is one that states A) what is, was, or will be. B) what is and what should be. C) what should be but is not. D) what is desirable. E) non-negative numbers. 2) Answer: A Explanation: A) B) C) D) E) 3) Which is the best description of positive statements? Positive statements A) have been verified by appeal to factual evidence. B) form the basis of all normative arguments. C) are falsifiable in principle by appeal to factual evidence. D) are seldom employed in social sciences like economics. E) have no place in economics because economics deals only with value judgments. 3) Answer: C Explanation: A) B) C) D) E) 1 4) Which is an example of a positive statement? A) There should be one price for gasoline throughout Canada. B) The higher the price for gasoline, the less of it will be consumed. C) Substitutes for fossil fuels should be developed. D) Canada should reduce its imports of consumer goods. E) Corporations in Canada should pay more taxes. 4) Answer: B Explanation: A) B) C) D) E) 5) Which is the best description of a normative statement? A normative statement A) can be derived logically from facts. B) concerns what is provable. C) is a statement that is empirically testable. D) is one that involves a value judgment. E) has no place in the study and practice of economics. 5) Answer: D Explanation: A) B) C) D) E) 6) Which of the following is a normative statement? A) The sun rises in the west and sets in the east. B) A government deficit will reduce unemployment and cause an increase in prices. C) Reducing unemployment is more important than reducing inflation. D) Queen Elizabeth II is the wealthiest woman in the world. E) An increase in the price of lumber is followed by a decrease in the construction of new houses. 6) Answer: C Explanation: A) B) C) D) E) 7) Which of the following is a normative statement? A) The higher is the level of taxes, the lower is consumption spending. B) The higher is the level of taxes, the higher are wage demands. C) A reduction in export taxes on petroleum would result in higher wages. D) Tuition fees should be waived for low-income students. E) A free-trade agreement between two countries will result in an increase in trade. 7) Answer: D Explanation: A) B) C) D) E) 2 8) Suppose an economist tells you that the unemployment rate in Canada last year was 7.8%. This is an example of a(n) ________ statement. A) autonomous B) positive C) normative D) induced E) imputed 8) Answer: B Explanation: A) B) C) D) E) 9) Suppose an economist tells you that, on average, people in Canada have too much personal debt. This is an example of a(n) ________ statement. A) autonomous B) positive C) normative D) independent E) induced 9) Answer: C Explanation: A) B) C) D) E) 10) Which of the following statements belongs more properly in the field of normative economics than positive economics? A) An increase in the minimum wage leads to more unemployment. B) The price of one Canadian dollar is $0.85 U.S. C) When a drought occurs, the price of vegetables tends to rise. D) Canadian governments should provide assistance to the auto industry. E) Technological change has reduced the cost of cell phone service. 10) Answer: D Explanation: A) B) C) D) E) 3 11) Which of the following best describes the relationship between positive and normative statements in economics? A) Normative statements are those with which all economists agree; positive statements may give rise to some disagreement. B) Positive and normative statements are alternate ways of describing the desirability of certain economic policies. C) Normative statements evaluate the desirability of certain economic changes; positive statements do not. D) Neither positive nor normative statements are concerned with the desirability of certain economic changes. E) Economists generally agree with each other regardless of whether a question is positive or normative. 11) Answer: C Explanation: A) B) C) D) E) 12) A theory A) enables one to make prophesies about the future. B) is designed to explain and predict what we observe. C) is used to impose order on the world. D) can only be tested with a controlled experiment. E) assumes definitions for variables. 12) Answer: B Explanation: A) B) C) D) E) 13) An assertion about the desirability of reducing unemployment by lowering payroll taxes is most likely A) a theory. B) a testable proposition. C) a hypothesis. D) a normative statement. E) a positive statement. 13) Answer: D Explanation: A) B) C) D) E) 4 14) An economic theory requires, among other things, A) a set of definitions of the variables to be considered. B) a controlled laboratory setting in which the theory can be tested. C) that the set of predictions be correct. D) a set of value judgments to interpret the empirical evidence. E) the use of endogenous variables only. 14) Answer: A Explanation: A) B) C) D) E) 15) Choose the statement that best describes how endogenous variables differ from exogenous variables. A) An endogenous variable is explained within the theory, while an exogenous variable influences the endogenous variables but is determined outside the theory. B) An endogenous variable is a flow, while an exogenous variable is a stock. C) An endogenous variable is explained outside the theory and influences an exogenous variable while an exogenous variable is explained within the theory. D) An exogenous variable is a function of the endogenous variable, and both are flow variables. E) An endogenous variable is a function of the exogenous variable, and both are stock variables. 15) Answer: A Explanation: A) B) C) D) E) 16) Suppose there is a theory that several things influence the price of fish in Halifax, one of which is the weather during the fishing season. When examining the determinants of the price of fish, the weather is A) an endogenous variable, as it influences the price of fish. B) an exogenous variable, as it is determined outside the theory. C) a stock, as it influences the quantity of fish caught. D) an act of God and, therefore, has no legitimate connection with the theory. E) an endogenous variable, as it is determined within the theory. 16) Answer: B Explanation: A) B) C) D) E) 5 17) The statement that a country's rate of economic growth is influenced by its firms' investment behaviour is an example of a(n) A) variable. B) prediction. C) normative statement. D) theory. E) economic law. 17) Answer: D Explanation: A) B) C) D) E) 18) The statement that a 2% increase in the money supply leads to a 2% increase in the price level is an example of a(n) A) prediction. B) assumption. C) normative statement. D) variable. E) model. 18) Answer: A Explanation: A) B) C) D) E) 19) The statement that introducing a policy of legislated rent controls will lead to a housing shortage is an example of a(n) A) assumption. B) prediction. C) theory. D) normative statement. E) model. 19) Answer: B Explanation: A) B) C) D) E) 6 20) Choose the statement that best characterizes an economic theory. A valid theory A) allows one to deduce a normative statement. B) appeals to the law of large numbers. C) generates a hypothesis that can predict future events. D) extrapolates from the past behaviour of a variable to predict its future course. E) allows one to prove irrefutably one's hypothesis. 20) Answer: C Explanation: A) B) C) D) E) 21) Choose the statement that best characterizes an economic theory. An economic theory A) is only useful if its underlying assumptions are realistic. B) will be useful as long as it is logically consistent. C) must be judged on its ability to explain and predict real-world phenomena. D) will predict more accurately if it contains a greater number of mathematical equations. E) will be useful only if all human behaviour is rational. 21) Answer: C Explanation: A) B) C) D) E) 22) Which of the following pairs of words have similar meanings? A) induced and autonomous B) endogenous and autonomous C) independent and exogenous D) dependent and exogenous E) induced and exogenous 22) Answer: C Explanation: A) B) C) D) E) 23) The statement that a country's rate of GDP growth is influenced by individuals' saving behaviour is an example of a(n) A) variable. B) prediction. C) normative statement. D) theory. E) economic law. 23) Answer: D Explanation: A) B) C) D) E) 7 24) Choose the answer that best explains why economists build models that abstract from the complexities of reality. A) Because the complexities of reality are unimportant. B) Because they believe they gain a greater understanding of reality. C) Because economists are not interested in reality. D) Because this allows economists to conduct controlled experiments to test their theories. E) Because economics deals only in the abstract. 24) Answer: B Explanation: A) B) C) D) E) 25) Suppose an individual wheat farmer's income is influenced by the region's average daily temperature. When examining the determinants of individual farmer income, the average daily temperature is a(n) ________ variable. A) endogenous B) exogenous C) flow D) dependent E) induced 25) Answer: B Explanation: A) B) C) D) E) 26) If we seek to explain the number of seats sold on a particular air route, say Toronto to Halifax, over a one-year period, we would consider many variables. Which of the following variables would be endogenous to our theory? A) the average salary of Canadian airline pilots B) the number of airline seats sold on this route C) the price of jet fuel D) the number of fog days in Halifax E) the unemployment rate in Toronto 26) Answer: B Explanation: A) B) C) D) E) 8 27) When an economist assumes that the owners of firms are motivated only by the desire to maximize profits, the economist most likely believes that A) it doesn't matter whether or not the assumption is descriptively accurate; what matters is whether a theory built on the assumption predicts well. B) the assumption is descriptively accurate, since surveys have been taken and the owners of firms have admitted that their only objective is to maximize profits. C) the assumption is inaccurate, since surveys have been taken and the owners of firms have admitted that they care about more than just profits. D) individuals entering business are quite narrow in their personal objectives. E) all people enter business for their own selfish gain. 27) Answer: A Explanation: A) B) C) D) E) 28) An economic model that contains a highly realistic set of assumptions is A) useful because there is then very little difference between "theory" and "reality." B) necessarily better able to predict the future. C) certainly superior to a model whose assumptions are highly unrealistic. D) more abstract than a model whose assumptions are further removed from reality. E) not likely to be useful because of its particularized nature and its complexity. 28) Answer: E Explanation: A) B) C) D) E) 29) Economists build models that abstract from the complexities of reality because A) it is easier to do so. B) they believe they gain a greater understanding of reality. C) economists are not interested in reality. D) economists do not understand the real world. E) the complexities of reality are unimportant. 29) Answer: B Explanation: A) B) C) D) E) 9 30) Suppose we have data for 1000 students for a period of one year. The data show that those students who spend more hours studying have a higher grade point average (GPA). We can say that A) there is a positive correlation between hours of study time and GPA. B) having a higher GPA leads students to spend more time studying. C) there is a causal relationship between hours of study time and GPA. D) more hours spent studying leads to a higher GPA. E) if hours of study time increase, then GPA will automatically increase. 30) Answer: A Explanation: A) B) C) D) E) 31) Suppose economists at the World Bank discover a positive correlation between family income and female education levels in developing countries. We can say that A) the correlation is inconsistent with a theory that an increase in female education levels causes an increase in family income. B) an increase in family income causes an increase in female education levels. C) an increase in female education levels causes an increase in family incomes. D) there is a causal relationship between family income and female education. E) the observed correlation is consistent with a theory that an increase in female education levels causes an increase in family income. 31) Answer: E Explanation: A) B) C) D) E) 32) Suppose economists at the Department of Finance in Ottawa employ an economic model that predicts the effects of an increase in the GST. After implementation of the change, researchers find that the empirical data rejects the prediction. They are likely to A) modify the prediction in light of the new evidence. B) ignore the empirical evidence and continue using the model. C) modify the theory in light of this newly acquired empirical knowledge. D) reject the empirical data as faulty because it did not support the theory. E) modify the data to suit the definitions and assumptions. 32) Answer: C Explanation: A) B) C) D) E) 10 33) Suppose economists at the World Bank develop a theory with a prediction that increased levels of foreign aid lead to increases in per capita GDP in the recipient developing countries. They find empirical evidence that is consistent with this theory. The economists are able to conclude that A) the evidence fails to reject the theory. B) the theory has been proven correct. C) the theory is always reliable. D) the evidence is rejected by the theory. E) the assumptions used in the theory have been proven correct. 33) Answer: A Explanation: A) B) C) D) E) 34) When using statistics in economics, the possibility of error A) cannot be eliminated. B) cannot be controlled. C) cannot be evaluated. D) is not considered to be important. E) can be eliminated with more sophisticated statistical techniques. 34) Answer: A Explanation: A) B) C) D) E) 35) Suppose that a particular theory predicts that on sunny days consumption of ice cream will rise and that on cloudy days consumption of ice cream will fall. If an economist tests this theory and finds that over a six-month period the theory predicts accurately, the economist would likely say A) the theory has been proven correct. B) the theory is always reliable. C) the evidence fails to reject the theory. D) the theory shouldn't