Principles of Economics - D089 TESTS
Which type of economy is characterized by a government that plans and controls all economic activity? -
(correct Answer) - Command
Correct! A command economy is a centralized economic system in which all economic decisions are
made by the nation's government.
What is an example of a normative economic statement? - (correct Answer) - Marginal tax rates should
be lowered on high-income individuals.
Correct! A marginal tax rate is the amount of money an individual pays in taxes on each additional dollar
earned. This statement uses the word "should", which makes it a value judgment or opinion and a
normative statement.
Which characteristic is associated with natural resources from a business perspective? - (correct Answer)
- They exist without human effort.
Correct! Natural resources are found in nature without any human effort.
How can the available supply of natural resources be increased? - (correct Answer) - Discovering new
ways to extract resources
Correct! The discovery of different ways to extract natural resources can make them more available.
A ski resort sells tickets online at $70 per ticket. The resort is not selling many tickets, so it offers a two-
for-one opportunity. Which economic principle is being used? - (correct Answer) - People respond to
incentives.
Correct! The incentive of a sale or coupon changed the cost from $70 to $35, making the ski trip more
affordable and desirable. This incentive is what likely changed buyers' behaviors.
What are the characteristics of the production possibility frontier graph? - (correct Answer) - Trade-offs
in choices and downward sloping
Correct! The graph of the production possibility frontier reflects trade-offs in choices and is downward
sloping.
How is scarcity represented on the production possibility frontier? - (correct Answer) - By there being
attainable and unattainable points
Correct! The production possibility frontier depicts the impact of scarcity by providing a clear mark
between the set of attainable and unattainable points.
The government imposes new safety regulations on the production of gas stoves. What will happen in
the market for gas stoves? - (correct Answer) - Supply decreases.
, Correct! New government regulations on producers will make it more expensive to produce gas stoves
and will decrease supply.
The price of steel has increased by 5%, which leads to an increase in quantity supplied by 8%. Which
outcome can be concluded from the demand and supply of steel? - (correct Answer) - The supply of steel
is elastic.
Correct! Because the quantity supplied increased by more than 5%, it is reasonable to conclude that the
supply of steel is elastic.
An individual wants to sell a car that frequently requires costly repairs. Although the car performs worse
and requires more repairs than similar products, the seller hopes to get a price equal to better
performing cars since the buyers will not know about the problems. Why is this seller able to charge a
price equal to other sellers? - (correct Answer) - Asymmetric information
Correct! The seller has more information relevant to the transaction about the car than the buyer does.
Which market failure is overcome by a money-back guarantee strategy using mail-order catalogs? -
(correct Answer) - Imperfect information
Correct! A money-back guarantee helps instill confidence in the buyer about the quality of the product
by refunding purchase price if the buyer is dissatisfied.
Why do high labor-cost countries typically have more capital than low labor-cost countries? - (correct
Answer) - Firms choose technology that requires more capital than labor to offset higher labor costs.
Correct! Firms minimize costs by choosing a mix of inputs according to their relative cost. Firms
operating in high labor cost countries will use more capital than firms operating in low labor cost
countries.
A bakery operates in an industry with many competitors and easy entry and exit. The firms in the
industry are price takers. What is the price elasticity of demand for the bakery's bread? - (correct
Answer) - Perfectly elastic
Correct! In a perfectly competitive market, the price elasticity of demand is infinite
A firm is operating in an environment with other firms who differentiate their products with
advertisements. The firm finds that its long-run economic profits equal zero. Which market environment
is this firm operating in? - (correct Answer) - Monopolistic competition
Correct! Consumers view products of firms in a monopolistic competitive market environment as close
substitutes with some differentiation between competitors' products. This enables them to have some
market power, but not enough to prevent driving long-run economic profit to zero.
The market share of the top four firms was measured, and the concentration ratio score indicated that a
proposed merger would draw the attention of anti-trust authorities. Which concentration ratio score was
calculated? - (correct Answer) - 58%
Correct! A concentration ratio score of more than 50% would be considered especially high and would
draw the attention of antitrust authorities.
Which type of economy is characterized by a government that plans and controls all economic activity? -
(correct Answer) - Command
Correct! A command economy is a centralized economic system in which all economic decisions are
made by the nation's government.
What is an example of a normative economic statement? - (correct Answer) - Marginal tax rates should
be lowered on high-income individuals.
Correct! A marginal tax rate is the amount of money an individual pays in taxes on each additional dollar
earned. This statement uses the word "should", which makes it a value judgment or opinion and a
normative statement.
Which characteristic is associated with natural resources from a business perspective? - (correct Answer)
- They exist without human effort.
Correct! Natural resources are found in nature without any human effort.
How can the available supply of natural resources be increased? - (correct Answer) - Discovering new
ways to extract resources
Correct! The discovery of different ways to extract natural resources can make them more available.
A ski resort sells tickets online at $70 per ticket. The resort is not selling many tickets, so it offers a two-
for-one opportunity. Which economic principle is being used? - (correct Answer) - People respond to
incentives.
Correct! The incentive of a sale or coupon changed the cost from $70 to $35, making the ski trip more
affordable and desirable. This incentive is what likely changed buyers' behaviors.
What are the characteristics of the production possibility frontier graph? - (correct Answer) - Trade-offs
in choices and downward sloping
Correct! The graph of the production possibility frontier reflects trade-offs in choices and is downward
sloping.
How is scarcity represented on the production possibility frontier? - (correct Answer) - By there being
attainable and unattainable points
Correct! The production possibility frontier depicts the impact of scarcity by providing a clear mark
between the set of attainable and unattainable points.
The government imposes new safety regulations on the production of gas stoves. What will happen in
the market for gas stoves? - (correct Answer) - Supply decreases.
, Correct! New government regulations on producers will make it more expensive to produce gas stoves
and will decrease supply.
The price of steel has increased by 5%, which leads to an increase in quantity supplied by 8%. Which
outcome can be concluded from the demand and supply of steel? - (correct Answer) - The supply of steel
is elastic.
Correct! Because the quantity supplied increased by more than 5%, it is reasonable to conclude that the
supply of steel is elastic.
An individual wants to sell a car that frequently requires costly repairs. Although the car performs worse
and requires more repairs than similar products, the seller hopes to get a price equal to better
performing cars since the buyers will not know about the problems. Why is this seller able to charge a
price equal to other sellers? - (correct Answer) - Asymmetric information
Correct! The seller has more information relevant to the transaction about the car than the buyer does.
Which market failure is overcome by a money-back guarantee strategy using mail-order catalogs? -
(correct Answer) - Imperfect information
Correct! A money-back guarantee helps instill confidence in the buyer about the quality of the product
by refunding purchase price if the buyer is dissatisfied.
Why do high labor-cost countries typically have more capital than low labor-cost countries? - (correct
Answer) - Firms choose technology that requires more capital than labor to offset higher labor costs.
Correct! Firms minimize costs by choosing a mix of inputs according to their relative cost. Firms
operating in high labor cost countries will use more capital than firms operating in low labor cost
countries.
A bakery operates in an industry with many competitors and easy entry and exit. The firms in the
industry are price takers. What is the price elasticity of demand for the bakery's bread? - (correct
Answer) - Perfectly elastic
Correct! In a perfectly competitive market, the price elasticity of demand is infinite
A firm is operating in an environment with other firms who differentiate their products with
advertisements. The firm finds that its long-run economic profits equal zero. Which market environment
is this firm operating in? - (correct Answer) - Monopolistic competition
Correct! Consumers view products of firms in a monopolistic competitive market environment as close
substitutes with some differentiation between competitors' products. This enables them to have some
market power, but not enough to prevent driving long-run economic profit to zero.
The market share of the top four firms was measured, and the concentration ratio score indicated that a
proposed merger would draw the attention of anti-trust authorities. Which concentration ratio score was
calculated? - (correct Answer) - 58%
Correct! A concentration ratio score of more than 50% would be considered especially high and would
draw the attention of antitrust authorities.
