Mr. Beck

SUNY College at Oneonta

Review Questions for Chapter 1

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Review Questions for Economics 110

Major Topics Covered in Chapter 1

Basic Assumptions: Questions  #Q4  #Q11   #Q15

Voluntary Exchange: Questions #Q1   #Q7

"Invisible Hand": Questions  #Q3  #Q5    #Q10  #Q13

Market Failure: Questions  #Q2   #Q6   #Q8  #Q9   #Q12   #Q14

1. Adam Smith claims that for an economy to achieve mutual gains from voluntary exchange it requires

  1. consumers being considerate of their fellow man.
  2. self interested behavior by consumers and businesses.
  3. businesses maintaining good will in their business relations.
  4. government interference with the market.
  5. businesses developing monopoly power to improve efficiency in production.

  6. Q1 answer
2. Which one of the following would be an example of market failure requiring government interference?
  1. Michael Jordan is offered $38 million per year to play basketball.
  2. Competition among businesses drives down the price of calculators so low that many producers go bankrupt.
  3. Negative externalities are generated by business production polluting the environment.
  4. Consumers are influenced by advertising convincing them to buy products they do not need.
  5. Consumers eat excessive amounts of unhealthy and fattening foods.

  6. Q2 answer
3. To Adam Smith, the "invisible hand" refers to
  1. the government
  2. his faith in people's basic human kindness to their fellow man.
  3. the free market.
  4. the generosity of businesses in a capitalist system.

  5. Q3 answer
4. The most basic assumption upon which the foundation of economics is based is that
  1. continued technological improvement is necessary to stimulate essential economic growth.
  2. the market system is the best of all possible production systems.
  3. private ownership of resources is necessary for maximum economic growth.
  4. private production is more economically efficient than governmental production.
  5. society's resources are limited and unable to satisfy unlimited wants.

  6. Q4 answer
5. According to Adam Smith’s theory of the “invisible hand,” businesses will produce the products consumers most desire because
  1. this will maximize consumer satisfaction.
  2. the government requires them to do so.
  3. this will maximize business profits.
  4. this will maximize society’s welfare.
  5. this will generate consumer “good will.”

  6. Q5 answer
6. Which one of the following is an example of an externality, a market shortcoming which requires government interference?
  1. Unskilled workers are paid less than a living wage.
  2. A majority of Americans are overweight because they have unhealthy diets.
  3. Shaquille O’Neal gets paid more than $15 million per year to play basketball.
  4. Excessive pollution generated by business production is damaging the environment.
  5. Successful advertising convinces consumers to buy products they cannot afford and do not need.

  6. Q6 answer
7.  For voluntary exchange between 2 parties to occur,
  1. both parties must gain the same amount.
  2. one party must gain more than the other party loses.
  3. one party must gain what the other party loses.
  4. both parties must gain.
  5. None of the above answers is correct.

  6. Q7 answer
8. Which one of the following would be an example of market failure requiring government interference?
  1. Ken Griffey Jr is offered $116.5 million to play baseball for the next 9 years.
  2. The price of gasoline continues to increase making it difficult for the poor to be able to afford to drive to work.
  3. Excessive automobile emissions pollute the air and endanger the environment.
  4. Consumers are influenced by advertising convincing them to buy products they do not need.
  5. A majority of Americans are overweight because of unhealthy diets.

  6. Q8 answer
9. Which one of the following would Adam Smith agree is an example of market failure requiring government interference?
  1. Many dot.com internet based companies go bankrupt in 2000.
  2. Alex Rodriguez is offered $252 million to play baseball for the next 10 years.
  3. Stock values of many high tech companies fall by more than 50% in 2000.
  4. The production of steel pollutes the air and endangers the environment.
  5. The price of heating oil continues to increase making it difficult, if not impossible, for the poor to be able to afford to heat their homes this winter.

  6. Q9 answer
10.  Adam Smith’s “invisible hand” theory claims that, under a strict set of assumptions, the free market would be the best method to allocate a good X. This conclusion is based on all of the following assumptions about good X, except one. The single exception is
  1.  competition exists among producers of good X.
  2.  No externalities exist in the production or consumption of good X.
  3.  Businesses attempt to maximize their profits in the production of good X.
  4.  Consumer sovereignty applies with respect to the consumption of good X.
  5.  Businesses attempt to maximize the welfare of the customers who purchase good X.

  6. Q10 answer
11. One of the basic assumptions underlying Adam Smith's theory of the Invisible Hand is that
  1. government attempts to maximize power.
  2. government planning is necessary to maximize economic growth.
  3. businesses and households are concerned about their own “self-interest.”
  4. households are unselfish. They attempt to maximize the well being of their fellow citizens.
  5. businesses attempt to maximize the well being of their consumers.

  6. Q11  answer
12. Which one of the following would Adam Smith agree is an example of market failure requiring government interference?
  1. Some airlines are threatened with bankruptcy as a result of the recent disruption of air travel.
  2. The use of the automobile pollutes the air and generates a negative externality.
  3. Fears of reduced oil supplies cause gas prices to increase, resulting in low income workers being unable to drive to work.
  4. The stock market tumbles downward in the aftermath of the terrorist attacks.
  5. Rents increase in midtown Manhattan in the wake of the World Trade Center collapse.

  6. Q12 answer
13. Adam Smith’s theory of the “invisible hand” assumes that
  1. businesses  will voluntary reduce negative externalities generated by the production of their products.
  2. consumers are concerned about maximizing the welfare of their fellow consumers.
  3. self-interested producers sell their products to self-interested consumers.
  4. government research is necessary to inform businesses what consumers most want.
  5. producers are concerned about maximizing the welfare of consumers.

  6. Q13 answer
14. To cure the problem of externalities, such as pollution, economists recommend that government
  1. regulate polluters.
  2. pursues a policy of laissez-faire, "hands off" businesses.
  3. determine mandatory limits controlling the amount of pollution which businesses may generate.
  4. use the market mechanism to control undesirable externalities.

  5. Q14 answer
15. For the free market to yield optimal results for the production and consumption of good X, Adam Smith assumed all of the following would have to exist, except possibly one. The single exception, if one exists, is
  1. competition exists in the production of good X.
  2. successful government planning is able to inform businesses how much of good X consumers demand.
  3. no externalities exist in the production or consumption of good X.
  4. consumer sovereignty exists.
  5. None of the above is an exception. Adam Smith assumed all of the above.

  6.     Q15 answer
Answers


 

1. b  Return to Q1
Solution to Q1

2. c  Return to Q2
Solution to Q2

3. c  Return to Q3
Solution to Q3

4. e  Return to Q4
Solution to Q4

5. c  Return to Q5
Solution to Q5

6. d  Return to Q6
Solution to Q6

7. d  Return to Q7
Solution to Q7

8. c  Return to Q8
Solution to Q8

9. d  Return to Q9
Solution to Q9

10. e  Return to Q10
Solution to Q10

11. c  Return to Q11
Solution to Q11

12. b Return to Q12
Solution to Q12

13. c  Return to Q13
Solution to Q13

14. d  Return to Q14
Solution to Q14

15. b  Return to Q15
Solution to Q15

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