Part I: Twelve Key Elements of Economics

Twelve Key Elements of Economics

Practice Test

 Incentives matter

1. 1. only when people are greedy and selfish.
   2. only in a free market system.
   3. only in the private sector.
   4. to all human beings regardless of environment.

2. Which of the following is often referred to as the basic postulate of economics?
   1. Individuals act only out of selfish motives.
   2. Incentives matter—individuals respond in predictable ways to changes in personal costs and benefits.
   3. The accuracy of the assumptions is the best test of an economic theory.
   4. The value of a good is objective; it is equal to the cost of producing the good.

3. The expression, “There’s no such thing as a free lunch,” implies that
   1. everyone has to pay for his own lunch.
   2. the person consuming a good must always pay for it.
   3. opportunity costs are incurred when resources are used to produce goods and services.
   4. no one has time for a good lunch anymore.

4. Maria wishes to buy gasoline and have her car washed. She finds that if she buys 9 gallons of gasoline at $2.50 per gallon, the car wash costs $2, but if she buys 10 gallons of gasoline, the car wash is free. For Maria, the marginal cost of the tenth gallon of gasoline is
   2. 50 cents.
   3. $2.00.
   4. $2.50.

5. If the market price of a good is more than the opportunity cost of producing it,
   1. the market price of the product will increase in the long run.
   2. producers will increase supply in the long run.
   3. resources will flow away from production of the good, causing supply to decline with the passage of time.
   4. the situation will remain unchanged as long as supply and demand remain in balance.

6. Who gains in a voluntary trade?
   1. the buyer only Twelve Key Elements of Economics
   2. the seller only
   3. both the buyer and the seller
   4. both the buyer and the seller, but the seller usually gains more

7. Economic progress
   1. reflects that people are achieving higher income levels and living standards.
   2. requires that individuals work longer hours.
   3. indicates that scarcity is no longer a problem.
   4. indicates income levels are higher even though environmental and health conditions have worsened.

8. Voluntary trade promotes economic progress because it
   1. moves goods, services and resources from people who value them more to individuals who value them less.
   2. encourages individuals to become self-sufficient.
   3. makes larger outputs possible as a result of specialization.
   4. benefits buyers at the expense of sellers.

9. High transaction costs will tend to
   1. reduce the number of mutually beneficial exchanges.
   2. lead to more specialization in accordance with the law of comparative advantage.
   3. increase the total gains from trade.
   4. increase the number of mutually beneficial exchanges.

10. Middlemen
    1. increase transaction costs.
    2. increase the price of goods, services and resources without providing any benefits.
    3. impede trade and hinder economic growth.
    4. reduce transactions costs.

11. If the Internet helps buyers learn about the availability of products and find potential sellers more quickly,
    1. the volume of trade will decline.
    2. transaction costs will rise.
    3. the gains from trade will increase.
    4. buyers will be better off, but sellers will be worse off.
    5. Twelve Key Elements of Economics