econ910 chapter 4

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1. Normal profits are:
A. a cost, because any excess of total receipts over total costs will accrue to the businessperson.
B. a cost, because they represent payments made for the resources that the businessperson owns and
supplies in his or her own enterprise.
C. not a cost, because a firm can avoid these payments by temporarily closing down.
D. not a cost of production, because they need not be realised, in order for a firm to retain entrepreneurial ability.

B

2. Economic profits are:
A. a cost, because they are really a part of wage costs.
B. a cost, because they accrue to the entrepreneur.
C. not a cost, because they cannot be calculated.
D.not an economic cost, because they need not be realised, in order for a business to acquire and retain
entrepreneurial ability.

D

3. If competitive industry Z is realising substantial economic profits, we can expect that in the long term, output will:
A. diminish, product price will fall, and economic profits will tend to disappear.
B. diminish, product price will rise, and economic profits will tend to disappear.
C. expand, product price will fall, and economic profits will tend to disappear.
D. expand, product price will fall, and economic profits will tend to rise.

C

4. 'Consumer sovereignty' refers to the:
A. fact that resource prices tend to be high, relative to product prices, in capitalistic economies.
B. idea that the pursuit of self-interests will prove, ultimately, to be in the public's interest.
C. notion that the decisions of producers and resource suppliers, with respect to the kinds and amounts of goods produced, must be appropriate to consumer demands.
D. fact that a federal authority exists to protect consumers from harmful and defective products.

C

5. The presence of economic profits in an industry suggests that the industry:
A. can earn more profits by increasing product price.
B. will attract more firms.
C. has excess productive capacity.
D. is the size that consumers want it to be.

B

6. If competitive industry Y is incurring substantial losses, we can expect that in the long term, output will:
A. expand, product price will rise, and losses will tend to disappear.
B. diminish, product price will fall, and losses will increase.
C. diminish, product price will rise, and losses will tend to disappear.
D. expand, product price will fall, and losses will tend to disappear.

C

7. 'The "dollar votes" of consumers will ultimately determine the composition of output and the allocation of
resources in a market economy.' This statement best describes the concept of:
A. derived demand.
B. external costs and benefits.
C. consumer sovereignty.
D. the invisible hand.

C

8. The most efficient combination of resources producing any output is the combination that:
A. comes closest to using the same quantities of land, labour, capital, and entrepreneurial ability.
B. can be obtained for the smallest money outlay.
C. uses the smallest total quantity of all resources.
D. conserves most on the use of labour.

B

9. The following data show all available techniques by which 20 units of a given commodity can be produced:
Resource Resource ($) Possible production techniques
a b c d
Land 4 2 4 2 4
Labour 3 1 2 4 1
Capital 3 5 2 3 1
Entrepreneurial ability 2 3 1 1 4
Given the indicated resource prices above, the most economically efficient production technique(s) will be
technique(s):
A. a.
B. b and d.
C. c.
D. a and c.

B

10. The following data show all available techniques by which 20 units of a given commodity can be produced:
Resource Resource ($) Possible production techniques
a b c d
Land 4 2 4 2 4
Labour 3 1 2 4 1
Capital 3 5 2 3 1
Entrepreneurial ability 2 3 1 1 4
If a new production technique is developed that enables a firm to produce 20 units of output with 3 units of
land, 3 units of labour, 1 unit of capital and 2 units of entrepreneurial ability, this technique would:
A. not be adopted, because although it reduces production costs, it does not increase profits.
B. be adopted, because it would lower production costs and increase economic profits.
C. not be adopted, because it entails higher production costs than other available techniques.
D. be adopted, even though economic profits would be reduced slightly.

B

11. In a competitive market economy, firms will select the least-cost production technique because:
A. such choices will result in the full employment of available resources.
B. to do so will maximise a firm's profit.
C. this will prevent new firms from entering the industry.
D. 'dollar voting' by consumers mandates such a choice.

B

12. 'For whom is a given mix of goods and services to be produced? In other words, how is the product to be distributed among people when such commodities and services are available?' In a market economy, this problem is primarily resolved in the:
A. public sector, through the mechanism of central planning.
B. business sector, through the mechanism of advertising.
C. private sector, through the earning and spending of income.
D. money market, through borrowing and saving by households and businesses.

C

13. Assume the demand for product Y increases and the subsequent market system response results in the production of more Y. This illustrates:
A. that the concept of derived demand is inapplicable.
B. that consumer sovereignty is inoperative in this economy.
C. the scarcity function of prices.
D. the directing or guiding function of prices.

D

14. Which of the following best describes the 'guiding function' of competitive prices?
A. Profitable industries tend to contract and unprofitable industries tend to expand.
B. The market system will always generate economic profits for firms that use the least costly production technology.
C. The market system can negotiate reallocations of resources that are appropriate to changes in consumer
tastes, technology, and resource supplies.
D. When prices are in equilibrium, product shortages or surpluses cannot occur.

C

15. When economists say that the demand for a resource is a 'derived demand', they mean that:
A. producers tend to substitute low-priced resources for high-priced resources.
B. the demand for resources depends upon the demand for the product produced by those resources.
C. government demand complements private demand for most goods and services.
D. resource demand curves are often up-sloping.

B

16. Which of the following best reflects the notion of 'derived demand'?
A. Product demand is determined by the demand for resources.
B. The demand for cars will decline if the price of petrol goes up.
C. Economic resources are demanded because there is a demand for the goods they produce.
D. The 'dollar votes' of consumers determines the composition of output.

C

17. An increase in consumer demand for product X increases the demand for resources used in producing X. This indicates that:
A. consumer sovereignty is not functioning in this economy.
B. the notion of derived demand is relevant.
C. production must be taking place at a loss.
D. firms are failing to use the least-cost production technique.

B

18. In a market economy, the distribution of income would be primarily determined by:
A. consumer needs and preferences.
B. the quantities and prices of the resources that households supply.
C. government regulations that provide a minimum income for all.
D. a social consensus as to what distribution of income is most equitable.

B

19. In a market economy, the money incomes of individuals will primarily depend upon:
A. government policies in setting wages and interest rates.
B. the value and amounts of the productive resources the individuals possess.
C. the amount of education the individuals have.
D. how hard they are willing to work.

B

20. Which of the following best describes the 'invisible hand' concept?
A.The desire of resource suppliers and producers to further their own self-interest will automatically further
the public's interest.
B. The non-substitutability of resources gives rise to a conflict between private and public interests, and the need for government intervention.
C. Mixed capitalism is the best system for overcoming the scarce-resources - unlimited-wants problem.
D. Central direction by the government will improve resource allocation in a capitalistic economy.

A

21. The 'invisible hand' refers to the:
A. fact that our tax system redistributes income from rich to poor.
B. notion that, under competition, decisions motivated by self-interest promote the social interest.
C. tendency of monopolistic sellers to raise prices above competitive levels.
D. fact that government controls the functioning of the market system.

B

22. The 'invisible hand' concept suggests that:
A. market failures imply the need for a national economic plan.
B. big businesses are inherently more efficient than small businesses.
C. the competitiveness of a capitalistic market economy invariably diminishes over time.
D. given competition, private and public interests will tend to coincide.

D

23. The major virtues of the competitive market system are that it:
A. allocates resources efficiently and allows economic freedom.
B. results in an equitable personal distribution of income and always maintains full employment.
C. results in price-level stability and a fair personal distribution of income.
D. eliminates discrimination and minimises environmental pollution.

A

24. The basic economic argument for the market system is that it promotes:
A. an efficient allocation of resources.
B. equality in the distribution of income.
C. personal freedom.
D. the use of money.

A

25. The market economy is regarded as 'allocatively efficient', in that:
A. it achieves a large quantity of output per unit of input.
B. it generates a rapid rate of technological change.
C. it directs resources to meet consumer demand.
D. managers and workers have an incentive to work hard.

C

26. If firms have sufficient time to enter and leave industries, economic profits will be maximised.
A. True
B. False

B

27. An economic profit is the minimum compensation that is just sufficient to obtain and retain contributions
by the entrepreneur.
A. True
B. False

B

28. The concept of consumer sovereignty refers to situations in which consumers are represented on the board
of directors of large corporations.
A. True
B. False

B

29. In the market system, prices tend to guide resources from less important to more important uses as the
market system accommodates change.
A. True
B. False

B

30. Consumer sovereignty means that legislation now protects the rights of consumers to dispose of their incomes as they see fit.
A. True
B. False

B

31. If a competitive industry is realising substantial losses, we can expect that in the long term, output will:
A. diminish, product price will fall, and losses will tend to disappear.
B. diminish, product price will rise, and losses will tend to disappear.
C. expand, product price will fall, and losses will tend to disappear.
D. expand, product price will fall, and losses will tend to rise.

B

32. The ability of the market system to communicate changes in changes in consumer tastes and to bring about appropriate responses from business and resource suppliers can be referred to as:
A. the guiding function of prices.
B. technological advance.
C. market failure.
D. unequal distribution of income.

A

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