Microeconomics David Colander 11th Edition- Test Bank

 

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Sample Test

Microeconomics, 11e (Colander)

Chapter 3   Economic Institutions

 

1) Private property rights are essential to market economies.

 

Answer:  TRUE

Explanation:  Market economies rely on market forces, which are dependent upon the existence of property rights.

Difficulty: 1 Easy

Topic:  Economic Systems

Learning Objective:  03-01 Define market economy and compare and contrast socialism with capitalism.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

2) In a market economy, society relies on the self-interest of individuals to determine what, how, and for whom to produce.

 

Answer:  TRUE

Explanation:  In a market economy, individuals decide how, what, and for whom to produce based on self-interest.

Difficulty: 1 Easy

Topic:  Economic Systems

Learning Objective:  03-01 Define market economy and compare and contrast socialism with capitalism.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

3) The goal of socialist economies is to distribute what is produced according to the needs of individuals. Market economies tend to distribute what is produced according to ability and effort.

 

Answer:  TRUE

Explanation:  Under socialism, individuals give according to their ability and receive according to their need. Under a market economy, what one receives is a function of one’s ability, effort, and inheritance.

Difficulty: 1 Easy

Topic:  Economic Systems

Learning Objective:  03-01 Define market economy and compare and contrast socialism with capitalism.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

4) Feudalism and mercantilism relied on markets to solve the three main coordination problems.

 

Answer:  FALSE

Explanation:  Feudalism solved these problems by relying on tradition while mercantilism relied on government intervention.

Difficulty: 1 Easy

Topic:  Evolving Economic Systems

Learning Objective:  Appendix

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

5) Households supply factors of production to businesses and are paid by businesses for doing so. The market where this interaction takes place is called the factor market.

 

Answer:  TRUE

Explanation:  The factor market is the market in which inputs are supplied by households and demanded by businesses.

Difficulty: 1 Easy

Topic:  Economic Institutions in a Market Economy

Learning Objective:  03-02 Describe the role of businesses and households in a market economy.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

6) Businesses produce goods and services and sell them to households and governments. The market where this interaction takes place is called the goods market.

 

Answer:  TRUE

Explanation:  The goods market is the market in which goods and services are supplied by businesses and demanded by households and governments.

Difficulty: 1 Easy

Topic:  Economic Institutions in a Market Economy

Learning Objective:  03-02 Describe the role of businesses and households in a market economy.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

7) Limited liability is a key advantage of partnerships and sole proprietorships over corporations.

 

Answer:  FALSE

Explanation:  The liability of both sole proprietorships and partnerships is unlimited; this is not the case for corporations.

Difficulty: 1 Easy

Topic:  Economic Institutions in a Market Economy

Learning Objective:  03-02 Describe the role of businesses and households in a market economy.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

8) Governments establish the laws that regulate the interaction between businesses and households but do not serve as actors in the economy themselves.

 

Answer:  FALSE

Explanation:  Governments do referee the interaction between households and businesses in the economy, but they also serve as actors by redistributing income and purchasing goods and services.

Difficulty: 2 Medium

Topic:  The Roles of Government

Learning Objective:  03-03 List and discuss the various roles of government.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

9) The L3C (low profit limited liability company) type of corporation, sometimes called a benefit corporation, ignores profit considerations and instead pursues only social goals.

 

Answer:  FALSE

Explanation:  L3Cs take social objectives and profit into consideration when making decisions.

Difficulty: 1 Easy

Topic:  Economic Institutions in a Market Economy

Learning Objective:  03-02 Describe the role of businesses and households in a market economy.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

10) When there are market externalities, the market allocation of resources will be optimal.

 

Answer:  FALSE

Explanation:  When externalities arise, mutually beneficial transactions between buyers and sellers give rise to third party effects not accounted for by buyers or sellers. Because decision makers ignore these effects, there is no guarantee that their decisions will be in society’s best interest.

Difficulty: 2 Medium

Topic:  The Roles of Government

Learning Objective:  03-03 List and discuss the various roles of government.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

11) Membership in the Group of Seven consists of both developed and developing countries.

 

Answer:  FALSE

Explanation:  This group involves the most powerful developed economies in the world.

Difficulty: 1 Easy

Topic:  Global Institutions

Learning Objective:  03-04 Explain why global policy issues differ from national policy issues.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

12) Market economies are based on:

1.   A) private property and individual good will toward others.

2.   B) government planning and individual good will toward others.

3.   C) government planning and individual self-interest.

4.   D) private property and individual planning.

 

Answer:  D

Explanation:  See the definition of a market economy in the text.

Difficulty: 1 Easy

Topic:  Economic Systems

Learning Objective:  03-01 Define market economy and compare and contrast socialism with capitalism.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

13) Private property rights:

1.   A) are essential elements of a market economy.

2.   B) do not need to be enforced in market economies.

3.   C) must be established before a socialist economy can function properly.

4.   D) ensure an equitable distribution of income in market economies.

 

Answer:  A

Explanation:  Private property rights give individuals control over private property. Without this control, incentives to produce and sell goods would be too limited to support markets.

Difficulty: 1 Easy

Topic:  Economic Systems

Learning Objective:  03-01 Define market economy and compare and contrast socialism with capitalism.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

14) McDonald’s Corporation lost a battle to keep a Singapore firm, Future Enterprises, from selling goods under the labels MacNoodles, MacTea, and MacChocolate. In this case, the court system in Singapore was defining:

1.   A) globalization.

2.   B) limited liability.

3.   C) consumer sovereignty.

4.   D) property rights.

 

Answer:  D

Explanation:  Trademarks, which were in dispute in this case, are a form of intellectual property rights.

Difficulty: 2 Medium

Topic:  Economic Systems

Learning Objective:  03-01 Define market economy and compare and contrast socialism with capitalism.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

15) A market economy:

1.   A) requires government to set prices.

2.   B) allocates according to need.

3.   C) distributes property rights.

4.   D) relies on the invisible hand to coordinate supply and demand.

 

Answer:  D

Explanation:  A market economy relies on the invisible hand to coordinate supply and demand decisions. The invisible hand mechanism relies on people to be selfishly motivated.

Difficulty: 1 Easy

Topic:  Economic Systems

Learning Objective:  03-01 Define market economy and compare and contrast socialism with capitalism.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

16) Which of the following is not a characteristic of pure capitalism?

1.   A) Government ownership of means of production

2.   B) Private ownership of land

3.   C) Freedom of enterprise

4.   D) Worker freedom

 

Answer:  A

Explanation:  Capitalism is an economic system based on private property and the market. It gives private property rights to individuals and relies on the self-interest of individuals and market forces to coordinate economic activity. Government ownership of capital is a characteristic of socialism.

Difficulty: 1 Easy

Topic:  Economic Systems

Learning Objective:  03-01 Define market economy and compare and contrast socialism with capitalism.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

17) Which of the following is a characteristic of a market economy?

1.   A) Private property

2.   B) Government ownership of the means of production

3.   C) Distribution according to need

4.   D) Tradition determines the what, how, and for whom decisions

 

Answer:  A

Explanation:  A market economy is an economic system based on private property and the market. It gives private property rights to individuals and relies on market forces to coordinate economic activity.

Difficulty: 1 Easy

Topic:  Economic Systems

Learning Objective:  03-01 Define market economy and compare and contrast socialism with capitalism.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

18) For a market to exist:

1.   A) private property rights must be allocated and defended by government.

2.   B) government must guarantee equal treatment for all.

3.   C) individuals must be concerned with the social good.

4.   D) everyone must have identical wants and desires.

 

Answer:  A

Explanation:  For a market to exist private property rights must exist and be accepted by individuals or be defended by other means such as government or tradition.

Difficulty: 2 Medium

Topic:  Economic Systems

Learning Objective:  03-01 Define market economy and compare and contrast socialism with capitalism.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

19) In a market economy:

1.   A) government owns the means of production so that it can produce what is in society’s best interest.

2.   B) businesses design their plans to maximize their profit and the market is relied upon to see that individual self-interest is consistent with society’s interest.

3.   C) workers are directed by government planning boards to produce what is in society’s best interest.

4.   D) government sets prices to make necessities affordable because it is in society’s best interest to make necessities affordable.

 

Answer:  B

Explanation:  Capitalism solves the how to problem by allowing businesspeople to decide how to produce efficiently guided by their desire to make a profit.

Difficulty: 2 Medium

Topic:  Economic Systems

Learning Objective:  03-01 Define market economy and compare and contrast socialism with capitalism.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

20) Markets coordinate economic activity through:

1.   A) the price mechanism.

2.   B) commanding individuals what to do.

3.   C) asking individuals what to do.

4.   D) the legal mechanism.

 

Answer:  A

Explanation:  Markets are based upon the price mechanism—encouraging the production and discouraging the consumption of goods which are in shortage by raising their price.

Difficulty: 1 Easy

Topic:  Economic Systems

Learning Objective:  03-01 Define market economy and compare and contrast socialism with capitalism.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

21) Suppose that at the current price, consumers would like to purchase 10 million large-screen televisions and 15 million are available. When the market coordinates the demand and supply for large-screen televisions, the price of large-screen televisions will:

1.   A) rise.

2.   B) fall.

3.   C) stay the same.

4.   D) be fixed by the government.

 

Answer:  B

Explanation:  If there is an excess supply of large-screen televisions, firms who cannot sell them at the current price will offer a lower price. As the price falls, fewer firms will supply them and more consumers will buy them, so the surplus will shrink.

Difficulty: 2 Medium

Topic:  Economic Systems

Learning Objective:  03-01 Define market economy and compare and contrast socialism with capitalism.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

22) Suppose that at the current price, waffle producers offer 5 million waffles for sale, but consumers want to buy 6 million. When the market coordinates the demand and supply for waffles, the price of waffles will:

1.   A) rise.

2.   B) fall.

3.   C) stay the same.

4.   D) be fixed by the government.

 

Answer:  A

Explanation:  If waffles are in short supply, some consumers who cannot buy them will begin to offer a higher price. As the price rises, fewer consumers will purchase them and more producers will supply them, so the shortage will diminish.

Difficulty: 2 Medium

Topic:  Economic Systems

Learning Objective:  03-01 Define market economy and compare and contrast socialism with capitalism.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

23) Capitalism:

1.   A) is based on private property and the market.

2.   B) does not have a rationing mechanism.

3.   C) gives private property rights to government.

4.   D) relies on market forces to establish initial property rights.

 

Answer:  A

Explanation:  Capitalism is an economic system based on private property and the market. Market forces are guided by the invisible hand, or prices that ration scarce resources.

Difficulty: 1 Easy

Topic:  Economic Systems

Learning Objective:  03-01 Define market economy and compare and contrast socialism with capitalism.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

24) A socialist economy in theory:

1.   A) requires private ownership of property.

2.   B) is coordinated by the invisible hand.

3.   C) expects people to be altruistic.

4.   D) expects people to be selfish.

 

Answer:  C

Explanation:  Socialism, in theory, is an economic system that tries to see that all people contribute what they can and get what they need. It expects people to be altruistic.

Difficulty: 2 Medium

Topic:  Economic Systems

Learning Objective:  03-01 Define market economy and compare and contrast socialism with capitalism.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

25) In the former USSR, state planners decided what was to be produced. They passed orders down to factories, allocating raw materials, workers, and other factors of production to them. This is an example of (a):

1.   A) corporation.

2.   B) command economy.

3.   C) market economy.

4.   D) government as a referee.

 

Answer:  B

Explanation:  See the definition of command economy in the text.

Difficulty: 2 Medium

Topic:  Economic Institutions in a Market Economy

Learning Objective:  03-02 Describe the role of businesses and households in a market economy.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

26) Through most of the 20th century in the former USSR:

1.   A) people contributed what they could and took what they needed without a market.

2.   B) the country was free of economic forces.

3.   C) a type of socialism that departed from theory was implemented.

4.   D) goods were distributed according to their need.

 

Answer:  C

Explanation:  The USSR implemented a type of socialism that departed from theory. Economic forces always operate.

Difficulty: 1 Easy

Topic:  Economic Systems

Learning Objective:  03-01 Define market economy and compare and contrast socialism with capitalism.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

27) In socialism:

1.   A) economic forces do not operate.

2.   B) individuals are encouraged to act for their own benefit.

3.   C) government planning, rather than the market, is relied upon to coordinate economic activity.

4.   D) distribution is determined by the individual’s ability.

 

Answer:  C

Explanation:  Socialism, in practice, is an economic system based upon government ownership of the means of production with economic activity governed by central planning. The “for whom” decision is based upon need, NOT ability.

Difficulty: 1 Easy

Topic:  Economic Systems

Learning Objective:  03-01 Define market economy and compare and contrast socialism with capitalism.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

28) Socialism in theory is based on the principle that individuals should:

1.   A) look out for their own interests and let the government look out for the public interest.

2.   B) rely on the government to meet their needs.

3.   C) cooperate with one another to meet their needs.

4.   D) compete with one another to meet their needs.

 

Answer:  C

Explanation:  Unlike capitalism, which relies on competition among individuals, socialism relies on cooperation among individuals.

Difficulty: 1 Easy

Topic:  Economic Systems

Learning Objective:  03-01 Define market economy and compare and contrast socialism with capitalism.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

29) In principle, socialism is:

1.   A) less concerned about fairness than capitalism.

2.   B) just as concerned about fairness as capitalism.

3.   C) more concerned about fairness than capitalism.

4.   D) not concerned about fairness at all.

 

Answer:  C

Explanation:  Socialism is, in principle, based on the idea that the needs of each individual should be met. In contrast, capitalism is based on the idea that “them that works, gets; them that don’t, starve.”

Difficulty: 2 Medium

Topic:  Economic Systems

Learning Objective:  03-01 Define market economy and compare and contrast socialism with capitalism.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

30) In practice, distribution under socialism is primarily determined by:

1.   A) individual altruism and cooperation.

2.   B) the ability of each individual to produce.

3.   C) central planners within the government.

4.   D) market forces of supply and demand.

 

Answer:  C

Explanation:  In practice, central planners determine distribution under socialism because individual goodwill could not be relied on.

Difficulty: 1 Easy

Topic:  Economic Systems

Learning Objective:  03-01 Define market economy and compare and contrast socialism with capitalism.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

31) In a socialist economic system:

1.   A) markets are relied upon to decide what to produce, but government intervenes when necessary.

2.   B) individuals tell government what to produce and the government decides how best to achieve that goal.

3.   C) government planning boards decide what to produce, but rely on markets to achieve that goal.

4.   D) government planning boards decide what to produce and then give individuals directives how to achieve those goals.

 

Answer:  D

Explanation:  Under socialism, central planners determine both what is produced and how it is produced.

Difficulty: 1 Easy

Topic:  Economic Systems

Learning Objective:  03-01 Define market economy and compare and contrast socialism with capitalism.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

32) Market and socialist economies can be contrasted in all the following ways except that:

1.   A) under a market economy labor is allocated by individual choice based on wage levels; under traditional socialism it is allocated by a government planning board.

2.   B) under a market economy government plays no role in the market; under socialism, government planning boards make most major economic decisions.

3.   C) under a market economy the distribution of income is to each according to his ability, effort, and inheritance; under ideal socialism the distribution of income is to each according to his need.

4.   D) under a market economy self-interest is the primary motive of economic activity; under socialism, individuals are supposed to act from considerations of the general good.

 

Answer:  B

Explanation:  Government does play a role in determining the “what, how, and for whom” decisions under capitalism. For example, governments must allocate property rights if a market-based system is to function.

Difficulty: 3 Hard

Topic:  Economic Systems

Learning Objective:  03-01 Define market economy and compare and contrast socialism with capitalism.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

33) Which of the following is not one of the three principal components of a socialist economy?

1.   A) Government ownership of the means of production

2.   B) Workers directed by a government planning board as to where they will work and how much they will be paid

3.   C) Entrepreneurs are encouraged by the profit motive, rather than government directive, to satisfy consumer wants in the most efficient manner possible

4.   D) Distribution is according to need

 

Answer:  C

Explanation:  Under socialism, government directives determine what is produced, not individuals.

Difficulty: 2 Medium

Topic:  Economic Systems

Learning Objective:  03-01 Define market economy and compare and contrast socialism with capitalism.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

34) Most economies today are:

1.   A) pure market economies.

2.   B) differentiated primarily by the degree to which they depend on markets.

3.   C) differentiated primarily by who owns the means of production.

4.   D) socialist.

 

Answer:  B

Explanation:  Virtually all economies in the world today rely on markets to allocate resources. What differentiates modern economies is the degree of reliance on markets, not whether or not markets are present.

Difficulty: 1 Easy

Topic:  Economic Systems

Learning Objective:  03-01 Define market economy and compare and contrast socialism with capitalism.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

35) The Industrial Revolution was important to the history of economic systems because it:

1.   A) changed the way people exchanged goods—from barter to using money as a medium of exchange.

2.   B) concentrated wealth in the hands of a few noblemen who then controlled the land in their region, creating a feudal system.

3.   C) increased the wealth of merchants and artisans and eventually led to a change in economic systems to mercantilism.

4.   D) increased the power of capitalists and eventually led to a revolution instituting capitalism as the dominant economic system.

 

Answer:  D

Explanation:  The Industrial Revolution was a time when technology and machines rapidly modernized industrial production and mass-produced goods replaced handmade goods. Capitalists invested in the machinery that concentrated power in their hands.

Difficulty: 1 Easy

Topic:  The Industrial Revolution

Learning Objective:  Appendix

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

36) During the Industrial Revolution:

1.   A) feudal lords lost their power to artisans.

2.   B) mercantilists lost their power to capitalists.

3.   C) artisans lost their power to mercantilists.

4.   D) capitalists lost their power to mercantilists.

 

Answer:  B

Explanation:  The Industrial Revolution was a time when technology and machines rapidly modernized industrial production and mass-produced goods replaced handmade goods. Artisans had already lost their power to mercantilists. During the Industrial Revolution, mercantilists lost their power to capitalists.

Difficulty: 1 Easy

Topic:  The Industrial Revolution

Learning Objective:  Appendix

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

37) In the mercantilist system:

1.   A) markets, rather than political forces, make the central economic decisions.

2.   B) serfs make the central economic decisions.

3.   C) governments let the market decide what to produce.

4.   D) governments distributed the rights to produce.

 

Answer:  D

Explanation:  Mercantilism is an economic system in which government determines the what, how, and for whom decisions by doling out production rights.

Difficulty: 1 Easy

Topic:  Mercantilism

Learning Objective:  Appendix

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

38) In a feudalist society, in comparison with mercantilism:

1.   A) merchants play a more important political role than serfs.

2.   B) tradition plays a more important role than the government.

3.   C) government plays a large role in determining the what, how, and for whom decisions.

4.   D) markets make the central economic decisions.

 

Answer:  B

Explanation:  Feudalism is an economic system in which traditions rule. In mercantilism government makes the what, how, and for whom decisions.

Difficulty: 2 Medium

Topic:  Economic Systems

Learning Objective:  03-01 Define market economy and compare and contrast socialism with capitalism.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

39) In contrast to the capitalism of the early Industrial Revolution, both feudalism and mercantilism:

1.   A) had stronger central government intervention in economic life.

2.   B) expected tradition to answer the central coordination problems.

3.   C) relied less on the invisible hand to coordinate economic decisions.

4.   D) relied less on state intervention to promote economic growth.

 

Answer:  C

Explanation:  Under capitalism during the Industrial Revolution, the invisible hand coordinated economic activity in the market without the active involvement of government. Feudalist and mercantilist societies relied less on the invisible hand to coordinate economic decisions and more on tradition and the government.

Difficulty: 2 Medium

Topic:  Capitalism

Learning Objective:  Appendix

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

40) Capitalism and socialism have not existed forever. Capitalism came into existence in the:

1.   A) mid-1800s and socialism came into existence in the early 1900s.

2.   B) early 1900s and socialism came into existence in the mid-1800s.

3.   C) mid-1700s and socialism came into existence in the early 1900s.

4.   D) early 1900s and socialism came into existence in the mid-1700s.

 

Answer:  C

Explanation:  See the discussion in the text.

Difficulty: 1 Easy

Topic:  Capitalism

Learning Objective:  Appendix

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

41) Which two systems require the least amount of government intervention?

1.   A) Mercantilism and capitalism

2.   B) Feudalism and socialism

3.   C) Capitalism and feudalism

4.   D) Mercantilism and socialism

 

Answer:  C

Explanation:  Government intervention is limited under these two systems because feudalism relies on tradition to coordinate economic activity, while capitalism relies on the market.

Difficulty: 2 Medium

Topic:  Evolving Economic Systems

Learning Objective:  Appendix

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

42) In the factor market:

1.   A) households supply factors of production to business and are paid by business for doing so.

2.   B) households supply factors of production to business and are paid by government for doing so.

3.   C) business produces goods and services and sells them to households and government.

4.   D) government produces goods and services and supplies them to households and business.

 

Answer:  A

Explanation:  See the definition of the factor market in the text.

Difficulty: 1 Easy

Topic:  Economic Institutions in a Market Economy

Learning Objective:  03-02 Describe the role of businesses and households in a market economy.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

43) In the goods market:

1.   A) households supply factors of production to businesses and are paid by businesses for doing so.

2.   B) households supply goods to businesses and are paid by businesses for doing so.

3.   C) businesses produce goods and services and sells them to households and government.

4.   D) government produces goods and services and supplies them to households and businesses.

 

Answer:  C

Explanation:  See the definition of the goods market in the text.

Difficulty: 1 Easy

Topic:  Economic Institutions in a Market Economy

Learning Objective:  03-02 Describe the role of businesses and households in a market economy.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

44) The market where businesses sell goods and services to households and the government is called the:

1.   A) goods market.

2.   B) factor market.

3.   C) capital market.

4.   D) money market.

 

Answer:  A

Explanation:  The definition of the goods market is given in the text.

Difficulty: 1 Easy

Topic:  Economic Institutions in a Market Economy

Learning Objective:  03-02 Describe the role of businesses and households in a market economy.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

45) Households are on the:

1.   A) supply side of factor markets and the demand side of goods markets.

2.   B) demand side of factor markets and the supply side of goods markets.

3.   C) supply side of both factor markets and goods markets.

4.   D) demand side of both factor markets and goods markets.

 

Answer:  A

Explanation:  Households supply labor to business in the factor market and demand goods and services from business in the goods market.

Difficulty: 2 Medium

Topic:  Economic Institutions in a Market Economy

Learning Objective:  03-02 Describe the role of businesses and households in a market economy.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

46) Businesses are on the:

1.   A) supply side of factor markets and the demand side of goods markets.

2.   B) demand side of factor markets and the supply side of goods markets.

3.   C) supply side of both factor markets and goods markets.

4.   D) demand side of both factor markets and goods markets.

 

Answer:  B

Explanation:  Businesses supply goods and services in the goods market and demand factors of production in the factors market

Difficulty: 2 Medium

Topic:  Economic Institutions in a Market Economy

Learning Objective:  03-02 Describe the role of businesses and households in a market economy.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

47) Government is on the:

1.   A) supply side of factor markets and the demand side of goods markets.

2.   B) demand side of factor markets and the supply side of goods markets.

3.   C) supply side of both factor markets and goods markets.

4.   D) demand side of both factor markets and goods markets.

 

Answer:  D

Explanation:  Governments demand factors of production and goods and services.

Difficulty: 2 Medium

Topic:  Economic Institutions in a Market Economy

Learning Objective:  03-02 Describe the role of businesses and households in a market economy.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

48) Governments do all of the following except:

1.   A) oversee the interaction of households and businesses in the goods and factor markets.

2.   B) demand labor services from households in the factor market.

3.   C) demand goods and services from businesses in the goods market.

4.   D) supply labor services to businesses in the factor market.

 

Answer:  D

Explanation:  Households, not the government, supply labor services to businesses.

Difficulty: 1 Easy

Topic:  Economic Institutions in a Market Economy

Learning Objective:  03-02 Describe the role of businesses and households in a market economy.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

49) Businesses do all of the following except:

1.   A) pay taxes to the government.

2.   B) demand labor services from households in the factor market.

3.   C) demand goods and services from households in the goods market.

4.   D) supply goods and services to the government in the goods market.

 

Answer:  C

Explanation:  Businesses produce the goods and services that households and the government demand.

Difficulty: 1 Easy

Topic:  Economic Institutions in a Market Economy

Learning Objective:  03-02 Describe the role of businesses and households in a market economy.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

50) Households do all of the following except:

1.   A) receive income that is redistributed by the government.

2.   B) demand labor services from businesses in the factor market.

3.   C) demand goods and services from businesses in the goods market.

4.   D) supply labor services to the government in the factor market.

 

Answer:  B

Explanation:  Households supply labor services while businesses and the government demand them.

Difficulty: 1 Easy

Topic:  Economic Institutions in a Market Economy

Learning Objective:  03-02 Describe the role of businesses and households in a market economy.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

51) Entrepreneurship is defined as the ability to:

1.   A) organize and get something done.

2.   B) raise investment capital.

3.   C) earn above-average profits.

4.   D) minimize production costs.

 

Answer:  A

Explanation:  See the definition of entrepreneurship in the text.

Difficulty: 1 Easy

Topic:  Economic Institutions in a Market Economy

Learning Objective:  03-02 Describe the role of businesses and households in a market economy.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

52) Businesses fail because:

1.   A) they follow the principle of consumer sovereignty too closely.

2.   B) the invisible hand determines that they are not producing something that is socially valuable.

3.   C) they earn excessive profits.

4.   D) entrepreneurship is present.

 

Answer:  B

Explanation:  The invisible hand works to insure that the desire to earn profits is ultimately channeled into the general good of society. Businesses that fail to produce something that contributes to this good will not be profitable.

Difficulty: 2 Medium

Topic:  Economic Institutions in a Market Economy

Learning Objective:  03-02 Describe the role of businesses and households in a market economy.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

53) Profit is:

1.   A) the same as cost.

2.   B) the same as revenue.

3.   C) what is left over from total revenue after all of the appropriate costs have been subtracted.

4.   D) what is left over from total cost after all of the appropriate revenues have been subtracted.

 

Answer:  C

Explanation:  See the definition of profit in the text.

Difficulty: 1 Easy

Topic:  Economic Institutions in a Market Economy

Learning Objective:  03-02 Describe the role of businesses and households in a market economy.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

54) A firm’s profits equal $100 if

100.             A) its total revenue is $100.

101.             B) the sum of its total revenue and its total cost is $100.

102.             C) the difference between its total revenue and its total cost is $100.

103.             D) its total cost is $100.

 

Answer:  C

Explanation:  Profit is the difference between total revenue and total cost.

Difficulty: 2 Medium

Topic:  Economic Institutions in a Market Economy

Learning Objective:  03-02 Describe the role of businesses and households in a market economy.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

55) If a firm’s total revenue is $10,000 and its total costs are $9,000, then its profits are:

1.   A) −$1,000.

2.   B) $1,000.

3.   C) $10,000.

4.   D) $19,000.

 

Answer:  B

Explanation:  Profit is the difference between total revenue and total cost.

Difficulty: 2 Medium

Topic:  Economic Institutions in a Market Economy

Learning Objective:  03-02 Describe the role of businesses and households in a market economy.

Bloom’s:  Apply

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

56) Business decisions about what and how much to produce are based on what:

1.   A) maximizes market share.

2.   B) consumers demand.

3.   C) the government wants.

4.   D) maximizes profits.

 

Answer:  D

Explanation:  Businesses’ decisions are based primarily on how they affect profits.

Difficulty: 1 Easy

Topic:  Economic Institutions in a Market Economy

Learning Objective:  03-02 Describe the role of businesses and households in a market economy.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

57) Relative to corporations, sole proprietorships are:

1.   A) more numerous and smaller in size.

2.   B) less numerous and smaller in size.

3.   C) more numerous and larger in size.

4.   D) less numerous and larger in size.

 

Answer:  A

Explanation:  Most businesses are sole proprietorships, but most of these are very small in size.

Difficulty: 1 Easy

Topic:  Economic Institutions in a Market Economy

Learning Objective:  03-02 Describe the role of businesses and households in a market economy.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

58) A company such as Microsoft or Pepsi Co. is a legal hassle to organize, difficult to monitor, and possibly could double tax income. It is an example of a:

1.   A) consumer.

2.   B) sole proprietorship.

3.   C) partnership.

4.   D) corporation.

 

Answer:  D

Explanation:  See the data in the text.

Difficulty: 2 Medium

Topic:  Economic Institutions in a Market Economy

Learning Objective:  03-02 Describe the role of businesses and households in a market economy.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

59) With a sole proprietorship:

1.   A) all of one’s assets are at risk of loss.

2.   B) shares are valued by the marketplace.

3.   C) responsibility is shared.

4.   D) income is taxed twice.

 

Answer:  A

Explanation:  With a sole proprietorship, all of one’s assets are at risk. Because there is only one owner, there is now shared responsibility and no shares. Income is taxed only once.

Difficulty: 1 Easy

Topic:  Economic Institutions in a Market Economy

Learning Objective:  03-02 Describe the role of businesses and households in a market economy.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

60) A defining difference in what makes a firm a sole proprietorship, partnerships, or a corporation is the:

1.   A) size of each type of business.

2.   B) number of each type of business.

3.   C) nature of ownership and accountability for each type of business.

4.   D) profitability of each type of business.

 

Answer:  C

Explanation:  The nature of ownership and liability varies across the three businesses, with sole proprietorships having a single owner who is legally liable, partnerships having two or more owners who are legally liable, and corporations having stockholders who have only limited liability.

Difficulty: 1 Easy

Topic:  Economic Institutions in a Market Economy

Learning Objective:  03-02 Describe the role of businesses and households in a market economy.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

61) A partnership is a business:

1.   A) with two or more owners, with each owner liable for every other owner’s actions.

2.   B) that has only one owner.

3.   C) legally treated as a person and owned by stockholders who are not liable for the actions of the corporate “person.”

4.   D) in which each owner is liable only to the extent of his or her own investment.

 

Answer:  A

Explanation:  A partnership is defined in the text as a business with two or more owners. Each owner is liable for the other owner’s mistakes.

Difficulty: 1 Easy

Topic:  Economic Institutions in a Market Economy

Learning Objective:  03-02 Describe the role of businesses and households in a market economy.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

62) A business is most likely to be characterized as a corporation if:

1.   A) it has two or more owners, with each owner liable for every other owner’s actions.

2.   B) it has only one owner.

3.   C) it is legally treated as a person and owned by stockholders who are liable for the actions of the corporate “person” regardless of their investment.

4.   D) each owner is liable only to the extent of his or her own investment.

 

Answer:  D

Explanation:  Limited liability is what distinguishes corporations from other businesses.

Difficulty: 2 Medium

Topic:  Economic Institutions in a Market Economy

Learning Objective:  03-02 Describe the role of businesses and households in a market economy.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

63) A business is likely a sole proprietorship if:

1.   A) it has two or more owners, with each owner liable for every other owner’s actions.

2.   B) it has only one owner who has unlimited liability.

3.   C) it is legally treated as a person and owned by stockholders who are liable for the actions of the corporate “person.”

4.   D) multiple owners are liable only to the extent of their own investment.

 

Answer:  B

Explanation:  Sole proprietorships are businesses that have a single owner.

Difficulty: 1 Easy

Topic:  Economic Institutions in a Market Economy

Learning Objective:  03-02 Describe the role of businesses and households in a market economy.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

64) One advantage of a partnership over a sole proprietorship is:

1.   A) greater accountability.

2.   B) limited liability.

3.   C) ease of formation.

4.   D) the ability to share the work and risks of business.

 

Answer:  D

Explanation:  Accountability is greatest for a sole proprietorship. Only with a corporation is liability limited. A sole proprietorship is the easiest to form but there is no one with whom to share the work and the risks as there is with a partnership.

Difficulty: 2 Medium

Topic:  Economic Institutions in a Market Economy

Learning Objective:  03-02 Describe the role of businesses and households in a market economy.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

65) One advantage of a partnership over a corporation is:

1.   A) greater accountability.

2.   B) limited liability.

3.   C) increased ability to get funds.

4.   D) the ability to share the work and risks of business.

 

Answer:  A

Explanation:  Accountability is greater with a partnership because the owners have a more direct say in how the business is managed. With a corporation, shareholders often have very little say in business decisions.

Difficulty: 2 Medium

Topic:  Economic Institutions in a Market Economy

Learning Objective:  03-02 Describe the role of businesses and households in a market economy.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

66) One advantage of a corporation over a sole proprietorship is:

1.   A) greater accountability.

2.   B) avoidance of double taxation.

3.   C) ease of formation.

4.   D) greater ability to obtain funds.

 

Answer:  D

Explanation:  Corporations find it easier to raise funds because they tend to be larger than sole proprietorships and because the liability of a corporation’s owners is limited.

Difficulty: 2 Medium

Topic:  Economic Institutions in a Market Economy

Learning Objective:  03-02 Describe the role of businesses and households in a market economy.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

67) One advantage of a sole proprietorship over a corporation is:

1.   A) limited liability.

2.   B) the ability to share work and risks.

3.   C) ease of formation.

4.   D) greater ability to obtain funds.

 

Answer:  C

Explanation:  Sole proprietorships are much easier to form than corporations.

Difficulty: 2 Medium

Topic:  Economic Institutions in a Market Economy

Learning Objective:  03-02 Describe the role of businesses and households in a market economy.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

68) One advantage of a sole proprietorship over a partnership is:

1.   A) direct control by the owner.

2.   B) limited liability.

3.   C) the ability to share the work and risks of business.

4.   D) greater ease of obtaining financing.

 

Answer:  A

Explanation:  Only with a sole proprietorship is there direct control by the owner. This is the advantage a sole proprietorship has over both a partnership and a corporation. Liability is unlimited with a sole proprietorship. One works alone and the ability to get funds is limited.

Difficulty: 2 Medium

Topic:  Economic Institutions in a Market Economy

Learning Objective:  03-02 Describe the role of businesses and households in a market economy.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

69) Which of the following is a disadvantage of setting up a business as a corporation?

1.   A) Limited personal liability

2.   B) Greater ability to get funds

3.   C) Limited control by owners

4.   D) Risk of personal assets not invested in the firm

 

Answer:  C

Explanation:  Control of corporations is more limited because managers, not stockholders or owners, make many corporate decisions.

Difficulty: 2 Medium

Topic:  Economic Institutions in a Market Economy

Learning Objective:  03-02 Describe the role of businesses and households in a market economy.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

70) Which of the following statements is correct?

1.   A) Stockholders are legally liable for all the debt of a corporation.

2.   B) A corporation is a business that is legally owned by its employees.

3.   C) Corporations are legal entities that, in law, are treated as persons.

4.   D) Most large companies and many small companies in the United States are not corporations.

 

Answer:  C

Explanation:  Corporations are legal constructs designed to make it easier to separate company owners from company management.

Difficulty: 2 Medium

Topic:  Economic Institutions in a Market Economy

Learning Objective:  03-02 Describe the role of businesses and households in a market economy.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation