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Multiple Choice TutorialChapter 3

Economic Decision Makers

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1. Households supply the four basic groups of resources in our economy. They include all of the following excepta. landb. final goods and servicesc. capitald. entrepreneurial ability

B. Final goods and services are provided for by businesses not households.

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2. Rational households with limited resources attempt to maximizea. the amount of goods acquiredb. the amount of services obtainedc. marginal utilityd. average utilitye. total utility

E. Households make individual decisions based on their marginal utility; in the process their total utility is maximized.

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3. The majority of income earned by households comes froma. rentsb. interestc. wages and salariesd. dividends

C. This is because the majority of Americans are not self employed.

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4. The major source of individual income in the United States is from which group of resources?a. landb. oil wellsc. capitald. entrepreneurial abilitye. labor

E. People who own a business have a good or service to sell, but if you do not own a business the only thing you have to sell is your labor.

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5. Which of the following is not a transfer payment?a. food stampsb. Medicarec. Aid to Families with Dependent Children

(AFDC)d. the direct deposit of an FBI agent’s

paycheck while she is doing undercover work

D. Payment to an FBI agent is paying someone that is employed and performing a service, people who receive transfer payments need not sell their labor to receive payments.

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6. Which of the following is not a durable good?a. automobileb. refrigeratorc. television setd. new coat

D. A coat would be a durable good, but a new coat is not because it is new only once.

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7. Each of the following is a nondurable good excepta. clothingb. gasolinec. newspaperd. foode. medical care

E. All of the above are nondurable except medical care because once they are used they are gone, but medical care continues on and on regardless how often it is used. Nondurable goods make up about 30% of consumption.

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8. Durable goods account for about what percent of after tax expenditures for a typical household?a. 80%b. 60%c. 39%d. 13%

D. The other 87% is spent on nondurable goods, like food, gasoline and services etc.

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9. Which of the following accounts for the largest percentage of spending by households in the United States?a. durable goodsb. nondurable goodsc. servicesd. insurance payments

C. Services are such things as housing, electricity, and medical care. Services make up about 57% of personal consumption.

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10. Services account for about what percent of after tax expenditures for a typical household?a. 78%b. 57%c. 35%d. 24%e. 10%

B. See previous question.

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11. Which of the following is not an economic reason for the existence of household manufacturing?a. minimal skills and specialization requiredb. cheap laborc. reduced transaction costsd. easy to avoid taxes

B. Whether the business is home based or not, it still has to hire labor from the same labor market.

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12. Which of the following characteristics does not describe a modern business firm?a. profit-seekingb. uses hired resourcesc. uses large, centrally powered factoriesd. minimal specialization

D. The modern business firm is highly specialized. The more specialization that takes place the greater are the chances to increase productivity.

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13. Entrepreneurs face limits on their ability to monitor all the specialized resources, exercise control at each stage, and keep track of the entire process. This is known as a. unbounded rationalityb. the invisible hand conceptc. bounded rationalityd. diseconomies of scale

C. Bounded rationality means that they face limits on their ability to monitor all the specialized resources, exercise quality control at each stage, and keep track of the entire process.

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14. The advantages of a sole proprietorship would include all of the following excepta. ease of organization b. be your own bossc. receive all profitsd. unlimited liability

D. Unlimited liability is certainly not an advantage of a sole proprietorship. In a sole proprietorship the assets of the business are not differentiated from the assets of the owner. The owner of this type of business can be sued for their private holdings as well as the holdings of the business.

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15. Compared to a corporation, the major disadvantages of a sole proprietorship would include all of the following excepta. the opportunities for specializationb. unlimited liabilityc. limited lifespand. complexity of organization

D. An advantage of a sole proprietorship is the simplicity of organization. With no employees or partners the whole business process does not have the complexities of other types of business organizations.

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16. Compared to proprietorships and partnerships, the major advantages of a corporation would include all of the following excepta. financial capabilityb. the manner in which the owners’ profits

are taxedc. the extent of liability of each ownerd. the ease of transferring ownership

B. A disadvantage of a corporation is double taxation. When a dollar is made as profit, it is taxed, then when that dollar is paid out as a dividend to a stock holder, the stock holder pays taxes again on that same dollar.

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17. The major disadvantages of a corporation would include all of the following excepta. double taxation- the manner in which the

owners’ profits are taxedb. unlimited lifespan - the potential lifespan

of the firmc. an individual owners’ ability to influence

the firmd. the manner in which a realized capital

gain is taxedB. A big advantage of a corporation is the fact

that it is considered a legal person. Because the business can be sold or inherited, there is no limit to its potential lifespan.

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18. Which category includes the largest number of firms?a. sole proprietorshipb. partnershipc. corporationd. S-corporation

A. The sole proprietorship is the smallest type of business firm, but in terms of numbers, there are more sole proprietorships than any other type of business.

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19. Which of the following would not be considered a nonprofit institution?a. Columbia Broadcasting Corp. (CBS)b. American Red Crossc. Salvation Armyd. a public library

A. CBS is a business that exists for the purpose of making a profit for its owners.

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20. All of the following are discussed in the text as governmental responsibilities to improve society’s welfare when the market fails except a. promoting competitionb. regulating natural monopoliesc. providing public goodsd. providing private goods

D. In a free market system, the government does not provide us with private goods. Businesses owned by private individuals provide us with private goods.

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21. When public cost is greater than private cost, we havea. positive externalityb. negative externalityc. public goodd. private good

B. An externality is the cost or benefit that falls to third parties and is therefore ignored by the two parties to the market transaction. The externality is negative when the result is something undesirable.

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22. Which of the following situations would be an example of a negative externality?a. driver education classesb. public health clinicsc. a neighbor’s uncovered trash cand. a neighbor’s well-cared-for yard and

gardenC. The trash can may have been left uncovered

unintentionally and the bad smell was not meant to bother a neighbor, but the sight and the smell of the trash did effect a third party. The owner of the trash being the first party, and the sanitation company being the second.

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23. If third parties (innocent bystanders) receive benefit from some market transaction or activity, there is aa. positive externalityb. negative externalityc. public goodd. private good

A. Not all externalities are negative. A well kept lawn is an example of a positive externality to neighbors.

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24. Which of the following would not have significant negative externalities?a. a firm dumps particles of heavy metals,

such as lead, into a local streamb. a coal burning electric generating plant

with no pollution controlsc. an outdoor rock concert in a residential

neighborhoodd. restaurant consumption of foods high in

saturated fat, such as some Mexican foods, pizza, etc.

D. Foods eaten of high saturated fats only hurt the person who is doing the eating, not third parties in the sense of negative externalities.

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25. Which of the following is not a public good?a. national defenseb. the justice systemc. a lighthoused. a movie

D. A public good is one that is available for all to consume, regardless of who pays and who does not.

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26. Which of the following would best be considered a public good?a. an automobileb. an airplanec. a dam on a riverd. a country club

C. A dam on a river benefits everyone and no one is excluded from its benefits. The power and even the lake that results provide positive consequences for everyone.

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27. Which of the following terms best describes a public good?a. excludable and rivalsb. non-excludable and non-rivalsc. non-excludable and rivalsd. excludable and non-rivals

B. For example, a lighthouse is a public good. Once it exists, all boats can use it and no boat can be excluded from using it. Also, the benefits of a lighthouse are not diminished due to competition.

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28. Which of the following terms best describe a private good?a. excludable and rivalsb. non-excludable and non-rivalsc. non-excludable and rivalsd. excludable and non-rivals

A. An automobile would be an example of a private good. It specifically benefits the owner and others can be excluded from its use.

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29. Federal government spending constituted what percent of GDP in 1995?a. 10%b. 15%c. 34%d. 23%

D. Total government spending, that is federal, state and local, constitute about 34% of GDP; the federal government is responsible for about 23%.

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30. Total government spending, national, state, and local combined, constituted what percent of GDP in 1995?a. 12%b. 23%c. 34%d. 55%

C. Same as previous question.

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31. What part of federal spending has grown the most rapidly in recent years?a. national defenseb. welfarec. net interest on the debtd. Social Security and Medicare

D. Transfer payments are the fastest growing programs of the federal government.

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32. What part of federal government spending has grown the most slowly in recent years?a. national defenseb. welfarec. net interest on the debtd. Social Security and Medicare

A. Under the Reagan administration from 1980 to 1988 there was an increase in military spending. But with the Clinton administration beginning in 1992, there has been less emphasis and support for the military.

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33. The largest source of federal government revenue isa. corporate income taxesb. individual income taxesc. payroll taxesd. sales and excise taxes

B. This is because there are so many individual tax payers.

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34. The fastest growing area of federal tax revenues in recent years would bea. corporate income taxesb. individual income taxesc. payroll taxesd. sales and excise taxes

C. Because the majority of individual tax payers work for someone else, that is, they do not own their own business, they pay their federal and state income taxes via payroll deduction.

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35. Over the last decade, the individual income tax has accounted for about what percent of federal government income?a. 15%b. 30%c. 45%d. 60%

C. Assorted and varied types of taxes make up the rest of the 55%.

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36. In the United States, the individual income tax is best described as what type of tax?a. regressiveb. proportionalc. flatd. progressive

D. It is progressive because higher income earners pay a larger percentage of each additional dollar then do lower income tax payers. This is because each dollar is taxed on the margin, that is, the last dollar earned.

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37. Under a progressive tax system, the marginal tax ratea. increases as income decreasesb. decreases as income increasesc. remains constant as income increasesd. increases as income increases

D. Most tax payers fall into either the 15% tax bracket or the 28% bracket. If the demarcation between the two is $30,000 for example, and your taxable income is $32,000, you will pay 15% in taxes for every dollar up to $30,000 and 28% on each dollar above $30,000.

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38. Under a regressive tax system, the marginal tax ratea. decreases as income increasesb. increases as income increasesc. remains constant as income increasesd. decreases as income decreases

A. The Social Security tax is an example of this. Above a certain income level, a tax payer does not pay additional tax dollars.

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39. Which of the following taxes best represents a progressive tax?a. excise and luxury taxesb. Social Security taxc. sales taxd. federal individual income tax

D. Only the individual income tax taxes income more at higher incomes than at lower incomes.

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40. Which of the following taxes best represents the benefits received principle?a. Social Security taxesb. individual income taxesc. sales taxd. gasoline taxes

D. The benefits received principle is a tax that falls most heavily on the people who benefit the most from the use of something. For example, our roads are built and maintained by taxes on each gallon of gasoline purchased. So the more one drives and uses the roads, the more taxes that person will pay.

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41. Which of the following taxes would best reflect the ability to pay principle?a. tax on incomeb. tax on medicinec. tax on foodd. tax on property, such as land or buildings

A. The ability to pay principle says that the more one can afford to pay the tax, the more tax that person will pay. With the progressive income tax, the higher a person’s income, the more tax that person pays on each additional dollar.

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42. A comparison of a country’s exports with its imports is known as itsa. balance of paymentsb. merchandise trade accountc. capital account balanced. gold flow account

B. Money can enter or leave a country in many ways. When we look at the flow of money in and out of a country strictly in terms of exports and imports, this is what is called the merchandise trade account.

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43. Which of the following was the result of voluntary trade restrictions on automobiles by the Japanese in the 1980’s?a. prices for U.S cars went downb. American consumers had greater choice

and availability of cars to purchasec. more upscale Japanese automobiles were

shipped to the U.S. instead of subcompactsC. By restricting the importation of automobiles

from Japan, the Japanese made up the loss in revenue by marketing higher priced cars. If you can’t make the money in terms of volume, the profit per unit becomes more important. The profit margin on an expensive car is more than on an economy car.

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44. Trade restrictions result in all of the following excepta. higher pricesb. fewer choicesc. improved qualityd. misallocation of resources

C. If anything, the quality of an import would decline because of trade restrictions. The added costs of the import tax lessons the profit margin on each item sold.

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45. Trade restrictions can take any of the following forms excepta. tariffsb. free trade agreementsc. quotasd. voluntary trade restrictions

B. Free trade agreements help limit trade restrictions on imports and exports.

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46. Which of the following firms have limited liability?a. both c and db. partnershipc. sole proprietorshipd. corporation

D. Corporations have limited liability because the corporation is a legal person in the eyes of the law. The assets, debts and liabilities become separate from those of its owners.

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47. Which of the following firms have the most financial capability?a. both c and db. partnershipc. sole proprietorshipd. corporation

D. The corporation has the largest financial capability because it is the largest business form.

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48. Which type of business accounts for less than 11% of the total dollar amount of U.S. sales?a. both c and db. corporationc. sole proprietorshipd. partnership

A. In terms of dollar amount, the corporation is the largest, although fewer in number then sole proprietorships. Partnerships fall into between these two extremes.

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49. Which of the following accounts for the largest dollar volume of sales in the U.S?a. sole proprietorshipsb. partnershipsc. corporationsd. nonprofit institutions

C. Same as the previous question.

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50. Which of the following effectively has its profits taxed twice?a. sole proprietorshipsb. partnershipsc. corporationsd. nonprofit institutions

C. This is because the dollar earned as profit is taxed and is taxed again when received by the business owner (stock holder) as dividend.

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51. Which of the following has declined the most since WWII as a percentage of federal government receipts?a. both b and cb. payroll taxes (Social Security and

Medicare taxes)c. personal income taxesd. corporate income taxes

D. This is because we want to give business owners and prospective business owners an incentive to start and operate a business. Also, a tax on a business can simply be passed on to the consumer in the form of higher prices.

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52. Which of the following taxes has accounted for approximately 45% of federal government revenues since the end of WWII?a. tariffs on imported goodsb. corporate income taxc. personal income taxC. This is contrasted to the tax situation in many European countries where the value added tax is prominent. With the value added tax, the person who buys the finished product is the one who ends up paying the tax. If one receives income, but saves it instead of spends it, that person will not pay taxes on that income.

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53. Which typically lasts longer?a. c and d are approximately the same lengthb. economic stagnationc. economic expansionsd. economic contractions

C. Historically, economic expansions last about three times longer than economic contractions.

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54. Since WWII, which of the following has been the least common in the United States?a. depressionb. recessionc. economic expansiond. inflation

A. We have not experience a depression since the Great Depression of the 1930’s.

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END