Economics study guide
Multiple Choice
Identify the choice that best completes the statement or answers the question.
____
1. Which group of people ultimately determines the products that a free enterprise economy produces?
a. Congress
c. local government
b. property owners
d. consumers
____
5. The economic decisions of central planners often are wrong because they have little understanding of
a. local economic conditions
b. bureaucracies
c. Karl Marx's theories
d. democracy
____
6. An individual buying a DVD is participating in the
a. circular flow market
b. factor market
c. product market
d. economic resources market
____
7. Moving railroads from government ownership to ownership by stockholders is an example of
a. globalization
b. socialization
c. nationalization
d. privatization
____
8. To arrive at an economic decision, a decision-making grid may be used to evaluate
a. productivity.
c. alternative choices of action.
b. only durable goods.
d. only capital goods.
____
9. A popular model used to illustrate the concept of opportunity cost is
a. the production possibilities frontier.
c. the paradox of value.
b. entrepreneurship.
d. the factors of production.
____ 10. An economy at its production possibilities frontier is operating
a. with slow economic growth.
c. without division of labor.
b. at full potential.
d. as a free enterprise economy.
____ 11. The money used to buy the tools and equipment needed for production is known as
a. capital goods.
c. financial capital.
b. the factors of production.
d. wealth.
____ 13. Into what four categories do economist divide factors of production?
a. land, labor, capital, and entrepreneurship
b. land, labor, money, and entrepreneurship
c. resources, labor, capital, and entrepreneurship
d. resources, labor, money, and entrepreneurship
____ 14. Producers determine the allocation of scarce resources by seeking
a. incentives and responding to consumer votes on a product
b. incentives and responding to all open opportunities
c. profits and responding to consumer votes on a product
d. profits and responding to all open opportunities
____ 15. Public goods are funded by
a. charitable donations collected by the government
b. profits made by private businesses
c. profits made by public companies
d. taxes collected by the government
____ 16. A person who does not pay for a service but benefits from it is called a(n)
a. free consumer
b. free rider
c. investment risk
d. subsidy risk
____ 17. An externality is a side effect of a transaction that affects
a. both the producer and the buyer
b. someone other than the buyer or producer
c. the buyer but not the producer
d. the producer but not the buyer
____ 18. A public transfer payment happens when the government transfers income from
a. donors to recipients who do not provide anything in return
b. donors to recipients who provide something in return
c. taxpayers to recipients who do not provide anything in return
d. taxpayers to recipient who provide something in return
____ 19. Government programs that protect people from economic hardship are called a
a. free rider
b. positive externality
c. public safety net
d. public subsidy
____ 20. If dry pasta began to receive more consumer votes through increased purchases, producers likely would
a. allocate fewer resources into the production of dry pasta
b. allocate more resources into the production of dry pasta
c. increase the amount of frozen pasta being produced
d. decrease the types of dry pasta being produced
____ 21. Street lighting is an example of a
a. local service
b. public good
c. private product
d. government subsidy
____ 22. A common way of dealing with the free rider problem is for
a. the free riders to provide the good or service
b. the government to provide the good or service
c. individuals to provide the good or service
d. private business to provide the good or service
____ 23. The U.S. government often makes transfer payments to
a. the aged and disabled
b. healthy people with high incomes
c. people over 50 years of age
d. the wealthiest people
____ 24. Which is a modified free enterprise economy?
a. an economy that emphasizes a communist approach more than free enterprise
b. an economy that emphasizes a traditional approach more than free enterprise
c. an economy that has a few regulations that adjust free enterprise
d. an economy that has no regulations that adjust free enterprise
____ 25. Which is an example of a public good?
a. cell phones
b. high-definition TVs
c. national defense
d. private landscaping
____ 27. When you are hungry, you receive the most satisfaction from the first apple and less satisfaction from each
additional apple. What explains this?
a. income effect
b. substitution effect
c. law of elasticity of demand
d. law of diminishing marginal utility
____ 28. Which of the following is most likely to have inelastic demand?
a. an expensive sports car
b. experimental cosmetic surgery
c. organic fruits and vegetables
d. an effective cancer-fighting drug
____ 29. According to the law of supply, what happens when prices increase?
a. Supply increases.
b. Supply decreases.
c. Quantity supplied increases.
d. Quantity supplied decreases.
____ 30. What happens when businesses hire too many workers?
a. The increased competition causes some employees to quit their jobs.
b. Fights among employees become more common.
c. Employees get in each other's way, causing disorganization and inefficiency.
d. The employees form a union and go on strike for higher wages.
____ 31. Which of the following government actions is most likely to reduce the supply of frosted, berry-flavored, corn
puffs cereal?
a. Corn farmers receive a subsidy.
b. A tax on imported sugar is repealed.
c. Sugar crop is leveled by a hurricane.
d. Truck tolls are reduced.
____ 32. What does the term limited life mean?
a. The business is restricted in size.
b. There is a ceiling on the amount of business expenses.
c. There are many regulations about business activities.
d. The business does not continue if the owner leaves.
____ 33. Which of the following is an advantage of partnership but not of sole proprietorship?
a. few regulations
b. easy to open and close
c. specialization of skills
d. limited life
____ 35. Which of the following is a corporation that issues stock that can be freely bought and sold?
a. nonprofit corporation
b. multinational corporation
c. private corporation
d. public corporation
____ 36. Angela opens a coffee shop, which she owns and where she sells a national brand of gourmet coffee. She pays
licensing fees to do this. What kind of business it this?
a. a franchise
b. a cooperative
c. a nonprofit
d. a partnership
____ 37. Which of the following is a typical startup requirement for a sole proprietorship?
a. obtaining a business license
b. selling shares on the stock market
c. signing a contract with a partner
d. hiring officers to run the company
____ 38. Three certified public accountants form an accounting firm by pooling their investment money. None wants to
be responsible if one of the others makes a serious financial error. What type of firm will they choose?
a. sole proprietorship
b. general partnership
c. limited partnership
d. limited liability partnership
____ 39. What is a dividend?
a. the part of the corporation owned by a stockholder
b. the part of the corporate profits paid to a stockholder
c. the part of the corporation most available to stockholders
d. the part of the corporate debt owed by the stockholders
____ 40. Which of the following are advantages that corporations have over sole proprietorships and partnerships?
a. limited life, limited liability
b. limited life, greater access to funds
c. unlimited life, limited liability
d. unlimited liability, greater access to funds
____ 41. Why are doctors' offices often run as limited liability partnerships?
a. because the investors who put money in the office cannot take part in the medical
decisions
b. because recently graduated doctors have less money to invest in the office than
experienced doctors
c. so that if one doctor loses a malpractice suit, the other doctors won't have to help pay the
damages
d. so that the office will be able to stay open if one doctor leaves to start her own medical
practice
____ 42. What does double taxation mean?
a. The government taxes sole proprietors at higher rates.
b. The government taxes both partners in a partnership.
c. The government taxes corporate profits and also shareholder dividends.
d. Both the U.S. government and foreign governments tax multinational corporations.
____ 43. The difference between savings and investments is that
a. savings earn money while investments do not
b. investments earn money while savings do not
c. savings are investments that are put to use
d. investments are savings that are put to use
____ 44. An institution that helps to bring savers, borrowers, and financial assets together is a
a. financial intermediary
b. financial market
c. primary market
d. secondary market
____ 45. One of the biggest advantages of a mutual fund is that it
a. specializes in the stock of companies on the Dow Jones Industrial Average
b. is traded on the NASDAQ rather than the New York Stock Exchange
c. allows individuals without a lot of money to own a variety of financial assets
d. allows individuals to move investments from money markets to capital markets
____ 46. The two categories used to classify financial asset markets are
a. time and resalability
b. time and risk
c. resalability and diversity
d. risk and diversity
____ 47. In general, people put money in risky investments because
a. they can take a tax deduction if they lose money
b. such investments often earn the greatest profits
c. no other investments are available at the time
d. they receive bad advice from a financial analyst
____ 48. Stock prices are determined by
a. the ruling of the Securities and Exchange Commission
b. price fixing by workers at the stock exchanges
c. the valuation made by corporate auditors
d. the market forces of supply and demand
____ 49. Economic investment differs from personal investment in that economic investment
a. is investment by the government, not individuals
b. is investment in assets held by the government
c. specifically refers to money lent to businesses
d. specifically refers to individuals putting their money in savings
____ 50. Which of the following is a nonbank financial intermediary?
a. commercial bank
b. credit union
c. finance company
d. savings and loan
____ 51. Which of the following would most likely be part of the capital market?
a. a Treasury bill
b. a loan for a summer trip
c. a 6-month CD
d. a mortgage loan
____ 52. In general, investments with high rates of return
a. are not resalable
b. do not keep up with inflation.
c. have low risk
d. have high risk
____ 53. Financial intermediaries are essential to the financial system because they
a. put up the money for personal and commercial loans
b. provide the financial assets to secure loans
c. bring together savers and borrowers who might not otherwise connect
d. act as go-betweens for corporations dealing with the government
____ 54. Which of the following is a banking financial intermediary?
a. credit union
b. finance company
c. mutual fund
d. pension fund
____ 55. One advantage money markets have over capital markets is that
a. they offer higher rates of return
b. depositors' money is tied up only for a year or less
c. assets can be redeemed only by the original buyer
d. assets can be resold easily
____ 56. The three important questions every society must ask are
a. When to make it, where to make it, what c. What to make, how to make it, who to
to make it
make it for
b. How to make it, who to make it for, why d. What must be made, who should make it,
to make it
who to make it for
____ 57. A modified free enterprise economy is a type of
a. centrally-planned economy
b. mixed economy
c. pure market economy
d. traditional economy
____ 58. In a circular flow model of a modified free enterprise system, the government is typically placed
a. in the center
b. on the left side
c. on the right side
d. at the top
____ 59. The dollar value of all final goods and services and the most comprehensive measure of a country's total
production output is
a. its standard of living.
c. a cost-benefit analysis.
b. financial capital.
d. Gross Domestic Product (GDP).
____ 60. An increase in the price of cameras results in a decrease in the demand for film. The two products are
a. substitutes.
c. unrelated.
b. demand elastic.
d. complements.
____ 84. An increase in the price of milk causes a decrease in the demand for cereal. The two products are
a. substitutes.
c. unrelated.
b. complements.
d. demand elastic.
____ 86. An advantage of a corporation is that
a. owners pay fewer taxes than owners of other forms of business.
b. the business is subject to little government regulation.
c. owners have limited liability for debt.
d. owners have direct and immediate control over daily management of the business.
____ 87.
According to the illustration, what is the least common form of business organization in the United
States?
a. proprietorships
c. corporations
b. partnerships
d. joint ventures
____ 88.
Which letter represents the proper location on the diagram for “unlimited liability”?
a. T
c. V
b. W
d. Y
____ 89.
What type of merger created Mega Corporation in the illustration?
a. horizontal merger
c. diagonal merger
b. vertical merger
d. conglomerate merger
Scott Melton thinks he got a raw deal. Melton, who recently opened Sushi Nights on Main Street in Deep
Ellum [Texas], filed for Chapter 11 bankruptcy in April for Sushi Deep Ellum Inc., the general partnership he
formed to operate Deep Sushi.... Last June, Deep Sushi’s limited partners, a group of 10 or so
anesthesiologists and other human meat menders, gave Melton the boot. Not only that, they stiffed him, he
says. “They left me holding the bag for $57,000 worth of unpaid taxes...including utilities and vendor bills....”
Source: “Raw Feelings,” Dallas Observer Online, May 20-26, 1999.
____ 90.
What form of business organization operated Sushi Nights, the restaurant discussed in the passage?
a. proprietorship
c. general partnership
b. limited partnership
d. corporation
Grocery store giant Kroger Co. agreed Monday to purchase rival Fred Meyer Co. in a $12.8 billion deal that
will enable Kroger to reclaim its status as the nation’s largest supermarket company.... [Analysts say] the
merger is a good deal for both companies, one that should create the economies of scale necessary to remain
competitive in the tough supermarket industry.
The merger also will enable Kroger to [stay] ahead of rival Albertson’s, which otherwise would have eclipsed
Kroger through its $11.7 billion buyout of American Stores Co. in August.... Combined with Meyer, currently
the fifth-largest grocery chain, Kroger will operate 2,200 supermarkets in 31 states, boasting $43 billion in
annual sales.
Source: “Kroger Bags Fred Meyer,” CNNfn, October 19, 1998.
____ 91.
What type of merger does the passage describe?
a. vertical
c. multinational
b. conglomerate
d. horizontal
____ 92.
When Candace and Roger Kuebel of Larchmont, N.Y., flew to Grenada for a week’s
vacation, they did something most parents of young children do only in their dreams. The
Kuebels left their two-year-old daughter, Heather, in the care of two responsible adults—
parents themselves...they also didn’t pay a child care service any costly fees.
The couple’s secret: They belong to a baby-sitting cooperative.
The idea behind the baby-sitting co-op is simple: Families swap baby-sitting duties without
ever exchanging money. Co-ops usually rely on a coupon system: members with coupons
have an incentive to use them, while those low on coupons need to sit.
Source: “Baby-Sitting Co-Ops a Growing Trend,” The New York Times On the Web, February 1, 1998.
The baby-sitting co-op described in the passage would be categorized as what type of cooperative?
a. consumer cooperative
c. service cooperative
b. credit union
d. producer cooperative
____ 93. Perfect competition is characterized by all of the following EXCEPT
a. a large number of buyers and sellers.
c. sellers acting together to set prices.
b. identical products.
d. well-informed buyers and sellers.
____ 94. A monopoly that is based on the ownership or control of a manufacturing method, process, or other scientific
advance is a
a. geographic monopoly.
c. government monopoly.
b. natural monopoly.
d. technological monopoly.
____ 95. The Sherman Antitrust Act
a. outlawed restraints and monopolies that hindered trade.
b. nationalized the railroads.
c. established the FDA.
d. applied only to banking.
____ 97. When a major car company lowers its prices, other car makers will probably
a. maintain existing prices.
c. go out of business.
b. raise their prices.
d. lower their prices.
____ 98. On an average shopping trip, a consumer’s eye lingers on a product for only about 2.5 seconds. In order to
stay competitive, companies experiment with new formulas, along with the color and size of the product’s
packaging. These research and development costs can range from $100,000 for adding a new color to an
existing product line to millions of dollars for the creation of a new product.
According to the passage, companies are trying to compete through
a. economies of scale.
b. price-fixing.
c. product differentiation.
d. nonprice competition.
____ 99.
A rose is a rose is a rose, wrote Gertrude Stein. But don’t tell that to flower sellers who are
trying to differentiate themselves from their fellow petal-pushers.
To stand out in a crowd, U.S.A. Floral Products, the nation’s biggest flower distributor, is
test-marketing a plan to sell flowers sporting a tag telling consumers the last date the flowers
can be sold for maximum freshness—the equivalent of a “sell by” date on a quart of milk.
Source: Business Week, February 15, 1999.
Based on the passage, U.S.A. Floral Products is differentiating its product from competitors’ by trying
to convince customers that its roses are
a. more red.
c. less expensive.
b. fresher.
d. higher quality.
____ 100. What often happens when the owner of a sole proprietorship dies?
a. The partner takes over the business.
b. The government takes over the business.
c. The business closes down.
d. The business changes names.
____ 101. Which of the following characteristics is most likely to characterize someone who opens a sole
proprietorship?
a. risk-taking
b. caution
c. conformity
d. dependence
____ 102. What type of organization is a credit union?
a. franchise
b. service cooperative
c. consumer cooperative
d. nonprofit organization
____ 103. What is a typical requirement of a consumer cooperative?
a. paying a membership fee
b. working without a salary
c. paying a licensing fee
d. maximizing profit
USE THE STOCK TABLE TO ANSWER THE FOLLOWING QUESTIONS.
____ 104. What is the 52-week low stock price for this company?
a. $180.98
c. $181.25
b. $179.26
d. $172.19
____ 105. What was the three month average volume for this company?
a. 2,307,813
c. 5,930,192
b. 5,192,930
d. 2,813,307
____ 106. Which stock market does this stock trade on?
a. NASDAQ
b. DOW
c. NYSE
d. S&P 500
____ 107. When the website was consulted, was this company up or down for the day? How much?
a. $1.28
c. -$1.28
b. $180.98
d. -$180.98
____ 108. What is insurance?
a. protection from the police
b. protection from diseases
c. protection from financial trouble
d. protection from financial losses
____ 109. When dealing with insurance, what does the annual premium refer to?
a. how much you will save if you buy
c. how good the insurance is
insurance
b. how much you will have to pay for one
d. how the insurance is rated by the Better
year of coverage
Business Bureau
____ 110. When purchasing car insurance, what does the term deductible mean?
a. how much the insurance company will pay c. the amount you need to pay every month
in all accidents
b. the maximum limit of your coverage
d. the amount you have to pay before any
repairs are started
____ 111. According to the insurance game, how is risk defined?
a. the Milton Bradley war game
c. how much danger you could be in
b. your possibility of financial loss
d. how big of a chance you are willing to
take on your insurance
Health insurance (office visits, hospitalization)
Option #1: Premium: $3,600
Coverage: $10 co-pay on visits, 100% hospitalization
Option #2: Premium: $2,800
Coverage: $20 co-pay on visits, 80% hospitalization
Option #3: Premium: $2,100
Coverage: 100% hospitalization
Option #4: Premium: $0
Coverage: No premium or coverage
____ 112. Using the insurance information provided determine how much you woulc be liable for in the example.
You have been to the doctor’s office 20 times for a cost of $4000, you have also had two major hospital stays
totaling $76,000 dollars. Each doctor visit costs $200 dollars.
You have chosen Option #2 for your coverage.
What is your total out-of-pocket expense for the year (not including your coverage premium)?
a. $15,600
b. $200
c. $80,000
d. $4,000
____ 113.
Money is burning a hole in consumers’ pockets. Again last month, U.S. wage earners spent
nearly as much as they made, contributing to record low savings. But consumers have good
reason to be out there spending. They’ve got jobs, their incomes are rising, confidence is
high, and the stock market is booming. This trend dragged down the savings rate—savings as
a percentage of after-tax income—to a record low.
Source: The Columbus Dispatch, May 29, 1999.
This passage suggests that the low savings rate is due to
a. high unemployment.
c. low prices.
b. the booming economy.
d. falling incomes.
____ 114.
According to the stock market quotation, which stock has made the biggest gain up to this point in the
year?
a. ExtndStayAm ESA
c. FedExCp FDX
b. ExxonMobile XOM
d. FordMotor F
____ 115.
a.
b.
c.
d.
____ 116.
Based on this graph, how do governments and businesses borrow funds?
directly from savers
directly from savers and indirectly through financial intermediaries
indirectly from savers through financial intermediaries
by generating financial assets
Based on the graph, in which two years did the FedEx stock fall below the performance of the S&P
500?
a. 1999 and 2000
c. 1998 and 2001
b. 1998 and 2000
d. 1999 and 2001