macroeconomics canadian 13th edition mcconnell test bank

Macroeconomics Canadian 13th Edition MCCONNELL Test Bank Full Download: http://alibabadownload.com/product/macroeconomic...

0 downloads 54 Views
Macroeconomics Canadian 13th Edition MCCONNELL Test Bank Full Download: http://alibabadownload.com/product/macroeconomics-canadian-13th-edition-mcconnell-test-bank/

Chapter 01 Limits, Alternatives, and Choices 1. What is a brief definition of economics? What are the conditions that give rise to this definition?

2. What are the key economic concepts that pertain to the individual?

3. What are the key economic concepts that pertain to interactions among individuals?

This sample only, Download all chapters at: alibabadownload.com

4. What are the key economic concepts that pertain to the economy as a whole?

5. What do economists mean when they say that "there is no free lunch"? Give another example to which this statement applies.

6. What are the three interrelated features of the economic perspective?

7. What is utility and what is its relevance to rational behaviour?

8. Use marginal analysis to explain why it is possible to "have too much of a good thing". Use education as an example.

9. What does it mean to say that theories, principles, and models are "purposeful simplifications"?

10. The distinguished economist Kenneth Boulding stated: "Theories without facts may be barren, but facts without theories are meaningless". Explain what he meant.

11. Explain the importance of the ceteris paribus or "other-things-equal" assumption.

12. "Bad theories are abstract and therefore unrealistic; good theories are fully realistic and fit all the facts". Evaluate.

13. "Economic models are somewhat like different types of maps". Evaluate.

14. Distinguish between microeconomics and macroeconomics.

15. Below are six statements. Indicate whether each one pertains to microeconomics (MIC) or macroeconomics (MAC). (a) "The inflation rate in Canada hit its lowest level in the last twenty years". (b) "The profits of BCE rose 20 percent during the past quarter". (c) "A drought has occurred in the Prairies. The prices for barley are expected to rise sharply". (d) "The nation's economy grew at an annual rate of 3.7 percent in the final quarter of the year". (e) "The trade surplus in Canada was $4 billion last month". (f) "General Motors plans to spend $800 million on a new automobile plant".

16. Why have the last few years been an exciting time to study macroeconomics?

17. Give one example of a positive economic statement and one example of a normative economic statement.

18. Below are six statements. Identify whether each is a positive or normative statement. (a) The minimum wage should be increased so low-income workers can earn a living wage. (b) The unemployment rate is too high and should be reduced through government actions. (c) The rate of inflation was about 2 percent last year, an all time low for the past decade. (d) The government should take action to break up the monopoly power of Air Canada. (e) Interest rates should be lower in Canada so that people can afford to build a home. (f) The Federal government achieved a budget surplus for the first time in thirty years.

19. Identify whether each of the following is a positive or normative statement. (a) Should tuition fees increase, fewer students would obtain a post-secondary education. (b) The Prime Minister announced that Canada is the best place in the world to live.

20. "Economists are scientists and therefore should not become involved in making value judgments which policy formulation necessarily entails". Do you agree?

21. "Economics cannot be scientific because it is based upon the value judgment that 'more (output) is better'". Do you agree?

22. What were the approximate average incomes of Canadians and Liberians in 2010?

23. What is meant by the "the individual's economic problem"?

24. Describe the Greek Debt Crisis, and explain its relation to the Economic Problem?

25. What variables are used to determine the individual's budget line?

26. How do income changes affect the position of the budget line?

27. What do economists mean when they say that economic resources or factors of production are scarce or limited in supply?

28. What is meant by "society's economic problem"?

29. List the four resource categories and give a brief description of each.

30. What four basic functions does the entrepreneur perform for the economy?

31. Explain and evaluate: "If resources were infinitely abundant in relation to the demand for them, the economic problem would dissolve in a sea of affluence".

32. "The relative scarcity of resources makes the operation of any economy a matter of choosing between alternatives". Explain.

33. "The two cornerstones of economics are the scarcity of resources and the multiplicity of wants. True economy consists of deriving maximum want satisfaction from available resources". Explain.

34. Explain the relationship between full employment of resources and full production.

35. The production possibilities table below shows the hypothetical relationship between the production of food and clothing in an economy. (a) What is the marginal opportunity cost of producing the second unit of clothing? (b) What is the total opportunity cost of producing two units of clothing? (c) What is the marginal opportunity cost of producing the third unit of clothing? (d) What is the total opportunity cost of producing three units of clothing?

36. A production possibilities table for two products, grain and airplanes, is found below. Usual assumptions regarding production possibilities are implied. Grain is measured in tons and airplanes are measured in units of 1,000. (a) Using the below graph construct a production possibilities curve from this information placing grain on the vertical axis and airplanes on the horizontal axis.

(b) What is the opportunity cost of producing the first unit of airplanes? The marginal opportunity cost of producing the fourth unit of airplanes?

37. A production possibilities table for two products, corn and paper, is found below. Usual assumptions regarding production possibilities are implied. Corn is measured in tons, and paper is measured per unit.

(a) Using the following graph construct a production possibilities curve from this information placing corn on the vertical axis and paper on the horizontal axis.

(b) What is the marginal opportunity cost of producing the first unit of paper? The marginal opportunity cost of producing the fourth unit of paper?

38. What is the economic rationale for the law of increasing costs?

39. Explain how increasing opportunity costs are reflected graphically in the production possibilities curve. How would the curve appear if opportunity costs were constant?

40. An economy consists of five workers, who can produce either fish or fruit. The following table shows the daily output of each worker.

(a) Suppose one worker catches fish and four workers pick fruit. For the economy to achieve productive efficiency, which of the five workers must fish? (b) Does the economy achieve full employment and productive efficiency by producing 26 fish and 20 fruit?

41. An economy consists of five workers, who can produce either fish or fruit. The following table shows the daily output of each worker.

(a) Suppose one worker catches fish and four workers pick fruit. For the economy to achieve productive efficiency, which of the five workers must fish? (b) Does the economy achieve full employment and productive efficiency by producing 12 fish and 4 fruit?

42. What changes must occur for the potential total output of the economy to grow?

43. Look at the following production possibilities curve illustrating the possibilities in Sluggerville for producing bats and/or peanuts with the existing level of resources and technology.

(a) Show a point U that would indicate unemployed resources in Sluggerville. (b) Draw a new curve B that illustrates the results of improved technology in the production of bats, but no change in the production efficiency of peanuts. (c) Show a point G that would indicate a point that is currently unattainable in the production of peanuts and bats in Sluggerville.

44. Explain how each event affects production possibilities. (a) The population becomes more educated over time as the number of high school dropouts falls and the number of college graduates rises. (b) The unemployment rate declines from 8 to 6 percent of the labour force. (c) Businesses and government are unable to solve a major computer problem, thus reducing economic efficiency and national output. (d) Advances in telecommunications and new technology significantly contribute to economic growth over time. (e) The Federal government decides to allocate more resources to national defence.

45. Describe the adjustments in the production possibilities curves in each of the following situations for the Canadian economy. (a) the economy moves from full employment into a deep recession (b) the economy makes great strides in eliminating discrimination (c) the end of the Cold War leads to cuts in military spending (d) the government significantly increases spending for health and education

46. Evaluate. Since the production possibilities curve can shift outward over time, it is possible for an economy to get more of a product without incurring an opportunity cost.

47. One application of the production possibilities concept has been to explain the difference in growth patterns of a nation with a high level of investment (Alta) and an equivalent nation with a low level of investment (Zorn). Use the concept to explain why Alta's economic growth would be greater than that of Zorn over time.

48. The production possibilities curve suggests that a nation cannot live beyond its means or production potential. Explain why international trade would cause this statement to be modified.

49. Why do economists use graphs in their work?

50. In a two-dimensional graph showing the relationship between income and consumption in the economy, what is shown on the vertical axis and what is shown on the horizontal axis?

51. Define what is meant by a positive or direct relationship between two variables and describe the line graph depicting such a relationship.

52. Define what is meant by an inverse relationship between two variables and describe the line graph depicting such a relationship.

53. Differentiate between the independent and dependent variables in an economic relationship.

54. Describe the slope of a direct and an inverse relationship.

55. Show graphically the relationships that you would expect to find between (a) student IQs and grade point averages (GPAs); (b) the price of a product and the amount consumers will purchase; (c) the temperature and the number of people at the swimming pool. Which of these are direct relationships and which are inverse? What considerations might change the expected relationships?

56. Show graphically on the below graph the expected relationship between investment spending and interest rates. Put investment expenditures on the horizontal axis and the rate of interest on the vertical axis; connect the points and label the curve "Investment demand". Describe this relationship between the rate of interest and investment expenditures. Describe the slope of the investment curve.

57. There are two sets of x, y points on a straight line in a two-variable graph with y on the vertical axis and x on the horizontal axis. What would be the linear equation for the line if one set of points was (0, 12) and the other set was (12, 36)?

58. The value of the vertical intercept is $100 and the slope is 0.8 in a linear equation for consumption (measured on the vertical axis) and disposable income (measured on the horizontal axis). If disposable income is $1000, what is consumption? State the linear equation and show how you found the answer.

59. How do you determine the slope of a nonlinear curve? Will the slope be the same along the curve? Explain.

60. Using the below graph give the slopes of the lines tangent to the curve at points A, B, and C.

Chapter 01 Limits, Alternatives, and Choices Key 1.

What is a brief definition of economics? What are the conditions that give rise to this

(p. 1-2)

definition?

It is the social science concerned with the efficient use of scarce resources to achieve the maximum satisfaction of economic wants. Economic wants are many and diverse. People seek many goods and services to satisfy their wants. Society uses productive resources to produce goods and services that meet these wants. Unfortunately, the economic wants of society exceeds the productive capacity of the economy to produce the goods and services to satisfy those wants.

Learning Objective: 01-01 Ten key concepts to retain for a life time Level: Medium McConnell - Chapter 01 #1 Other: Pick-up

2.

What are the key economic concepts that pertain to the individual?

(p. 2)

The four key economic concepts that pertain to the individual are: (1) when individuals face scarce resources relative to their wants, they must incur tradeoffs; (2) the cost of a choice is what someone gives up for it or the opportunity cost; (3) decisions are usually made at the margin where a little more or a little less of something is chosen; and (4) choices are influenced by incentives.

Learning Objective: 01-01 Ten key concepts to retain for a life time Level: Medium McConnell - Chapter 01 #2 Other: Pick-up

3.

What are the key economic concepts that pertain to interactions among individuals?

(p. 2)

The three key economic concepts that pertain to interactions among individuals are: (1) individuals can make themselves better off through specialization and trade; (2) markets usually do a good job of coordinating decisions among individuals, groups, and nations; and (3) government can sometimes improve the coordinating function of markets.

Learning Objective: 01-01 Ten key concepts to retain for a life time Level: Medium McConnell - Chapter 01 #3 Other: Pick-up

4.

What are the key economic concepts that pertain to the economy as a whole?

(p. 2)

The three key economic concepts are: (1) the standard of living in a country depends on its production of goods and services; (2) printing of money in excess of the growth of output of goods and services will eventually lead to inflation; (3) society faces a short-run tradeoff between inflation and unemployment.

Learning Objective: 01-01 Ten key concepts to retain for a life time Level: Medium McConnell - Chapter 01 #4 Other: Pick-up

5.

What do economists mean when they say that "there is no free lunch"? Give another example

(p. 3-5)

to which this statement applies.

Anything of any value that is offered for "free" still has a cost. Economists refer to this sacrifice as an opportunity cost. In this case, the resources that were used to provide the free lunch could have been put to an alternative use. The opportunity cost is the next best alternative use for those resources. As another example, consider the case of a bank that offers you a "free" sports bag to open an account at the bank. The bag may be free to you as a new bank customer, but there is still a cost paid by the bank in the form of resources that could have been put to alternative uses.

Learning Objective: 01-02 The economic way of thinking Level: Easy McConnell - Chapter 01 #5 Other: Pick-up

6.

What are the three interrelated features of the economic perspective?

(p. 3-5)

First, economics recognizes that there is a general condition of scarcity that forces individuals and society to make choices. Human and property resources are scarce, so choices must be made about how best to use those limited resources. Second, economics assumes that private or public decision-making is based on "rational self-interest". People make rational decisions to achieve the maximum satisfaction of a goal. Consumers try to get the best value for their expenditures. Workers try to get the best job given their skills and abilities. Businesses try to maximize their profits. Elected representatives try to enact policies that best promote the national interest. Third, economics focuses on marginal analysis when making an economic decision. The marginal or "additional" costs from an economic choice are weighed against the additional benefit. If the marginal benefit outweighs the marginal costs, then a decision will be made to take the beneficial action. If the marginal cost is greater than the marginal benefit, then the action will not be taken.

Learning Objective: 01-02 The economic way of thinking Level: Medium McConnell - Chapter 01 #6 Other: Pick-up

7.

What is utility and what is its relevance to rational behaviour?

(p. 3)

Utility is the satisfaction that individuals derive from consuming goods and services. The economic approach assumes that humans engage in rational behaviour, that individuals make decisions to maximize their utility.

Learning Objective: 01-02 The economic way of thinking Level: Easy McConnell - Chapter 01 #7 Other: Pick-up

8.

Use marginal analysis to explain why it is possible to "have too much of a good thing". Use

(p. 4-5)

education as an example.

This explanation is based on an evaluation of the marginal costs and marginal benefit of providing a good or service. We may want more education for our society, but at some point the marginal cost of providing additional education is greater than the marginal benefit of the additional education. We would have to give up too many other things to obtain the additional education. For example, would it make sense to provide additional education resources for everyone so that they can earn a Ph.D. degree? The answer is no. In this case, the marginal cost of these additional educational resources (for example, lost labour time or inefficient use of people's abilities) would not be worth the marginal benefit to society of having everyone earn a Ph.D. degree.

Learning Objective: 01-02 The economic way of thinking Level: Hard McConnell - Chapter 01 #8 Other: Pick-up

9.

What does it mean to say that theories, principles, and models are "purposeful

(p. 5-6)

simplifications"?

Theories, principles, and models are "purposeful simplifications" means that when we study economies we find far too much complexity to make any significant gain in understanding. By assuming away unnecessary details we make it possible to gain a clearer understanding of basic economic relationships.

Learning Objective: 01-03 Theories; principles; and models Level: Easy McConnell - Chapter 01 #9 Other: Pick-up

10.

The distinguished economist Kenneth Boulding stated: "Theories without facts may be barren,

(p. 5-6)

but facts without theories are meaningless". Explain what he meant.

Economic theories are generalizations about the economic behaviour of individuals and institutions. As generalizations or principles, they are abstractions and may not offer specific information about a particular issue that can be obtained from facts. Economic theories are barren in the sense that they offer a framework for thinking about the economic issue without a lot of the details about it. Having a lot of facts about an economic issue, however, is not very meaningful. Facts need to be arranged and organized if they are to have meaning and give insight into the issue. Economic theory offers that framework for organizing the factual information.

Learning Objective: 01-03 Theories; principles; and models Level: Hard McConnell - Chapter 01 #10 Other: Pick-up

11.

Explain the importance of the ceteris paribus or "other-things-equal" assumption.

(p. 6)

The real-world is "messy" so economists try to analyze changes in the variables of interest by finding ways to hold "other things constant or equal". The ceteris paribus assumption is made to indicate that these other variables are not changing or affecting the variables of interest. For example, the theory of consumer demand states that price and quantity demanded are inversely related; people will buy less at higher prices than they will at lower prices. But this theory assumes that other variables like tastes and income that might affect quantity demanded are not changing. Increasingly, experimental economists are attempting to test theories in laboratory environments in which ceteris paribus assumptions hold.

Learning Objective: 01-03 Theories; principles; and models Level: Medium

McConnell - Chapter 01 #11 Other: Pick-up

12.

"Bad theories are abstract and therefore unrealistic; good theories are fully realistic and fit all

(p. 5-6)

the facts". Evaluate.

While some abstract theories are bad, that certainly does not have to be true. Most good theories are generalizations or predictions about human economic behaviour and will not be true in every situation, and thus will not fit all the facts all of the time. A good theory is based on observable behaviour and will generally explain or predict correctly.

Learning Objective: 01-03 Theories; principles; and models Level: Medium McConnell - Chapter 01 #12 Other: Pick-up

13.

"Economic models are somewhat like different types of maps". Evaluate.

(p. 5-6)

Economic models are necessarily a simplification of the real world. The validity of a particular economic model should be based upon a comparison of the model's predictions to observable fact. A world atlas is not the best map to use to find out how to get to Vancouver from Charlottetown, but it will tell you where South Africa is in relation to Luxembourg. If you wanted to get to Vancouver from Charlottetown, you'd need a road map of Canada. But a road map would not sufficiently describe the elevations if you were riding your bike and would not likely tell you how to find Main Street in Golden, B.C. The map you use should be judged based not on its complete accuracy and detail, but on its ability to get you where you are going.

Learning Objective: 01-03 Theories; principles; and models Level: Medium McConnell - Chapter 01 #13 Other: Pick-up

14.

Distinguish between microeconomics and macroeconomics.

(p. 6)

Microeconomics deals with individual economic units such as industries, firms, households, and with individual markets, particular prices, and specific goods and services. Macroeconomics, on the other hand, deals with the economy as a whole, including such major aggregates as the household, business, and governmental sectors and with totals for the economy.

Learning Objective: 01-04 Microeconomics and Macroeconomics Level: Easy McConnell - Chapter 01 #14 Other: Pick-up

15.

Below are six statements. Indicate whether each one pertains to microeconomics (MIC) or

(p. 6)

macroeconomics (MAC). (a) "The inflation rate in Canada hit its lowest level in the last twenty years". (b) "The profits of BCE rose 20 percent during the past quarter". (c) "A drought has occurred in the Prairies. The prices for barley are expected to rise sharply". (d) "The nation's economy grew at an annual rate of 3.7 percent in the final quarter of the year". (e) "The trade surplus in Canada was $4 billion last month". (f) "General Motors plans to spend $800 million on a new automobile plant".

(a), (d), and (e) are macro; (b), (c), and (f) are micro.

Learning Objective: 01-04 Microeconomics and Macroeconomics Level: Easy McConnell - Chapter 01 #15 Other: Pick-up

16.

Why have the last few years been an exciting time to study macroeconomics?

(p. 6)

Since macroeconomics deals with the economy as a whole, the global financial crisis that spread to Canada in late 2008 resulted in a deep recession, which has been dubbed the Great Recession which has impacted major aggregates including households, businesses, and governmental sectors for the Canadian economy.

Learning Objective: 01-05 The economic problem Level: Hard McConnell - Chapter 01 #16 Other: New

17.

Give one example of a positive economic statement and one example of a normative

(p. 7)

economic statement.

A positive economic statement is any factual statement such as: "Last month there were 1.2 million workers unemployed". A normative economic statement is one which contains an opinion such as: "Many people today are too lazy to look for work and that is why the unemployment figures are so high".

Learning Objective: 01-04 Microeconomics and Macroeconomics Level: Easy McConnell - Chapter 01 #17 Other: Pick-up

18.

Below are six statements. Identify whether each is a positive or normative statement.

(p. 7)

(a) The minimum wage should be increased so low-income workers can earn a living wage. (b) The unemployment rate is too high and should be reduced through government actions. (c) The rate of inflation was about 2 percent last year, an all time low for the past decade. (d) The government should take action to break up the monopoly power of Air Canada. (e) Interest rates should be lower in Canada so that people can afford to build a home. (f) The Federal government achieved a budget surplus for the first time in thirty years.

(a), (b), (d) and (e) are normative; and (c) and (f) are positive.

Learning Objective: 01-04 Microeconomics and Macroeconomics Level: Easy McConnell - Chapter 01 #18 Other: Pick-up

19.

Identify whether each of the following is a positive or normative statement.

(p. 7)

(a) Should tuition fees increase, fewer students would obtain a post-secondary education. (b) The Prime Minister announced that Canada is the best place in the world to live.

Both statements are positive. Although statement (a) contains the word, "should", it is simply a cause and effect statement. Another way of expressing the same idea is "If tuition fees are increased, fewer students would obtain a post-secondary education". Statement (b) is also positive because it is concerned with facts. Although the statement is made up of a normative phrase ("best place in the world"), at its core is a factual statement regarding an announcement by the Prime Minister.

Learning Objective: 01-04 Microeconomics and Macroeconomics Level: Medium McConnell - Chapter 01 #19

Other: Pick-up

20.

"Economists are scientists and therefore should not become involved in making value

(p. 7)

judgments which policy formulation necessarily entails". Do you agree?

It is important to distinguish between positive and normative economics. When conducting positive economic analysis, economists use objective, scientific methods to collect data and test hypotheses to arrive at economic theories and principles. However, there is a need to apply economic theories to real-world problems and this necessarily requires some value judgments or the use of normative economics. Even scientists who can experiment in laboratories have to make value judgments when they arrive at the point of applying their theories. For example, geneticists must make value judgments about the uses of genetic science. Economists know their own theories best so they should be involved in the decisions about how to apply those theories. Of course, in a democratic society those judgments are often advisory and must be approved by elected representatives before they are enacted.

Learning Objective: 01-04 Microeconomics and Macroeconomics Level: Hard McConnell - Chapter 01 #20 Other: Pick-up

21.

"Economics cannot be scientific because it is based upon the value judgment that 'more

(p. 7)

(output) is better'". Do you agree?

This statement can be subjected to positive economic analysis. If you can show that this assumption is valid, i.e., that it is correct that most people believe that "more is better", then this is not a value judgment but a testable principle of economics. Where this assumption is questioned, it is a rather simple matter to test the hypothesis about whether "more is regarded as better". In other words, if people behave as if more is better, then this assumption is not a result of value judgments by economists, but rather the result of observing that this is the way humans act.

Learning Objective: 01-04 Microeconomics and Macroeconomics Level: Hard McConnell - Chapter 01 #21 Other: Pick-up

22.

What were the approximate average incomes of Canadians and Liberians in 2010?

(p. 8)

$41950 and $330 ($US at market exchange rates).

Learning Objective: 01-05 The economic problem Level: Hard McConnell - Chapter 01 #22 Other: Modified

23.

What is meant by the "the individual's economic problem"?

(p. 7-8)

An individual's income is limited whereas their wants are unlimited. This forces them to make choices to optimize their well-being.

Learning Objective: 01-05 The economic problem Level: Easy McConnell - Chapter 01 #23 Other: Pick-up

24.

Describe the Greek Debt Crisis, and explain its relation to the Economic Problem?

(p. 9)

In late 2009, it became known that the Greek government had gone on a spending spree, and had an accumulated debt that was about 120 percent of the country's income (or GDP). Moreover, in 2010 Greece's annual budget shortfall was more than 10 percent of GDP, one of the highest in the world and unsustainable given its poor prospects for economic growth, and so the Greek economy was in a crisis. The Greek government was forced to institute strict austerity measures that led to the contraction of the economy in both 2010 and 2011. Greece was able to consume beyond its means by borrowing, but inevitably in a world of scarcity of resources this practice cannot be sustained indefinitely. Just like an individual's income is limited whereas their wants are unlimited, similarly on an aggregate level the entire nation of Greece is forced them to make choices to optimize their well-being.

Learning Objective: 01-05 The economic problem Level: Hard McConnell - Chapter 01 #24 Other: New

25.

What variables are used to determine the individual's budget line?

(p. 9-10)

Income and the prices of the two goods will determine the position of the budget line. Income divided by the price of a good will determine the point where the budget line intersects an axis.

Learning Objective: 01-05 The economic problem Level: Easy McConnell - Chapter 01 #25 Other: Pick-up

26.

How do income changes affect the position of the budget line?

(p. 10)

Increases in income causes a parallel shift outward of the budget line (without changing its slope) while decreases in income cause the budget line to shift inward.

Learning Objective: 01-05 The economic problem Level: Easy McConnell - Chapter 01 #26 Other: Pick-up

27.

What do economists mean when they say that economic resources or factors of production

(p. 11)

are scarce or limited in supply?

They mean that resources are not so abundant that they may be used freely for everything everyone wants. There are not enough resources available to meet all of society's unlimited economic wants.

Learning Objective: 01-05 The economic problem Level: Easy McConnell - Chapter 01 #27

Other: Pick-up

28.

What is meant by "society's economic problem"?

(p. 10-11)

The economic problem stems from two related facts. Economic wants are unlimited because they cannot be completely satisfied with the existing limited supply of resources available for production. Resources are said to be scarce relative to these unlimited economic wants. For this reason, people must make choices and economize on resource use.

Learning Objective: 01-05 The economic problem Level: Easy McConnell - Chapter 01 #28 Other: Pick-up

29.

List the four resource categories and give a brief description of each.

(p. 11)

(a) Land: natural resources including land, forests, water and minerals. (b) Capital: investment goods or those manufactured items used in production of other goods. Factories, tools, machinery, transportation facilities, and equipment are examples. Money is not a capital good. (c) Labour: a broad term used to describe the physical and mental talents of men and women available to be used in producing goods and services. (d) Entrepreneurial ability: a type of human resource, but unique from productive labour in that it refers to the person who is the driving force behind production decisions, innovation, and the one who is willing to take the risk of time, effort, reputation, and/or funds.

Learning Objective: 01-05 The economic problem Level: Medium McConnell - Chapter 01 #29 Other: Modified

30.

What four basic functions does the entrepreneur perform for the economy?

(p. 11-12)

First, the entrepreneur takes the initiative in combining resources to produce a product. In this way the entrepreneur is a catalyst for production in the economy. Second, the entrepreneur makes basic business policy decisions that set the course for the business enterprise. Third, the entrepreneur will introduce new or improved products to the market place or develop new forms of business organization. In this role, the entrepreneur serves as an innovator for the economy. Fourth, the entrepreneur bears the risk in terms of time, effort, and invested funds. Innovation is risky, as nearly all new products and ideas are subject to the possibility of failure as well as success. Progress would cease without entrepreneurs who are willing to take on risk by devoting their time, effort, and ability—as well as their own money and the money of others—to commercializing new products and ideas that may enhance society's standard of living.

Learning Objective: 01-05 The economic problem Level: Hard McConnell - Chapter 01 #30 Other: Pick-up

31.

Explain and evaluate: "If resources were infinitely abundant in relation to the demand for them,

(p. 11-12)

the economic problem would dissolve in a sea of affluence".

The economic problem refers to the need to make choices because economic wants are virtually unlimited but the means (income, time, resources) for satisfying those wants are limited. If resources were infinitely abundant in relation to the demand for them, people would not have to make choices and there would be no need for economic systems to distribute the goods and services produced. In a world of abundance, people could simply help themselves to whatever they wanted.

Learning Objective: 01-05 The economic problem

Level: Medium McConnell - Chapter 01 #31 Other: Pick-up

32.

"The relative scarcity of resources makes the operation of any economy a matter of choosing

(p. 11-12)

between alternatives". Explain.

The fact that people cannot have as much as they want of everything requires them to make choices. There has to be some system for making these choices. For example, it may be "first come, first serve", or a system based on power with the strongest controlling the resources, or it may be a market-based system where the primary motivation is the profit incentive.

Learning Objective: 01-05 The economic problem Level: Medium McConnell - Chapter 01 #32 Other: Pick-up

33.

"The two cornerstones of economics are the scarcity of resources and the multiplicity of wants.

(p. 10-16)

True economy consists of deriving maximum want satisfaction from available resources". Explain.

The first statement refers to the basic economic problem: that society's wants are unlimited relative to the limited supply of productive resources. The second part of the statement refers to the concept of efficiency, both allocative and productive. Since resources are scarce, it is desirable to achieve the most output from those available. Otherwise we waste resources and will not satisfy as many wants as we could from the resources that we have available, which would mean not achieving productive efficiency. Allocative efficiency means the maximum satisfaction of wants with these resources.

Learning Objective: 01-05 The economic problem Learning Objective: 01-06 Production possibilities model and increasing opportunity costs Level: Medium

McConnell - Chapter 01 #33 Other: Pick-up

34.

Explain the relationship between full employment of resources and full production.

(p. 12-13)

Full employment of resources means that none of the available resources are idle. Full production goes one step further. It means that not only are resources fully employed, they are employed efficiently in the sense that they are making their most valued contributions to the national output. If the economy fails to realize full production, then economists say our resources are underemployed.

Learning Objective: 01-06 Production possibilities model and increasing opportunity costs Level: Medium McConnell - Chapter 01 #34 Other: Pick-up

35.

The production possibilities table below shows the hypothetical relationship between the

(p. 12-14)

production of food and clothing in an economy. (a) What is the marginal opportunity cost of producing the second unit of clothing? (b) What is the total opportunity cost of producing two units of clothing? (c) What is the marginal opportunity cost of producing the third unit of clothing? (d) What is the total opportunity cost of producing three units of clothing?

(a) 5 units of food (18 - 13 = 5); (b) 9 units of food (22 - 13 = 9); (c) 6 units of food (13 - 7 = 6); (d) 15 units of food (22 - 7 = 15).

Learning Objective: 01-06 Production possibilities model and increasing opportunity costs Level: Medium McConnell - Chapter 01 #35 Other: Pick-up

36.

A production possibilities table for two products, grain and airplanes, is found below. Usual

(p. 12-14)

assumptions regarding production possibilities are implied. Grain is measured in tons and airplanes are measured in units of 1,000. (a) Using the below graph construct a production possibilities curve from this information placing grain on the vertical axis and airplanes on the horizontal axis.

(b) What is the opportunity cost of producing the first unit of airplanes? The marginal opportunity cost of producing the fourth unit of airplanes?

(a) See graph below.

(b) Two units of grain (56-54) are sacrificed if one unit of planes is produced. When the fourth unit of planes is produced the marginal opportunity cost is eight units of grain (44-36).

Learning Objective: 01-06 Production possibilities model and increasing opportunity costs Level: Medium McConnell - Chapter 01 #36 Other: Pick-up

37.

A production possibilities table for two products, corn and paper, is found below. Usual

(p. 12-14)

assumptions regarding production possibilities are implied. Corn is measured in tons, and paper is measured per unit.

(a) Using the following graph construct a production possibilities curve from this information placing corn on the vertical axis and paper on the horizontal axis.

(b) What is the marginal opportunity cost of producing the first unit of paper? The marginal opportunity cost of producing the fourth unit of paper?

(a) See graph below.

(b) Three units of corn (63-60) are sacrificed if 1 unit of paper is produced. When the fourth unit of paper is produced the opportunity cost is 12 units of corn (45-33).

Learning Objective: 01-06 Production possibilities model and increasing opportunity costs Level: Medium McConnell - Chapter 01 #37 Other: Pick-up

38.

What is the economic rationale for the law of increasing costs?

(p. 15)

Economic resources are not completely adaptable to alternative uses. In a two-product (A and B) economy, an increase in the production of product A will cause a reduction in the quantity of product B that can be produced because resources are being reallocated from the production of B to A. That reallocation of resources is not constant and becomes increasingly costly in terms of the lost production of B. As more resources shift from the production of B to A, these resources are less and less adaptable or suitable for the production of A. The production of more and more of A entails an increasing opportunity cost in the form of less and less production of B.

Learning Objective: 01-06 Production possibilities model and increasing opportunity costs Level: Medium McConnell - Chapter 01 #38 Other: Pick-up

39.

Explain how increasing opportunity costs are reflected graphically in the production

(p. 15)

possibilities curve. How would the curve appear if opportunity costs were constant?

The production possibilities curve illustrates the concept of increasing opportunity cost with its changing slope. This causes the curve to be concave toward the origin. It occurs because when society produces more and more of one product, it must give up increasing amounts of alternative products due to the fact that resources are specialized. If resources could be used equally efficiently to produce all things, opportunity costs would be constant and the production possibilities curve would be a straight line graph showing alternative production possibilities.

Learning Objective: 01-06 Production possibilities model and increasing opportunity costs Level: Hard McConnell - Chapter 01 #39 Other: Pick-up

40.

An economy consists of five workers, who can produce either fish or fruit. The following table

(p. 12-15)

shows the daily output of each worker.

(a) Suppose one worker catches fish and four workers pick fruit. For the economy to achieve productive efficiency, which of the five workers must fish? (b) Does the economy achieve full employment and productive efficiency by producing 26 fish and 20 fruit?

(a) Productive efficiency requires that resources be used in the least costly way. To achieve productive efficiency, worker D must catch fish since this worker incurs the lowest opportunity cost. For each fish that worker D catches, .5 units of fruit are lost. The other workers face a higher opportunity cost for each fish caught. As the economy produces more fish, it must shift the workers from fruit. Initially, the opportunity cost of doing so is relatively low. However, the opportunity cost increases. This is why the production possibilities curve is concave to the origin. Although workers A and E can produce more fish than worker D, they also incur greater opportunity costs. (b) Although the economy may be achieving full employment, it does not achieve productive efficiency. The economy can produce 26 fish and 20 fruit when fully employing workers A, C, and D in fishing and workers B and E in picking fruit. However, this allocation of resources does not achieve full production. Resources are underemployed. It is possible to produce more fish without losing any fruit by reallocating the five workers. If workers B, C, D, and E catch fish and worker A picks fruit, the economy's output is 32 fish and 20 fruit. Worker A incurs the lowest opportunity cost of all workers when picking fruit. Therefore, productive efficiency requires that worker A is allocated to picking fruit before any other worker.

Learning Objective: 01-06 Production possibilities model and increasing opportunity costs Level: Hard McConnell - Chapter 01 #40 Other: Pick-up

41.

An economy consists of five workers, who can produce either fish or fruit. The following table

(p. 12-15)

shows the daily output of each worker.

(a) Suppose one worker catches fish and four workers pick fruit. For the economy to achieve productive efficiency, which of the five workers must fish? (b) Does the economy achieve full employment and productive efficiency by producing 12 fish and 4 fruit?

(a) Productive efficiency requires that resources be used in the least costly way. To achieve productive efficiency, worker E must catch fish since this worker incurs the lowest opportunity cost. For each fish that worker E catches, .25 units of fruit are lost. The other workers face a higher opportunity cost for each fish caught. As the economy produces more fish, it must shift the workers from fruit. Initially, the opportunity cost of doing so is relatively low. However, the opportunity cost increases. This is why the production possibilities curve is concave to the origin. Although workers B and D can produce more fish than worker E can, they also incur greater opportunity costs. (b) Although the economy may be achieving full employment, it does not achieve productive efficiency. The economy can produce 12 fish and 4 fruit when fully employing workers A and D in fishing and workers B, C, and E in picking fruit. However, this allocation of resources does not achieve full production. Resources are underemployed. It is possible to produce more fish without losing any fruit by reallocating the five workers. If workers B, C, D, and E catch fish and workers A picks fruit, the economy's output is 20 fish and 4 fruit. Worker A incurs the lowest opportunity cost of all workers when picking fruit. Therefore, productive efficiency requires that worker A is allocated to picking fruit before any other worker.

Learning Objective: 01-06 Production possibilities model and increasing opportunity costs Level: Hard McConnell - Chapter 01 #41 Other: Pick-up

42.

What changes must occur for the potential total output of the economy to grow?

(p. 17-19)

Economic growth is the result of (1) increases in supplies of factors of production or resources, (2) improvements in factor or resource quality, and (3) technological advances so that more can be produced with the existing level and quality of resources.

Learning Objective: 01-07 Economic growth; present choices; and future possibilities Level: Easy McConnell - Chapter 01 #42 Other: Modified

43.

Look at the following production possibilities curve illustrating the possibilities in Sluggerville

(p. 12-20)

for producing bats and/or peanuts with the existing level of resources and technology.

(a) Show a point U that would indicate unemployed resources in Sluggerville. (b) Draw a new curve B that illustrates the results of improved technology in the production of bats, but no change in the production efficiency of peanuts. (c) Show a point G that would indicate a point that is currently unattainable in the production of peanuts and bats in Sluggerville.

Learning Objective: 01-06 Production possibilities model and increasing opportunity costs Learning Objective: 01-07 Economic growth; present choices; and future possibilities Level: Medium McConnell - Chapter 01 #43 Other: Pick-up

44.

Explain how each event affects production possibilities.

(p. 16-20)

(a) The population becomes more educated over time as the number of high school dropouts falls and the number of college graduates rises. (b) The unemployment rate declines from 8 to 6 percent of the labour force. (c) Businesses and government are unable to solve a major computer problem, thus reducing economic efficiency and national output. (d) Advances in telecommunications and new technology significantly contribute to economic growth over time. (e) The Federal government decides to allocate more resources to national defence.

(a) Improvements in the basic education of the labour force typically contribute to an increase in productivity. The production possibilities curve should move outward. (b) Unemployment means that there is inefficient use of existing resources. Production moves from a point inside the production possibilities curve toward the frontier. (c) The most likely answer is that the production possibilities curve shifts inward. It would also be possible that there is movement from the frontier of the production possibilities curve to an interior point. Both answers indicate that there is less economic inefficiency in the economy. (d) Advances in telecommunications and new technology significantly contribute to economic growth over time. (e) There will be movement along the existing production possibilities curve toward more defence goods at one axis from all other goods at the other axis.

Learning Objective: 01-07 Economic growth; present choices; and future possibilities Level: Medium McConnell - Chapter 01 #44 Other: Pick-up

45.

Describe the adjustments in the production possibilities curves in each of the following

(p. 16-20)

situations for the Canadian economy. (a) the economy moves from full employment into a deep recession (b) the economy makes great strides in eliminating discrimination (c) the end of the Cold War leads to cuts in military spending (d) the government significantly increases spending for health and education

(a) The economy begins at a point on the curve but with recession there is unemployment and the economy now operates at a point in the area inside the curve, indicating that production is less than that which is possible because some resources are not being used. (b) Eliminating discrimination would move the economy from a point inside its production possibilities curve toward a point on the curve. (c) If the curve is illustrating the tradeoff between private spending and government spending (or between military and consumer goods), then this should mean a movement along the curve in the direction of more private or consumer production and less military production. Government spending in general could decrease, but if that were not the case, then the government might simply shift some funds from the military to other types of government spending and the point would not necessarily move at all on a curve depicting the tradeoff between government and private spending. (d) Movement depends on where the money is coming from. If the money comes from increased taxes or borrowing, then there is a movement along the curve away from private spending and toward public spending. If the money comes from other government programs and the curve is illustrating government versus private spending, the amount of total government production would not necessarily change, so the point could remain at the same spot on the curve.

Learning Objective: 01-07 Economic growth; present choices; and future possibilities Level: Medium McConnell - Chapter 01 #45 Other: Pick-up

46.

Evaluate. Since the production possibilities curve can shift outward over time, it is possible for

(p. 16-20)

an economy to get more of a product without incurring an opportunity cost.

Outward shifts of the production possibilities curve occur if factor supplies increase or if technology advances. Both these changes, however, are not without cost. Increases or improvements in factor supplies involve tradeoffs. For example, a nation can increase its stock of capital by forgoing some goods for the present. Likewise, an increase in natural resources requires the use of resources for exploration and development that could have been used to produce goods for the present. Similarly, technological advancement is the result of employing resources with alternative uses in research and development.

Learning Objective: 01-07 Economic growth; present choices; and future possibilities Level: Hard McConnell - Chapter 01 #46 Other: Pick-up

47.

One application of the production possibilities concept has been to explain the difference in

(p. 19-20)

growth patterns of a nation with a high level of investment (Alta) and an equivalent nation with a low level of investment (Zorn). Use the concept to explain why Alta's economic growth would be greater than that of Zorn over time.

The application suggests the tradeoff illustrated by a production possibilities curve with consumption spending on one axis and investment spending on the other axis. In Alta the combination of consumption and investment spending is heavily weighted toward investment. In Zorn investment spending is a smaller percentage of domestic output. If investment were measured on the vertical axis and consumption on the horizontal axis, Alta's optimal selection would be much higher on its production possibilities curve than would be the selection in Zorn. As a result of this larger proportion of income spent on investment goods, Alta's capital resource base and its economy grow more rapidly, which means its production possibilities curve shifts outward at a more rapid pace over time.

Learning Objective: 01-07 Economic growth; present choices; and future possibilities Level: Medium McConnell - Chapter 01 #47 Other: Pick-up

48.

The production possibilities curve suggests that a nation cannot live beyond its means or

(p. 20)

production potential. Explain why international trade would cause this statement to be modified.

International trade allows for greater specialization and production. This activity has the effect of increasing the quantity and quality of resources, using resources more efficiently or improving output through the use of new production techniques. Thus, the gains from international specialization and trade are the equivalent of economic growth.

Learning Objective: 01-07 Economic growth; present choices; and future possibilities

Level: Medium McConnell - Chapter 01 #48 Other: Pick-up

49.

Why do economists use graphs in their work?

(p. 26)

Economists use graphs to illustrate the relationship between economic variables in a visual format which often is more efficient than explaining the relationship in words. By seeing the relationship in graphical format, the reader (viewer) is able to readily describe the relationship.

Learning Objective: 0A1-01: Graphs and their meanings Level: Easy McConnell - Chapter 01 #49 Other: Pick-up

50.

In a two-dimensional graph showing the relationship between income and consumption in the

(p. 26)

economy, what is shown on the vertical axis and what is shown on the horizontal axis?

In the typical two-dimensional graph, the vertical axis measures the dependent variable, which in this case would be consumption. The horizontal axis measures the independent variable, which in this case would be income.

Learning Objective: 0A1-01: Graphs and their meanings Level: Easy McConnell - Chapter 01 #50 Other: Pick-up

51.

Define what is meant by a positive or direct relationship between two variables and describe

(p. 27)

the line graph depicting such a relationship.

A positive or direct relationship between two variables describes a situation where the two variables change in the same direction. If the first variable increases, the second variable increases; if the first decreases, the second decreases. An example would be individual income and spending. Generally, high spending is associated with high incomes and lower spending is associated with lower incomes. The line graph of a direct, positive relationship is upward sloping from left to right.

Learning Objective: 0A1-01: Graphs and their meanings Level: Medium McConnell - Chapter 01 #51 Other: Pick-up

52.

Define what is meant by an inverse relationship between two variables and describe the line

(p. 27)

graph depicting such a relationship.

An inverse relationship describes a situation where the two variables change in opposite directions. When the first variable increases, the second variable decreases and vice versa. An example would be product price and quantity demanded of the product. Other things being equal, the higher the product price, the less will be purchased. The line graph of an inverse relationship has a negative slope; that is, it is downward sloping from left to right.

Learning Objective: 0A1-01: Graphs and their meanings Level: Medium McConnell - Chapter 01 #52 Other: Pick-up

53.

Differentiate between the independent and dependent variables in an economic relationship.

(p. 27)

The dependent variable changes as a consequence of the change in the independent variable. By specifying one variable as the dependent variable, a causal relationship is implied with changes in the independent variable causing changes in the dependent variable. The dependent variable is the "effect" or outcome.

Learning Objective: 0A1-01: Graphs and their meanings Level: Easy McConnell - Chapter 01 #53 Other: Pick-up

54.

Describe the slope of a direct and an inverse relationship.

(p. 28)

The ratio of the vertical change (the rise or fall) to the horizontal change (the run) in moving between two points on the line is called the slope of the line. The slope of an upward sloping line is positive, reflecting a direct relationship between two variables; the slope of a downward sloping line is negative, reflecting an inverse relationship.

Learning Objective: 0A1-01: Graphs and their meanings Level: Medium McConnell - Chapter 01 #54 Other: Pick-up

55.

Show graphically the relationships that you would expect to find between (a) student IQs and

(p. 26-28)

grade point averages (GPAs); (b) the price of a product and the amount consumers will purchase; (c) the temperature and the number of people at the swimming pool. Which of these are direct relationships and which are inverse? What considerations might change the expected relationships?

The direct relationships expected are (a) IQs and grade point averages, and (c) the temperature and the number of people at the pool. These relationships could change if external conditions were changed to affect these relationships. For example, in (a) if high IQ students were forced to take the most difficult classes, the direct relationship might disappear; in (b) if high-priced products became very fashionable and were of far superior quality, people might actually buy more when prices rose; in (c) if the number of people in the pool was limited to a low number or if air pollution alerts accompanied high temperatures, the direct relationship between temperature and pool attendance might change.

*** ANDRIA - can you switch the labels on graphs (a) and (c)? GPA on vertical axis and IQs on horizontal axis in (a) and similarly for (c)? Usually economists follow the mathematical rule that the independent variable goes on the horizontal axis. It is only in a few cases (and there's historical reason) that we don't follow this rule.

Learning Objective: 0A1-01: Graphs and their meanings Level: Medium McConnell - Chapter 01 #55

Other: Pick-up

56.

Show graphically on the below graph the expected relationship between investment spending

(p. 28)

and interest rates. Put investment expenditures on the horizontal axis and the rate of interest on the vertical axis; connect the points and label the curve "Investment demand". Describe this relationship between the rate of interest and investment expenditures. Describe the slope of the investment curve.

The relationship between the interest rate and investment expenditures is inverse. The slope of the investment curve is downsloping or negative.

Learning Objective: 0A1-01: Graphs and their meanings Level: Easy McConnell - Chapter 01 #56 Other: Pick-up

57.

There are two sets of x, y points on a straight line in a two-variable graph with y on the vertical

(p. 29)

axis and x on the horizontal axis. What would be the linear equation for the line if one set of points was (0, 12) and the other set was (12, 36)?

The linear equation is y = 12 + 2x.

Learning Objective: 0A1-01: Graphs and their meanings Level: Medium McConnell - Chapter 01 #57 Other: Pick-up

58.

The value of the vertical intercept is $100 and the slope is 0.8 in a linear equation for

(p. 29)

consumption (measured on the vertical axis) and disposable income (measured on the horizontal axis). If disposable income is $1000, what is consumption? State the linear equation and show how you found the answer.

The linear equation is consumption = $100 + 0.8(disposable income). When disposable income is $1000, consumption is $900 = 100 + 0.8($1000).

Learning Objective: 0A1-01: Graphs and their meanings Level: Medium McConnell - Chapter 01 #58 Other: Pick-up

59.

How do you determine the slope of a nonlinear curve? Will the slope be the same along the

(p. 29-30)

curve? Explain.

The slope of a curve at any point is determined by calculating the slope of a straight line tangent to the curve at that point. The slope will change as you move along the curve. The curve has a different slope at each point.

Learning Objective: 0A1-01: Graphs and their meanings Level: Easy McConnell - Chapter 01 #59 Other: Pick-up

60.

Using the below graph give the slopes of the lines tangent to the curve at points A, B, and C.

(p. 29-30)

To find the slope, choose two points on the tangent line and divide the vertical distance between the two points by the horizontal distance. The tangent line aa passes through (5, 10) and (0, 3). Therefore, the slope at point A is 7/5 or 1.4. The slope at point B is zero. The tangent line cc passes through (35, 10) and (31, 15). Therefore, the slope at point C is -5/4 or 1.25.

Learning Objective: 0A1-01: Graphs and their meanings Level: Medium McConnell - Chapter 01 #60

Other: Pick-up

Chapter 01 Limits, Alternatives, and Choices Summary Category

# of Questions

Learning Objective: 01-01 Ten key concepts to retain for a life time

4

Learning Objective: 01-02 The economic way of thinking

4

Learning Objective: 01-03 Theories; principles; and models

5

Learning Objective: 01-04 Microeconomics and Macroeconomics

7

Learning Objective: 01-05 The economic problem

13

Learning Objective: 01-06 Production possibilities model and increasing opportunity costs

10

Learning Objective: 01-07 Economic growth; present choices; and future possibilities

7

Learning Objective: 0A1-01: Graphs and their meanings

12

Level: Easy

18

Level: Hard

12

Level: Medium

30

McConnell - Chapter 01

60

Other: Modified

3

Other: New

2

Other: Pick-up

55

Chapter 02 The Market System and the Circular Flow 1. Explain what is meant by a command economy.

2. Explain the term "laissez-faire capitalism."

3. List nine characteristics of the market system.

4. Why is the right of private property an essential characteristic of a market system?

5. Explain the most important consequence of legally enforceable property rights?

6. What roles do freedom of enterprise and freedom of choice play in capitalism? How important are they to the operation of a competitive market economy?

7. Explain the importance of self-interest in the operation of a market system.

8. What is the importance of competition in relation to self-interest in a market system?

9. What conditions are necessary for economic competition to exist?

10. Explain why the market system is an organizing mechanism.

11. Respond to the following question: "Producing capital goods takes time, so how can that be a more efficient form of production of consumer goods?"

12. Describe two types of specialization in production.

13. What are the economic advantages of the division of labour?

14. Describe three ways that the division of labour contributes to society's output.

15. Describe all the advantages a money economy has over a barter economy?

16. How does the use of money differ from the use of barter in the exchange of goods and services?

17. What is money and what important function does it perform? Explain how it overcomes the disadvantages associated with barter. What conditions are necessary for people to accept paper currency in exchange for the goods and services, which they sell?

18. Suppose Tom, Dick, and Harry live in a barter economy. Tom produces wine, Dick bakes bread, and Harry makes cheese. Tom wants some bread to go with his wine and is willing to trade 1 litre of wine for two loaves of bread. Dick wants some cheese to go with his bread and is willing to trade one loaf of bread for one-half kilogram of cheese. Harry doesn't want bread, but wants some wine to go with his cheese and is willing to trade cheese for one litre of wine. It is not possible for all three of them to meet together at one time. (a) Explain how this situation illustrates the difficulty with a barter economy. (b) Devise a money system using rubies where four rubies are equivalent in value to one litre of wine. In other words tell how much bread and cheese would be worth in terms of rubies in this economy. In this system, how much cheese must Harry sell in order to buy one litre of wine?

19. Why does specialization require a convenient means of exchanging goods?

20. One of the characteristics of a modern market economy is an "active, but limited, government." How can the government "help" the economy?

21. What are the so-called Five Fundamental Questions that every economy must answer?

22. Assume that a firm can produce product A, product B, or product C with the resources it currently employs. These resources cost the firm a total of $100 per week. Assume, for the purposes of this problem, that the firm's costs cannot be changed. The market prices and the quantities of A, B, and C these resources can produce are given as follows.

(a) Compute the firm's profit when it produces A, B, or C and enter these data in the table. (b) Which product will the firm produce? (c) If the price of A rose to $16, which product will the firm produce? (d) If the firm produces A at a price of $16, what would tend to happen to the number of firms producing product A?

23. Assume that a firm can produce product A, product B, or product C with the resources it currently employs. These resources cost the firm a total of $100 per week. Assume, for the purposes of this problem, that the firm's costs cannot be changed. The market prices and the quantities of A, B, and C these resources can produce are given below.

(a) Compute the firm's profit when it produces A, B, or C and enter these data in the table. (b) Which product will the firm produce? (c) Suppose the quantity of product B the firm was able to produce with the same amount of inputs now rose to 25. Which product will the firm now produce? (d) As a result of the rise in quantity of product B to 25 that each firm can produce, what will happen to the number of firms producing product B?

24. How does consumer choice differ from consumer sovereignty in a market system?

25. Why is the consumer the king (or queen) in a market system?

26. Explain the two different motives that firms have for choosing the lowest-cost production methods to produce goods and services?

27. What factors determine who will get the output?

28. How does the market system accommodate change in consumer's preferences?

29. Assume that a firm finds that its profits will be maximized (or losses minimized) when it produces $30 worth of product X. Each of these techniques shown in the following table will produce exactly $30 worth of X.

(a) Which method is most efficient? Why? (b) Given the above prices, will the firm adopt a new method, which involves 10 units of land, 3 of labour, 2 of capital, and 2 of entrepreneurial ability? (c) Suppose the price of capital falls to $1 without any other prices changing. Which of the methods will the firm now choose? Why?

30. Assume that a firm finds that its profits will be maximized (or losses minimized) when it produces $50 worth of product X. Each of these techniques shown in the following table will produce exactly $50 worth of X.

(a) Which method is most efficient? Why? (b) Given the above prices, will the firm adopt a new method, which involves 2 units of land, 2 of labour, 4 of capital, and 8 of entrepreneurial ability? (c) Suppose the price of labour falls to $1 without any other prices changing. Which of the methods will the firm now choose? Why?

31. What is meant by the guiding function of prices?

32. How can technological advance result in creative destruction?

33. Explain this quote from Adam Smith: "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner but from their regard to their own interest."

34. Describe the three major virtues of a market system.

35. "Competition is the mechanism that brings order out of potential chaos in a price-directed economy." Explain.

36. "Every economy is based on 'planning' of one sort or another." Interpret and explain.

37. List two problems that have contributed to the decline of command systems on a national scale.

38. Explain what is meant by the free-rider problem and how a government can help solve the problem.

39. Describe the basic features of the circular flow model.

40. What is the relationship between businesses and households in the circular flow model?

41. List and describe the three main categories of businesses?

42. Provide examples of prominent Canadian corporations and describe the unique implications that arise due to the fact that such corporations are independent legal entities?

43. In the below circular flow diagram, the household and business sectors are labelled with arrows representing the flows of income and output labelled (a) through (f) and the two appropriate markets labelled (g) and (h). Supply the correct descriptive titles for each of these labels (a) through (h).

Chapter 02 The Market System and the Circular Flow Key 1.

Explain what is meant by a command economy.

(p. 34)

The command economy is the opposite extreme alternative to pure capitalism. It is a system characterized by government ownership of all or nearly all property resources and centrally planned and administered production.

Learning Objective: 02-01 Economic systems Level: Easy McConnell - Chapter 02 #1 Other: Pick-up

2.

Explain the term "laissez-faire capitalism."

(p. 34)

Pure capitalism is sometimes called "laissez faire" capitalism which is a French term for "let it be." In pure capitalism the government's role is limited to protecting private property and establishing the legal framework for free enterprise and free markets to function.

Learning Objective: 02-01 Economic systems Level: Easy McConnell - Chapter 02 #2 Other: Pick-up

3.

List nine characteristics of the market system.

(p. 35-40)

The nine characteristics discussed in the text are: (1) private property; (2) freedom of enterprise and choice; (3) self-interest as the major motivation for economic activity; (4) competition among buyers and sellers; (5) reliance on the market (price) system; (6) the use of advanced technology and large amounts of capital goods; (7) specialization; (8) the use of money rather than barter; and (9) active but limited role for government

Learning Objective: 02-02 Characteristics of the market system Level: Hard McConnell - Chapter 02 #3 Other: Pick-up

4.

Why is the right of private property an essential characteristic of a market system?

(p. 35)

The most important consequence of legally enforceable property rights is that they encourage

people to cooperate by helping to ensure that only mutually agreeable economic transactions take place. Property rights are also important because they give people private ownership of resources. This ownership encourages them to make the best use of those resources because they will benefit if they do. Property rights also encourage people to take the risk of investing in capital goods or to develop new innovation or products because they will receive the benefits from this activity if they are successful. Property rights offer incentives for people to maintain their property to preserve its value and invest in it if they think they can increase its value. Property rights also facilitate exchanges by making clear who owns a resource so that there is no question about the legitimacy of the transaction.

Learning Objective: 02-02 Characteristics of the market system Level: Hard McConnell - Chapter 02 #4 Other: Modified

5.

Explain the most important consequence of legally enforceable property rights?

(p. 35)

The most important consequence of legally enforceable property rights is that they encourage

people to cooperate by helping to ensure that only mutually agreeable economic transactions take place. Without legally enforceable property rights the strong could simply take whatever they wanted from the weak without giving them any compensation. But in a world of legally enforceable property rights, any person wanting something from you has to get you to agree to give it to them. And you can say no. The result is that if they really want what you have, they must offer you something that you value more highly in return. That is, they must offer you a

mutually agreeable economic transaction—one that benefits you as well as them.

Learning Objective: 02-02 Characteristics of the market system Level: Hard McConnell - Chapter 02 #5 Other: New

6.

What roles do freedom of enterprise and freedom of choice play in capitalism? How important

(p. 35-36)

are they to the operation of a competitive market economy?

In capitalism, two essential freedoms are the freedom of enterprise and freedom of choice. Businesses must be free to get economic resources, organize them to produce products, and sell them in the market. Businesses must also be free to enter or leave an industry. Freedom of choice gives business owners, resource owners and consumers the freedom to act to advance their own self-interest. Business owners are free to buy and sell property. Labour resources (workers) can enter or exit any line of work for which they are qualified. Consumers are free to purchase goods and services as they choose based on their budget constraints. Without these freedoms it would be impossible for a market economy to exist.

Learning Objective: 02-02 Characteristics of the market system Level: Medium

McConnell - Chapter 02 #6 Other: Pick-up

7.

Explain the importance of self-interest in the operation of a market system.

(p. 36-37)

Self-interest is the motivating force behind both the demand and supply sides of the product and resource markets in a capitalist system. Entrepreneurs engage in production with the expectation of making a profit; workers seek the best wage and working conditions they can get; consumers allocate their spending in order to maximize their satisfaction.

Learning Objective: 02-02 Characteristics of the market system Level: Easy McConnell - Chapter 02 #7 Other: Pick-up

8.

What is the importance of competition in relation to self-interest in a market system?

(p. 37)

Competition is important as the force, which tempers or regulates the self-interest of producers, sellers, workers, and buyers. If producers make too much profit, competitors will arise to take advantage of the opportunity and as production increases, prices and profits will fall. If workers demand too much, employers will seek other workers who are willing to work for less. If buyers are not willing to pay a fair price for the product, producers will sell the product to someone who is. In each case it is competition or the threat of competition that tempers the potential abuse of economic power.

Learning Objective: 02-02 Characteristics of the market system Level: Medium McConnell - Chapter 02 #8 Other: Pick-up

9.

What conditions are necessary for economic competition to exist?

(p. 37)

Competition requires the presence of large numbers of buyers and sellers. The number must be large enough so that no single buyer or seller can affect the price of the product by their individual actions regarding demand or supply. In addition, competition assumes that it is simple for consumers to leave markets on the basis of their self-interest, and also for producers to enter or leave a particular industry on the basis of their self-interest so that the economy can adjust appropriately to changes in consumer demand, technology, or resource supplies.

Learning Objective: 02-02 Characteristics of the market system Level: Medium McConnell - Chapter 02 #9 Other: Modified

10.

Explain why the market system is an organizing mechanism.

(p. 37)

Markets and price give the economic system its ability to coordinate millions of economics decisions made on a daily basis. The system is an extensive communication network for expressing the wishes of consumers to producers. The price signals given by markets direct resources to the goods and services people want and indicate where profits are to be made for producers. Producers who fail to heed the market signals are punished. Consumers also use the market price to figure out how to make the best use of their limited incomes.

Learning Objective: 02-02 Characteristics of the market system Level: Hard McConnell - Chapter 02 #10 Other: Pick-up

11.

Respond to the following question: "Producing capital goods takes time, so how can that be a

(p. 19-20,

more efficient form of production of consumer goods?"

38)

The production of capital goods does require time. These capital goods, however, can then be used to increase the production of consumer goods. This roundabout method of production is more efficient over time, but it does not come without a cost. As shown by the production possibilities curve, resources used to make capital goods must be diverted from the production of consumer goods today to produce capital goods that will then be used to increase the consumer goods of tomorrow.

Learning Objective: 02-02 Characteristics of the market system Level: Hard McConnell - Chapter 02 #11 Other: Pick-up

12.

Describe two types of specialization in production.

(p. 38-39)

Specialization may be of the human form with division of labour where different workers perform different production tasks; or it may be geographic specialization where some goods and services are produced in certain regions and others are produced in other areas.

Learning Objective: 02-02 Characteristics of the market system Level: Easy McConnell - Chapter 02 #12 Other: Pick-up

13.

What are the economic advantages of the division of labour?

(p. 38-39)

Specialization enables individuals to take advantage of existing differences in their abilities and skills. Other advantages come from increased productivity or output per worker as specialized workers gain skills in performing one task and avoid loss of time in switching from one task to another. Therefore, more is produced with the same amount of resources as before specialization.

Learning Objective: 02-02 Characteristics of the market system Level: Medium McConnell - Chapter 02 #13 Other: Modified

14.

Describe three ways that the division of labour contributes to society's output.

(p. 38-39)

First, specialization lets people take advantage of differences in skills and abilities so they can be more efficient and productive. Second, specialization fosters learning by doing so people can become good at a particular task. Third, specialization saves time because people do not have to switch from one task to another.

Learning Objective: 02-02 Characteristics of the market system Level: Medium McConnell - Chapter 02 #14 Other: Pick-up

15.

Describe all the advantages a money economy has over a barter economy?

(p. 39-40)

Trade is difficult with barter because it requires a coincidence of wants. Money overcomes that problem. A buyer can obtain goods without having to locate a seller who desires what the person has to trade. All products can be priced and traded on a common basis. Also, with money, neither party needs to carry products around with them so they are always available for trade. Money facilitates the exchange of products, which is necessary for specialization. Economic efficiency is improved with a system of money.

Learning Objective: 02-02 Characteristics of the market system Level: Hard McConnell - Chapter 02 #15 Other: Modified

16.

How does the use of money differ from the use of barter in the exchange of goods and

(p. 39-40)

services?

Barter requires a coincidence of wants. In order for exchange to take place both parties have to want what the other is offering. Money, on the other hand, acts as a medium of exchange in that the appropriate quantity of it is generally acceptable in exchange for any good or service.

Learning Objective: 02-02 Characteristics of the market system Level: Medium McConnell - Chapter 02 #16 Other: Pick-up

17.

What is money and what important function does it perform? Explain how it overcomes the

(p. 39-40)

disadvantages associated with barter. What conditions are necessary for people to accept paper currency in exchange for the goods and services, which they sell?

Money is anything that is generally acceptable as a medium of exchange. In Canada, money includes currency, coins, and chequable deposits. Barter requires a coincidence of wants between the two parties to a transaction. Each has to want what the other has to offer. Money makes this coincidence unnecessary, as the seller is willing to accept money in exchange for goods or services offered and can, in turn, exchange the money earned for other goods and services from another seller. The necessary condition for the use of paper currency is that it must be generally acceptable. Sellers must have faith that the currency will have value when they want to use it to buy goods and services for themselves. Note that the money does not have to have any intrinsic value; that is, it does not have to be backed by a material that has some use like gold or silver.

Learning Objective: 02-02 Characteristics of the market system Level: Hard McConnell - Chapter 02 #17 Other: Pick-up

18.

Suppose Tom, Dick, and Harry live in a barter economy. Tom produces wine, Dick bakes

(p. 39-40)

bread, and Harry makes cheese. Tom wants some bread to go with his wine and is willing to trade 1 litre of wine for two loaves of bread. Dick wants some cheese to go with his bread and is willing to trade one loaf of bread for one-half kilogram of cheese. Harry doesn't want bread, but wants some wine to go with his cheese and is willing to trade cheese for one litre of wine. It is not possible for all three of them to meet together at one time. (a) Explain how this situation illustrates the difficulty with a barter economy. (b) Devise a money system using rubies where four rubies are equivalent in value to one litre of wine. In other words tell how much bread and cheese would be worth in terms of rubies in this economy. In this system, how much cheese must Harry sell in order to buy one litre of wine?

(a) The lack of coincidence of wants is illustrated in this situation. Tom wants the bread that Dick has, Dick wants Harry's cheese, and Harry wants Tom's wine but for any two of them there is no incentive to trade for something each does not want. In other words, there is no coincidence of wants. (b) If rubies could be used as a medium of exchange, Tom could receive four rubies for each litre of wine. According to their initial exchange values, he should be willing to pay two rubies for each loaf of bread. Dick would then have four rubies to purchase one kilogram of cheese and Harry could buy wine with the four rubies he earned from selling this cheese. In terms of ruby prices, bread is worth two rubies per loaf and one litre of wine and one kilogram of cheese are each worth four rubies in this economy.

Learning Objective: 02-02 Characteristics of the market system Level: Hard McConnell - Chapter 02 #18 Other: Pick-up

19.

Why does specialization require a convenient means of exchanging goods?

(p. 38-39)

As consumers, individuals prefer to have a wide range of products to satisfy their desires. However, when individuals specialize in production, they focus their efforts on producing one or a few goods. This limited range of production does not match their preferences in consumption. Therefore, individuals must be able to exchange the goods that they specialize in for other goods that they desire to consume. Without a convenient means of exchanging goods, individuals could only consume what they produce. Instead, individuals would be jacksof-all-trades producing a wide variety of products for their own consumption. There would be little incentive to specialize and to take advantage of the resulting increase in productivity.

Learning Objective: 02-02 Characteristics of the market system Level: Medium McConnell - Chapter 02 #19 Other: Pick-up

20.

One of the characteristics of a modern market economy is an "active, but limited, government."

(p. 40, 46)

How can the government "help" the economy?

The market is not always perfect. In some cases it directs the economy to an undesirable outcome. We call these instances market failures. When market failures exist, the governments can direct the economy to a more efficient outcome.

Learning Objective: 02-02 Characteristics of the market system Learning Objective: 02-04 The demise of the command system Level: Easy McConnell - Chapter 02 #20 Other: Pick-up

21.

What are the so-called Five Fundamental Questions that every economy must answer?

(p. 41)

Every economy must respond to five fundamental economic questions. What goods and services will be produced? How will the goods and services be produced? Who will get the goods and services? How will the system accommodate change? How will the system promote progress?

Learning Objective: 02-03 Five fundamental questions Level: Hard McConnell - Chapter 02 #21 Other: Pick-up

22.

Assume that a firm can produce product A, product B, or product C with the resources it

(p. 41)

currently employs. These resources cost the firm a total of $100 per week. Assume, for the purposes of this problem, that the firm's costs cannot be changed. The market prices and the quantities of A, B, and C these resources can produce are given as follows.

(a) Compute the firm's profit when it produces A, B, or C and enter these data in the table. (b) Which product will the firm produce? (c) If the price of A rose to $16, which product will the firm produce? (d) If the firm produces A at a price of $16, what would tend to happen to the number of firms producing product A?

(a) Profit for A will be $40; for B will be -$1 (loss); for C will be $50. (b) Firm will produce product C. (c) If the price of A rises (assuming the firm can sell all of its output at the new price), it would make a profit of $60 on A and so would produce product A. (d) If other firms face similar costs, more firms would enter industry A to take advantage of the higher economic profits.

Learning Objective: 02-03 Five fundamental questions Level: Hard McConnell - Chapter 02 #22 Other: Pick-up

23.

Assume that a firm can produce product A, product B, or product C with the resources it

(p. 41)

currently employs. These resources cost the firm a total of $100 per week. Assume, for the purposes of this problem, that the firm's costs cannot be changed. The market prices and the quantities of A, B, and C these resources can produce are given below.

(a) Compute the firm's profit when it produces A, B, or C and enter these data in the table. (b) Which product will the firm produce? (c) Suppose the quantity of product B the firm was able to produce with the same amount of inputs now rose to 25. Which product will the firm now produce? (d) As a result of the rise in quantity of product B to 25 that each firm can produce, what will happen to the number of firms producing product B?

(a) Profit for A will be -$40 (loss); for B will be -$5 (loss); for C will be $50. (b) The firm will produce product C. (c) The firm would still choose product C. (d) If all firms are identical with identical costs, there will be no change in the number of firms producing product B because it is still more profitable for each firm to product C. Thus product B is unaffected.

Learning Objective: 02-03 Five fundamental questions Level: Hard McConnell - Chapter 02 #23 Other: Pick-up

24.

How does consumer choice differ from consumer sovereignty in a market system?

(p. 41)

Consumer choice by itself refers only to consumers' freedom to choose what they are willing and able to buy from what is available. Consumer sovereignty that exists in a market system goes one crucial step further. It means that producers respond to the choices that consumers make. If consumer demand declines for a particular product, that decreased demand will be reflected in prices and quantity produced. If consumer demand increases, that also will be reflected in terms of prices and quantities produced. In a centrally planned system changing consumer demand is largely ignored in favour of planners' decisions which focus on the state's goals rather than consumer wishes.

Learning Objective: 02-03 Five fundamental questions Level: Hard McConnell - Chapter 02 #24 Other: Pick-up

25.

Why is the consumer the king (or queen) in a market system?

(p. 41)

Consumers exert their preferences in a market system through their dollar votes or their purchases. When there is sufficient demand for a product by consumers, businesses that produce those products can make a normal profit. By shifting their purchases, consumers dictate to firms the types and quantities of products they desire. Businesses must respond to the wishes of consumers. When they fail to meet the desires of consumers, they make losses and eventually will cease to exist.

Learning Objective: 02-03 Five fundamental questions Level: Medium McConnell - Chapter 02 #25 Other: Modified

26.

Explain the two different motives that firms have for choosing the lowest-cost production

(p. 42)

methods to produce goods and services?

The first motive is that because inefficiency drives up costs and lowers profits, any firm wishing to maximize its profits will make great efforts to minimize production costs. These efforts will include using the right mix of labour and capital, given the prices and productivity of those resources. They also mean locating production facilities optimally to minimize production and transportation expenses. The second motive is due to competition, consumers strongly prefer low prices and will shift their purchases over to the firms that can produce a quality product at the lowest possible price. Any firm foolish enough to use higher-cost production methods will go bankrupt as it is undersold by its more efficient competitors who can still make a profit when selling at a lower price. In other words, competition eliminates high-cost producers, and so firms are motivated to choose the lowest-cost production methods to produce goods and services.

Learning Objective: 02-03 Five fundamental questions Level: Hard McConnell - Chapter 02 #26 Other: New

27.

What factors determine who will get the output?

(p. 42)

Individuals are able to choose what they want to buy subject to their income which depends on the property and human resources they possess and the prices of those factors. In a competitive market goods will go to the persons most willing and able to pay.

Learning Objective: 02-03 Five fundamental questions Level: Medium McConnell - Chapter 02 #27 Other: Pick-up

28.

How does the market system accommodate change in consumer's preferences?

(p. 42-43)

As consumers increase their demand for certain products, those product prices will rise and increase profitability. Producers will be induced to increase their production by hiring more workers and other factors of production.

Learning Objective: 02-03 Five fundamental questions Level: Medium McConnell - Chapter 02 #28 Other: Pick-up

29.

Assume that a firm finds that its profits will be maximized (or losses minimized) when it

(p. 42-43)

produces $30 worth of product X. Each of these techniques shown in the following table will produce exactly $30 worth of X.

(a) Which method is most efficient? Why? (b) Given the above prices, will the firm adopt a new method, which involves 10 units of land, 3 of labour, 2 of capital, and 2 of entrepreneurial ability? (c) Suppose the price of capital falls to $1 without any other prices changing. Which of the methods will the firm now choose? Why?

(a) Method #1 is most efficient because it uses relatively more of the least expensive resources, and relatively less of the more expensive resources. (b) Yes, it is now the least-cost method. (c) It will choose #3 because it uses relatively more of capital, which is now much less expensive, and the total cost of each method now makes #3 the least-cost combination.

Learning Objective: 02-03 Five fundamental questions Level: Hard McConnell - Chapter 02 #29 Other: Pick-up

30.

Assume that a firm finds that its profits will be maximized (or losses minimized) when it

(p. 42-43)

produces $50 worth of product X. Each of these techniques shown in the following table will produce exactly $50 worth of X.

(a) Which method is most efficient? Why? (b) Given the above prices, will the firm adopt a new method, which involves 2 units of land, 2 of labour, 4 of capital, and 8 of entrepreneurial ability? (c) Suppose the price of labour falls to $1 without any other prices changing. Which of the methods will the firm now choose? Why?

(a) Method #2 is most efficient because it uses relatively more of the least expensive resource, and relatively less of the more expensive resources. (b) Yes, it is now the least-cost method. (c) It will choose #3 because it uses relatively more of labour, which is now much less expensive, and the total cost of each method now makes #3 the least-cost combination.

Learning Objective: 02-03 Five fundamental questions Level: Hard McConnell - Chapter 02 #30 Other: Pick-up

31.

What is meant by the guiding function of prices?

(p. 43)

The guiding function of prices refers to the response of producers to changes in prices. With a given supply schedule, if demand increases, the market equilibrium price will rise and producers will respond to that by producing an increased quantity of the product. Also, there may be entry of firms into the industry. Conversely, if demand decreases, the market equilibrium price will fall and producers will respond to that change by producing a decreased quantity of the product. There may also be an exodus of firms from the industry. The market system is a communications system and prices are the way information is communicated and incentives are given to take action.

Learning Objective: 02-03 Five fundamental questions Level: Medium McConnell - Chapter 02 #31 Other: Pick-up

32.

How can technological advance result in creative destruction?

(p. 43)

Rival firms must follow the lead of innovative firms that are making economic profits. If the rival firms fail to do so, they can suffer economic losses and eventually fail or be bought by other firms. Sometimes technological advance actually destroys industries because an old product is no longer needed with a new innovation put on the market, a situation referred to as creative destruction. The innovation creates a new product, but in the process of doing so it effectively destroys an industry. One example would be the automobile, which eventually destroyed the market for horse-drawn carriages.

Learning Objective: 02-03 Five fundamental questions Level: Medium McConnell - Chapter 02 #32 Other: Pick-up

33.

Explain this quote from Adam Smith: "It is not from the benevolence of the butcher, the

(p. 44)

brewer, or the baker that we expect our dinner but from their regard to their own interest."

Adam Smith believed that sellers want to make a profit and that is the reason that they are willing to sell to consumers. They are not producing bread, beer, or meat to satisfy the hunger of their customers, but rather to earn the revenues that result from the sale of these products. If they produced due to benevolence, they would give away these products.

Learning Objective: 02-03 Five fundamental questions Level: Easy McConnell - Chapter 02 #33 Other: Pick-up

34.

Describe the three major virtues of a market system.

(p. 44)

First, the market system promotes efficient use of scarce resources. Products are produced in the least costly way and the products most desired by society get produced. Second, the market system provides incentives for continual improvement and innovation. Rewards are given to entrepreneurs, workers, and consumers who attempt to make the best use of scarce resources. Third, the market system supports individual freedom for producers, consumers, and workers. Each group is able to pursue their own self-interest and thus promote the social interest.

Learning Objective: 02-03 Five fundamental questions Level: Medium McConnell - Chapter 02 #34 Other: Pick-up

35.

"Competition is the mechanism that brings order out of potential chaos in a price-directed

(p. 37, 42-

economy." Explain.

45)

This is true in the absence of government direction of production. Producers are forced to produce at lowest cost by the pressures of competition. If they don't they will not be able to sell their goods and services, because their rivals will attract the buyers at lower prices. Furthermore, producers must produce what consumers want at prices that just cover their economic costs or other producers will attract the buyers away from them. Thus, producers are driven by competition in the most efficient manner in the sense of maximizing output and maximizing society's satisfaction.

Learning Objective: 02-02 Characteristics of the market system Learning Objective: 02-03 Five fundamental questions Level: Hard McConnell - Chapter 02 #35 Other: Pick-up

36.

"Every economy is based on 'planning' of one sort or another." Interpret and explain.

(p. 41-47)

Command economies are based on central planning by government planners. In a market system planning occurs primarily at the level of the firm, although government "planning" with regard to fiscal and monetary policy will affect economic performance. Also, government planning takes place in areas of public goods production such as highway construction and national defence. Finally, individuals plan as they make decisions about their economic futures.

Learning Objective: 02-03 Five fundamental questions Learning Objective: 02-04 The demise of the command system Level: Hard McConnell - Chapter 02 #36 Other: Pick-up

37.

List two problems that have contributed to the decline of command systems on a national

(p. 45-47)

scale.

As a means of organizing national economies, the command system has become noticeably less popular. This is because of the coordination problem and the incentive problem. The coordination problem occurs because there are millions upon millions of individual decisions made by consumers and businesses each day. What to buy, what to sell, how to produce — these things that are all questions answered by individual actions in the market system but require specific government decisions in the command system. The incentive problem occurs because without prices determined independent of planners' decisions there is no simple method to clear up cases of excess supply or excess demand. Without profits serving as a signal there is no independent method to attract resources from one productive activity to another.

Learning Objective: 02-04 The demise of the command system Level: Medium McConnell - Chapter 02 #37 Other: Pick-up

38.

Explain what is meant by the free-rider problem and how a government can help solve the

(p. 46)

problem.

Private companies find it challenging to provide public goods. A road available for public use within a city is a good example. It is difficult to keep people from using the road and everyone hopes others will pay for the road so that they themselves can use it for free - this is the freerider problem. While a private company may not build the road, a government can tax everyone to pay for it.

Learning Objective: 02-04 The demise of the command system Level: Medium

McConnell - Chapter 02 #38 Other: Pick-up

39.

Describe the basic features of the circular flow model.

(p. 47-49)

In the simple circular flow model, there are two decision-makers: households and businesses. These two groups are related through the resource and product markets. In the upper half of the circular flow, households sell economic resources (land, labour, capital, and entrepreneurial ability) and businesses buy resources through the resource market. Businesses pay for the cost of these resources, which in turn becomes money income for households. It is the supply decisions of resources sellers (households) and the buying decisions of businesses that determine prices and employment in the resource market. In the lower half of the circular flow, businesses sell goods and services and households buy goods and services in the product market. Households pay for these goods and services with the money income they received from providing resources. These consumption expenditures become revenue for businesses. It is the product buying decisions of households and the product selling decisions of businesses that determine prices and output in the product market.

Learning Objective: 02-05 The circular flow model Level: Hard McConnell - Chapter 02 #39 Other: Pick-up

40.

What is the relationship between businesses and households in the circular flow model?

(p. 47-49)

Households sell their resources to firms in return for money income. Businesses combine the households' labour with other resources to create products. They offer these products for sale to households and in return receive revenue. These revenues to firms enable them to pay for the cost of resources from households as the cycle begins again.

Learning Objective: 02-05 The circular flow model Level: Medium McConnell - Chapter 02 #40 Other: Pick-up

41.

List and describe the three main categories of businesses?

(p. 47-49)

Businesses fall into three main categories. • A sole proprietorship is an unincorporated business owned and operated by a single person. The proprietor (the owner) provides all of the labour and produces all of the output. Examples include an arborist who runs her own tree cutting business and an independent accountant who helps his clients with their taxes. • The partnership form of business organization is a natural outgrowth of the sole proprietorship. In a partnership, two or more individuals (the partners) agree to own and operate a business together. They pool their financial resources and business skills to operate the business, and they share any profits or losses that the business may generate. Many law firms and dental practices are organized as partnerships, as are a wide variety of firms in many other industries. • A corporation is an independent legal entity that can—on its own behalf—acquire resources, own assets, produce and sell products, incur debts, extend credit, sue and be sued, and otherwise engage in any legal business activities.

Learning Objective: 02-05 The circular flow model Level: Medium McConnell - Chapter 02 #41 Other: New

42.

Provide examples of prominent Canadian corporations and describe the unique implications

(p. 49)

that arise due to the fact that such corporations are independent legal entities?

Research In Motion, Bombardier, and Air Canada are examples of large Canadian corporations, but corporations come in all sizes and operate in every type of industry. The fact that a corporation is an independent legal entity means that its owners bear no personal financial responsibility for the fulfillment of the corporation's debts and obligations. For instance, if a corporation has failed to repay a loan to a bank, the bank can sue the corporation but not its owners.

Learning Objective: 02-05 The circular flow model Level: Hard McConnell - Chapter 02 #42 Other: New

43.

In the below circular flow diagram, the household and business sectors are labelled with

(p. 48)

arrows representing the flows of income and output labelled (a) through (f) and the two appropriate markets labelled (g) and (h). Supply the correct descriptive titles for each of these labels (a) through (h).

(a) Goods and services; (b) Consumption expenditures; (c) Revenue; (d) Costs; (e) Money income; (f) Factors land, labour, capital, entrepreneurial ability; (g) Factor markets; (h) Product markets.

Learning Objective: 02-05 The circular flow model Level: Medium McConnell - Chapter 02 #43 Other: Pick-up

Macroeconomics Canadian 13th Edition MCCONNELL Test Bank Full Download: http://alibabadownload.com/product/macroeconomics-canadian-13th-edition-mcconnell-test-bank/

Chapter 02 The Market System and the Circular Flow Summary Category

# of Questions

Learning Objective: 02-01 Economic systems

2

Learning Objective: 02-02 Characteristics of the market system

19

Learning Objective: 02-03 Five fundamental questions

16

Learning Objective: 02-04 The demise of the command system

4

Learning Objective: 02-05 The circular flow model

5

Level: Easy

6

Level: Hard

19

Level: Medium

18

McConnell - Chapter 02

43

Other: Modified

5

Other: New

4

Other: Pick-up

34

This sample only, Download all chapters at: alibabadownload.com