Business A Practical Introduction 1st Edition by Williams Test Bank

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Business A Practical Introduction 1st Edition by Williams Test Bank

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Business: A Practical Introduction (Williams/Sawyer/Berston)
Chapter 3 Economics

1) Resource development focuses on studying the factors of production.
Answer: TRUE
Explanation: This area of study examines how to develop the resources for creating and best utilizing goods and services. Factors of production are the means for developing goods and services.
Page Ref: 64
Difficulty: Easy
Objective: 3.1 What is economics principally concerned with, and what are its two major fields?
Classification: Concept

2) Capitalism is an example of a central-planning economy.
Answer: FALSE
Explanation: Communism and socialism are central-planning, or command, economies.
Page Ref: 65
Learning Outcome: Compare and contrast different economic systems
Difficulty: Easy
Objective: 3.2 How do the three different economies of the world differ from each other?
Classification: Concept

3) Under socialism, all property and industries are owned by the governmet, and wealth is redistributed through social programs.
Answer: FALSE
Explanation: Only some major industries are owned by the government under socialism; smaller businesses are owned by individuals.
Page Ref: 66
Learning Outcome: Compare and contrast different economic systems
Difficulty: Easy
Objective: 3.2 How do the three different economies of the world differ from each other?
Classification: Concept

4) People living in capitalist economies have greater incentive to work and create wealth than those living in command economies.
Answer: TRUE
Explanation: With government controlling the distribution of wealth and the provision of services in a command economy, its people have less incentive to work toward prosperity.
Page Ref: 68
Learning Outcome: Compare and contrast different economic systems
Difficulty: Easy
Objective: 3.2 How do the three different economies of the world differ from each other?
Classification: Concept

5) Private individuals have greater influence in a free-market economy than in a command economy.
Answer: TRUE
Explanation: In a free-market economy, production and distribution of goods and services are controlled by individuals, not by the government, as in command economies.
Page Ref: 69
Learning Outcome: Compare and contrast different economic systems
Difficulty: Easy
Objective: 3.2 How do the three different economies of the world differ from each other?
Classification: Concept
6) A monopoly infringes on the right to compete and the right to free choice.
Answer: TRUE
Explanation: Because a monopoly consists of only one seller, other potential sellers lose the right to compete and buyers lose the right to freely choose what to buy.
Page Ref: 73
Difficulty: Moderate
Objective: 3.3 What are the basic underpinnings of the free market?
Classification: Concept

7) In a free-market economy, the core elements of perfect competition are a high number of sellers and a diverse selection of products.
Answer: FALSE
Explanation: In a perfect-competition market, interchangeable products are offered by a high number of small sellers. There is virtually no difference among products offered for sale.
Page Ref: 74
Difficulty: Easy
Objective: 3.3 What are the basic underpinnings of the free market?
Classification: Concept

8) Monopolistic competition is marked by many sellers who sell similar products but have found ways to distinguish among them.
Answer: TRUE
Explanation: Differentiation among sellers and products may be slight, such as delivery time, store location, or advertising.
Page Ref: 74
Difficulty: Easy
Objective: 3.3 What are the basic underpinnings of the free market?
Classification: Concept

9) In an oligopoly, products are differentiated by marketing and branding, and prices are similar.
Answer: TRUE
Explanation: An oligopoly usually has a few large sellers that dominate more than half the market.
Page Ref: 74
Difficulty: Easy
Objective: 3.3 What are the basic underpinnings of the free market?
Classification: Concept

10) In the United States, monopolies are generally prohibited.
Answer: TRUE
Explanation: This offers safeguards for buyers since monopolies can set any price for their goods and services.
Page Ref: 75
Difficulty: Easy
Objective: 3.3 What are the basic underpinnings of the free market?
Classification: Concept
11) In economic terms, demand is defined as the quantity of products that people are able and willing to buy at various prices at a given time.
Answer: TRUE
Explanation: Scarcity of a product plays a role in demand.
Page Ref: 76
Difficulty: Easy
Objective: 3.3 What are the basic underpinnings of the free market?
Classification: Concept

12) The term demand dynamics describes the concept that consumers influence the marketplace through their choices of which products to buy or not buy.
Answer: FALSE
Explanation: This concept is called consumer sovereignty.
Page Ref: 78
Difficulty: Easy
Objective: 3.3 What are the basic underpinnings of the free market?
Classification: Concept

13) The producer price index (PPI) measures prices of goods at the wholesale level.
Answer: TRUE
Explanation: PPI tracks prices of goods being purchased in large quantities for resale.
Page Ref: 82
Difficulty: Easy
Objective: 3.4 What do I need to know about the U.S. economic system to operate successfully within it?
Classification: Concept

14) Unemployed workers who have given up looking for work are not counted to determine the unemployment rate.
Answer: TRUE
Explanation: These people are considered to have dropped out of the labor force.
Page Ref: 82
Difficulty: Easy
Objective: 3.4 What do I need to know about the U.S. economic system to operate successfully within it?
Classification: Concept

15) Landscapers in the northern states who are out of work during the winter months fall under the category of cyclical unemployment.
Answer: FALSE
Explanation: These people fall under the category of seasonal unemployment; they are out of work due to the seasonal nature of their jobs.
Page Ref: 83
Difficulty: Easy
Objective: 3.4 What do I need to know about the U.S. economic system to operate successfully within it?
Classification: Application
16) A governments fiscal policy options to maintain economic stability are to raise or lower taxes or to borrow money.
Answer: TRUE
Explanation: These two fiscal policy tools enable the government to infuse money into or withdraw money from the general economy.
Page Ref: 85
Difficulty: Easy
Objective: 3.4 What do I need to know about the U.S. economic system to operate successfully within it?
Classification: Concept

17) The decline in total household wealth during the Great Recession of the late 2000s was five times greater than the decline of wealth that occurred during the Great Depression.
Answer: TRUE
Explanation: The drop in household wealth between December 2007 and December 2008 was 17 percent.
Page Ref: 87
Difficulty: Easy
Objective: 3.5 What launched the Great Recession?
Classification: Concept

18) Securitization is a new financial vehicle developed by bankers in the early 2000s to distribute risks and increase earnings during the housing bubble.
Answer: FALSE
Explanation: Securitization was developed in 1977. It distributes risks by packaging loans together into mortgage-backed securities sold to many kinds of investors.
Page Ref: 88
Difficulty: Easy
Objective: 3.5 What launched the Great Recession?
Classification: Concept

19) Which element of economics focuses on the demand side?
A) product development
B) production
C) consumption
D) distribution
E) marketing
Answer: C
Explanation: C) Buyers, or consumers, demand products and services.
Page Ref: 62
Difficulty: Moderate
Objective: 3.1 What is economics principally concerned with, and what are its two major fields?
Classification: Concept
20) Which of the following would NOT fall within the study of macroeconomics?
A) job growth and unemployment
B) consumer price index
C) U.S. gross domestic product
D) bioengineering product development
E) periods of economic recession and expansion
Answer: D
Explanation: D) Bioengineering is a distinct business sector, which falls under microeconomics.
Page Ref: 63
Difficulty: Moderate
Objective: 3.1 What is economics principally concerned with, and what are its two major fields?
Classification: Concept

21) In todays economic system, what has become an increasingly important issue in the area of resource development?
A) capital
B) human resources
C) entrepreneurship
D) knowledge
E) natural resources
Answer: D
Explanation: D) With the growth of information technology in business, knowledge has become a crucial production factor to gain competitive advantage.
Page Ref: 64
Difficulty: Moderate
Objective: 3.1 What is economics principally concerned with, and what are its two major fields?
Classification: Concept

22) The development of e-books and e-readers has led to the closure of many brick-and-mortar booksellers. Which of the following likely did NOT drive this change in the marketplace?
A) The demand for e-book titles increased.
B) The demand for new technology increased.
C) The demand for shopping convenience increased.
D) The demand for print books decreased.
E) The demand for print books increased.
Answer: E
Explanation: E) A strong demand for print books relative to e-books would likely have enabled traditional booksellers to still serve buyers.
Page Ref: 63
Difficulty: Moderate
Objective: 3.1 What is economics principally concerned with, and what are its two major fields?
Classification: Application
23) What happens when a product is scarce?
A) Demand declines to zero.
B) Sellers can charge more for it.
C) Sellers must charge less for it.
D) Buyers will expect to pay less for it.
E) Factors of production are meeting demand.
Answer: B
Explanation: B) Because demand is higher for a scarce product, sellers can increase the price.
Page Ref: 63
Learning Outcome: Discuss strategies for setting and adjusting prices
Difficulty: Moderate
Objective: 3.1 What is economics principally concerned with, and what are its two major fields?
Classification: Concept

24) A family in Michigan recently found an 1894 football card for Anonymousthe Harvard players name was left off. Dealers estimated the cards value at $10,000 to $18,000. Which of the following is most likely a significant driver for the price?
A) quality
B) respect for Harvard
C) historical value
D) scarcity
E) nostalgia
Answer: D
Explanation: D) Assuming some level of demand, the more scarce a product is, the higher the selling price. This football card is extremely rare.
Page Ref: 63
Learning Outcome: Discuss strategies for setting and adjusting prices
Difficulty: Moderate
Objective: 3.1 What is economics principally concerned with, and what are its two major fields?
Classification: Application

25) Which of the following would be studied by microeconomists?
A) price setting by the Middle East oil cartel
B) sales of movie tickets vs. home theater systems
C) U.S. consumer sentiment figures
D) valuation of the Chinese currency
E) financial health of eurozone countries
Answer: B
Explanation: B) Microeconomics studies individual economic units such as particular groups of people, businesses, organizations, and markets.
Page Ref: 64
Difficulty: Moderate
Objective: 3.1 What is economics principally concerned with, and what are its two major fields?
Classification: Application
26) Which field of economic study focuses on factors of production?
A) macroeconomics
B) microeconomics
C) entrepreneurship
D) resource development
E) central planning
Answer: D
Explanation: D) Factors of production are the means for developing goods and services, which is the focus of resource development.
Page Ref: 64
Difficulty: Moderate
Objective: 3.1 What is economics principally concerned with, and what are its two major fields?
Classification: Concept

27) Which of the following is a government strategy to remove money from the general economy?
A) lower taxes
B) borrow money
C) increase funds available to banks
D) raise taxes
E) lower interest rates
Answer: D
Explanation: D) Raising taxes takes money out of the hands of consumers and businesses.
Page Ref: 86
Difficulty: Moderate
Objective: 3.1 What is economics principally concerned with, and what are its two major fields?
Classification: Concept

28) Some governments develop five-year plans that map out allocations for economic resources over that period of time. What type of economy would be most likely to utilize such plans?
A) communist
B) socialist
C) capitalist
D) free-market
E) mixed
Answer: A
Explanation: A) Five-year plans are a common product of central planning within communist economies.
Page Ref: 65
Learning Outcome: Compare and contrast different economic systems
Difficulty: Moderate
Objective: 3.2 How do the three different economies of the world differ from each other?
Classification: Application
29) Which of the following countries operates under the purest form of communism?
A) China
B) Vietnam
C) Cuba
D) North Korea
E) Russia
Answer: D
Explanation: D) China, Vietnam, and Cuba allow some private business activity. After the Soviet Union broke apart in 1991, Russia has transitioned toward capitalism.
Page Ref: 66
Learning Outcome: Compare and contrast different economic systems
Difficulty: Moderate
Objective: 3.2 How do the three different economies of the world differ from each other?
Classification: Concept

30) Communism over the past few decades has been in decline as governments reduced control over their economies. Whats the most likely reason why governments have done this?
A) to give citizens more political freedom
B) to stimulate economic growth
C) to decrease bureaucracy
D) to shrink the welfare state
E) to lower budget deficits
Answer: B
Explanation: B) Less government control gives people more incentive to produce, unleashing Adam Smiths invisible hand to generate economic wealth.
Page Ref: 66
Learning Outcome: Compare and contrast different economic systems
Difficulty: Moderate
Objective: 3.2 How do the three different economies of the world differ from each other?
Classification: Concept

31) U.S. television reports in the 1970s and 1980s showed citizens in the Soviet Union standing in long lines to buy bread and other necessities in stores with nearly bare shelves. What led to this situation?
A) the inability of government central planners to adequately anticipate consumer demands
B) lack of resources to produce adequate supplies of needed goods
C) high taxes forcing producers such as bakeries out of business
D) a brain drain of businesspeople who could anticipate and meet consumer demand
E) private business owners creating scarcity to force up prices
Answer: A
Explanation: A) Government-set prices under communism did not offer an accurate picture of supply and demand, leading to faulty central planning on production.
Page Ref: 66
Learning Outcome: Compare and contrast different economic systems
Difficulty: Moderate
Objective: 3.2 How do the three different economies of the world differ from each other?
Classification: Application

32) Karl Marxs concept of a communist economic system based on the philosophy from each according to his abilities, to each according to his needs sounds noble on paper. In practice, what core aspect of communism has led to the global collapse of this system?
A) high taxes
B) welfare state
C) lack of incentive
D) central planning
E) exploitation
Answer: C
Explanation: C) Because everyone is rewarded according to his or her needs under communism, there is no incentive to work hard, expand resources, and create wealth.
Page Ref: 66
Learning Outcome: Compare and contrast different economic systems
Difficulty: Moderate
Objective: 3.2 How do the three different economies of the world differ from each other?
Classification: Concept
AACSB: Analytic Skills

33) Government would have the highest level of influence on both macroeconomics and microeconomics in which type of system?
A) mixed economies
B) socialism
C) free-market economies
D) communism
E) capitalism
Answer: D
Explanation: D) Under communism, the government has near total control over all aspects of the economy through central planning.
Page Ref: 66
Learning Outcome: Compare and contrast different economic systems
Difficulty: Moderate
Objective: 3.2 How do the three different economies of the world differ from each other?
Classification: Synthesis

34) Which of the following is NOT a characteristic of socialist economies?
A) high proportion of government-owned enterprises
B) extensive welfare state
C) central planning
D) high social equality
E) low taxes
Answer: E
Explanation: E) Socialist economies have higher tax burdens on individuals and business to support extensive welfare-state social services.
Page Ref: 67
Learning Outcome: Compare and contrast different economic systems
Difficulty: Moderate
Objective: 3.2 How do the three different economies of the world differ from each other?
Classification: Concept
35) Julio has lived all his life in a country operating under a strongly socialist economy. Compared to a resident of the United States, Julio and his fellow citizens likely experience all of the following EXCEPT which?
A) less poverty
B) lower infant mortality
C) lower taxes
D) higher life expectancy
E) a developed welfare state
Answer: C
Explanation: C) To pay for extensive services of the welfare state, taxes in socialist counties are generally higher than those in capitalist countries.
Page Ref: 67
Learning Outcome: Compare and contrast different economic systems
Difficulty: Moderate
Objective: 3.2 How do the three different economies of the world differ from each other?
Classification: Application

36) Which of the following is NOT considered a drawback of socialism?
A) high taxes
B) brain drain
C) income inequality
D) government deficits
E) less job creation
Answer: C
Explanation: C) Redistribution of wealth under socialism results in less social inequality and poverty.
Page Ref: 68
Learning Outcome: Compare and contrast different economic systems
Difficulty: Moderate
Objective: 3.2 How do the three different economies of the world differ from each other?
Classification: Concept

37) Catherine works in a government agency focused on economic resource development. Her current project is to develop strategies to reverse brain drain. This process has the strongest impact on which factor of production for a modern economy?
A) natural resources
B) capital
C) human resources
D) entrepreneurship
E) knowledge
Answer: E
Explanation: E) Brain drain is emigration of highly skilled intellectual and technical labor to other countries. While this impacts human resources, the loss of knowledge is more critical to modern, technology-driven economies.
Page Ref: 68
Difficulty: Difficult
Objective: 3.2 How do the three different economies of the world differ from each other?
Classification: Synthesis
AACSB: Analytic Skills
38) During the 2010s, what was partly the cause of dangerously high levels of government debt among some eurozone countries?
A) central planning errors
B) the welfare state
C) brain drain
D) high taxes
E) income inequality
Answer: B
Explanation: B) Provision of high levels of social services in some eurozone socialist economies has led to government spending that far exceeds revenue.
Page Ref: 68
Learning Outcome: Compare and contrast different economic systems
Difficulty: Moderate
Objective: 3.2 How do the three different economies of the world differ from each other?
Classification: Application

39) What is a core premise of 18th-century economist Adam Smiths philosophy on free-market economies?
A) dividing fixed resources
B) central planning of production
C) eliminating business risk
D) expanding resources
E) redistribution of wealth
Answer: D
Explanation: D) Smiths theory of the invisible hand would drive people to produce goods and services in order to achieve prosperity.
Page Ref: 69
Learning Outcome: Compare and contrast different economic systems
Difficulty: Moderate
Objective: 3.2 How do the three different economies of the world differ from each other?
Classification: Concept

40) Compared to communism and socialism, what has capitalism excelled at?
A) eliminating budget deficits
B) creating income equality
C) creating jobs
D) eliminating poverty
E) economic central planning
Answer: C
Explanation: C) Peoples drive to create wealth through the production of goods and services results in job creation.
Page Ref: 69
Learning Outcome: Compare and contrast different economic systems
Difficulty: Moderate
Objective: 3.2 How do the three different economies of the world differ from each other?
Classification: Concept
41) Which of the following potential drawbacks of an economic system is most influenced by human nature?
A) income inequality
B) exploitation
C) high exposure to risk
D) central planning
E) lack of incentive
Answer: B
Explanation: B) The other options are more a product of systemic forces. Exploitation is mainly driven by the human capacity for greed.
Page Ref: 70
Learning Outcome: Compare and contrast different economic systems
Difficulty: Moderate
Objective: 3.2 How do the three different economies of the world differ from each other?
Classification: Concept

42) The U.S. governments ownership of Amtrak suggests that the economy is an example of what type?
A) socialist
B) capitalist
C) blended
D) mixed
E) command
Answer: D
Explanation: D) In a mixed economy, some resources are allocated by the free market and some resources are allocated by the government.
Page Ref: 71
Learning Outcome: Compare and contrast different economic systems
Difficulty: Moderate
Objective: 3.2 How do the three different economies of the world differ from each other?
Classification: Concept

43) Which of the following countries has an economic system based solely on nonmaterial incentives such as status?
A) United States
B) Japan
C) India
D) England
E) Cuba
Answer: E
Explanation: E) As a purely communist country, Cubas economy provides no material incentives, such as money, for production. Only nonmaterial incentives, such as status recognition, can serve as an economic incentive.
Page Ref: 71
Learning Outcome: Compare and contrast different economic systems
Difficulty: Moderate
Objective: 3.2 How do the three different economies of the world differ from each other?
Classification: Application
44) How does income distribution occur in communist countries?
A) by the invisible hand dynamic
B) according to individual needs
C) by market forces
D) by income to wealthy creators
E) by a mix of wealth-creator income and state benefits
Answer: B
Explanation: B) According to Karl Marx, the originator of communist philosophy, workers are rewarded each according to his needs.
Page Ref: 71
Learning Outcome: Compare and contrast different economic systems
Difficulty: Moderate
Objective: 3.2 How do the three different economies of the world differ from each other?
Classification: Concept

45) What is the general goal of the shift toward mixed economies?
A) lowering taxes
B) offering more consumer choice
C) strengthening wealth-creation incentive
D) shrinking the welfare state
E) balancing freedom and economic equality
Answer: E
Explanation: E) A mixed economys allocation of some resources by the government and some by the free market results in a somewhat better balance between economic equality and business freedom.
Page Ref: 71
Learning Outcome: Compare and contrast different economic systems
Difficulty: Moderate
Objective: 3.2 How do the three different economies of the world differ from each other?
Classification: Concept

46) Where can a U.S. consumer find an example of the ideal supply and demand model?
A) auto dealerships
B) electric utilities
C) hospitals
D) farmers markets
E) coffee-and-doughnut chains
Answer: D
Explanation: D) An example of ideal supply and demand operates with perfect (equal) competition and no outside influence. Farmers markets are a rare example of perfect competition.
Page Ref: 77
Difficulty: Moderate
Objective: 3.2 How do the three different economies of the world differ from each other?
Classification: Application
47) Which of the following is NOT one of the four basic rights under capitalism?
A) the right to own property
B) the right to free choice
C) the right to fair pricing
D) the right to make and keep profits
E) the right to compete
Answer: C
Explanation: C) Pricing of goods and services is not a basic right for successful operation of a free-market economy.
Page Ref: 72
Learning Outcome: Compare and contrast different economic systems
Difficulty: Moderate
Objective: 3.3 What are the basic underpinnings of the free market?
Classification: Concept

48) What do the four basic rights under capitalism limit for a businessperson?
A) liability
B) incentive
C) tax burden
D) risk
E) rewards
Answer: D
Explanation: D) By limiting the risks of operating a business, the four rights help support the functioning of a market economy.
Page Ref: 72
Learning Outcome: Compare and contrast different economic systems
Difficulty: Moderate
Objective: 3.3 What are the basic underpinnings of the free market?
Classification: Concept

49) Two years ago, Ahmed opened a Middle Eastern restaurant in town. It was an overnight success, with lines out the door every night. So Ahmed was furious when Nasim opened a similar restaurant across the street. He wants to sue, but in opening a similar restaurant across the street, Nasim is only exercising a basic capitalist right. Which one?
A) to own property
B) to compete
C) to free choice
D) to seller sovereignty
E) to make and keep profits
Answer: B
Explanation: B) Under capitalism, a person has the right to go into the marketplace and compete with other businesses according to his or her best judgment and skills.
Page Ref: 73
Difficulty: Moderate
Objective: 3.3 What are the basic underpinnings of the free market?
Classification: Application
50) Which of the following is NOT a legal restriction on the right to make and keep profits?
A) child labor laws
B) antitrust laws
C) workplace safety laws
D) workers compensation laws
E) truth in advertising laws
Answer: B
Explanation: B) Antitrust laws are a restriction on the right to compete.
Page Ref: 73
Difficulty: Moderate
Objective: 3.3 What are the basic underpinnings of the free market?
Classification: Concept

51) Mischka owns a regional chain of jewelry stores and has been a huge fan of America since he left the former Soviet Union. He says that people have so many basic rights under capitalism, and its even protected in the U.S. Constitution. Which specific right is Mischka referring to?
A) the right to free choice
B) the right to compete
C) the right to own property
D) the right to make and keep profits
E) the right to file lawsuits
Answer: C
Explanation: C) The right to own property is one of the four basic rights under capitalism and is stated in the Fifth Amendment to the U.S. Constitution.
Page Ref: 72
Difficulty: Moderate
Objective: 3.3 What are the basic underpinnings of the free market?
Classification: Application

52) Which of the following is NOT a type of free market?
A) monopoly
B) oligopoly
C) managed competition
D) monopolistic competition
E) perfect competition
Answer: C
Explanation: C) Managed competition is a term used in the health care industry.
Page Ref: 73
Difficulty: Moderate
Objective: 3.3 What are the basic underpinnings of the free market?
Classification: Concept
53) Jason owns a dozen fast food hamburger franchises in the area. To distinguish his stores from the other burger options in the area and increase sales, he is implementing a delivery service. Which free-market model characterizes Jasons restaurants?
A) perfect competition
B) oligopoly
C) monopoly
D) service economy
E) monopolistic competition
Answer: E
Explanation: E) Because fast food burgers offered by the many different chains are similar, sellers differentiate themselves with other strategies, such as brand awareness and delivery.
Page Ref: 74
Difficulty: Moderate
Objective: 3.3 What are the basic underpinnings of the free market?
Classification: Application

54) Rosa loves fresh tomatoes. In August, she goes to each farmers market stall, squeezing tomatoes to check for ripeness, smelling them for sweetness, looking for blotches. Since each vendor charges about the same price, she can be sure of getting the best quality. Which of the following is benefitting Rosa?
A) consumer sovereignty
B) perfect competition
C) monopolistic competition
D) oligopoly
E) buyer-seller irrationality
Answer: B
Explanation: B) Rosa is an informed buyer choosing among interchangeable products offered by sellers too small to dictate the price.
Page Ref: 74
Difficulty: Moderate
Objective: 3.3 What are the basic underpinnings of the free market?
Classification: Application

55) Harry is a cynical character who thinks life is rigged against the little guy. He says whenever you want to buy something these days, there are only a few stores that offer virtually the same thing and they basically run the table. Which industry does NOT fit Harrys definition?
A) airlines
B) automobiles
C) power utilities
D) soft drinks
E) health insurance
Answer: C
Explanation: C) Harry is describing an oligopoly. Power utilities often have virtually no competition and are usually monopolies.
Page Ref: 75
Difficulty: Moderate
Objective: 3.3 What are the basic underpinnings of the free market?
Classification: Application
56) In a free-market economy, what drives the amount of production?
A) demand
B) supply
C) competition
D) price
E) scarcity
Answer: D
Explanation: D) In a free market, people with wants come together with people who can fill those wants to negotiate a price. That price tells producers how much to produce.
Page Ref: 75
Difficulty: Difficult
Objective: 3.3 What are the basic underpinnings of the free market?
Classification: Concept

57) The large businesses operating in an oligopoly benefit from lower costs as the number of customers they serve increases. What is the term for this dynamic?
A) the equilibrium price point
B) perfect competition
C) producer sovereignty
D) economies of scale
E) managed competition
Answer: D
Explanation: D) Smaller businesses in this market cannot serve enough customers to benefit from this dynamic.
Page Ref: 75
Difficulty: Moderate
Objective: 3.3 What are the basic underpinnings of the free market?
Classification: Concept

58) The equilibrium price is determined by the interaction of what two factors?
A) demand and supply
B) demand and price
C) supply and production
D) risk and demand
E) price and production
Answer: A
Explanation: A) The equilibrium price is the one at which the quantity supplied to the market is equal to the quantity demanded by the market.
Page Ref: 76
Learning Outcome: Discuss strategies for setting and adjusting prices
Difficulty: Moderate
Objective: 3.3 What are the basic underpinnings of the free market?
Classification: Concept

59) For the following points (x, y) on the demand curve and supply curve, x = quantity and y = price.
Demand curve points: (10,5) (20,4) (30, 3) (40, 2) (50, 1)
Supply curve points: (10, 1) (20, 2) (30, 3) (40, 4) (50, 5)
What is the market price?
A) 1
B) 2
C) 3
D) 4
E) 5
Answer: C
Explanation: C) Market price, or equilibrium price, is the point at which the two curves intersectin this case (30, 3). The equilibrium price is 3.
Page Ref: 76
Learning Outcome: Discuss strategies for setting and adjusting prices
Difficulty: Difficult
Objective: 3.3 What are the basic underpinnings of the free market?
Classification: Application

60) For a particular product, what is set by the point at which the quantity supplied equals the quantity demanded?
A) benchmark price
B) fair price
C) wholesale price
D) price ceiling
E) market price
Answer: E
Explanation: E) The market price is set by the equilibrium of supply and demand. This is also called the equilibrium price.
Page Ref: 76
Learning Outcome: Discuss strategies for setting and adjusting prices
Difficulty: Moderate
Objective: 3.3 What are the basic underpinnings of the free market?
Classification: Concept

61) As a college student in the 1980s, Darell wore classic sport coats from the 1950s that he picked up at vintage shops for 10 dollars. His college-age son wants to have the same look in the 2010s, but the 1950s jackets now cost nearly 100 dollars. Discounting inflation, what is the likely cause for the price increase?
A) low demand
B) high supply
C) government restrictions
D) low supply
E) monopoly market
Answer: D
Explanation: D) Every product has a useful life. Jackets from the mid-20th century would be over 50 years old, and few remain in wearable condition. Scarcity drives up the price.
Page Ref: 74
Learning Outcome: Discuss strategies for setting and adjusting prices
Difficulty: Moderate
Objective: 3.3 What are the basic underpinnings of the free market?
Classification: Application
62) Which of the following is an example of a small company shaking up the status quo within an oligopoly?
A) McDonalds selling premium coffee to compete against Starbucks
B) JetBlue offering lower fares and better service than established larger airlines
C) Dominos reformulating its pizza recipe to improve taste
D) Amazon launching the Kindle e-reader to compete with now-defunct Borders Books
E) Verizon deploying fiber optic systems to compete with cable TV providers
Answer: B
Explanation: B) JetBlue has quickly grown from a small player in the airline oligopoly to a highly successful carrier.
Page Ref: 74
Difficulty: Difficult
Objective: 3.3 What are the basic underpinnings of the free market?
Classification: Application

63) Laverna bought cucumbers for 50 cents each, pickled them, and sold jars to friends. She got orders for 100 jars and negotiated with the grocery to get cucumbers at 35 cents. In two months, she was filling web orders and buying cucumbers from the distributor for 12 cents each. How does this impact Lavernas price for cucumbers?
A) consumer sovereignty
B) monopolistic competition
C) economies of scale
D) perfect competition
E) the basic right to compete
Answer: C
Explanation: C) Lavernas costs go down as she is able to serve more customers.
Page Ref: 75
Difficulty: Moderate
Objective: 3.3 What are the basic underpinnings of the free market?
Classification: Application

64) Luther has a nice suburban home and everything necessary to be happy, but when his neighbors buy a high-profile item like a car or a hot tub, Luther has to buy something similar. His wife calls it keeping up with the Joneses. What would economists say is at work here?
A) consumer sovereignty
B) government influences
C) product scarcity
D) incomplete information
E) buyer-seller irrationality
Answer: E
Explanation: E) The ideal supply and demand model operates under pure logic, but our buying and selling decisions are often influenced by emotions such as envy.
Page Ref: 77
Difficulty: Moderate
Objective: 3.3 What are the basic underpinnings of the free market?
Classification: Application

65) A high-priced food store replaced a discount grocery in an urban neighborhood. Older residents could not afford the higher prices, so the community organized a boycott. For months the new store was almost empty. Finally, management agreed to lower its prices, and shoppers returned. What is at work here?
A) monopolistic competition
B) consumer sovereignty
C) economies of scale
D) buyer-seller irrationality
E) oligopoly
Answer: B
Explanation: B) Under this principle, consumers influence the marketplace through their purchasing decisions. Not purchasing from the high-end store forced it to lower prices.
Page Ref: 78
Difficulty: Moderate
Objective: 3.3 What are the basic underpinnings of the free market?
Classification: Application

66) In a free market, who has the most control?
A) sellers
B) buyers
C) the government
D) distributors
E) suppliers
Answer: B
Explanation: B) A business earns profits by meeting demand. Consumers needs, tastes, and desires drive demand.
Page Ref: 78
Difficulty: Moderate
Objective: 3.3 What are the basic underpinnings of the free market?
Classification: Concept

67) Which of the following is NOT a phase of the business cycle?
A) expansion
B) stability
C) peak
D) trough
E) contraction
Answer: B
Explanation: B) Stability is considered a period of predictability in economic conditions but is not a phase of the business cycle.
Page Ref: 80
Difficulty: Moderate
Objective: 3.4 What do I need to know about the U.S. economic system to operate successfully within it?
Classification: Concept

68) What occurs after a trough in the business cycle?
A) Unemployment begins to rise.
B) GDP falls.
C) Economic expansion begins to slow.
D) Unemployment begins to fall.
E) Economic contraction begins.
Answer: D
Explanation: D) The trough is the point where economic contraction ends. As expansion begins, unemployment begins to fall.
Page Ref: 80
Difficulty: Moderate
Objective: 3.4 What do I need to know about the U.S. economic system to operate successfully within it?
Classification: Concept

69) Which of the following is NOT often identified as a potential trigger of economic contraction?
A) rise in exports
B) decline in consumer spending
C) rise in taxes
D) decrease in government spending
E) decrease in investment
Answer: A
Explanation: A) A rise in exports triggers economic expansion.
Page Ref: 80
Difficulty: Moderate
Objective: 3.4 What do I need to know about the U.S. economic system to operate successfully within it?
Classification: Concept

70) After a prolonged recession, businesses are investing and consumers are spending freely again. The unemployment rate is well below the historical average and exports have increased substantially. What term best describes this point in the business cycle?
A) peak
B) expansion
C) recovery
D) prosperity
E) trough
Answer: D
Explanation: D) Prosperity is the latter phase of economic expansion. The economy has completed its recovery from the trough and business is booming.
Page Ref: 80
Difficulty: Moderate
Objective: 3.4 What do I need to know about the U.S. economic system to operate successfully within it?
Classification: Application
71) Which of the following goods and services available in the United States is NOT factored into counting GDP?
A) Apple software produced in Silicon Valley
B) education at the University of Iowa
C) Ford trucks manufactured in Michigan
D) Toblerone chocolate manufactured in Switzerland
E) Honda sedans manufactured in Kentucky
Answer: D
Explanation: D) GDP is the total value of all goods and services that a country produces within its borders in one year.
Page Ref: 81
Difficulty: Moderate
Objective: 3.4 What do I need to know about the U.S. economic system to operate successfully within it?
Classification: Application

72) At the beginning of May, Chanda paid $100 for her standard weekly grocery order. At the beginning of June, the same order cost $175. What would be the cause for this change?
A) inflation
B) economic stability
C) hyperinflation
D) deflation
E) disinflation
Answer: C
Explanation: C) Hyperinflation is defined as a monthly inflation rate of at least 50 percent.
Page Ref: 81
Difficulty: Moderate
Objective: 3.4 What do I need to know about the U.S. economic system to operate successfully within it?
Classification: Application

73) The United States is the worlds largest economy. What was the World Banks estimate for U.S. GDP in 2010?
A) $754 billion
B) $921 billion
C) $6.2 trillion
D) $14.7 trillion
E) $45.7 trillion
Answer: D
Explanation: D) This is the total value of all goods and services produced within U.S. borders in 2010.
Page Ref: 81
Difficulty: Moderate
Objective: 3.4 What do I need to know about the U.S. economic system to operate successfully within it?
Classification: Concept
74) What occurs when there is an overabundance of available goods and people dont have enough money to buy them?
A) inflation
B) contraction
C) disinflation
D) deflation
E) depression
Answer: D
Explanation: D) With too few dollars chasing too many goods, producers reduce prices to sell them. Deflation is a general decline in prices of most goods and services.
Page Ref: 81
Difficulty: Moderate
Objective: 3.4 What do I need to know about the U.S. economic system to operate successfully within it?
Classification: Concept

75) For the most recent quarter, prices increased at the following monthly rates: April 33.7 percent; May 32.9 percent; June 31.8 percent. Which term best describes this situation?
A) deflation
B) inflation
C) disinflation
D) contraction
E) hyperinflation
Answer: C
Explanation: C) This month-to-month decline in the rate of inflation is called disinflation.
Page Ref: 82
Difficulty: Difficult
Objective: 3.4 What do I need to know about the U.S. economic system to operate successfully within it?
Classification: Application

76) Seth is a software engineer who has been out of work for 16 months. He has sent out hundreds of resumes and never even scored an interview. Seth has decided to take time off from job hunting. How is Seth accounted for in government employment statistics?
A) unemployed worker
B) underemployed worker
C) transitional worker
D) discouraged worker
E) unemployable worker
Answer: D
Explanation: D) Seth has given up looking for work and has dropped out of the labor force.
Page Ref: 82
Difficulty: Moderate
Objective: 3.4 What do I need to know about the U.S. economic system to operate successfully within it?
Classification: Application
77) Margo operates a small chain of grocery stores in the Southwest. Each month, she buys over 8,000 packages of tortilla shells from a local food manufacturer and sells them to customers of the store. Which of the following tracks Margos cost to purchase the tortillas?
A) wholesalers price index (WPI)
B) consumer price index (CPI)
C) market basket index (MBI)
D) perishable market index (PMI)
E) producer price index (PPI)
Answer: E
Explanation: E) PPI measures prices at the wholesale levelwholesale goods purchased in large quantities for resale.
Page Ref: 82
Difficulty: Moderate
Objective: 3.4 What do I need to know about the U.S. economic system to operate successfully within it?
Classification: Application

78) When the steel industry collapsed in Pennsylvania, many longtime steelworkers could not find new jobs because they lacked the skills required to work in new industries such as computer technology. Which unemployment category describes these workers?
A) cyclical
B) structural
C) seasonal
D) transitional
E) frictional
Answer: B
Explanation: B) Structural unemployment refers to people who are out of work due to a mismatch in the skills they possess and the jobs that are available.
Page Ref: 83
Difficulty: Moderate
Objective: 3.4 What do I need to know about the U.S. economic system to operate successfully within it?
Classification: Application

79) Nina hated her job. The commute took over an hour each way, her coworkers were gossipy, and her boss was incompetent. So she quit and is looking for another job closer to home and with less stress. Which of the following categories does Nina fall within?
A) discouraged worker
B) structural unemployed
C) seasonal unemployed
D) frictional unemployed
E) cyclical unemployed
Answer: D
Explanation: D) Nina is out of work temporarily as a result of more common life situations such as quitting an unsatisfying job or entering the workforce after finishing school.
Page Ref: 83
Difficulty: Moderate
Objective: 3.4 What do I need to know about the U.S. economic system to operate successfully within it?
Classification: Application
80) Last quarter, 25 workers at the Pedal to the Metal factory manufactured 17 bikes per hour. After investing in new robot technology, this quarter the factory manufactured 28 bikes per hour using 15 workers. What is being measured by these figures?
A) labor costs
B) wholesale costs
C) productivity
D) unemployment
E) deflation
Answer: C
Explanation: C) Productivity measures the amount of goods and services an organization produces given the resources used to produce them.
Page Ref: 83
Difficulty: Moderate
Objective: 3.4 What do I need to know about the U.S. economic system to operate successfully within it?
Classification: Application

81) What is the traditional factor used to measure productivity?
A) quality
B) price
C) quantity
D) speed
E) supply
Answer: C
Explanation: C) Productivity generally measures how many products are produced with the resources used. Quantity is a unit of measure to track productivity in service industries.
Page Ref: 83
Difficulty: Moderate
Objective: 3.4 What do I need to know about the U.S. economic system to operate successfully within it?
Classification: Concept

82) What is the primary goal of U.S. government fiscal policy?
A) to increase productivity
B) to decrease inflation
C) to stabilize the economy
D) to reduce unemployment
E) to increase lending by banks
Answer: C
Explanation: C) Some of the other options may be a consequence of fiscal policy, but the overall goal is to achieve economic stability.
Page Ref: 85
Difficulty: Moderate
Objective: 3.4 What do I need to know about the U.S. economic system to operate successfully within it?
Classification: Concept
83) During the financial crises of the 2000s and 2010s, governments in the United States and Europe freed up additional funds to banks, enabling them to loan money to jump-start slow economies. What is this an example of?
A) expansionary monetary policy
B) expansionary fiscal policy
C) restrictive monetary policy
D) restrictive fiscal policy
E) reactive fiscal policy
Answer: A
Explanation: A) Expanding the money supply makes it available for businesses and consumers to use to stimulate economic growth.
Page Ref: 86
Difficulty: Moderate
Objective: 3.4 What do I need to know about the U.S. economic system to operate successfully within it?
Classification: Application

84) What type of policy does the Federal Reserve System use to influence economic activity?
A) fiscal
B) tax
C) monetary
D) regulatory
E) financial
Answer: C
Explanation: C) Using monetary policy, the Fed can expand or limit the money supply and raise or lower interest rates.
Page Ref: 86
Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system
Difficulty: Moderate
Objective: 3.4 What do I need to know about the U.S. economic system to operate successfully within it?
Classification: Concept

85) Which of the following did NOT play a role in creating the housing bubble that preceded the Great Recession?
A) subprime mortgage loans
B) rising home prices
C) mortgage-backed securities
D) foreclosures
E) low interest rates
Answer: D
Explanation: D) Home foreclosures began as the bubble collapsed; they were a result of the housing bubble.
Page Ref: 88
Difficulty: Moderate
Objective: 3.5 What launched the Great Recession?
Classification: Concept
86) When considering consumers, which of the following did NOT play a role in the subprime bubble?
A) the right to own property
B) the right to free choice
C) buyer-seller irrationality
D) high interest rates
E) low interest rates
Answer: D
Explanation: D) Low interest rates were put in place by the Fed to improve economic activity after the collapse of the housing bubble.
Page Ref: 88
Difficulty: Difficult
Objective: 3.5 What launched the Great Recession?
Classification: Synthesis
AACSB: Dynamics of the Global Economy

87) Which of the following is NOT a likely driver for an economic bubble?
A) sound logic
B) desire for wealth
C) irrational exuberance
D) fast-growing business sector
E) extensive availability of capital
Answer: A
Explanation: A) If people operated on pure logic, they could see risks of a potential bubble and their pullback would likely prevent it. Bubbles are often driven by human irrationality, or as former Fed Chairman Alan Greenspan called it, irrational exuberance.
Page Ref: 88
Difficulty: Difficult
Objective: 3.5 What launched the Great Recession?
Classification: Concept

88) Which of the following did NOT occur during the Great Recession?
A) Homeowners lost wealth.
B) Banks lost capital.
C) Foreclosures decreased.
D) Unemployment increased.
E) Consumer demand decreased.
Answer: C
Explanation: C) Foreclosure rates increased significantly as homeowners could not meet their mortgage debt obligations.
Page Ref: 88
Difficulty: Moderate
Objective: 3.5 What launched the Great Recession?
Classification: Concept
89) During a period of the Great Recession, 10 percent of Americans were unemployed and household wealth dropped significantly. Consequently, people stopped buying goods and began saving for an uncertain future. Policymakers were fearful this would lead to what process?
A) hyperinflation
B) securitization
C) disinflation
D) deflation
E) inflation
Answer: D
Explanation: D) Under deflation, too few dollars are chasing too many goods. Prices drop. This can become a vicious cycle that curbs economic growth.
Page Ref: 88
Difficulty: Moderate
Objective: 3.5 What launched the Great Recession?
Classification: Synthesis
AACSB: Communication Abilities

90) As the economy started to recover from the Great Recession, businesses began to sell down inventories of overstocked goods. Under this scenario, demand eventually grows to be in line with available supply. As the economy strengthens and consumer demand continues to grow, what happens next?
A) Prices drop.
B) Prices rise.
C) Supply increases.
D) Supply decreases.
E) Productivity drops.
Answer: B
Explanation: B) Once demand is in line with supply, additional demand shifts the intersection of the demand curve and the supply curveand prices increase.
Page Ref: 88
Difficulty: Moderate
Objective: 3.5 What launched the Great Recession?
Classification: Synthesis
AACSB: Dynamics of the Global Economy

91) The 2009 American Recovery and Reinvestment Act was designed to stimulate economic growth in the Great Recession. The act was a combination of tax cuts as well as government spending funded through borrowing. What is this is an example of?
A) regulatory policy
B) fiscal policy
C) monetary policy
D) central planning
E) the welfare state
Answer: B
Explanation: B) Governments can borrow money and raise or lower taxes to help manage the economy.
Page Ref: 85
Difficulty: Moderate
Objective: 3.5 What launched the Great Recession?
Classification: Synthesis
92) Describe the significance of the concept of scarcity to the science of economics.
Answer: The main idea is that all things are essentially scarce or limited, which drives the key concepts of supply and demand.
Explanation: Scarcity, or some limitation in the availability of goods, is a basic assumption that economics operates upon.
Page Ref: 62
Difficulty: Moderate
Objective: 3.1 What is economics principally concerned with, and what are its two major fields?
Classification: Concept

93) What is meant by supply in economic terms?
Answer: In economic terms, supply expresses how willing and able sellers are to provide goods and services at different prices.
Explanation: The scarcity of a product or service determines how much the seller will charge for it.
Page Ref: 63
Difficulty: Easy
Objective: 3.1 What is economics principally concerned with, and what are its two major fields?
Classification: Concept

94) What is microeconomics?
Answer: Microeconomics is focused on the behavior and operations of individual economic units such as particular groups of people, businesses, organizations, and markets.
Explanation: This is contrasted with macroeconomics, which studies the economy as a whole, focusing on large economic units.
Page Ref: 63
Difficulty: Easy
Objective: 3.1 What is economics principally concerned with, and what are its two major fields?
Classification: Concept

95) What is the welfare state?
Answer: Government social services that give citizens economic security when they are unemployed, ill, or elderly are part of a structure called the welfare state.
Explanation: Characteristics of the welfare state are present in all economies but are more prevalent in command economies.
Page Ref: 67
Learning Outcome: Compare and contrast different economic systems
Difficulty: Easy
Objective: 3.2 How do the three different economies of the world differ from each other?
Classification: Concept

96) Explain Adam Smiths concept of the invisible hand.
Answer: Smiths term describes individuals drive for prosperity, which compels them to produce all the goods and services to meet economic and social needs for everyone.
Explanation: Adam Smith, the founder of modern economics, believed that free-market economies are guided by an invisible hand.
Page Ref: 69
Difficulty: Moderate
Objective: 3.2 How do the three different economies of the world differ from each other?
Classification: Concept

97) Describe how fiscal policy is used by the U.S. government to achieve stability.
Answer: The government can stimulate the economy as needed by a policy of taxation and borrowing. Lower taxes tend to stimulate a sluggish economy and government borrowing can be used to increase the economys money supply. Alternatively, in an economic boom, taxes can be raised and borrowing lessened.
Explanation: As part of fiscal policy, the government can borrow money and raise or lower taxes.
Page Ref: 85
Difficulty: Moderate
Objective: 3.4 What do I need to know about the U.S. economic system to operate successfully within it?
Classification: Concept

98) Describe the business cycle.
Answer: The business cycle is a regular pattern of ups and down in total economic production.
Explanation: The business cycle is a long-term pattern marked by both periods of growth and slowdown.
Page Ref: 80
Difficulty: Easy
Objective: 3.4 What do I need to know about the U.S. economic system to operate successfully within it?
Classification: Concept

99) Explain how a recession is defined.
Answer: A recession is defined as two or more consecutive periods of decline in GDP.
Explanation: A recession is a slowdown in the rate of growth. GDP is measured per annual quarter, so a slowdown in two or more consecutive periods counts as an overall pattern of recession.
Page Ref: 80
Difficulty: Moderate
Objective: 3.4 What do I need to know about the U.S. economic system to operate successfully within it?
Classification: Concept

100) How is a countrys gross domestic product measured?
Answer: The total value of all goods and services that a country produces within its borders in one year is called the gross domestic product.
Explanation: GDP is key to tracking activity in the business cycle.
Page Ref: 81
Difficulty: Moderate
Objective: 3.4 What do I need to know about the U.S. economic system to operate successfully within it?
Classification: Concept

101) What are the criteria for economic stability?
Answer: When there are enough desirable goods and services to satisfy consumer demand, and consumers have the purchasing power to buy the products they want, business is in a period of economic stability.
Explanation: Supply satisfying demand is not the only criterion for economic stability. Consumers must have enough money to buy the goods and services they want.
Page Ref: 81
Difficulty: Moderate
Objective: 3.4 What do I need to know about the U.S. economic system to operate successfully within it?
Classification: Concept
102) Who are underemployed workers?
Answer: People who have part-time jobs but want to work full time, or are working for jobs they are overqualified for, are known as underemployed workers.
Explanation: These people are not factored into determining the unemployment rate.
Page Ref: 82
Difficulty: Moderate
Objective: 3.4 What do I need to know about the U.S. economic system to operate successfully within it?
Classification: Concept

103) Technology usually is a benefit to economic vitality. How did technology play a role in the Great Recession?
Answer: It led to the speculation-fueled dot.com bubble, which laid the foundation for the subprime bubble.
Explanation: The collapse of the dot.com bubble led to low interest rates that fueled the subprime crisis, which led to the Great Recession.
Page Ref: 88
Difficulty: Moderate
Objective: 3.5 What launched the Great Recession?
Classification: Concept

104) How is an economic bubble characterized?
Answer: An economic bubble is a period in which stocks and other securities rise far above their actual value.
Explanation: The United States has already experienced technology and housing bubbles in the 21st century.
Page Ref: 87
Difficulty: Moderate
Objective: 3.5 What launched the Great Recession?
Classification: Concept

105) What happens in a foreclosure?
Answer: A bank repossessing and selling a home on which the borrower cannot meet loan payment obligations is called a foreclosure.
Explanation: Foreclosure rates skyrocketed during the collapse of the bubble in the U.S. housing industry.
Page Ref: 88
Difficulty: Moderate
Objective: 3.5 What launched the Great Recession?
Classification: Concept
In the past, only Indias elite could afford to buy a car. But recent dramatic changes in Indias economy have produced a growing middle class and rapidly rising incomes. Now, to meet the new demand, established automakers are introducing smaller, more affordable vehicles into India. But they will have to find a way to compete with Indias Tata Motors, which has unveiled the least expensive car ever in this market, the Tata Nano. The Nano sells for only 100,000 rupees (about US $2,200). It seats four passengers, gets 50 miles per gallon, and travels at a top speed of 60 miles per hour.

106) Based on the information above, Tata most likely believes that as a result of recent changes in Indias economy, a growing number of Indian consumers ________.
A) became even more cost-conscious than ever before
B) would be willing and able to spend 100,000 rupees on a car
C) would choose a vehicle with high fuel efficiency primarily because of concern about the natural environment
D) will eventually prefer models similar to those currently available in the United States and Europe
E) will place a higher value on car safety than fuel economy
Answer: B
Explanation: B) The changes to Indias economy produced a growing middle class and rising incomes. Tata responded to the new demand by producing a new car that sells for 100,000 rupees. Therefore, Tata must believe that a growing number of Indian consumers are willing and able to pay 100,000 rupees for a car, as Choice B indicates. Choice A goes against the discussion, and Indians have more money now. Choice C brings in concern for the environment, which is possible but not mentioned by the passage. Choice D speculates about the future, but the passage doesnt. Choice E, if anything, goes against the passage because the Tata sounds like a fuel-efficient car but not necessarily a safe one.
Page Ref: 63
Learning Outcome: Discuss strategies for setting and adjusting prices
Difficulty: Moderate
Objective: 3.1 What is economics principally concerned with, and what are its two major fields?
Classification: Critical Thinking
AACSB: Analytic Skills

Anon Corporation is a manufacturer of widgets. Faced with increasing input material costs, the company is contemplating a price increase in the range of 15 to 20 percent. There are significant disagreements among senior personnel in the company about this move.

107) Which of the following, if true, strengthens the argument in favor of a price increase?
A) Substitutes for widgets are available in the market.
B) The price of materials consumed along with widgets has gone up.
C) A change in the environment is likely to stimulate overall demand for widgets.
D) Competitors have announced that they intend to keep prices at current levels.
E) Relaxation of import restrictions would lead to foreign competitors flooding the market.
Answer: C
Explanation: C) If overall demand is expected to go up, people will be more willing to pay high prices. So Choice C supports the case for a price increase. Choice A weakens the argument. If substitutes are available, people would be more likely to choose those substitutes if Anon raised its prices. Choice B is relevant to the supply curve but not the demand

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