Economics Unit II Quiz Study Guide

What is the role of incentives in economic choices?

• They have no impact on economic decisions.

• They only discourage businesses from investing.

• They can be positive or negative motivators that influence choices.

• They always lead to increased pollution.

Answer explanation

Incentives play a crucial role in economic choices as they can motivate individuals and businesses positively or negatively, influencing their decisions and behaviors in the market.

What is a barrier to reaching equilibrium in the housing market?

• Unlimited supply of affordable housing

• Zoning restrictions and limited supply

• Excessive demand for luxury homes

• High interest rates on mortgages

Answer explanation

Zoning restrictions and limited supply hinder the availability of housing, preventing the market from reaching equilibrium. These regulations can limit new construction and reduce the overall housing stock.

According to the Law of Demand, what happens when prices rise?

• The quantity demanded increases.

• The quantity demanded falls.

• The quantity supplied decreases.

• The quantity supplied remains constant.

Answer explanation

According to the Law of Demand, when prices rise, consumers tend to buy less of a good, leading to a decrease in the quantity demanded. Therefore, the correct answer is that the quantity demanded falls.

What is an example of a factor affecting supply?

• Consumer preferences

• Income levels

• Production costs

• Future price expectations

Answer explanation

Production costs directly impact supply; if costs rise, producers may supply less. In contrast, consumer preferences and income levels affect demand, while future price expectations can influence both supply and demand.

What occurs when supply exceeds demand in a market?

• Equilibrium

• Disequilibrium

• Inflation

• Deflation

Answer explanation

When supply exceeds demand, it leads to excess goods in the market, resulting in disequilibrium. This situation disrupts the balance between supply and demand, causing prices to adjust until equilibrium is restored.

What does Price Elasticity of Demand measure?

• How sensitive the quantity supplied is to a price change

• How sensitive the quantity demanded is to a price change

• The total revenue generated by a product

• The cost of production for a good

Answer explanation

Price Elasticity of Demand measures how sensitive the quantity demanded is to a price change. A higher elasticity indicates that consumers will significantly change their demand in response to price fluctuations.

Which of the following is an example of an inelastic good?

• Luxury cars

• Designer clothes

• Insulin

• Smartphones

Answer explanation

Insulin is an inelastic good because it is a necessity for people with diabetes, meaning demand remains constant regardless of price changes. In contrast, luxury cars, designer clothes, and smartphones are elastic goods.

What is a characteristic of a traditional economy?

• Prices are determined by supply and demand

• The government makes all economic decisions

• Relies on customs, history, and time-honored beliefs

• A blend of market and command economies

Answer explanation

A traditional economy relies on customs, history, and time-honored beliefs to make economic decisions, rather than on supply and demand or government control, distinguishing it from other economic systems.

In a market economy, who primarily drives the economic decisions?

• The government

• International organizations

• Consumers and producers

• Historical precedents

Answer explanation

In a market economy, economic decisions are primarily driven by consumers and producers. They interact through supply and demand, determining prices and resource allocation, rather than the government or historical precedents.

What is a feature of perfect competition?

• Few firms, differentiated products

• Many firms, identical products

• High barriers to entry

• Firms are price makers

Answer explanation

A feature of perfect competition is that there are many firms offering identical products. This leads to price-taking behavior, where no single firm can influence the market price.