Chapter 2

Understanding business

1. America's business success is largely due to an economic and social climate that allows businesses to operate freely.

True

2. Global economics and politics have no significant influence on businesses in the United States.

False

3. The study of how society chooses to employ resources to produce goods and services and to distribute them for consumption among various competing groups and individuals is known as sociology.

False

4. Economists study how people use resources to produce and distribute goods and services for consumption among competing groups and individuals.

True

5. Macroeconomics is the economic perspective that looks at the operation of a nation's economy as a whole.

True

6. Microeconomics focuses on the decisions and behavior of people and organizations in particular markets.

True

7. Resource development is concerned with finding the best way to utilize the fixed amount of resources a society has available.

False

8. Resource development is the study of how to increase resources and to create the conditions that will make better use of those resources.

True

9. Peace and prosperity will flourish if we can find the one best way to divide existing resources among nations.

False

10. Thomas Malthus believed that overpopulation was a major cause of poverty.

True

11. In developing nations of the world, population has leveled off and is not expected to increase dramatically in the future.

False

12. Studies about the effects of population growth on the economy are part of macroeconomics.

True

13. Economic progress can occur when business owners provide jobs and economic growth for their employees, their communities, and themselves.

True

14. Economist Adam Smith's important contribution was an inquiry as to why some nations are wealthy, while others remain poor.

True

15. Adam Smith believed the self-interest of businesspeople would lead them to create needed goods, services, and jobs.

True

16. The "invisible hand" in Adam Smith's theory turns self-directed gain into social and economic benefits for all.

True

17. According to Adam Smith, the "invisible hand" refers to the government's effort to always keep a check on the wealth creation of individuals, so that no one business would control a market for a particular good or service.

False

18. A contemporary economic challenge is creating profitable businesses by selling goods and services that contribute toward a healthier environment.

True

19. An economist is examining how consumers in the automobile market have responded to recent price increases by car manufacturers. He is examining a microeconomic situation.

True

20. Macroeconomics looks at long run economic problems while microeconomics examines short run economic problems.

False

21. Thomas Malthus believed that people in most countries would never be able to achieve high standards of living unless the problems of overpopulation were addressed.

True

22. Adam Smith believed that since businesspeople are motivated to improve their own prosperity, their actions are unlikely to benefit society as a whole.

False

23. Adam Smith believed that an economic system couldn't truly prosper unless people were taught to value the welfare of others above their own personal gain.

False

24. The concept of the invisible hand begins with the assumption that the primary motivation of entrepreneurs is that they will prosper from their own hard work.

True

25. Adam Smith's research focused on determining the best way to distribute a fixed amount of resources, rather than on how to create more wealth.

False

26. Large educated populations can contribute to an economy by offering knowledge and entrepreneurship.

True

27. Adam Smith believed that incentives to seek personal gain would create wealth, but that the government must then step in to make sure that this wealth is equitably distributed.

False

28. As indicated by the Making Ethical Decisions box, activities that lead to corruption can destroy free economic opportunities because they interfere with the right to freely compete.

True

29. In capitalist countries, the government decides what to produce and how the goods and services will be produced.

False

30. Capitalism is the foundation of the U.S. economic system.

True

31. The most fundamental of all rights in capitalism is the right to private property.

True

32. Under capitalism, the government prohibits people and businesses from competing with each other.

False

33. A basic right under capitalism is the right of businesses to receive government funding.

False

34. Free-market capitalism has made it more difficult for individuals to gain wealth.

False

35. Due to the fundamental rights afforded to us by a free-market capitalistic system; persons are more willing to take calculated risks.

True

36. A free-market economic system is one in which the market of buyers and sellers decides what is produced, how much is produced, and how it is distributed.

True

37. Under the basic principle of supply, as the price goes down, manufacturers and suppliers of a product tend to supply less of the product to the market.

True

38. Demand refers to the quantity of a good that consumers are willing and able to buy at different prices at a specific time.

True

39. At the equilibrium price, the quantity consumers desire to buy equals the quantity sellers desire to sell.

True

40. If the quantity supplied in a market exceeds the quantity demanded, a shortage will exist.

False

41. If a shortage exists in a market for a good, the price of that good will tend to fall.

False

42. The point of intersection between the supply and demand curves is called the stress point.

False

43. In the long run, the market price tends to adjust toward the equilibrium point.

True

44. Countries that rely on a free market system are plagued by persistent shortages or surpluses of goods and services.

False

45. One of the drawbacks of free markets is the fact that competition in such markets undermines the ability of price to adjust to its equilibrium value in the long run.

False

46. In perfect competition, each firm produces a product that is clearly differentiated from the products of other firms in the same market.

False

47. A monopoly occurs when there is a single seller for a product or service.

True

48. Economists refer to a market in which a few sellers dominate the supply side as monopolistic competition.

False

49. Product differentiation is a key to success in monopolistic competition.

True

50. In the United States, laws prohibit the creation of most types of monopolies.

True

51. One strength of a free-market economic system is that it emphasizes the fair and humane treatment of the less fortunate in society.

False

52. The greed of businesspeople represents one of the greatest dangers to the operation of a free market system.

True

53. Fetna resides in a country where the economic system is primarily based on free market capitalism. Fetna is likely to have the freedom to buy and sell property.

True

54. A surplus currently exists for a product called widgets. In a free market system, the government must step in and buy any widgets that consumers do not buy in order to eliminate the surplus and establish equilibrium.

False

55. In a free market economic system, the lack of government control and regulation means that businesses find it easy to take advantage of customers by offering poor quality products at high prices.

False

56. History shows that free-market capitalism leads to a fair and equitable distribution of wealth.

False

57. Jill owns a bakery that specializes in cheesecakes. Until recently, Jill charged a price of $12 for each cheesecake. At this price Jill's customers bought an average of 84 cheesecakes each week. For the last few weeks, she has reduced her price to $10.50 per cheesecake, and her customers have purchased an average of 96 cheesecakes each week. These results are consistent with the economic concept of demand.

True

58. Monica notices that just a few big companies produce the vast majority of soft drinks. She would be correct in describing the soft drink industry as an oligopoly.

True

59. GLAMOR GAL, a popular women's cosmetics company is gaining popularity among younger women. Differentiating itself from the sea of companies that compete for the same business, it focuses on products for sensitive, youthful skin. GLAMOR GAL clearly operates in an oligopolistic environment.

False

60. GLAMOR GAL is a popular cosmetics company. Although it is gaining in popularity among younger women, its promotional strategy continues to focus on the shadow-free finish that it produces on almost any skin type. Due to the fact that its industry faces monopolistic competition, the company knows that it must continue to differentiate itself from the competition.

True

61. As you drive to school in the morning, you will probably flip through several radio stations before deciding to settle on one for the duration of the drive. For instance: you can listen to a "fair and balanced" talk show; an "intelligent talk" program; an interactive "call-in" talk show; a "right-wing" political talk show; a "self-improvement" talk show; and, even an "all sports" talk show. With so much monopolistic competition in radio programming, radio stations focus on offering you something just a little different.

True

62. Roland is a nation with an economic system that closely approximates pure capitalism. While Roland's economy is likely to generate a great deal of wealth, it may do a poor job of providing an acceptable level of income for the elderly or disabled.

True

63. In the newspaper this morning, you read about the downfall of a multi-national entertainment business, and a report that the company's CEO enjoyed a 9% increase in his salary during the same year that the company's profits were down 35%. As you read further, you learn that the company's board of directors approved undeserved salary increases. Clearly, this is an example of how inequality and greed can infiltrate the free- market economic system.

True

64. As you scan the national news online, you read about the BXY Utility Company's latest problems. The story describes an expansive retaining wall that collapsed during a flood last week, spewing toxic coal ash, burying homes, and causing a few fatalities. An editorial claims that the company will not be held accountable to the same standards as the asbestos companies of a few years back that paid severe fines and even went out of business due to their lack of attention to environmental clean-up. You agree with the writer because you recently studied about the various competitive markets and utility companies clearly fall under monopolistic competition.

False

65. The PowerHouse Utility Company recently built a nuclear power plant in a southern state and started competing against BXY Utility Company that has served customers in that region for 65 years. Due to deregulation, consumers now have a choice among utility companies in this area. Although PowerHouse has made a sizeable capital investment, if it successfully grows market share, eventually prices for electricity may stabilize or fall.

True

66. Socialists believe that the primary economic function of the government is to promote rapid economic growth.

False

67. In socialist economies, the government owns some, if not most basic businesses such as telecommunications systems and utilities.

True

68. The top tax rate on personal income in most socialist economies is usually lower than the top tax rate on personal income in capitalist economies.

False

69. The major benefit of socialism is that it creates strong incentives to work hard and take the risks associated with starting and operating a business.

False

70. Socialists believe that wealth should be more evenly distributed than what actually occurs in a free-market capitalistic system.

True

71. Workers in socialist countries often get longer vacations and more social benefits than workers in free market economies.

True

72. Over the past decade, socialist economies have proven to be more successful at creating wealth and jobs than capitalist economies.

False

73. One drawback of socialism is that it may result in a reduction in the individual's incentive to work hard.

True

and How It Affects Business 74. Brain drain is the loss of the best and brightest people to other countries.

True

75. High tax rates in socialist countries is a major reason these nations have experienced a brain drain.

True

76. Incentive to own and operate businesses is high in nations whose governments are proponents of socialistic practices.

False

77. One of the benefits of communism is that it allows individuals a great deal of freedom to make their own economic decisions.

False

78. Communism is an economic and political system in which the state makes almost all economic decisions and owns almost all the major factors of production.

True

79. Most communist countries today are suffering from severe economic problems.

True

80. A major distinction between capitalism and socialism concerns the distribution of income.

True

81. Countries that wish to avoid shortages and surpluses of goods should adopt a communist system.

False

82. Workers in nations who are strong proponents of communism work much harder and longer hours.

False

83. In the small nation of Equalia, the government owns several of the key businesses and provides a wide range of social services. The government places a great deal of emphasis on eliminating large disparities in people's incomes. These features of Equalia's economy are consistent with a socialist economic system.

True

84. Abby left her native land in Eastern Europe in order to become a nanny for a family in a western suburb of Chicago, Illinois. One of the benefits of her arrangement was that she could attend the community college near her family's residence. When she arrived at her new job, she experienced the differences from a predominately socialist nation and a capitalist nation. Abby noted that public transportation in northern Illinois was limited and expensive, making it difficult to get to school. For a negligible fee, the government in her native country provided public transportation for everyone. Abby's native country's economic system was more characteristic of socialism.

True

85. Socialism and communism are both variations of a free-market economy.

False

86. In command economies, the government plays a major role in deciding which goods are produced and who will get them.

True

87. Governments that were predominantly capitalistic are moving toward socialism, while governments that were predominantly socialistic are moving toward capitalism.

True

88. Like most nations, the United States has a mixed economy.

True

89. Most countries throughout the world can be classified as either purely capitalist or purely socialist.

False

90. There is general agreement in the United States on the degree to which the government should be involved in the economy.

False

91. Subtle differences such as the right to one's religious preference make the command economic system known as communism more like a mixed economy than a socialistic system.

False

92. In the past, socialist nations have realized that some of the government run businesses do not grow as quickly as businesses that operate for a profit.

True

93. Although mixed economies tend to improve economic conditions, moral values prevent communist nations such as China and Vietnam from progressing in this direction. Overall, economic progress continues to be very slow in these nations.

False

94. In a mixed economy, the government's goal is to grow the economy and maintain some measure of social equality.

True

95. Sweetland is a nation that publicly supports a free market economy with private ownership of businesses. Over time, the government of Sweetland has developed policies designed to help the needy and reduce the level of income inequality. It pays for these programs by levying relatively high taxes on businesses and workers. These arrangements suggest that the economy of Sweetland is trending toward pure capitalism.

False

96. Deanne is a vocal critic of socialism. She likes to point out that in recent years the governments in many socialistic nations have cut back on government services and have reduced taxes. Deanne believes that this trend will ultimately result in all nations adopting pure capitalistic ideals. Recent evidence suggests that Deanne's views are essentially correct.

False

97. Recently, Hugo Chavez, the Prime Minister of Venezuela announced that he is standing behind the concept of state owned utilities and public schools in his nation. Although not all industry is owned and managed by the government, his ideas would lead one to believe that he has a preference for socialism.

True

98. Most nations recognize that private enterprise is detrimental to business growth and what is best for consumers. Recently, a nation had the opportunity to sell its government-owned telecommunication system to a private firm. Instead it realized that it would be better off if it raised taxes so that it could maintain the status quo.

False

99. We use indicators such as (1) the gross domestic product (GDP), (2) the interest rate, and (3) the price indexes to measure the health of our economy.

False

100. The total value of a country's output of final goods and services in a given year is known as the gross domestic product (GDP).

True