Name: 
 

Economics chapter 3



True/False
Indicate whether the sentence or statement is true or false.
 

 1. 

The government decides what goods will be produced in a free enterprise economy.
 

 2. 

Under free enterprise, individuals are free to compete with others.
 

 3. 

The desire to earn an income strongly motivates business owners to produce what others want.
 

 4. 

A loss occurs any time total revenue is greater than total cost.
 

 5. 

One of the complaints against King George III of Great Britain was that he advocated free trade.
 

 6. 

The responsibilities of people in a free enterprise economy include open disclosure, obeying the law, and being truthful.
 

 7. 

A private good is a good in which one person’s consumption takes away from another person’s consumption.
 

 8. 

A public good is excludable if individuals cannot be excluded from consuming it.
 

 9. 

Public education and inoculation against disease are examples of activities that result in positive externalities.
 

 10. 

The desire to earn money is a strong incentive for most people.
 

 11. 

Legal systems can both help and hinder free enterprise.
 

 12. 

The main components of the circular flow diagram are households, businesses, and the government.
 

 13. 

Profit is the amount of money left over after all the costs of production have been paid.
 

 14. 

Total cost is the average cost of a good multiplied by the number of units sold.
 

 15. 

One of the characteristics of an ethical free enterprise system is the reward or punishment that reflects how well producers have responded to the preferences of the buying public.
 

 16. 

An entrepreneur is someone who manages a business for the owner.
 

 17. 

Businesspeople in a free enterprise economy will be quite willing to produce and sell excludable public goods.
 

 18. 

Households are the only taxpayers shown on the circular flow.
 

 19. 

A loss occurs when all products have not been sold.
 

 20. 

Sellers in a free enterprise have no responsibility to provide buyers with accurate information.
 

 21. 

Excludable public goods are those that individuals cannot be physically prohibited from consuming.
 

 22. 

A lighthouse or Fourth of July fireworks display at the beach would be considered a nonexcludable public good.
 

Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.
 

 23. 

The responsibilities of people in a free enterprise economy include
a.
being truthful.
c.
open disclosure.
b.
obeying the law.
d.
All of the above
 

 24. 

Which of the following is not a feature of free enterprise?
a.
private property
c.
voluntary exchange
b.
public property
d.
competition
 

 25. 

Eminent domain refers to
a.
the city government having the right to permit or prohibit businesses from building within the city limits.
b.
the right to own your own home and keep others from entering it.
c.
the right of government to take ownership of private land without the consent of the owner by compensating owners for the loss of their land.
d.
the right of a company to take ownership of private land without the consent of the owner by compensating owners for the loss of their land.
 

 26. 

On the circular flow diagram, tax dollars flow to the government from
a.
households and businesses.
c.
households.
b.
foreign countries.
d.
businesses.
 

 27. 

Entrepreneurs are motivated by
a.
the desire to be famous.
c.
humanitarian reasons.
b.
potential profit.
d.
goodwill.
 

 28. 

Which of the following is a public good?
a.
hamburger
c.
post office
b.
car
d.
beauty shop
 

 29. 

Which of the following is a private good?
a.
bicycle
c.
school
b.
court
d.
park
 

 30. 

A person who receives the benefits of a good without paying for it is called a
a.
bum.
c.
free rider.
b.
freeloader.
d.
thief.
 

 31. 

The government produces public goods because
a.
it is the only entity that knows how to do so.
b.
it prohibits businesses from producing them.
c.
the private market will not produce them.
d.
All of the above
 

 32. 

National defense is an example of a
a.
private good.
c.
positive externality.
b.
public good.
d.
negative externality.
 

 33. 

An externality exists when
a.
one person’s actions affect another person.
b.
the buyers and sellers meet.
c.
the government is involved.
d.
businesses sell their products to foreign countries.
 

 34. 

A negative externality
a.
has an adverse effect on a third party.
c.
has an adverse effect on the producer.
b.
has an adverse effect on the consumer.
d.
affects everyone equally.
 

 35. 

The circular flow has two loops. What do they represent?
a.
the flow of dollars and the flow of loans
b.
the flow of goods and the flow of services
c.
jobs and incomes
d.
the flow of goods and services and the flow of dollars
 

 36. 

On the circular flow diagram, resources flow from
a.
businesses to the government.
c.
households to the government.
b.
households to businesses.
d.
businesses to households.
 

 37. 

What do households sell to businesses?
a.
services
c.
goods
b.
assets
d.
resources
 

 38. 

Profits and losses are signals to
a.
firms earning the profits or taking the losses.
b.
firms standing on the sidelines.
c.
consumers who follow business trends.
d.
Both a and b
 

 39. 

Which of the following documents notes that “private property [shall not] be taken for public use, without just compensation”?
a.
U.S. Constitution
c.
Bible
b.
Bill of Rights
d.
Declaration of Independence
 

 40. 

Public goods include all of the following except
a.
a park.
c.
your yard.
b.
national defense.
d.
the beach.
 

 41. 

The government will provide nonexcludable public goods and pay for them with
a.
interest.
c.
taxes.
b.
bonds.
d.
savings.
 

 42. 

A good is excludable if
a.
one person’s use of the good reduces another person’s enjoyment of it.
b.
the government regulates whether or not you may use it.
c.
people can be prevented from using it.
d.
it is produced by a private firm.
 

 43. 

National defense is a good example of a public good because
a.
individuals can’t afford to arm themselves properly.
b.
everyone wants to be protected.
c.
there aren’t enough private security companies to protect us.
d.
it is difficult to exclude people from receiving the benefits from national defense once it is provided.
 

 44. 

Which of the following is an externality?
a.
a neighbor’s dog barking
c.
a neighbor landscaping his yard
b.
pollution from a local factory
d.
All of the above
 

 45. 

The government can minimize the negative externalities in society through
a.
the court system.
c.
taxation.
b.
regulation.
d.
All of the above
 



 
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