Topic 1 Ten Principles of Economics

MULTIPLE CHOICE

1
1.Resources are
a. scarce for households but plentiful for economies.
b. plentiful for households but scarce for economies.
c. scarce for households and scarce for economies.
d. plentiful for households and plentiful for economies.
2.Economics deals primarily with the concept of
a. scarcity.
b. money.
c. poverty.
d. banking.
3.The phenomenon of scarcity stems from the fact that
a. most economies’ production methods are not very good.
b. in most economies, wealthy people consume disproportionate quantities of goods and services.
c. governments restrict production of too many goods and services.
d. resources are limited.
4.When a society cannot produce all the goods and services people wish to have, it is said that the economy is experienc-
ing
a. scarcity.
b. surpluses.
c. inefficiencies.
d. inequalities.
5.Economics is the study of
a. production methods.
b. how society manages its scarce resources.
c. how households decide who performs which tasks.
d. the interaction of business and government.
HOW PEOPLE MAKE DECISIONS

6.The adage, "There is no such thing as a free lunch," means

a. even people on welfare have to pay for food.
b. the cost of living is always increasing.
c. people face tradeoffs.
d. all costs are included in the price of a product.
7.Which of the following statements best represents the principle represented by the adage, "There is no such thing as a
free lunch"?
a. Melissa can attend the concert only if she takes her sister with her.
b. Greg is hungry and homeless.
c. Brian must repair the tire on his bike before he can ride it to class.
d. Kendra must decide between going to Colorado or Cancun for spring break.
8.The principle that "people face tradeoffs" applies to
a. individuals.
b. families.
c. societies.
d. All of the above are correct.
9.When society requires that firms reduce pollution, there is
a. a tradeoff because of reduced incomes to the firms' owners and workers.
b. a tradeoff only if some firms are forced to close.
c. no tradeoff, since the cost of reducing pollution falls only on the firms affected by the requirements.
d. no tradeoff, since everyone benefits from reduced pollution.
10.Economists use the word equality to describe a situation in which
a. each member of society has the same income.
b. each member of society has access to abundant quantities of goods and services, regardless of his or
her income.
c. society is getting the maximum benefits from its scarce resources.
d. society's resources are used efficiently.
11.Efficiency
a. and equality both refer to how much a society can produce with its resources.
b. and equality both refer to how fairly the benefits from using resources are distributed between
members of a society.
c. refers to how much a society can produce with its resources. Equality refers to how evenly the
benefits from using resources are distributed among members of society.
d. refers to how evenly the benefits from using resources are distributed between members of society.
Equality refers to how much a society can produce with its resources
12.Which of the following words and phrases best captures the notion of equality?
a. minimum waste
b. maximum benefit
c. sameness
d. efficiency
13.When the government attempts to improve equality in an economy the result is often
a. an increase in overall output in the economy.
b. additional government revenue since overall income will increase.
c. a reduction in equality.
d. a reduction in efficiency.
14.When the government implements programs such as progressive income tax rates, which of the following is likely to
occur?
a. equality is increased and efficiency is increased.
b. equality is increased and efficiency is decreased.
c. equality is decreased and efficiency is increased.
d. equality is decreased and efficiency is decreased.
15.The government has just passed a law requiring that all residents earn the same annual income regardless of work ef-
fort. This law is likely to
a. increase efficiency and increase equality.
b. increase efficiency but decrease equality.
c. decrease efficiency but increase equality.
d. decrease efficiency and decrease equality.
16.The opportunity cost of an item is
a. the number of hours needed to earn money to buy the item.
b. what you give up to get that item.
c. usually less than the dollar value of the item.
d. the dollar value of the item.
17.In economics, the cost of something is
a. the dollar amount of obtaining it.
b. always measured in units of time given up to get it.
c. what you give up to get it.
d. often impossible to quantify, even in principle.
18.When computing the opportunity cost of attending a concert you should include
a. the price you pay for the ticket and the value of your time.
b. the price you pay for the ticket, but not the value of your time.
c. the value of your time, but not the price you pay for the ticket.
d. neither the price of the ticket nor the value of your time.
19.Denise decides to spend three hours working overtime rather than watching a video with her friends. She earns $10 an
hour. Her opportunity cost of working is
a. the $30 she earns working.
b. the $30 minus the enjoyment she would have received from watching the video.
c. the enjoyment she would have received had she watched the video.
d. nothing, since she would have received less than $30 of enjoyment from the video.

20.Ellie decides to spend two hours taking a nap rather than attending her classes. Her opportunity cost of napping is
a. the value of the knowledge she would have received had she attended class.
b. the $24 she could have earned if she had worked at her job for those two hours.
c. the value of her nap less the value of attending class.
d. nothing, since she valued sleep more than attendance at class.

21.The opportunity cost of going to college is

a. the total spent on food, clothing, books, transportation, tuition, lodging, and other expenses.
b. the value of the best opportunity a student gives up to attend college.
c. zero for students who are fortunate enough to have all of their college expenses paid by someone
else.
d. zero, since a college education will allow a student to earn a larger income after graduation.

22.A rational decisionmaker

a. ignores marginal changes and focuses instead on “the big picture.”
b. ignores the likely effects of government policies when he or she makes choices.
c. takes an action only if the marginal benefit of that action exceeds the marginal cost of that action.
d. takes an action only if the combined benefits of that action and previous actions exceed the
combined costs of that action and previous actions.

23.Making rational decisions "at the margin" means that people

a. make those decisions that do not impose a marginal cost.
b. evaluate how easily a decision can be reversed if problems arise.
c. compare the marginal costs and marginal benefits of each decision.
d. always calculate the dollar costs for each decision.

24.It costs a company $50,000 to produce 5000 beach towels. The company’s cost will be $50,009 if it produces an ad-
ditional beach towel. If the company produces 5,000 beach towels then
a. its average cost is greater than its marginal cost.
b. its average cost and its marginal cost are equal.
c. its average cost is less than its marginal cost.
d. there is insufficient information to compute average and marginal costs.

25.A barber currently cuts hair for 50 clients per week and earns a profit. He is considering expanding his operation in
order to serve more clients. Should he expand?
a. Yes, because cutting hair is profitable.
b. No, because he may not be able to sell more services.
c. It depends on the marginal cost of serving more clients and the marginal revenue he will earn from
serving more clients.
d. It depends on the average cost of serving more clients and the average revenue he will earn from
serving more clients.

26.The average cost per seat on the 75-passenger Get-There-Safe Bus company's trip from Milwaukee to Minneapolis,
on which no refreshments are served, is $37. In advance of a particular trip, three seats remain unsold. The bus
company could increase its profit only if it
a. charged any ticket price above $0 for the three remaining seats.
b. charged at least $18.50 for each of the three remaining seats.
c. charged at least $37 for each of the three remaining seats.
d. paid three people to occupy the three remaining seats.
27.Bill is restoring a car and has already spent $4000 on the restoration. He expects to be able to sell the car for $5800.
Bill discovers that he needs to do an additional $2400 of work to make the car worth $5800 to potential buyers. He
could also sell the car now, without completing the additional work, for $3800. What should he do?
a. He should sell the car now for $3800.
b. He should keep the car since it wouldn’t be rational to spend $6400 restoring a car and then sell it
for only $5800.
c. He should complete the additional work and sell the car for $5800.
d. It does not matter which action he takes since the outcome will be the same either way.
28.Bill is restoring a car and has already spent $4000 on the restoration. He expects to be able to sell the car for $6200.
Bill discovers that he needs to do an additional $2400 of work to make the car worth $6200 to potential buyers. He
could also sell the car now, without completing the additional work, for $3800. What should he do?
a. He should sell the car now for $3800.
b. He should keep the car since it wouldn’t be rational to spend $6400 restoring a car and then sell it
for only $6200.
c. He should complete the additional work and sell the car for $6200.
d. It does not matter if Bill sells the car now or completes the work and then sells it at the higher price
because the outcome will be the same either way.

29.George has spent $600 purchasing and repairing an old fishing boat, which he expects to sell for $900 once the re-
pairs are complete. George discovers that, in addition to the $600 he has already spent, he needs to make an addi-
tional repair, which will cost another $400, in order to make the boat worth $900 to potential buyers. He can sell
the boat as it is now for $400. What should he do?
a. He should sell the boat as it is now for $400.
b. He should keep the boat since it would not be rational to spend $1,000 on repairs and then sell the
boat for $900.
c. He should complete the repairs and sell the boat for $900.
d. It does not matter which action he takes; the outcome is the same either way.

30.Economists are particularly adept at understanding that people respond to

a. laws.
b. incentives.
c. punishments more than rewards.
d. rewards more than punishments.

31.Government policies can change the costs and benefits that people face. Those policies have the potential to
a. alter people’s behavior.
b. alter people’s decisions at the margin.
c. produce results that policymakers did not intend.
d. All of the above are correct.

32.Following the implementation of laws requiring automobiles to have seat belts, which of the following occurred?
a. An individual’s probability of surviving an auto accident rose.
b. There was an increase in pedestrian deaths.
c. There was an increase in automobile accidents.
d. All of the above are correct.

33.According to a recent study of Chilean bus drivers, drivers who are paid by the number of passengers they transport
have higher productivity than drivers who are paid by the hour. This result is an example of which principle of
economics?
a. People face tradeoffs.
b. The cost of something is what you give up to get it.
c. Rational people think at the margin.
d. People respond to incentives.

34.Which of the following is not an example of a group responding to an incentive?

a. Students attend class because of an attendance policy that reduces their grade for absences.
b. Consumers buy more of a product when it is on sale at a reduced price.
c. Universities offer fewer online classes when they generate more revenue than traditional classes.
d. Employees work harder to earn higher commissions.

HOW PEOPLE INTERACT

35. Which of the following is a principle concerning how people interact?
a. Markets are usually a good way to organize economic activity.
b. Rational people think at the margin.
c. People respond to incentives.
d. All of the above are correct.
36. Which is the most accurate statement about trade?
a. Trade can make every nation better off.
b. Trade makes some nations better off and others worse off.
c. Trading for a good can make a nation better off only if the nation cannot produce that good itself.
d. Trade helps rich nations and hurts poor nations.
37. The principle that trade can make everyone better off applies to
a. individuals.
b. families.
c. countries.
d. All of the above
38. Vietnam can benefit from trade
a. only with nations that can produce goods Vietnam cannot produce.
b. only with less developed nations.
c. only with nations outside of Asian.
d. with any nation.
39. If Vietnam chooses to engage in trade, it
a. will only benefit if it trades with countries that produce goods Vietnam cannot produce.
b. cannot benefit if it trades with less developed countries.
c. should first attempt to produce the good itself.
d. can benefit by trading with any other country.
40. Suppose that a country that has a high level of output per person agrees to trade with a country that has a low level
of output per person. Which country can benefit?
a. only the one with a low level of output per person.
b. only the one with a high level of output per person.
c. both
d. neither
41. Trade between countries tends to
a. reduce both competition and specialization.
b. reduce competition and increase specialization.
c. increase competition and reduce specialization.
d. increase both competition and specialization.
42. The government enforces property rights by
a. requiring property owners to pay property taxes.
b. providing police and courts.
c. forcing people to own property.
d. providing public parks and recreation facilities.
43. For which of the following problems can well-designed public policy enhance economic efficiency?
a. both externalities and market power
b. externalities, but not market power
c. market power, but not externalities
d. neither externalities nor market power
44. The term used to describe a situation in which markets do not allocate resources efficiently is
a. economic meltdown.
b. market failure.
c. equilibrium.
d. the effect of the invisible hand.
45. The term market failure refers to
a. a situation in which the market on its own fails to allocate resources efficiently.
b. an unsuccessful advertising campaign which reduces demand for a product.
c. a situation in which competition among firms becomes ruthless.
d. a firm which is forced out of business because of losses.
46. Which of the following can lead to market failure?
a. externalities and market power
b. externalities but not market power
c. market power but not externalities
d. neither externalities nor market power

47. Causes of market failure include

a. externalities and market power.
b. market power and incorrect forecasts of consumer demand.
c. externalities and foreign competition.
d. incorrect forecasts of consumer demand and foreign competition.

48. The term "market failure"

a. means the same thing as "market power."
b. refers to the dissolution of a market when firms decide to quit producing a certain product.
c. refers to the failure of a market to produce an efficient allocation of resources.
d. refers to government's failure to enforce the property rights of households or firms that participate
in a certain market.
 49. Which of the following is an example of an externality?
a. Annie purchases a handbag.
b. Bob’s dog barks loudly during the night waking his neighbors.
c. Clark sells a book to Calvin.
d. David watches a scary movie.

50. The willingness of citizens to pay for vaccinations does not include the benefit society receives from having vacci-
nated citizens who cannot transmit an illness to others. This extra benefit society gets from vaccinating its citizens
is known as
a. productivity.
b. an externality.
c. market power.
d. property rights.

51. Laws that restrict the smoking of cigarettes in public places are examples of government intervention that is in-
tended to reduce
a. efficiency.
b. equality.
c. externalities.
d. productivity.

52. Which of these activities will most likely impose an external cost?
a. Betty plants flowers in her garden.
b. Bonnie gets a flu vaccine.
c. Bridget drives her car after having too much alcohol to drink.
d. Becky buys a new flat screen television.

53. Which of these activities will most likely result in an external benefit?
a. A college student buys a deck of cards to play solitaire in her dorm room.
b. An elderly woman plants a flower garden on the vacant lot next to her house.
c. An executive purchases a book to read on a business trip.
d. A ten-year-old uses his allowance to buy new Nike shoes.

54. When a single person (or small group) has the ability to influence market prices, there is
a. competition.
b. market power.
c. an externality.
d. a lack of property rights.

55. Which of the following firms is likely to have the greatest market power?
a. an electric company
b. a farmer
c. a grocery store
d. a local electronics retailer

56. The price of diamonds is high, in part because the majority of the world’s diamonds are controlled by a single firm.
This is an example of
a. a market failure caused by an externality.
b. a market failure caused by market power.
c. a market failure caused by equality.
d. There is no market failure in this case.

TRUE/FALSE
 57. Scarcity means that there is less of a good or resource available than people wish to have. T

58. Economics is the study of how society allocates its unlimited resources. F

59. Choosing not to attend a concert so that you can study for your exam is an example of a tradeoff. T

60. Government policies that improve equality usually increase efficiency at the same time. T

61. The cost of an action is measured in terms of foregone opportunities. F

62. A marginal change is a small incremental adjustment to an existing plan of action.

63. If the average cost of transporting a passenger on the train from Hanoi to Ho Chi Minh City is $75, it would be ir-
rational for the railroad to allow any passenger to ride for less than $75. F

64. A rational decisionmaker takes an action if and only if the marginal cost exceeds the marginal benefit. F

65. Trade allows each person to specialize in the activities he or she does best, thus increasing each individual's pro-
ductivity. T

66. The government can potentially improve market outcomes if market inequalities or market failure exists. T

SHORT ANSWER

1.How does the study of economics depend upon the phenomenon of scarcity?

2.One tradeoff society faces is between efficiency and equality. Define each term. If the U.S. government redistributes
income from the rich to the poor, explain how this action affects equality as well as efficiency in the economy.

3.Define opportunity cost. What is the opportunity cost to you of attending college? What was your opportunity cost of
coming to class today?

4.With the understanding that people respond to incentives, outline the possible outcome for teachers if the K-12 school
year is extended to 11 months per year instead of the existing 9 months per year.

5.Under what conditions might government intervention in a market economy improve the economy’s performance?