Chap 01
Chap 01
Chap 01
a. “environment.”
d. “conservation.”
a. poverty.
b. scarcity.
c. change.
d. power.
3. Which of the following is NOT included in the decisions that every society must make?
b. at least one individual in society can obtain all he or she wants of the good.
d. those who have enough income can buy all they want of the good.
a. air
b. wood in a forest
d. water in a city
7. Economics is defined as
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10. Daniel decides to spend an hour playing basketball rather than working at $6 per hour. His tradeoff is
b. the increase in skill he obtains from playing basketball for that hour.
d. nothing, because he spent $6 for admission into the sports complex to play basketball.
b. there is no tradeoff for society as a whole, since the cost of reducing pollution falls only on the firms affected by the requirements.
d. there is a tradeoff because of reduced incomes to the firms’ owners, workers, and customers.
c. society’s goods and services are distributed fairly among society’s members.
d. the benefits of society’s resources are distributed fairly among society’s members.
b. fairness.
c. efficiency.
16. When the government redistributes income from the rich to the poor,
a. efficiency is improved.
d. rich people consume fewer goods and poor people consume more goods, resulting in no real change.
a. the total spent on food, clothing, books, transportation, tuition, lodging, and other expenses.
b. 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.
19. For most students, the largest single cost of a college education is
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21. Carolyn decides to spend an additional hour working overtime rather than watching a video with her friends. She earns $8 for her hour’s work. Her opportunity
cost of working is
b. the enjoyment she would have received had she watched the video.
c. the $8 minus the enjoyment she would have received from watching the video.
d. nothing, since she would have received less than $8 of enjoyment from the video.
22. Ryan spends an hour studying instead of going for a bike ride. The opportunity cost to him of studying is
b. the difference between the improvement in his grades from studying minus the enjoyment of a bike ride.
c. the enjoyment and exercise he would have received had he gone for a bike ride.
d. zero. Since Ryan chose to study rather than to ride his bike, the value of studying must have been greater than the value of the bike ride.
23. College-age athletes who drop out of school to play professional sports
a. are making a bad economic decision, since they can’t play forever.
d. are well aware that their opportunity cost of attending college is very high.
24. The term which means whatever must be given up to obtain an item is
a. efficiency.
b. externality.
c. opportunity cost.
d. market failure.
a. following tradition.
c. experience.
a. a long-term trend.
a. Mark graduates from college and takes a job. His income increases from $10,000 per year to $50,000 per year.
c. Kim works at the college bookstore. She gets a raise from $5.15 per hour to $5.20 per hour.
d. A drought hits the upper Midwest and the price of wheat increases from $4.00 per bushel to $8.00 per bushel.
d. the marginal benefit is greater than both the average cost and the marginal cost.
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29. You have spent $500 purchasing and repairing an old car which you expect to sell for $800 once the repairs are complete. You discover that you need an additional
part, which will cost $400, including labor, in order to complete the repairs. You can sell the car as it is now for $300. What should you do?
d. It doesn’t matter which action you take; the outcome is the same either way.
b. incentives.
31. Which of the following is important for policy makers to consider when designing public policy?
32. U.S. laws requiring that drivers wear seat belts have resulted in
c. little change in the number of driver deaths, but more accidents and more pedestrian deaths.
33. One effect of a government imposed seat belt law has been
b. safer driving.
34. In the former Soviet Union, producers were paid for meeting output targets, not for selling products. Under those circumstances, what were the economic
a. to produce good quality products so that society benefits from the resources used
d. to produce enough to meet the output target, without regard for quality or cost
a. by allowing the family to buy a greater variety of goods and services at a lower cost.
c. a and b
a. 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.
a. is a losing proposition for Mexico because U.S. workers are more productive.
b. is a losing proposition for the U.S. because Mexico has cheaper labor.
c. is like a sports contest: one side wins and the other side loses.
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b. only with nations which can produce goods the U.S. cannot produce.
39. If Canada is better than the U.S. at producing hockey sticks, but the U.S. is better than Canada at producing roller blades,
a. the U.S. should impose a tariff on Canadian hockey sticks in order to protect jobs in the U.S. roller blade industry.
b. the U.S. should sell roller blades to Canada, and should buy Canadian hockey sticks.
c. the U.S. should subsidize its hockey stick industry so that it can compete with Canadian hockey sticks.
d. the U.S. should put a quota on the amount of Canadian hockey sticks imported.
b. Markets are usually inferior to central planning as a way to organize economic activity.
c. Markets are flawed and are therefore not an acceptable way to organize economic activity.
d. Markets are a good way to organize economic activity in developed nations, but not in less-developed nations.
c. households decide which firms to work for and what to buy with their incomes.
a. the government.
b. prices.
c. central planners.
d. corporations.
43. One advantage market economies have over central planning is that market economies
44. Which of the following observations was made famous by Adam Smith in his book The Wealth of Nations?
b. People buy more when prices are low than when prices are high.
c. No matter how much people earn, they tend to spend more than they earn.
d. Households and firms interacting in markets are guided by an “invisible hand” that leads them to desirable market outcomes.
a. prices.
b. mass media.
c. subliminal messages.
d. government regulations.
a. 1692.
b. 1776.
c. 1816.
d. 1936.
47. The invisible hand works to promote general well-being in the economy primarily through
a. government intervention.
c. self interest.
d. altruism.
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c. they distort prices and thus the decisions of households and firms.
49. When the government prevents prices from adjusting naturally to supply and demand,
d. the reduced uncertainty associated with fixed prices is worth more than the cost in lower efficiency.
d. a situation in which the market on its own fails to allocate resources efficiently.
51. The two best reasons for a government to intervene in a market are
53. An externality is
b. the impact of the personal income tax on a person’s ability to purchase goods and services.
c. the impact of pollution from a factory on the health of people in the vicinity of the factory.
d. the impact of increases in health care costs on the health of individuals in society.
55. If a copper refinery does NOT bear the entire cost of the smoke it emits,
a. it will eliminate all smoke so as to avoid the entire cost of the smoke.
56. A situation in which a market left on its own fails to allocate resources efficiently is known as
a. scarcity.
b. opportunity cost.
c. market failure.
d. market power.
d. their ability to produce things that other people are willing to pay for.
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58. Which of these consumption activities is most likely to cause an external cost?
59. If education produces external benefits for society, which of the following might be an appropriate policy for society to establish regarding education?
b. a sense of social responsibility will cause the owners of the mill to reduce pollution.
c. the government can raise economic well-being by providing health care to those affected by the pollution.
d. the power of a single person (or small group of people) to unduly influence market prices.
d. a hospital in Missouri.
63. Which is the most correct statement about the invisible hand?
c. The invisible hand is more effective at ensuring equity than it is at ensuring efficiency.
d. The invisible hand is more effective at ensuring efficiency than it is at ensuring equity.
64. In the United States, higher income tax rates on rich people could be justified on the basis of
a. efficiency.
b. equity.
65. Taxing high incomes at a higher rate than low incomes is most likely to do which of the following?
a. $35,000.
b. $29,000.
c. $20,000.
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d. $15,000.
68. In the United States, incomes have historically grown about 2% per year. At this rate incomes will double every
a. 10 years.
b. 25 years.
c. 35 years.
d. 50 years.
69. The income of a typical worker in a country is most closely linked to which of the following?
a. population
b. labor unions
c. productivity
d. government policies
70. If the average income of an American is higher than the average income of an Italian, it is most likely because
a. labor unions are more aggressive in the United States than in Italy.
71. A worker in Bangladesh can earn $1 per day making cotton cloth on a hand loom. A worker in the United States can earn $100 per day making cotton cloth with a
b. Labor is more productive when making cotton cloth with a mechanical loom than with a hand loom.
c. There is little demand for cotton cloth in Bangladesh and great demand in the U.S.
d. Bangladesh has a low-wage policy to make its textile industry more competitive in world markets.
a. the actual amount of effort workers put into an hour of working time.
b. the number of workers required to produce a given amount of goods and services.
c. the amount of labor which can be saved by replacing workers with machines.
d. the amount of goods and services produced from each hour of a worker’s time.
a. the government.
b. labor unions.
c. productivity.
76. The historical rise in living standards of American workers is primarily a result of
c. minimum-wage laws.
d. tariff protection.
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Chapter 1/The Ten Principles of Economics 9
c. ensure that workers are well educated and have the necessary tools and technology.
78. Concern among economists about the U.S. government’s budget deficit is based largely on
a. the likelihood that the deficit will cause the country to go bankrupt.
c. the fact that part of the deficit is covered by borrowing from foreigners.
a. budget deficits
b. education
c. competition
d. investment
b. borrowing, which reduces funds available for investment in human and physical capital.
a. inefficiency.
b. low productivity.
c. foreign competition.
84. The person who referred to inflation as public enemy number one was
a. Richard Nixon.
b. Alan Greenspan.
c. Gerald Ford.
d. John F. Kennedy.
b. productivity to increase.
87. Which of the following is the most correct statement about the relationship between inflation and unemployment?
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89. One explanation of the tradeoff between inflation and unemployment is that
90. In the early 1980s, U.S. economic policy was directed toward reducing inflation. What would you assume about inflation and unemployment during this period?
91. Between 1929 and 1933, the U.S. economy went from a situation of full employment to one of 25% unemployment. What do you assume happened to prices?
TRUE/FALSE
92. The word economy comes from the Greek word for “conservation.”
93. Scarcity means that society has less to offer than people wish to have.
94. Economics is the study of how fairly goods and services are distributed within society.
95. Economists study how individuals make decisions, how they interact with each other, and the factors which affect the economy as a whole.
96. With careful planning, we can usually get something that we like without having to give up something else that we like.
97. Individuals face tradeoffs, but societies do not.
98. Equity means everyone in the economy should receive an equal share of the goods and services produced.
99. People are likely to make good decisions only if they understand the options that they have available.
100. Pollution regulations make society better off by raising incomes.
101. Equity refers to the size of the economic pie, and efficiency refers to how the pie is divided.
102. In economic policymaking, there is often a conflict between the goal of efficiency and the goal of equity.
103. When the government redistributes income from the rich to the poor, society benefits since there are more poor than rich.
104. For most students, tuition is the single largest cost of attending college.
105. The opportunity cost of something is what you give up to get it.
106. If an All-American basketball player decides to stay in school for his senior year rather than sign an NBA contract, the opportunity cost to him of his final year of
college could be well over $1 million.
109. A rational decisionmaker takes an action if and only if the marginal cost exceeds the marginal benefit.
110. Public policies often alter the costs and benefits of private actions.
111. Economist Sam Peltzman found that seat belt laws caused more accidents and more pedestrian deaths.
112. Policy makers cannot directly affect public behavior; they can only affect public behavior indirectly.
113. In international trade, if one party gains, the other party loses
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114. Trade allows each person to specialize in the activities he or she does best, thus increasing each individual’s productivity.
115. Trade makes rich nations richer and poor nations poorer.
116. In his book The Wealth of Nations, Adam Smith observed that households and firms interacting in markets are led by an “invisible hand” to make decisions that
produce desirable outcomes for society.
117. When the government prevents prices from adjusting naturally to supply and demand, efficiency is improved in the economy.
118. A market economy cannot possibly produce a socially desirable outcome because individuals are motivated by their own selfish interests.
119. While the invisible hand cannot guarantee efficiency, it is better at guaranteeing equity.
120. The two broad reasons for a government to intervene in the economy are to promote efficiency and to promote equity.
121. Market failure refers to a situation in which the market does not allocate resources efficiently.
122. Since taxes affect only the price paid by the buyer, they cannot have an adverse impact on the allocation of society’s resources.
123. A monopolist has market power.
124. A market economy rewards people according to their ability to produce things that other people are willing to pay for.
125. Monopoly power and income inequality are examples of market failure.
126. Productivity is defined as the quantity of goods and services produced from each hour of a worker’s time.
127. Better tools and technology can increase productivity and therefore living standards in countries.
128. Almost all variation in living standards is a result of differences in countries’ productivity.
129. Protecting domestic jobs from foreign competition is the best way to raise labor productivity.
130. During the 1970s, the United States experienced stable prices and robust economic growth.
131. Inflation increases the value of money.
132. If the government prints too much money, it will cause inflation.
133. The Phillips Curve shows the short-run tradeoff between inflation and economic growth.
134. Economists agree that monetary and fiscal policy, although not very powerful, are necessary instruments for controlling the economy.
135. The major cause of inflation in an economy is too much government debt.
SHORT ANSWER
APPLICATION/SCENARIO
136. Give three examples each of household and societal decisions regarding the allocation of resources.
137. Households face many of the same decisions that societies face. Explain why this is true.
138. What would happen to the study of economics if scarcity disappeared?
139. What does the phrase, “There is no such thing as a free lunch,” illustrate?
140. The U.S. government redistributes income from the rich to the poor. Explain how this action affects equity as well as efficiency in the economy.
141. One tradeoff that society faces is between efficiency and equity. Define each term and explain this tradeoff.
142. Define opportunity cost. What is the opportunity cost to you of attending college?
143. Suppose Regan enjoys hiking, skiing, and solitude. She graduates from college and needs to decide whether to take a job in a large coastal city at a salary of $55,000
per year, or a job in a small Rocky Mountain community at $40,000 per year. Would it be rational for her to take the lower-paying job? Explain.
144. Stan buys a 1966 Mustang with the intention of repairing, restoring and selling it. He anticipates that it will cost him $10,000 to purchase, repair and restore the car,
and that he can sell the finished car for $13,000. When he has spent a total of $10,000 on the project, he discovers that he needs to replace the engine. It will cost Stan
$4,000 to replace the engine. He can sell the car without the new engine for $9,000.What should he do?
147. You must decide whether or not to attend graduate school next semester. How might you use marginal analysis to make your decision?
148. 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.
149. Public policies often alter the costs and benefits of private actions. Why is it important for policy makers to consider both the direct and indirect effects of public
policies?
150. In the old days of the Soviet Union, ideology dictated that the prices of consumer goods should decline over time. Hence, the Soviet planners consistently set the
prices of goods like bread and meat much below the cost of the materials used to produce them. They did not, however, subsidize the prices of the goods and
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materials used by producers. Soviet fur breeders were supposed to purchase animal products at high prices to feed their mink and sable, and bread and meat at low
prices to feed their families. If these producers responded to incentives, how do you think they adjusted their purchases of grain, animal products, bread, and
meat?
151. Why is it that two individuals or nations can both gain from trade when they trade things of equal value?
152. What benefits can a family realize by choosing to trade instead of being self-sufficient?
153. Why does the United States continue to trade with a country like Japan, which places tariffs and other barriers on U.S. goods?
154. Under what conditions might a government intervention in an economy improve the market outcome?
155. Adam Smith used the term “invisible hand” in his 1776 book The Wealth of Nations. Prices are the instrument with which the invisible hand directs economic
activity in a market economy. Explain.
156. Suppose that the government enforces a law which prohibits the creation of any pollution. What effect do you think the enforcement of this law will have on the
well-being of society?
157. Most analysts believe that the failure of communism can be blamed on the failure of central planning to allocate resources efficiently. Why is it difficult for central
planners to allocate resources efficiently?
158. Why is productivity so important in an economy and what steps can the government take to increase productivity?
159. Explain how an attempt by the government to lower inflation could cause unemployment to increase in the short-run.
160. Russell learned in his economics class that income depends primarily on productivity. He took a summer job in construction, and worked very hard as a manual
laborer for one month at $8 per hour. His hard work and reliability led the foreman to give Russell a new responsibility--operating a steel roller at $15 per hour.
The new job required much less effort than the old job, and left Russell wondering why his income had increased when his effort had gone down. How can you
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