Chapter 1 Ten Principles of Economics

MULTIPLE CHOICE 1. The word that comes from the Greek word for one who manages a household is a. market. b. consumer. c. producer. d. economy. ANS !"# d. economy. T$%!# & S!'T()N# 1 *(++(',-T$# 1 .. The word economy comes from the Greek word for a. en/ironment. b. one who manages a household. c. one who participates in a market. d. conser/ation. ANS !"# b. one who manages a household. T$%!# & S!'T()N# 1 *(++(',-T$# 1 0. 1ouseholds and economies ha/e each of the following in common !2'!%T both a. must allocate scarce resources. b. face many decisions. c. must allocate the goods and ser/ices they produce. d. must ha/e a central decisionmaker. ANS !"# d. must ha/e a central decisionmaker. T$%!# & S!'T()N# 1 *(++(',-T$# . 3. !conomics deals primarily with the concept of a. scarcity. b. po/erty. c. change. d. power. ANS !"# a. scarcity. T$%!# & S!'T()N# 1 *(++(',-T$# 1 4. hich of the following is N)T included in the decisions that e/ery society must make5 a. what goods will be produced b. who will produce goods c. what determines consumer preferences d. who will consume the goods ANS !"# c. what determines consumer preferences T$%!# & S!'T()N# 1 *(++(',-T$# . 6. 7oth households and societies face many decisions because a. resources are scarce. b. populations may increase or decrease o/er time. c. wages for households and therefore society fluctuate with business cycles. d. people8 by nature8 tend to disagree. ANS !"# a. resources are scarce. T$%!# & S!'T()N# 1 *(++(',-T$# . 9. A good is considered scarce in a society when a. more output of the good is possible. b. e/eryone in that society cannot ha/e all they want of the good. c. the go/ernment restricts production of the good. d. only the richest people in the economy can buy all they want of the good. ANS !"# b. e/eryone in that society cannot ha/e all they want of the good. T$%!# & S!'T()N# 1 *(++(',-T$# . :. Scarcity e;ists when a. there is less than an infinite amount of a resource or good. b. society can meet the wants of e/ery indi/idual. c. there is less of a good or resource a/ailable than people wish to ha/e. d. the go/ernment fails to produce goods. ANS !"# c. there is less of a good or resource a/ailable than people wish to ha/e. T$%!# & S!'T()N# 1 *(++(',-T$# . <. hich of the following would N)T be true in a world without scarcity5 a. There would be no need for the science of economics. b. !/eryone would ha/e all the goods and ser/ices they wanted.

Chapter 1/Ten Principles of Economics

c. There would ha/e to be an infinite supply of e/ery resource. d. There would be opportunity costs. ANS !"# c. There would ha/e to be an infinite supply of e/ery resource. T$%!# & S!'T()N# 1 *(++(',-T$# . 1=. Appro;imately what percentage of the world>s economies e;perience scarcity5 a. .4? b. 4=? c. 94? d. 1==? ANS !"# d. 1==? T$%!# & S!'T()N# 1 *(++(',-T$# 1 11. hen a society cannot produce all the goods and ser/ices people wish to ha/e it is said that the economy is e;periencing a. scarcity. b. communism. c. e;ternalities. d. market failure. ANS !"# a. scarcity. T$%!# & S!'T()N# 1 *(++(',-T$# 1 1.. +or society8 a good is not scarce if a. at least one indi/idual in society can obtain all he or she wants of the good. b. firms are producing at full capacity. c. all members of society can ha/e all they want of it. d. those who ha/e enough income can buy all they want of the good. ANS !"# c. all members of society can ha/e all they want of it. T$%!# & S!'T()N# 1 *(++(',-T$# . 10. hich product would be considered scarce5 a. Nike shoes b. &onet paintings c. 1@carat diamonds d. All of the abo/e are correct. ANS !"# d. All of the abo/e are correct. T$%!# & S!'T()N# 1 *(++(',-T$# . 13. hich of the following goods best meets the definition of scarcity5 a. air b. water in the ocean c. water in a city d. wood in a forest ANS !"# c. water in a city T$%!# & S!'T()N# 1 *(++(',-T$# . 14. !conomics is defined as the study of a. business. b. how society manages its scarce resources. c. central planning. d. go/ernment regulation. ANS !"# b. how society manages its scarce resources. T$%!# & S!'T()N# 1 *(++(',-T$# 1 16. !conomics is the study of a. how society manages its scarce resources. b. the go/ernment>s role in society. c. how a market system functions. d. how to increase production. ANS !"# a. how society manages its scarce resources. T$%!# & S!'T()N# 1 *(++(',-T$# 1 19. (n most societies8 resources are allocated by a. a single central planner. b. those who own the resources. c. those firms that use resources to pro/ide goods and ser/ices. d. the combined actions of millions of households and firms. ANS !"# d. the combined actions of millions of households and firms. T$%!# & S!'T()N# 1 *(++(',-T$# . 1:. !conomists study all of the following !2'!%T a. how people make decisions. b. how people interact with one another. c. the forces and trends that affect the economy as a whole.

Chapter 1/Ten Principles of Economics

d. how societies change o/er time. ANS !"# d. how societies change o/er time. T$%!# & S!'T()N# 1 *(++(',-T$# . 1<. hich of the following is N)T a maAor area of study for economists5 a. how people make decisions b. how countries choose national leaders c. how people interact with each other d. how forces and trends affect the o/erall economy ANS !"# b. how countries choose national leaders T$%!# & S!'T()N# 1 *(++(',-T$# . .=. The adage8 There is no such thing as a free lunch8 is used to illustrate the concept of a. tradeoffs. b. scarcity. c. producti/ity. d. efficiency. ANS !"# a. tradeoffs. T$%!# & S!'T()N# 1 *(++(',-T$# . .1. The adage8 There is no such thing as a free lunch8 means a. e/en people on welfare ha/e to pay for food. b. the cost of li/ing is always increasing. c. to get something we like8 we usually ha/e to gi/e up another thing we like. d. all costs are included in the price of a product. ANS !"# c. to get something we like8 we usually ha/e to gi/e up another thing we like. T$%!# & S!'T()N# 1 *(++(',-T$# . ... !conomists use the phrase There is no such thing as a free lunch8 to illustrate a. how inflation increases prices. b. that to get one thing8 we must gi/e up something else. c. that nothing is free in a market economy. d. that if something looks too good to be true8 it probably is. ANS !"# b. that to get one thing8 we must gi/e up something else. T$%!# & S!'T()N# 1 *(++(',-T$# . .0. hich best represents the concept represented by the adage8 There is no such thing as a free lunch5 a. &elissa can only attend the concert if she takes her sister with her. b. Greg is hungry and homeless. c. 7rian must repair the tire on his bike before he can ride it to class. d. Bendra must decide between going to 'olorado or 'ancun for spring break. ANS !"# d. Bendra must decide between going to 'olorado or 'ancun for spring break. T$%!# & S!'T()N# 1 *(++(',-T$# 0 .3. Guns and butter are used to represent the classic societal tradeoff between spending on a. durable and nondurable goods. b. imports and e;ports. c. national defense and consumer goods. d. law enforcement and agriculture. ANS !"# c. national defense and consumer goods. T$%!# & S!'T()N# 1 *(++(',-T$# . .4. 1enry decides to spend two hours playing golf rather than working at his Aob which pays C: per hour. 1enry>s tradeoff is a. the C16 he could ha/e earned working for two hours. b. nothing8 because he enAoys playing golf more than working. c. the increase in skill he obtains from playing golf for those two hours. d. nothing8 because he spent C16 for green fees to play golf. ANS !"# a. the C16 he could ha/e earned working for two hours. T$%!# & S!'T()N# 1 *(++(',-T$# . .6. hen society reDuires that firms reduce pollution8 there is a. a tradeoff because of reduced incomes to the firms> owners8 workers8 and customers. b. no tradeoff8 since e/eryone benefits from reduced pollution. c. no tradeoff for society as a whole8 since the cost of reducing pollution falls only on the firms affected by the reDuirements. d. a tradeoff only if some firms are forced to close. ANS !"# a. a tradeoff because of reduced incomes to the firms> owners8 workers8 and customers. T$%!# & S!'T()N# 1 *(++(',-T$# 0 .9. *aniel decides to spend the last two hours of the night before his economics e;am studying instead of sleeping. +or *aniel8 his tradeoff would be a. nothing8 since no dollar /alue can be put on sleep. b. nothing8 since studying would be more beneficial than sleep.

Chapter 1/Ten Principles of Economics

c. the si; hours of sleep he could ha/e had if he had gone to bed before midnight. d. the two hours of rest he would ha/e gotten. ANS !"# d. the two hours of rest he would ha/e gotten. T$%!# & S!'T()N# 1 *(++(',-T$# . .:. A tradeoff e;ists between a clean en/ironment and a higher le/el of income in that a. studies show that indi/iduals with higher le/els of income actually pollute less than low@income indi/iduals. b. to pay for pollution clean@up8 the go/ernment must increase ta;es which lowers income. c. laws that reduce pollution raise costs of production and reduce incomes. d. by employing indi/iduals to clean up pollution8 employment and income both rise. ANS !"# c. laws that reduce pollution raise costs of production and reduce incomes. T$%!# & S!'T()N# 1 *(++(',-T$# 0 .<. hich of the following would N)T be a result of laws that reDuire firms to reduce pollution5 a. lower spending by go/ernment b. higher prices to consumers c. lower wages to workers d. smaller profit to firms ANS !"# a. lower spending by go/ernment T$%!# & S!'T()N# 1 *(++(',-T$# . 0=. %ollution regulations will a. increase profit to firms. b. impose a tradeoff on society. c. allow firms to raise workers> wages. d. lower prices for consumers. ANS !"# b. impose a tradeoff on society. T$%!# & S!'T()N# 1 *(++(',-T$# . 01. hich of the following best defines efficiency5 a. absolute fairness b. eDual distribution c. minimum waste d. consumer so/ereignty ANS !"# c. minimum waste T$%!# & S!'T()N# 1 *(++(',-T$# 1 0.. hich of the following is true5 a. !fficiency refers to the siEe of the economic pieF eDuity refers to how the pie is di/ided. b. +ortunately8 go/ernment policies are designed to promote both eDuity and efficiency. c. As long as the economic pie continually gets larger8 no one will ha/e to go hungry. d. !fficiency and eDuity can both be achie/ed if the economic pie is cut into eDual pieces. ANS !"# a. !fficiency refers to the siEe of the economic pieF eDuity refers to how the pie is di/ided. T$%!# & S!'T()N# 1 *(++(',-T$# 0 00. !fficiency means that a. society is conser/ing resources in order to sa/e them for the future. b. society>s goods and ser/ices are distributed fairly among society>s members. c. society has lessened its dependence on foreign energy sources. d. society is getting the most it can from its scarce resources. ANS !"# d. society is getting the most it can from its scarce resources. T$%!# & S!'T()N# 1 *(++(',-T$# . 03. !conomists use the word eDuity to describe a situation in which a. each member of society has the same income. b. society is getting the most it can from its scarce resources. c. those in society who ha/e the least will recei/e the most. d. the benefits of society>s resources are distributed fairly among society>s members. ANS !"# d. the benefits of society>s resources are distributed fairly among society>s members. T$%!# & S!'T()N# 1 *(++(',-T$# . 04. )ne definition of eDuity would be a. eDuality. b. efficiency. c. fairness. d. similarity. ANS !"# c. fairness. T$%!# & S!'T()N# 1 *(++(',-T$# 1 06. hen go/ernment policies are being designed8 a. there is usually a tradeoff between eDuity and efficiency. b. eDuity and efficiency goals are usually independent of each other. c. eDuity can usually be achie/ed without an efficiency loss.

Chapter 1/Ten Principles of Economics

d. increasing efficiency usually results in more eDuity. ANS !"# a. there is usually a tradeoff between eDuity and efficiency. T$%!# & S!'T()N# 1 *(++(',-T$# . 09. hen go/ernment policies such as the welfare system try to help the most needy members of society8 it a. increases eDuity and reduces efficiency. b. reduces charitable contributions in an economy. c. increases the producti/ity of the needy in the society. d. causes market failure to occur. ANS !"# a. increases eDuity and reduces efficiency. T$%!# & S!'T()N# . *(++(',-T$# . 0:. hen the go/ernment implements programs such as progressi/e income ta; rates8 which of the following is likely to occur5 a. !Duity is increased and efficiency is increased. b. !Duity is increased and efficiency is decreased. c. !Duity is decreased and efficiency is increased. d. !Duity is decreased and efficiency is decreased. ANS !"# b. !Duity is increased and efficiency is decreased. T$%!# & S!'T()N# . *(++(',-T$# . 0<. hen the go/ernment attempts to cut the economic pie into more eDual slices8 a. it is easier to cut the pie8 and therefore the economy can produce a larger pie. b. the go/ernment can more easily allocate the pie to those most in need. c. the pie gets smaller8 and there will be less pie for e/eryone. d. the economy will spend too much time cutting and loses the ability to produce enough pie for e/eryone. ANS !"# c. the pie gets smaller8 and there will be less pie for e/eryone. T$%!# & S!'T()N# . *(++(',-T$# 0 3=. hen the go/ernment attempts to impro/e eDuity in an economy the result is often a. an increase in o/erall output in the economy. b. additional go/ernment re/enue since o/erall income will increase. c. an actual reduction in eDuity. d. reduced efficiency in the economy. ANS !"# d. reduced efficiency in the economy. T$%!# & S!'T()N# . *(++(',-T$# . 31. hen the go/ernment redistributes income from the rich to the poor8 a. efficiency is impro/ed8 but eDuity is not. b. both rich people and poor people benefit directly. c. people work less and produce fewer goods and ser/ices. d. rich people consume fewer goods 8 but poor people consume more goods8 resulting in no real change. ANS !"# c. people work less and produce fewer goods and ser/ices. T$%!# & S!'T()N# 1 *(++(',-T$# . 3.. (n economics8 the cost of something is a. the dollar amount of obtaining it. b. always measured in units of time gi/en up to get it. c. what you gi/e up to get it. d. usually higher than people think it will be. ANS !"# c. what you gi/e up to get it. T$%!# & S!'T()N# 1 *(++(',-T$# 1 30. hat you gi/e up to obtain an item is called your a. opportunity cost. b. e;plicit cost. c. true cost. d. direct cost. ANS !"# a. opportunity cost. T$%!# & S!'T()N# 1 *(++(',-T$# 1 33. The opportunity cost of going to college is a. the total spent on food8 clothing8 books8 transportation8 tuition8 lodging8 and other e;penses. b. the /alue of the best opportunity a student gi/es up to attend college. c. Eero for students who are fortunate enough to ha/e all of their college e;penses paid by someone else. d. Eero8 since a college education will allow a student to earn a larger income after graduation. ANS !"# b. the /alue of the best opportunity a student gi/es up to attend college. T$%!# & S!'T()N# 1 *(++(',-T$# . 34. +or most students8 the largest single cost of a college education is a. the wages gi/en up to attend school. b. tuition8 fees8 and books. c. room and board. d. transportation8 parking8 and entertainment.

Chapter 1/Ten Principles of Economics

ANS !"# a. the wages gi/en up to attend school. T$%!# & S!'T()N# 1 *(++(',-T$# . 36. The largest single cost of going to college is usually a. books. b. room and board. c. tuition. d. lost wages. ANS !"# d. lost wages. T$%!# & S!'T()N# 1 *(++(',-T$# 1 39. The opportunity cost of an item is a. the number of hours needed to earn money to buy it. b. what you gi/e up to get that item. c. usually less than the dollar /alue of the item. d. the dollar /alue of the item. ANS !"# b. what you gi/e up to get that item. T$%!# & S!'T()N# 1 *(++(',-T$# 1 3:. &allory decides to spend 0 hours working o/ertime rather than watching a /ideo with her friends. She earns C: an hour. 1er opportunity cost of working is a. the C.3 she earns working. b. the C.3 minus the enAoyment she would ha/e recei/ed from watching the /ideo. c. the enAoyment she would ha/e recei/ed had she watched the /ideo. d. nothing8 since she would ha/e recei/ed less than C.3 of enAoyment from the /ideo. ANS !"# c. the enAoyment she would ha/e recei/ed had she watched the /ideo. T$%!# & S!'T()N# 1 *(++(',-T$# 0 3<. "ussell spends an hour studying instead of playing tennis. The opportunity cost to him of studying is a. the impro/ement in his grades from studying for the hour. b. the difference between the impro/ement in his grades from studying minus the enAoyment of playing tennis. c. the enAoyment and e;ercise he would ha/e recei/ed had he played tennis. d. Eero. Since "ussell chose to study rather than to play tennis8 the /alue of studying must ha/e been greater than the /alue of playing tennis. ANS !"# c. the enAoyment and e;ercise he would ha/e recei/ed had he played tennis. T$%!# & S!'T()N# 1 *(++(',-T$# . 4=. 'ollege@age athletes who drop out of college to play professional sports a. are not rational decision makers. b. are well aware that their opportunity cost of attending college is /ery high. c. are concerned more about present circumstances than their future. d. underestimate the /alue of a college education. ANS !"# b. are well aware that their opportunity cost of attending college is /ery high. T$%!# & S!'T()N# 1 *(++(',-T$# . 41. %eople make decisions at the margin by a. following tradition. b. e;perience. c. calculating dollar costs. d. comparing costs and benefits. ANS !"# d. comparing costs and benefits. T$%!# & S!'T()N# 1 *(++(',-T$# 1 4.. The word margin means a. edge. b. distance. c. space. d. measure. ANS !"# a. edge. T$%!# & S!'T()N# 1 *(++(',-T$# 1 40. &aking decisions at the margin means that people a. make those decisions that do not impose a marginal cost. b. e/aluate how easily a decision can be re/ersed if problems arise. c. compare the marginal costs and marginal benefits of each decision. d. always calculate the marginal dollar costs for each decision. ANS !"# c. compare the marginal costs and marginal benefits of each decision. T$%!# & S!'T()N# 1 *(++(',-T$# . 43. A marginal change is a a. long@term trend. b. large8 significant adAustment. c. change for the worse8 and so is usually short@term.

Chapter 1/Ten Principles of Economics

d. small incremental adAustment. ANS !"# d. small incremental adAustment. T$%!# & S!'T()N# 1 *(++(',-T$# 1 44. hich of the following is the best e;ample of a marginal change5 a. After graduating college8 Audrey>s income increases from C4== per month to C08=== per month. b. &organ gets a raise at her part@time Aob and is now paid C9..4 per hour instead of C9.==. c. 1ousing prices in an area increase by 3=? when a new interstate is built in a small town. d. A hard freeEe wipes out half of the orange crop in +lorida and the price of orange Auice doubles. ANS !"# b. &organ gets a raise at her part@time Aob and is now paid C9..4 per hour instead of C9.==. T$%!# & S!'T()N# 1 *(++(',-T$# 0 46. hich of the following is the best e;ample of a marginal change5 a. The price of housing rose in Seattle by 4? in last year. b. Bim gets a big promotion at work. She also gets a raise from C.48=== per year to C3=8=== per year. c. &ark graduates from college and takes a Aob. 1is income increases from C1=8=== per year to C4=8=== per year. d. A drought hits the upper &idwest and the price of wheat increases from C3.== per bushel to C:.== per bushel. ANS !"# a. The price of housing rose in Seattle by 4? in last year. T$%!# & S!'T()N# 1 *(++(',-T$# 0 49. A marginal change is illustrated by which of the following5 a. Nancy retires and takes a part@time Aob. She was working 3= hours per week and now works 1= hours per week. b. State ,ni/ersity has announced that due to state budget deficits8 tuition must rise by .4? ne;t year. c. "yan mo/ed to a new apartment and now pays 3=? more rent than before. d. AriEona8 which usually recei/es 1= inches of rain per year8 recei/ed 11 inches last year. ANS !"# d. AriEona8 which usually recei/es 1= inches of rain per year8 recei/ed 11 inches last year. T$%!# & S!'T()N# 1 *(++(',-T$# 0 4:. After much consideration8 you ha/e chosen 'ancun o/er +t. -auderdale for your Spring 7reak trip this year. +or this decision to change8 which of the following must occur5 a. The marginal benefit of 'ancun must increase. b. The marginal cost of 'ancun must decrease. c. The marginal benefit of +t. -auderdale must increase. d. The marginal cost of +t. -auderdale must increase. ANS !"# c. The marginal benefit of +t. -auderdale must increase. T$%!# & S!'T()N# 1 *(++(',-T$# 0 4<. The a/erage cost per seat on the 4=@passenger +loating@)n@Air 7us company>s trip from Bansas 'ity to St. -ouis is C3=. (f no refreshments are ser/ed and 0 seats are empty8 the bus company could increase its profit only if it a. charged no less than C3= for the 0 remaining seats. b. charged more than C3= for the 0 remaining seats. c. charged any ticket price abo/e C= for the remaining seats. d. left the seats empty. ANS !"# c. charged any ticket price abo/e C= for the remaining seats. T$%!# & S!'T()N# 1 *(++(',-T$# . 6=. A rational decision maker takes an action only if the a. marginal benefit is less than the marginal cost. b. marginal benefit is greater than the marginal cost. c. a/erage benefit is greater than the a/erage cost. d. marginal benefit is greater than both the a/erage cost and the marginal cost. ANS !"# b. marginal benefit is greater than the marginal cost. T$%!# & S!'T()N# 1 *(++(',-T$# . 61. &ike has spent C4== purchasing and repairing an old fishing boat8 which he e;pects to sell for C:== once the repairs are complete. 1e disco/ers that he needs an additional repair8 which will cost C3==8 in order to complete the repairs. 1e can sell the boat as it is now for C0==. hat should he do5 a. 1e should cut his losses and take the C0==. b. 1e should ne/er sell something for less than it cost. c. 1e should complete the repairs and sell the boat. d. (t doesn>t matter which action he takesF the outcome is the same either way. ANS !"# c. 1e should complete the repairs and sell the boat. T$%!# & S!'T()N# 1 *(++(',-T$# 0 6.. Stan buys a 1<66 &ustang8 which he plans to restore and sell. 1e anticipates that the cost of the car and the repairs will be C1=8=== and that he can sell it for C108===. hen he has spent C1=8===8 he disco/ers he needs to replace the engine8 which will cost C38===. 1e can sell the car without the new engine for C<8===. Stan should a. complete the repairs and sell the car for C108===. b. cut his losses and sell the car now for C<8 ===. d. ne/er try such an e;pensi/e proAect again. c. be totally indifferent between finishing the proAect and selling the car now. ANS !"# d. be totally indifferent between finishing the proAect and selling the car now.

Chapter 1/Ten Principles of Economics

T$%!# & S!'T()N# 1 *(++(',-T$# 0 60. A donut shop sells fresh baked donuts from 4 a.m. until 0 p.m. e/ery day but Sunday. The cost of making and selling a doEen glaEed donuts is C1.==. Since this shop does not sell day@old donuts the ne;t day8 what should the manager do if he still has 1= doEen left at .#0= p.m.5 a. lower the price of the remaining donuts e/en if the price falls below C1.== b. lower the price of the remaining donuts as long as it>s more than C1.== c. -ower the price on all donuts so they will all be sold earlier in the day d. throw them away and produce 1= fewer doEen tomorrow ANS !"# a. lower the price of the remaining donuts e/en if the price falls below C1.== T$%!# & S!'T()N# 1 *(++(',-T$# 0 63. !conomists understand that people respond to a. laws. b. incenti/es. c. threats more than rewards. d. positi/es8 but not negati/es. ANS !"# b. incenti/es. T$%!# & S!'T()N# 1 *(++(',-T$# 1 64. hen policymakers make policies that change the costs and benefits that people face8 they can a. alter beha/iors. b. make people ignore incenti/es. c. create inflation. d. reduce go/ernment re/enue. ANS !"# a. alter beha/iors. T$%!# S!'T()N# 1 *(++(',-T$# . 66. "alph Nader>s book Unsafe at Any Speed caused 'ongress to reDuire a. safety glass in all new cars. b. seat belts in all new cars. c. air bags in all new cars. d. stricter drunk dri/ing laws in all states. ANS !"# b. seat belts in all new cars. T$%!# & S!'T()N# 1 *(++(',-T$# 1 69. ,.S. laws reDuiring that dri/ers wear seat belts ha/e resulted in a. a reduction in both dri/er deaths and pedestrian deaths. b. fewer accidents and fewer deaths per accident. c. fewer dri/er deaths8 fewer accidents and fewer pedestrian deaths. d. little change in the number of dri/er deaths8 but more accidents and more pedestrian deaths. ANS !"# d. little change in the number of dri/er deaths8 but more accidents and more pedestrian deaths. T$%!# & S!'T()N# 1 *(++(',-T$# . 6:. )ne effect of a go/ernment@imposed seat belt law has been a. fewer pedestrian deaths. b. safer dri/ing. c. an increase in the number of accidents. d. that e/eryone now wears seat belts. ANS !"# c. an increase in the number of accidents. T$%!# & S!'T()N# 1 *(++(',-T$# 1 6<. hich of the following does N)T result when seat belt laws alter a dri/er>s cost@benefit calculation5 a. +ewer dri/ers are killed. b. &ore pedestrians are killed. c. *ri/ers dri/e faster. d. &ore accidents occur. ANS !"# a. +ewer dri/ers are killed. T$%!# & S!'T()N# 1 *(++(',-T$# . 9=. (n the former So/iet ,nion8 producers were paid for meeting output targets8 not for selling products. ,nder those circumstances8 what were the economic incenti/es for producers5 a. to produce good Duality products so that society benefits from the resources used b. to conser/e on costs8 so as to maintain efficiency in the economy c. to produce enough to meet the output target8 without regard for Duality or cost d. to produce those products that society desires most ANS !"# c. to produce enough to meet the output target8 without regard for Duality or cost T$%!# & S!'T()N# 1 *(++(',-T$# . 91. $our professor lo/es her work8 teaching economics. She has been offered other positions in the corporate world making .4 percent more8 but has decided to stay in teaching. 1er decision would not change unless the marginal a. cost of teaching increased. b. benefit of teaching increased.

Chapter 1/Ten Principles of Economics

c. cost of teaching decreased. d. cost of a corporate Aob increased. ANS !"# a. cost of teaching increased. T$%!# & S!'T()N# 1 *(++(',-T$# 0 9.. Suppose your management professor has been offered a corporate Aob with a 0=? pay increase. 1e has decided to take the Aob. +or him8 the marginal a. cost of lea/ing was greater than the marginal benefit. b. benefit of lea/ing was greater than the marginal cost. c. benefit of teaching was greater than the marginal cost. d. All of the abo/e are correct. ANS !"# b. benefit of lea/ing was greater than the marginal cost. T$%!# & S!'T()N# 1 *(++(',-T$# 0 90. hen policymakers implement policies that alter incenti/es8 they a. ha/e carefully weighed the direct and indirect effects of the policy. b. often do not always get the intended result. c. ha/e considered all possible effects of the incenti/e changes when they de/eloped the policy8 which will make the policy effecti/e. d. generally correctly anticipate the indirect effects8 but often miss the direct effects. ANS !"# b. often do not always get the intended result. T$%!# & S!'T()N# 1 *(++(',-T$# . 93. Trade can benefit a family a. by allowing the family to buy a greater /ariety of goods and ser/ices at a lower cost. b. by allowing each person to specialiEe in the acti/ities he or she does best. c. only if the family is not in economic competition with other families. d. All of the abo/e are correct. e. 7oth a and b are correct. ANS !"# e. 7oth a and b are correct. T$%!# & S!'T()N# . *(++(',-T$# . 94. hich is the most accurate statement about trade5 a. Trade can make e/ery 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. ANS !"# a. Trade can make e/ery nation better off. T$%!# & S!'T()N# . *(++(',-T$# . 96. !ach of the following statements about trade is true !2'!%T a. Trade increases competition. b. )ne country wins and one country loses. c. The ,nited States can benefit from trade with any country. d. Trade allows people to buy a greater /ariety of goods and ser/ices at lower cost. ANS !"# b. )ne country wins and one country loses. T$%!# & S!'T()N# . *(++(',-T$# . 99. 7enefits from trade would N)T include a. the ability to specialiEe. b. a greater /ariety of goods and ser/ices becoming a/ailable. c. less competition. d. lower prices. ANS !"# c. less competition. T$%!# & S!'T()N# . *(++(',-T$# . 9:. Trade between the ,nited States and (ndia a. benefits both the ,nited States and (ndia. b. is a losing proposition for the ,nited States because (ndia has cheaper labor. c. is like a sports contest# one side wins and the other side loses. d. is a losing proposition for (ndia because ,.S. workers are more producti/e. ANS !"# a. benefits both the ,nited States and (ndia. T$%!# & S!'T()N# . *(++(',-T$# . 9<. 'anada can benefit from trade a. only with nations which can produce goods 'anada cannot produce. b. with any nation. c. with any nation not in economic competition with 'anada. d. only with less de/eloped nations. ANS !"# b. with any nation. T$%!# & S!'T()N# . *(++(',-T$# . :=. (f Gapan chooses to engage in trade8 it

Chapter 1/Ten Principles of Economics

a. will only benefit if it trades with countries which produce goods it cannot produce. b. cannot benefit if it trades with less de/eloped countries. c. should first attempt to produce the good itself. d. can benefit by trading with any other country. ANS !"# d. can benefit by trading with any other country. T$%!# & S!'T()N# . *(++(',-T$# . :1. (f the ,nited States decides to trade with &e;ico8 we know that a. &e;ico will be better off8 but trade with a less de/eloped country could not help the ,nited States. b. it will not benefit &e;ico because workers in the ,nited States are more producti/e. c. &e;ico and the ,nited States can both be better off. d. it will not benefit either country because they are too different culturally. ANS !"# c. &e;ico and the ,nited States can both be better off. T$%!# & S!'T()N# . *(++(',-T$# . :.. (f +rance is better than 7elarus at producing wine8 but 7elarus is better than +rance at producing crystal8 a. 7elarus should sell crystal to +rance8 and should buy +rench wine. b. 7elarus should impose a tariff on +rench wine in order to protect Aobs in the 7elarusian crystal industry. c. 7elarus should subsidiEe its wine industry so that it can compete with +rench wine. d. 7elarus should put a Duota on the amount of +rench wine imported. ANS !"# a. 7elarus should sell crystal to +rance8 and should buy +rench wine. T$%!# & S!'T()N# . *(++(',-T$# 0 :0. hich of the following is the best statement about markets5 a. &arkets are usually a good way to organiEe economic acti/ity. b. &arkets are usually inferior to central planning as a way to organiEe economic acti/ity. c. &arkets fail and are therefore not an acceptable way to organiEe economic acti/ity. d. &arkets are a good way to organiEe economic acti/ity in de/eloped nations8 but not in less de/eloped nations. ANS !"# a. &arkets are usually a good way to organiEe economic acti/ity. T$%!# & S!'T()N# . *(++(',-T$# . :3. hich would N)T be true in a market economy5 a. +irms decide whom to hire and what to produce. b. Go/ernment policies do not affect the decisions of firms and households. c. 1ouseholds decide which firms to work for and what to buy with their incomes. d. %rofit and self@interest guide the decisions of firms and households. ANS !"# b. Go/ernment policies do not affect the decisions of firms and households. T$%!# & S!'T()N# . *(++(',-T$# . :4. The decisions of firms and households are guided by profit and self@interest in a a. command economy. b. traditional economy. c. market economy. d. All of the abo/e are correct. ANS !"# c. market economy. T$%!# & S!'T()N# . *(++(',-T$# 1 :6. (n a market economy8 economic acti/ity is guided by a. the go/ernment. b. corporations. c. central planners. d. prices. ANS !"# d. prices. T$%!# & S!'T()N# . *(++(',-T$# . :9. The term used to describe a situation in which markets fail to allocate resources efficiently is called a. economic meltdown. b. market failure. c. corporate bankruptcy. d. diseDuilibrium. ANS !"# b. market failure. T$%!# & S!'T()N# . *(++(',-T$# 1 ::. (n a market economy decisions are guided by indi/idual self@interest. 1ence8 there is a. still the ability to achie/e desirable economic well@being for society as a whole. b. a strong need for go/ernment inter/ention in the market. c. less efficiency in market economies than in command economies. d. more need for a strong legal system to control indi/idual greed. ANS !"# a. still the ability to achie/e desirable economic well@being for society as a whole. T$%!# & S!'T()N# . *(++(',-T$# 0 :<. %rices direct economic acti/ity in a market economy by a. influencing the actions of buyers and sellers.

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Chapter 1/Ten Principles of Economics

11

b. reducing scarcity of the goods and ser/ices produced. c. eliminating the need for go/ernment inter/ention. d. allocating goods and ser/ices produced in the most eDuitable way. ANS !"# a. influencing the actions of buyers and sellers. T$%!# & S!'T()N# . *(++(',-T$# . <=. (n a market economy8 prices reflect the a. /alue of a good to society. b. cost to society of making the good. c. Duantity society will ultimately choose to produce. d. 7oth a and b are correct. ANS !"# d. 7oth a and b are correct. T$%!# & S!'T()N# . *(++(',-T$# . <1. An e;ample of market power is a. a fast food restaurant in a college town. b. a wheat farmer in Bansas. c. the last gas station in New &e;ico for 1== miles. d. a shoe store in Bentucky. ANS !"# c. the last gas station in New &e;ico for 1== miles. T$%!# & S!'T()N# . *(++(',-T$# . <.. An e;ample of a firm with market power is a a. deli in New $ork. b. cable TH pro/ider in St. -ouis. c. clothing store in -os Angeles. d. farmer in (llinois. ANS !"# b. cable TH pro/ider in St. -ouis. T$%!# & S!'T()N# . *(++(',-T$# . <0. )ne ad/antage market economies ha/e o/er central planning is that market economies a. pro/ide an eDual distribution of goods and ser/ices to consumers. b. establish go/ernment economic control. c. sol/e the problem of scarcity. d. are more efficient. ANS !"# d. are more efficient. T$%!# & S!'T()N# . *(++(',-T$# . <3. A market economy differs from a communist economy in that economic decisions are made by a. a central planner. b. millions of firms and households. c. primarily the go/ernment. d. large corporations. ANS !"# b. millions of firms and households. T$%!# & S!'T()N# . *(++(',-T$# 1 <4. The collapse of communism in the So/iet ,nion and !astern !urope took place in the a. 1<6=s b. 1<9=s c. 1<:=s d. 1<<=s ANS !"# c. 1<:=s T$%!# & S!'T()N# . *(++(',-T$# 1 <6. %rior to its collapse8 communist countries worked on the premise that economic well@being could be organiEed only throughIby a. a market economy. b. go/ernment central planners. c. go/ernment@imposed pri/ate monopolies. d. increased competition. ANS !"# b. go/ernment central planners. T$%!# & S!'T()N# . *(++(',-T$# . <9. hich of the following obser/ations was made famous by Adam Smith in his book The Wealth of Nations? a. There is no such thing as a free lunch. b. %eople buy more when prices are low than when prices are high. c. No matter how much people earn8 they tend to spend more than they earn. d. 1ouseholds and firms interacting in markets are guided by an in/isible hand that leads them to desirable market outcomes. ANS !"# d. 1ouseholds and firms interacting in markets are guided by an in/isible hand that leads them to desirable market outcomes. T$%!# & S!'T()N# . *(++(',-T$# .

Chapter 1/Ten Principles of Economics

<:. The term in/isible hand was coined by a. Adam Smith. b. *a/id "icardo. c. Gohn &aynard Beynes. d. Thomas Gefferson. ANS !"# a. Adam Smith. T$%!# & S!'T()N# . *(++(',-T$# 1 <<. The in/isible hand directs economic acti/ity through a. ad/ertising. b. prices. c. central planning. d. go/ernment regulations. ANS !"# b. prices. T$%!# & S!'T()N# . *(++(',-T$# . 1==. The in/isible hand>s ability to coordinate the decisions of the firms and households in the economy can be hindered by a. go/ernment actions that distort prices. b. increased competition in the market. c. e;tended periods of unemployment. d. a dramatic reduction in consumer spending. ANS !"# a. go/ernment actions that distort prices. T$%!# & S!'T()N# . *(++(',-T$# 0 1=1. Adam Smith>s book The Wealth of Nations was published in a. 16<.. b. 1996. c. 1:16. d. 1<06. ANS !"# b. 1996. T$%!# & S!'T()N# . *(++(',-T$# 1 1=.. 7oth The Wealth of Nations and the *eclaration of (ndependence share the point of /iew that a. e/ery person is entitled to life8 liberty8 and the pursuit of happiness. b. indi/iduals are best left to their own de/ices without the go/ernment guiding their actions. c. the go/ernment has a central role in organiEing a market economy. d. because of human nature a strong legal system is necessary for a market system to sur/i/e. ANS !"# b. indi/iduals are best left to their own de/ices without the go/ernment guiding their actions. T$%!# & S!'T()N# . *(++(',-T$# . 1=0. The in/isible hand works to promote general well@being in the economy primarily through a. go/ernment inter/ention. b. the political process. c. self interest. d. altruism. ANS !"# c. self interest. T$%!# & S!'T()N# . *(++(',-T$# 1 1=3. Ta;es ad/ersely affect the allocation of resources in society because a. they do not always fall more hea/ily on the rich. b. the ta;es collected are not enough to finance go/ernment spending. c. not e/eryone pays ta;es. d. they distort prices and thus the decisions of households and firms. ANS !"# d. they distort prices and thus the decisions of households and firms. T$%!# & S!'T()N# . *(++(',-T$# . 1=4. A primary function of prices in a market economy is to pro/ide participants with a. economic information. b. spending limits. c. accounting capabilities. d. an eDuitable distribution of goods. ANS !"# a. economic information. T$%!# & S!'T()N# . *(++(',-T$# . 1=6. hen the go/ernment pre/ents prices from adAusting naturally to supply and demand8 a. it stabiliEes the economy by reducing market uncertainties. b. it ad/ersely affects the allocation of resources. c. the impro/ement in eDuity Austifies the reduction in efficiency. d. the impro/ement in efficiency Austifies the reduction in eDuity. ANS !"# b. it ad/ersely affects the allocation of resources. T$%!# & S!'T()N# . *(++(',-T$# 0 1=9. )ne component necessary for markets to work is

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Chapter 1/Ten Principles of Economics

a. go/ernment inter/ention. b. a bene/olent society. c. property rights. d. abundant resources. ANS !"# c. property rights. T$%!# & S!'T()N# . *(++(',-T$# . 1=:. )ne necessary role of go/ernment in a market economy is to a. ta; goods and ser/ices which are most desired by consumers. b. maintain welfare programs for the poor. c. pro/ide ser/ices such as mail deli/ery. d. enforce property rights. ANS !"# d. enforce property rights. T$%!# & S!'T()N# . *(++(',-T$# . 1=<. The go/ernment enforces property rights by a. reDuiring property owners to pay property ta;es. b. pro/iding police and courts. c. allowing people to decide whether or not they wish to own property. d. pro/iding a system of recording property deeds. ANS !"# b. pro/iding police and courts. T$%!# & S!'T()N# . *(++(',-T$# 1 11=. ithout go/ernment>s protection of property rights a. businesses would ha/e less incenti/e to pro/ide goods and ser/ices. b. there would be less go/ernment regulation of businesses and prices would be lower for consumers. c. ta;es would be lower causing less market inefficiencies. d. businesses would ha/e more freedom with production processes. ANS !"# a. businesses would ha/e less incenti/e to pro/ide goods and ser/ices. T$%!# & S!'T()N# . *(++(',-T$# 0 111. The term market failure refers to a. a situation in which the market on its own fails to allocate resources efficiently. b. an unsuccessful ad/ertising campaign which reduces buyer demand. c. a situation in which competition among firms becomes ruthless. d. a firm which is forced out of business because of losses. ANS !"# a. a situation in which the market on its own fails to allocate resources efficiently. T$%!# & S!'T()N# . *(++(',-T$# . 11.. hich of the following is N)T a reason for the go/ernment to inter/ene in the market5 a. to promote efficiency b. to enforce property rights c. to promote eDuity d. to protect an industry ANS !"# d. to protect an industry T$%!# & S!'T()N# . *(++(',-T$# . 110. Two reasons for a go/ernment to inter/ene in a market are to a. raise re/enues and to promote stability. b. promote eDuity and to promote efficiency. c. promote eDuity and to promote stability. d. promote efficiency and to promote stability. ANS !"# b. promote eDuity and to promote efficiency. T$%!# & S!'T()N# . *(++(',-T$# . 113. 'auses of market failure include a. e;ternalities and market power. b. market power and incorrect forecasts of consumer demand. c. e;ternalities and foreign competition. d. incorrect forecasts of consumer demand and foreign competition. ANS !"# a. e;ternalities and market power. T$%!# & S!'T()N# . *(++(',-T$# . 114. &arket failure can be caused by a. low consumer demand. b. go/ernment inter/ention and price controls. c. e;ternalities and market power. d. high prices and foreign competition. ANS !"# c. e;ternalities and market power. T$%!# & S!'T()N# . *(++(',-T$# . 116. An e;ternality is the impact of a. one person>s actions on the well@being of a bystander.

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Chapter 1/Ten Principles of Economics

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b. a person>s actions on that person>s well@being. c. society>s decisions on the well@being of society. d. society>s decisions on the well@being of one person in the society. ANS !"# a. one person>s actions on the well@being of a bystander. T$%!# & . S!'T()N# . *(++(',-T$# 1 119. An e;ample of an e;ternality is the impact of a. bad weather on the income of farmers. b. the personal income ta; on a person>s ability to purchase goods and ser/ices. c. pollution from a factory on the health of people in the /icinity of the factory. d. increases in health care costs on the health of indi/iduals in society. ANS !"# c. pollution from a factory on the health of people in the /icinity of the factory. T$%!# & S!'T()N# . *(++(',-T$# . 11:. hich of the following is most likely to generate an e;ternality5 a. Teachers at a local high school ha/e piEEa deli/ered e/ery +riday for lunch. b. A young man from a small town attends medical school to become a doctor. c. A newlywed couple buys a TH for their family room. d. Gohn buys a tractor to mow his newly purchased 4@acre lot. ANS !"# b. A young man from a small town attends medical school to become a doctor. T$%!# & S!'T()N# . *(++(',-T$# 0 11<. (f an e;ternality is present in a market8 economic efficiency may be enhanced by a. go/ernment inter/ention. b. increased competition. c. better informed market participants. d. more defined property rights. ANS !"# a. go/ernment inter/ention. T$%!# & S!'T()N# . *(++(',-T$# . 1.=. (f a copper refinery does N)T bear the entire cost of the smoke it emits8 it will a. not emit any smoke so as to a/oid the entire cost of the smoke. b. emit lower le/els of smoke. c. emit an acceptable le/el of smoke. d. emit too much smoke. ANS !"# d. emit too much smoke. T$%!# & S!'T()N# . *(++(',-T$# . 1.1. A market economy rewards people according to a. their need for goods and ser/ices. b. how willing they are to work. c. their ability to produce things that other people are willing to pay for. d. their ability to produce things of cultural importance. ANS !"# c. their ability to produce things that other people are willing to pay for. T$%!# & S!'T()N# . *(++(',-T$# . 1... hich of these consumption acti/ities will most likely impose an e;ternal cost5 a. An e;ecuti/e plays a /igorous game of golf. b. A student in a dorm plays her '*s at 1.= decibels late at night. c. A young mother e;ercises to an aerobics /ideo. d. A construction worker eats a sandwich during his lunch break. ANS !"# b. A student in a dorm plays her '*s at 1.= decibels late at night. T$%!# & S!'T()N# . *(++(',-T$# . 1.0. hich of these acti/ities will most likely result in an e;ternal benefit5 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 /acant lot ne;t to her house. c. An e;ecuti/e purchases a book to read on a business trip. d. A ten@year@old buys new Nikes with his allowance money he has sa/ed. ANS !"# b. An elderly woman plants a flower garden on the /acant lot ne;t to her house. T$%!# & S!'T()N# . *(++(',-T$# . 1.3. (f education produces e;ternal benefits for society8 which of the following might N)T be an appropriate policy for society to establish regarding education5 a. ta; incenti/es for schooling b. mandatory minimum le/els of education c. programs which promote the hiring of high school dropouts d. public subsidies of education ANS !"# c. programs which promote the hiring of high school dropouts T$%!# & S!'T()N# . *(++(',-T$# . 1.4. (f a sawmill creates too much air pollution8 a. interference by the go/ernment will surely make the matter worse.

Chapter 1/Ten Principles of Economics

b. a sense of social responsibility will cause the owners of the mill to reduce pollution. c. the go/ernment can raise economic well@being by pro/iding health care to those affected by the pollution. d. the go/ernment can raise economic well@being through en/ironmental regulation. ANS !"# d. the go/ernment can raise economic well@being through en/ironmental regulation. T$%!# & S!'T()N# . *(++(',-T$#. 1.6. hen a single entity has the ability to influence market prices8 there is a. competition. b. market power. c. efficiency. d. producti/ity. ANS !"# b. market power. T$%!# & S!'T()N# . *(++(',-T$#1 1.9. &arket power refers to the a. power of a single person or group to influence market prices. b. ability of a person or group of people to successfully market new products. c. power of the go/ernment to regulate a market. d. relati/e importance of a market to the o/erall economy. ANS !"# a. power of a single person or group to influence market prices. T$%!# & S!'T()N# . *(++(',-T$#1 1.:. An e;ample of a monopoly would be a. a Aewelry store in &iami8 +lorida. b. a sou/enir shop in 'ancun8 &e;ico. c. an electric company in *elight8 Arkansas. d. a doctor in *allas8 Te;as. ANS !"# c. an electric company in *elight8 Arkansas. T$%!# & S!'T()N# . *(++(',-T$# . 1.<. hich of the following businesses most likely has market power5 a. a furniture store in Greensboro8 North 'arolina. b. a /ineyard in the Napa Halley of 'alifornia. c. a maple sugar candy store in 7urlington8 Hermont. d. a hospital in Bearney8 Nebraska. ANS !"# d. a hospital in Bearney8 Nebraska. T$%!# & S!'T()N# . *(++(',-T$# . 10=. hich is the most correct statement about the in/isible hand5 a. The in/isible hand always ensures both eDuity and efficiency. b. The in/isible hand cannot ensure either eDuity or efficiency. c. The in/isible hand is more effecti/e at ensuring efficiency than it is at ensuring eDuity. d. The in/isible hand is more effecti/e at ensuring eDuity than it is at ensuring efficiency. ANS !"# c. The in/isible hand is more effecti/e at ensuring efficiency than it is at ensuring eDuity. T$%!# & S!'T()N# . *(++(',-T$# 0 101. According to Adam Smith8 the success of decentraliEed market economies is primarily due to a. the basic bene/olence of society. b. society>s Austice JlegalK system. c. indi/iduals> self@interest. d. basic human sur/i/al instincts. ANS !"# c. indi/iduals> self@interest. T$%!# & S!'T()N# . *(++(',-T$# . 10.. The self@interest of the participants in an economy is guided into promoting general economic self@interest by a. the in/isible hand. b. market power. c. go/ernment inter/ention. d. property rights. ANS !"# a. the in/isible hand. T$%!# & S!'T()N# . *(++(',-T$# 1 100. (n the ,nited States8 higher income ta; rates on rich people could be Austified on the basis of a. market efficiency. b. the lack of other sources of go/ernment re/enue. c. eDuity for society. d. go/ernment bias against the wealthy. ANS !"# c. eDuity for society. T$%!# & S!'T()N# . *(++(',-T$# . 103. The primary determinant of a country>s standard of li/ing is a. the ability to reduce foreign competition. b. its ability to produce goods and ser/ices.

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Chapter 1/Ten Principles of Economics

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c. the total supply of money in the economy. d. the a/erage age of the country>s labor force. ANS !"# b. its ability to produce goods and ser/ices. T$%!# & S!'T()N# 0 *(++(',-T$# . 104. (n .=== the a/erage American had an income of about a. C038===. b. C.<8===. c. C.=8===. d. C148===. ANS !"# a. C038===. T$%!# & S!'T()N# 0 *(++(',-T$# 1 106. (n the ,nited States8 incomes ha/e historically grown about .? per year. At this rate incomes will double e/ery a. 1= years. b. .4 years. c. 04 years. d. 4= years. ANS !"# c. 04 years. T$%!# & S!'T()N# 0 *(++(',-T$# . 109. The income of a typical worker in a country is most closely linked to which of the following5 a. population b. producti/ity c. the number of labor unions d. go/ernment policies ANS !"# b. producti/ity T$%!# & S!'T()N# 0 *(++(',-T$# . 10:. (f the a/erage income of an Australian is higher than the a/erage income of a "ussian8 it is most likely because a. producti/ity is higher in Australia than in "ussia. b. Australia has a more industrial economy than "ussia. c. there is more competition in Australia than in "ussia. d. labor unions are more aggressi/e in Australia than in "ussia. ANS !"# a. producti/ity is higher in Australia than in "ussia. T$%!# & S!'T()N# 0 *(++(',-T$# 0 10<. Suppose that the a/erage income of a Benyan is higher than the a/erage income of a South African. $ou might conclude that a. South African firms are faced with stricter go/ernment regulations than Benyan firms. b. total income is di/ided among fewer workers in Benya since it has a smaller labor force than South Africa. c. Benya>s climate allows for longer growing seasons and therefore Benya can produce large Duantities of grain. d. producti/ity in Benya is higher than in South Africa. ANS !"# d. producti/ity in Benya is higher than in South Africa. T$%!# & S!'T()N# 0 *(++(',-T$# 0 13=. A typical worker in (taly can produce .3 units of product in an : hour day8 where a typical worker in %oland produces .4 units of product in a 1= hour day. e can conclude that a. worker producti/ity in %oland is higher than in (taly. b. the standard of li/ing will be higher in (taly than in %oland. c. producti/ity for the %olish worker is 0 units per hour and . 1I. units per hour for the (talian worker. d. there will be no difference between the standard of li/ing in (taly and %oland. ANS !"# b. the standard of li/ing will be higher in (taly than in %oland. T$%!# & S!'T()N# 0 *(++(',-T$# 131. A worker in 7angladesh can earn C1 per day making cotton cloth on a hand loom. A worker in the ,nited States can earn C1== per day making cotton cloth with a mechanical loom. hat accounts for the difference in wages5 a. ,.S. te;tile workers belong to a union. b. There is little demand for cotton cloth in 7angladesh and great demand in the ,.S. c. -abor is more producti/e making cotton cloth with a mechanical loom than with a hand loom. d. 7angladesh has a low@wage policy to make its te;tile industry more competiti/e in world markets. ANS !"# c. -abor is more producti/e making cotton cloth with a mechanical loom than with a hand loom. T$%!# & S!'T()N# 0 *(++(',-T$# 0 13.. )/er the past century8 the a/erage income in the ,nited States has risen a. twofold. b. fi/efold. c. eightfold. d. tenfold. ANS !"# c. eightfold. T$%!# & S!'T()N# 0 *(++(',-T$# 1 130. (n the ,nited States8 incomes ha/e historically grown a. about 1= percent per year.

Chapter 1/Ten Principles of Economics

b. about 4 percent per year. c. about . percent per year. d. about =.4 percent per year. ANS !"# c. about . percent per year. T$%!# & S!'T()N# 0 *(++(',-T$# 1 133. Almost all /ariation in li/ing standards is attributable to differences in countries> a. population growth rates. b. endowments of natural resources. c. national go/ernment budgets. d. producti/ity. ANS !"# d. producti/ity. T$%!# & S!'T()N# 0 *(++(',-T$# . 134. %roducti/ity is defined as the a. amount of goods and ser/ices produced from each hour of a worker>s time. b. number of workers reDuired to produce a gi/en amount of goods and ser/ices. c. amount of labor which can be sa/ed by replacing workers with machines. d. actual amount of effort workers put into an hour of working time. ANS !"# a. amount of goods and ser/ices produced from each hour of a worker>s time. T$%!# & S!'T()N# 0 *(++(',-T$# 1 136. The amount of goods and ser/ices produced from each hour of a worker>s time is called a. total output. b. producti/ity. c. marginal product. d. efficiency. ANS !"# b. producti/ity. T$%!# & S!'T()N# 0 *(++(',-T$# 1 139. A direct or positi/e relationship e;ists between a country>s a. producti/ity and its standard of li/ing. b. go/ernment spending and its ta; rates. c. total population and its per@capita income. d. prices for its goods and ser/ices and its e;ports. ANS !"# a. producti/ity and its standard of li/ing. T$%!# & S!'T()N# 0 *(++(',-T$# . 13:. The historical rise in li/ing standards of American workers is primarily a result of a. the influence of labor unions. b. tariff protection imposed by the ,.S. go/ernment. c. the enactment of minimum@wage laws. d. the rise in labor producti/ity. ANS !"# d. the rise in labor producti/ity. T$%!# & S!'T()N# 0 *(++(',-T$# . 13<. (f the go/ernment wanted to enact a policy to increase li/ing standards in the country8 it might a. allow corporate ta; write@offs for money spent on worker safety. b. make it more difficult to recei/e unemployment benefits. c. increase educational opportunities for workers. d. prohibit unions from organiEing. ANS !"# c. increase educational opportunities for workers. T$%!# & S!'T()N# 0 *(++(',-T$# . 14=. The slow growth of ,.S. incomes during the 1<9=s and 1<:=s can best be e;plained by a. unstable economic conditions in !astern !urope. b. increased competition from abroad. c. a decline in the rate of increase in ,.S. producti/ity. d. a strong ,.S. dollar abroad8 hurting ,.S. e;ports. ANS !"# c. a decline in the rate of increase in ,.S. producti/ity. T$%!# & S!'T()N# 0 *(++(',-T$# . 141. To impro/e li/ing standards8 policymakers should a. impose restriction on foreign competition. b. formulate policies designed to increase producti/ity. c. impose tougher immigration policies. d. pro/ide ta; breaks for the middle class. ANS !"# b. formulate policies designed to increase producti/ity. T$%!# & S!'T()N# 0 *(++(',-T$# . 14.. To increase li/ing standards8 public policy should a. ensure that workers are well educated and ha/e the necessary tools and technology. b. make unemployment benefits more liberal.

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Chapter 1/Ten Principles of Economics

c. mo/e workers into Aobs directly from high school. d. ensure that workers ha/e access to union membership and benefits. ANS !"# a. ensure that workers are well educated and ha/e the necessary tools and technology. T$%!# & S!'T()N# 0 *(++(',-T$# . 140. To raise producti/ity8 policymakers could a. increase spending on education. b. pro/ide ta; credits to firms for capital impro/ements. c. fund research and de/elopment. d. 7oth a and c are correct. e. All of the abo/e are correct. ANS !"# e. All of the abo/e are correct. T$%!# & S!'T()N# 0 *(++(',-T$# . 143. An increase in the o/erall le/el of prices in an economy is referred to as a. economic growth. b. inflation. c. monetary policy. d. supply shocks ANS !"# b. inflation. T$%!# & S!'T()N# 0 *(++(',-T$# 1 144. (nflation is defined as a. a period of rising producti/ity in the economy. b. a period of rising income in the economy. c. an increase in the o/erall le/el of output in the economy. d. an increase in the o/erall le/el of prices in the economy. ANS !"# d. an increase in the o/erall le/el of prices in the economy. T$%!# & S!'T()N# 0 *(++(',-T$# 1 146. hen the German go/ernment increased the Duantity of money in the German economy in the 1<.=s8 a. Germany e;perienced hyperinflation. b. many people in Germany became rich. c. unemployment increased. d. Germany was able to repay all its foreign debts. ANS !"# a. Germany e;perienced hyperinflation. T$%!# & S!'T()N# 0 *(++(',-T$# 1 149. *uring the early 1<.=s in Germany8 prices a. doubled annually. b. doubled monthly. c. tripled monthly. d. tripled annually. ANS !"# c. tripled monthly. T$%!# & S!'T()N# 0 *(++(',-T$# . 14:. )ne of the worst episodes of inflation occurred in a. the ,nited States in the 1<6=>s. b. Argentina in the 1<4=>s. c. "ussia in the 1<0=>s. d. Germany in the 1<.=>s. ANS !"# d. Germany in the 1<.=s. T$%!# & S!'T()N# 0 *(++(',-T$# . 14<. (n the ,nited States8 the o/erall le/el of prices more than doubled during the a. 1<4=s. b. 1<6=s. c. 1<9=s. d. 1<:=s. ANS !"# c. 1<9=s. T$%!# & S!'T()N# 0 *(++(',-T$# 1 16=. -arge or persistent inflation is almost always caused by a. an increase in demand for domestic production. b. growth in the Duantity of money. c. foreign competition. d. higher worker producti/ity. ANS !"# b. growth in the Duantity of money. T$%!# & S!'T()N# 0 *(++(',-T$# . 161. %resident Gerald +ord referred to inflation as a. the national thief. b. a blight on our nation>s economy.

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Chapter 1/Ten Principles of Economics

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c. public enemy number one. d. a torpedo that could sink our economy. ANS !"# c. public enemy number one. T$%!# & S!'T()N# 0 *(++(',-T$# . 16.. The person who referred to inflation as public enemy number one was a. Gerald +ord. b. Alan Greenspan. c. "ichard Ni;on. d. Gohn +. Bennedy. ANS !"# a. Gerald +ord. T$%!# & S!'T()N# 0 *(++(',-T$# 1 160. (n the 1<<=s8 inflation in the ,nited States a. was almost Eero. b. was about 0 percent per year. c. approached double digits. d. was caused by too much consumer spending. ANS !"# b. was about 0 percent per year. T$%!# & S!'T()N# 0 *(++(',-T$# . 163. (nflation causes a. incomes to fall. b. producti/ity to increase. c. the go/ernment to lower ta;es. d. the /alue of money to fall. ANS !"# d. the /alue of money to fall. T$%!# & S!'T()N# 0 *(++(',-T$# . 164. hich of the following is the most correct statement about the relationship between inflation and unemployment5 a. (n the short run8 reducing inflation is associated with falling unemployment. b. (n the short run8 reducing inflation is associated with rising unemployment. c. (n the long run8 reducing inflation is associated with falling unemployment. d. (n the long run8 reducing inflation is associated with rising unemployment. ANS !"# b. (n the short run8 reducing inflation is associated with rising unemployment. T$%!# & S!'T()N# 0 *(++(',-T$# 0 166. The cur/e that illustrates the tradeoff between inflation and unemployment is called the a. -affer cur/e. b. -orenE cur/e. c. %hillips cur/e. d. *emand cur/e. ANS !"# c. %hillips cur/e. T$%!# & S!'T()N# 0 *(++(',-T$# 1 169. (n the short run8 the %hillips cur/e illustrates a. the tradeoff between inflation and unemployment. b. the tradeoff between eDuity and efficiency. c. labor producti/ity in an economy. d. the le/el of go/ernment inter/ention in a market economy. ANS !"# a. the tradeoff between inflation and unemployment. T$%!# & S!'T()N# 0 *(++(',-T$# . 16:. Although the %hillips cur/e is contro/ersial8 most economists belie/e that a. society faces a tradeoff between unemployment and inflation in the short run only. b. society faces a tradeoff between unemployment and inflation in the long run only. c. no tradeoff e;ists between unemployment and inflation. d. society faces a continuous tradeoff between unemployment and inflation. ANS !"# a. society faces a tradeoff between unemployment and inflation in the short run only. T$%!# & S!'T()N# 0 *(++(',-T$# 0 16<. %olicymakers can influence the combination of inflation and unemployment the economy e;periences by adAusting each of the following !2'!%T a. ta;es. b. go/ernment spending. c. the money supply. d. market prices. ANS !"# d. market prices. T$%!# & S!'T()N# 0 *(++(',-T$# . 19=. (n the early 1<:=s8 ,.S. economic policy was directed toward reducing inflation. hat would you assume about inflation and unemployment during this period5 a. (nflation fell and unemployment fell.

Chapter 1/Ten Principles of Economics

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b. (nflation and unemployment were both unaffected. c. (nflation fell and unemployment increased. d. (nflation fell and unemployment was unchanged. ANS !"# c. (nflation fell and unemployment increased. T$%!# & S!'T()N# 0 *(++(',-T$# 0 191. 7etween 1<.< and 1<008 the ,.S. economy went from a situation of full employment to one of .4 percent unemployment. hat do you assume happened to prices5 a. %rices were unaffected. b. %rices fell as the economy e;perienced deflation. c. %rices rose as the economy e;perienced inflation. d. (t is impossible to guess what happened to prices from the information gi/en. ANS !"# b. %rices fell as the economy e;perienced deflation. T$%!# & S!'T()N# 0 *(++(',-T$# 0 19.. The %hillips cur/e is important for understanding a. the business cycle. b. supply and demand. c. go/ernment spending. d. money supply changes. ANS !"# a. the business cycle. T$%!# & S!'T()N# 0 *(++(',-T$# 1 190. The business cycle is the a. relationship between unemployment and inflation. b. irregular fluctuations in economic acti/ity. c. positi/e relationship between the Duantity of money in an economy and inflation. d. predictable changes in economic acti/ity due to changes in go/ernment spending and ta;es. ANS !"# b. irregular fluctuations in economic acti/ity. T$%!# & S!'T()N# 0 *(++(',-T$# 1 193. Senator Smith wants to increase ta;es on people with high incomes and use the money to help the poor. Senator Gones argues that such a ta; will discourage successful people from working and will therefore make society worse off. An economist would say that a. we should agree with Senator Smith. b. we should agree with Senator Gones. c. a good decision reDuires that we recogniEe both /iewpoints. d. there are no tradeoffs between eDuity and efficiency. ANS !"# c. a good decision reDuires that we recogniEe both /iewpoints. T$%!# & S!'T()N# 1 *(++(',-T$# . 194. &aurice recei/es C1== as a birthday gift. (n deciding how to spend the money8 he narrows his options down to four choices8 )ption A8 )ption 78 )ption ' and )ption *. !ach option costs C1==. +inally he decides on )ption 7. The opportunity cost of )ption 7 is a. the /alue to him of the )ption he would ha/e chosen if )ption 7 were not a/ailable. b. the /alue to him of )ptions A8 ' and * combined. c. C0==. d. C1==. ANS !"# a# the /alue to him of the )ption he would ha/e chosen if )ption 7 were not a/ailable. T$%!# & S!'T()N# 1 *(++(',-T$# . 196. A furniture maker currently produces 1== tables per week and sells them for a profit. She is considering e;panding her operation in order to make more tables. Should she e;pand5 a. $es8 because making tables is profitable. b. No8 because she may not be able to sell the additional tables. c. (t depends on the marginal cost of producing more tables and the marginal re/enue she will earn from selling more tables. d. (t depends on the a/erage cost of producing more tables and the a/erage re/enue she will earn from selling more tables. ANS !"# c. (t depends on the marginal cost of producing more tables and the marginal re/enue she will earn from selling more tables. T$%!# & S!'T()N# 1 *(++(',-T$# . 199. (n the nation of *ictatorland8 farmers traditionally feed grain to their li/estock. 'entral planners8 howe/er8 decided to increase the price of grain to make grain farmers happy and to reduce the price of bread made from that grain to make city dwellers happy. Now the price of bread is lower than the price of grain. e might now e;pect a. farmers to continue to feed grain to their li/estock. b. farmers to start feeding bread to their li/estock. c. city dwellers to start buying grain to make bread to eat. d. city dwellers to start buying grain to make bread to sell. ANS !"# b. farmers to start feeding bread to their li/estock. T$%!# & S!'T()N# 1 *(++(',-T$# .

Chapter 1/Ten Principles of Economics

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19:. Senator Smart is trying to con/ince workers in her district that trade with other countries is beneficial. Senator Smart argues that trade can be beneficial a. only if it allows us to obtain things that we couldn>t make for oursel/es. b. because it allows specialiEation8 which increases total output. c. to us if we can gain and the others in/ol/ed in the trade lose. d. in only a limited number of circumstances because others are typically self@interested. ANS !"# b. because it allows specialiEation8 which increases total output. T$%!# & S!'T()N# . *(++(',-T$# . 19<. Adam Smith argued that in a market system8 when people act in their own self@interest8 they typically a. help only themsel/es. b. harm others. c. help others8 but not as much as they would ha/e if they were not self@interested. d. help others e/en more than when they seek to help others. ANS !"# d. help others e/en more than when they seek to help others. T$%!# & S!'T()N# . *(++(',-T$# . 1:=. A friend of yours asks you why market prices are better than go/ernment@determined prices. $ou say that market@determined prices are better because they generally reflect a. the /alue of a good to society8 but not the cost of making it. b. the cost of making a good to society8 but not its /alue. c. both the /alue of a good to society and the cost of making it. d. neither the /alue of a good to society nor the cost of making it. ANS !"# c. both the /alue of a good to society and the cost of making it. T$%!# & S!'T()N# . *(++(',-T$# 1 1:1. hich of the following is N)T true5 a. (n the presence of a market failure8 go/ernment action might not impro/e on the market outcome because sometimes public policies simply reward the politically powerful. b. (n the presence of a market failure8 go/ernment action might not impro/e on the market outcome because some leaders are not fully informed about the effects of their actions. c. (n the presence of a market failure8 go/ernment action can sometimes impro/e on the market outcome. d. (n the presence of a market failure8 go/ernment action will always impro/e on the market outcome. ANS !"# d. (n the presence of a market failure8 go/ernment action will always impro/e on the market outcome. T$%!# & S!'T()N# . *(++(',-T$# 1 1:.. hich of the following is most likely to raise the a/erage standard of li/ing in the ,nited States5 a. an increase in in/estment in new capital b. a continuation of the economic problems e;perienced by Gapan8 with whom the ,nited States competes in world markets c. an increase in the minimum legal wage d. shortening the a/erage work week ANS !"# a. an increase in in/estment in new capital T$%!# & S!'T()N# 0 *(++(',-T$# 1 1:0. *uring the 1<<=s8 the ,nited Bingdom e;perienced low le/els of inflation while Turkey e;perienced high le/els of inflation. The difference can best be e;plained by the fact that a. the ,nited Bingdom is more industrialiEed than Turkey. b. the ,nited Bingdom printed money at a slower rate than Turkey. c. workers in the ,nited Bingdom are more producti/e than workers in Turkey. d. there were more cases of market failure in Turkey than in the ,nited Bingdom. ANS !"# b. the ,nited Bingdom printed money at a slower rate than Turkey. T$%!# & S!'T()N# 0 *(++(',-T$# 1 1:3. hich of the following is consistent with the %hillips 'ur/e5 a. (f we increase the rate of inflation from 0 percent to 6 percent8 then the rate of unemployment will temporarily fall. b. (f we increase the rate of inflation from 0 percent to 6 percent8 then the rate of unemployment will temporarily rise. c. (f we increase the rate of inflation from 0 percent to 6 percent8 then the rate of unemployment will permanently fall. d. (f we increase the rate of inflation from 0 percent to 6 percent8 then the rate of unemployment will permanently rise. ANS !"# a. (f we increase the rate of inflation from 0 percent to 6 percent8 then the rate of unemployment will temporarily fall. T$%!# & S!'T()N# 0 *(++(',-T$# . T",!I+A-S! 1. Scarcity means that there is less of a good or resource a/ailable than people wish to ha/e. ANS !"# T T$%!# T S!'T()N# 1 "AN*)&# $ .. !conomics is the study of how fairly goods and ser/ices are distributed within society. ANS !"# + T$%!# T S!'T()N# 1 "AN*)&# $ 0. ith careful planning8 we can usually get something that we like without ha/ing to gi/e up something else that we like. ANS !"# + T$%!# T S!'T()N# 1 "AN*)&# $ 3. !Duity means e/eryone in the economy should recei/e an eDual share of the goods and ser/ices produced.

Chapter 1/Ten Principles of Economics

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ANS !"# + T$%!# T S!'T()N# 1 "AN*)&# $ 4. !Duity refers to how the pie is di/ided8 and efficiency refers to the siEe of the economic pie. ANS !"# T T$%!# T S!'T()N# 1 "AN*)&# $ 6. Tuition is the single@largest cost of attending college for most students. ANS !"# + T$%!# T S!'T()N# 1 "AN*)&# $ 9. The cost of an action is measured in terms of foregone opportunities. ANS !"# T T$%!# T S!'T()N# 1 "AN*)&# $ :. A marginal change is a small incremental adAustment to an e;isting plan of action. ANS !"# T T$%!# T S!'T()N# 1 "AN*)&# $ <. (f the a/erage cost of transporting a passenger on the train from 'hicago to St. -ouis is C948 it would be irrational for the railroad to allow any passenger to ride for less than C94. ANS !"# + T$%!# T S!'T()N# 1 "AN*)&# $ 1=. A rational decisionmaker takes an action if and only if the marginal cost e;ceeds the marginal benefit. ANS !"# + T$%!# T S!'T()N# 1 "AN*)&# $ 11. Trade allows each person to specialiEe in the acti/ities he or she does best8 thus increasing each indi/idual>s producti/ity. ANS !"# T T$%!# T S!'T()N# . "AN*)&# $ 1.. Trade with any nation can be mutually beneficial. ANS !"# T T$%!# T S!'T()N# . "AN*)&# $ 10. A market economy cannot produce a socially desirable outcome because indi/iduals are moti/ated by their own selfish interests. ANS !"# + T$%!# T S!'T()N# . "AN*)&# $ 13. The go/ernment can potentially impro/e market outcomes if market ineDualities or market failure e;ists. ANS !"# T T$%!# T S!'T()N# . "AN*)&# $ 14. &arket failure refers to a situation in which the market does not allocate resources efficiently. ANS !"# T T$%!# T S!'T()N# . "AN*)&# $ 16. Since ta;es affect only the price paid by the buyer8 they cannot ha/e an ad/erse impact on the allocation of society>s resources. ANS !"# + T$%!# T S!'T()N# . "AN*)&# $ 19. %roducti/ity is defined as the Duantity of goods and ser/ices produced from each hour of a worker>s time. ANS !"# T T$%!# T S!'T()N# 0 "AN*)&# $ 1:. %roducti/ity is the primary determinant of a countryLs li/ing standards. ANS !"# T T$%!# T S!'T()N# 0 "AN*)&# $ 1<. (nflation increases the /alue of money. ANS !"# + T$%!# T S!'T()N# 0 "AN*)&# $ .=. Go/ernment spending is the ultimate source of inflation. ANS !"# + T$%!# T S!'T()N# 0 "AN*)&# $ .1. The %hillips 'ur/e shows the short@run tradeoff between inflation and economic growth. ANS !"# + T$%!# T S!'T()N# 0 "AN*)&# $ S1)"T ANS !" A%%-('AT()NIS'!NA"() 1. hat would happen to the study of economics if scarcity disappeared5 ANS !"# Since economics is the study of how society allocates its scarce resources8 if there were no scarcity8 there would be no need for economics. !/eryone could ha/e all the goods and ser/ices they wanted. No one would ha/e to make decisions based on tradeoffs8 because there would be no opportunity cost associated with the decision. J(t is difficult to concei/e of a situation where time is not scarce8 howe/erK. T$%!# S S!'T()N# 1 "AN*)&# $ .. )ne tradeoff society faces is between efficiency and eDuity. *efine each term. (f the ,.S. go/ernment redistributes income from the rich to the poor8 e;plain how this action affects eDuity as well as efficiency in the economy. ANS !"# !fficiency is the property of society getting the most it can from its scarce resources. !Duity is defined as the property of distributing economic prosperity fairly among the members of society. )ften8 these two goals conflict. hen the go/ernment redistributes income from the rich to the poor8 it reduces the reward for working hard. +ewer goods and ser/ices are produced and the economic pie gets smaller. hen the go/ernment tries to cut the economic pie into more eDual slices8 the pie gets smaller. %olicies aimed at achie/ing a more eDual distribution of economic well@being8 such as the welfare system8 try to help those members of society who are most in need. The indi/idual income ta; asks the financially successful to contribute more than others to support the go/ernment. T$%!# S S!'T()N# 1 "AN*)&# $ 0. *efine opportunity cost. hat is the opportunity cost to you of attending college5 hat was your opportunity cost of coming to class today5 ANS !"# hate/er must be gi/en up to obtain some item it its opportunity cost. 7asically8 this would be a person>s second choice. The opportunity cost of a person attending college is the /alue of the best alternati/e use of that person>s time. +or most students this would be the income the student gi/es up by not working. A student>s opportunity cost of coming to class was the /alue of the best opportunity the student ga/e up. J+or most students8 that seems to be sleep.K T$%!# S S!'T()N# 1 "AN*)&# $

Chapter 1/Ten Principles of Economics

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3. ith the understanding that people respond to incenti/es8 outline the possible outcome for teachers if the B@1. school year is e;tended to 11 months per year instead of the e;isting < months per year. ANS !"# The concept of working longer per year would be percei/ed by many teachers as a definite increase in the cost of teaching. !/en with additional compensation8 many teachers look at summers off as a maAor benefit of the education profession. (f this benefit were eliminated or e/en diminished8 some teachers may percei/e that the marginal cost of teaching would now be greater than the marginal benefit and would choose to lea/e teaching. T$%!# S S!'T()N# 1 "AN*)&# $ 4. ,nder what conditions might go/ernment inter/ention in an economy impro/e the market outcome5 ANS !"# (f there is a market failure8 such as an e;ternality or monopoly8 go/ernment regulation might impro/e the well@being of society by promoting efficiency. (f the distribution of income or wealth is considered to be unfair by society8 go/ernment inter/ention might achie/e a more eDuitable distribution of economic well@being. T$%!# S S!'T()N# . "AN*)&# $ 6. !;plain how an attempt by the go/ernment to lower inflation could cause unemployment to increase in the short@run. ANS !"# To lower inflation8 the go/ernment may choose to reduce the money supply in the economy. hen the money supply is reduced8 prices don>t adAust immediately. -ower spending combined with prices8 which are too high8 reduces sales and causes workers to be laid off. 1ence8 the lower price le/el is associated with higher unemployment. T$%!# S S!'T()N# 0 "AN*)&# $