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Framingham State College

Principles Of Microeconomics

Problem Set Number 1

Ten Principles of Economics Quiz

My Name is? ________________________________________

Q1. We live in a world of ___________ ?

A1. “Scarcity”

Q2. What did Alfred Marshall say about economics?

A2. “Economics is the study of mankind in the ordinary business of life.”

Principle 1 – People face tradeoffs

Q3. What is Eric’s daily challenge?

A3. How to spend his time.

Q4. The tradeoff between defense and funding consumer goods is described as the tradeoff

A4. “Guns and Butter”

Q5. The miner describes a tradeoff between cleaner air and what?

A5. “Jobs”

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Principle 2 – The Cost of Something is What You Give Up to Get It.
Q6. What does Prof. Mankiw describe as being what you are giving up to go to college?

A6. “The lost wages that you could have otherwise earned.”

Q7. The opportunity cost of going to college is described as being low because the alternative would
be a….

A7. Low paying entry level job.

Q8. What would Kobe Bryant have given up if he had decided to go to college?

A8. “a several million dollar a year salary”

Principle 3 – Rational People Think at the Margin.

Q9. How does Jedawn make her best decisions?

A9. “by thinking at the margin”

Q10. Economists assume that rational people will only act if the marginal benefit of an action
exceeds the?

A10. “Marginal Cost”

Principle 4 – People Respond To Incentives.

Q11. Why do Europeans drive very small cars?

A11. They are heavily taxed on their gasoline.

Q12. What does President Clinton describe as being “one of the surest ways of reducing new

A12. “is to increase the price of cigarettes”.

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Q13. What unintended consequence resulted from the mandatory use of safety belts.

A13. “people drive less safely”.

Principle 5 – Trade can Make Everyone Better Off.

Q14. Would it be as efficient for us all to grow our own food in our own back yard as it is to have a
small number of farmers producing using high levels of technology? Yes or No?

A14. No, it would not be as efficient.

Q15. “Specialization” is said to allow “everyone, farmers and non-farmers to achieve…?

A15. “a higher standard of living”.

Principle 6 – Markets are Usually a Good Way to Organize Economic

Q16. Resources are allocated through the decisions of millions of firms and millions of …?

A16. Households.

Q17. What do Firms decide?

A17. “They decide what to make and who to hire.”

Q18. If you have a catcher’s mitt and I have $25 and I want to buy the catcher’s mitt for $25 and you
want to sell it to me, then what is the outcome that is described?

A18. “we both win”.

Principle 7 – Government Can Sometimes Improve Market Outcomes

Q19. One reason that markets may fail to work efficiently is described as being due to an …?

A19. “Externality”

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Q20. Market power occurs when one of the players in a market either a firm or a person who is
selling her services, is large relative to the market and is able to control some part of the market
and manipulate …?

A20. “Prices”

Principle 8 – A Country’s Standard of Living Depends on its Ability to

Produce Goods and Services.
Q21. What was the yearly per capita income of the average American in 1998?

The average Mexican?

The average Indian?

A21. $31,500 $8,300 $1,700

Q22. Why is the government concerned about the quality of education? Because of its impact on …?

A22. Skills and productivity.

Principle 9 – Prices Rise When the Government Prints Too Much Money.
Q23. As money becomes more available, its value shrinks and …?

A23. Prices rise.

Principle 10 – Society Faces a Short-Run Tradeoff Between Inflation and

Q24. The Role of the Chairman of the Federal Reserve Bank is to keep inflation under control and
also ensure that …?

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Additional Homework Question
From The Text Page 18: Question 16:

Look at a newspaper or at the Web site http://www.Economist.Com to find three stories about the
economy that have been in the news lately. For each story, identify one (or more) of the Ten Principles
of Economics discussed in this chapter that is relevant, and explain how it is relevant. Also, for each
story, look through this book's table of contents and try to find a chapter that might shed light on the
news event.

A24. “Unemployment stays low”.

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