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1
. The word economy comes from the Greek word for
a. “environment.”
d. “conservation.”
2
. Economics deals primarily with the concept of
a. poverty.
b. scarcity.
c. change.
d. power.
ANSWER: b. scarcity.
3
. Which of the following is NOT included in the decisions that every society must make?
4
. Scarcity exists when
1ANSWER:
c. “one who manages a household.”
ANSWER:
b. scarcity.
ANSWER:
ANSWER:
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2 Chapter 1/The Ten Principles of Economics
ANSWER: b. there is less of a good or resource available than people wish to have.
5
. For society, a good is not scarce if
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.
ANSWER: a. if all members of society can have all they want of it.
6
. Which of the following goods best meets the definition of scarcity?
a. air
b. wood in a forest
d. water in a city
7
. Economics is defined as
8
. Which of the following is NOT a major area of study for economists?
ANSWER:
ANSWER:
d. water in a city
ANSWER:
ANSWER:
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Chapter 1/The Ten Principles of Economics 3
9
. The adage, “There is no such thing as a free lunch,” means:
ANSWER: a. To get something we like, we usually have to give up another thing we like.
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.
11
. When society requires that firms reduce pollution,
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.
ANSWER: d. there is a tradeoff because of reduced incomes to the firms’ owners, workers, and customers.
ANSWER:
10
ANSWER:
11
ANSWER:
d. there is a tradeoff because of reduced incomes to the firms’ owners, workers, and customers.
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4 Chapter 1/The Ten Principles of Economics
12
. Efficiency means that
c. society’s goods and services are distributed fairly among society’s members.
ANSWER: a. society is getting the most it can from its scarce resources.
13
. Equity means that
d. the benefits of society’s resources are distributed fairly among society’s members.
ANSWER: d. the benefits of society’s resources are distributed fairly among society’s members.
14
. A good definition of equity would be
b. fairness.
c. efficiency.
ANSWER: b. fairness.
15
. When government policies are being designed,
12
ANSWER:
13
ANSWER:
d. the benefits of society’s resources are distributed fairly among society’s members.
14
ANSWER:
b. fairness.
15
ANSWER:
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Chapter 1/The Ten Principles of Economics 5
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.
ANSWER: c. people work less and produce fewer goods and services.
17
. In economics, the cost of something is
18
. The opportunity cost of going to college is
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.
ANSWER: c. the value of the best opportunity a student gives up to attend college.
19
. For most students, the largest single cost of a college education is
16
ANSWER:
17
ANSWER:
18
ANSWER:
19
ANSWER:
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6 Chapter 1/The Ten Principles of Economics
20
. The opportunity cost of an item is
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.
ANSWER: b. the enjoyment she would have received had she watched 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.
ANSWER: c. the enjoyment and exercise he would have received had he gone for a 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.
ANSWER: d. are well aware that their opportunity cost of attending college is very high.
20
ANSWER:
21
ANSWER:
b. the enjoyment she would have received had she watched the video.
22
ANSWER:
c. the enjoyment and exercise he would have received had he gone for a bike ride.
23
ANSWER:
d. are well aware that their opportunity cost of attending college is very high.
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Chapter 1/The Ten Principles of Economics 7
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.
25
. People make decisions at the margin by
a. following tradition.
c. experience.
26
. A marginal change is
a. a long-term trend.
27
. Which of the following is the best example of a marginal change?
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.
ANSWER: c. Kim works at the college bookstore. She gets a raise from $5.15 per hour to $5.20 per hour.
24
ANSWER:
c. opportunity cost.
25
ANSWER:
26
ANSWER:
27
ANSWER:
c. Kim works at the college bookstore. She gets a raise from $5.15 per hour to $5.20 per hour.
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8 Chapter 1/The Ten Principles of Economics
28
. A rational decisionmaker takes an action only if
d. the marginal benefit is greater than both the average cost and the marginal cost.
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.
ANSWER: a. You should complete the repairs and sell the car.
30
. Economists understand that people respond to
b. incentives.
ANSWER: b. incentives.
31
. Which of the following is important for policy makers to consider when designing public policy?
28
ANSWER:
29
ANSWER:
30
ANSWER:
b. incentives.
31
ANSWER:
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Chapter 1/The Ten Principles of Economics 9
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.
ANSWER: 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 incentives for
producers?
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
ANSWER: d. to produce enough to meet the output target, without regard for quality or cost
35
. Trade can benefit a family
a. by allowing the family to buy a greater variety of goods and services at a lower cost.
c. a and b
ANSWER: c. a and b
32
ANSWER:
c. little change in the number of driver deaths, but more accidents and more pedestrian deaths.
33
ANSWER:
34
ANSWER:
d. To produce enough to meet the output target, without regard for quality or cost.
35
ANSWER:
c. a and b
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10 Chapter 1/The Ten Principles of Economics
36
. Which is the most accurate statement about trade?
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.
37
. Trade between the United States and Mexico
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.
38
. The United States can benefit from trade
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.
ANSWER: b. the U.S. should sell roller blades to Canada, and should buy Canadian hockey sticks.
36
ANSWER:
37
ANSWER:
38
ANSWER:
39
ANSWER:
b. the U.S.should sell roller blades to Canada, and should buy Canadian hockey sticks.
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Chapter 1/The Ten Principles of Economics 11
40
. Which of the following is the best statement about markets?
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.
41
. In a market economy,
c. households decide which firms to work for and what to buy with their incomes.
42
. In a market economy, economic activity is guided by
a. the government.
b. prices.
c. central planners.
d. corporations.
ANSWER: b. prices.
43
. One advantage market economies have over central planning is that market economies
40
ANSWER:
41
ANSWER:
42
ANSWER:
b. prices.
43
ANSWER:
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12 Chapter 1/The Ten Principles of Economics
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.
ANSWER: d. Households and firms interacting in markets are guided by an “invisible hand” that leads them to desirable market outcomes.
45
. The “invisible hand” directs economic activity through
a. prices.
b. mass media.
c. subliminal messages.
d. government regulations.
ANSWER: a. prices.
46
. Adam Smith's book The Wealth of Nations was published in
a. 1692.
b. 1776.
c. 1816.
d. 1936.
ANSWER: b. 1776.
47
. The invisible hand works to promote general well-being in the economy primarily through
a. government intervention.
c. self interest.
d. altruism.
44
ANSWER:
d. Households and firms interacting in markets are guided by an “invisible hand” that leads them to desirable market outcomes.
45
ANSWER:
a. prices.
46
ANSWER:
b. 1776.
47
ANSWER:
c. self interest.
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Chapter 1/The Ten Principles of Economics 13
48
. Taxes adversely affect the allocation of resources in society because
c. they distort prices and thus the decisions of households and firms.
ANSWER: 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.
50
. The term market failure refers to
d. a situation in which the market on its own fails to allocate resources efficiently.
ANSWER: 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
48
ANSWER:
c. they distort prices and thus the decisions of households and firms.
49
ANSWER:
50
ANSWER:
d. a situation in which the market on its own fails to allocate resources efficiently.
51
ANSWER:
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14 Chapter 1/The Ten Principles of Economics
52
. Causes of market failure include
53
. An externality is
54
. An example of 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.
ANSWER: c. the impact of pollution from a factory on the health of people in the vicinity of the factory.
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.
52
ANSWER:
53
ANSWER:
54
ANSWER:
c. the impact of pollution from a factory on the health of people in the vicinity of the factory.
55
ANSWER:
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Chapter 1/The Ten Principles of Economics 15
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.
57
. A market economy rewards people according to
d. their ability to produce things that other people are willing to pay for.
ANSWER: d. their ability to produce things that other people are willing to pay for.
58
. Which of these consumption activities is most likely to cause an external cost?
ANSWER: d. A student in a dorm plays her CDs at 120 decibels late at night.
59
. If education produces external benefits for society, which of the following might be an appropriate policy for society to establish regarding education?
56
ANSWER:
c. market failure.
57
ANSWER:
d. their ability to produce things that other people are willing to pay for.
58
ANSWER:
59
ANSWER:
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16 Chapter 1/The Ten Principles of Economics
60
. If a sawmill creates too much air pollution,
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.
ANSWER: d. the government can raise economic well-being through environmental regulation.
61
. Market power refers to
d. the power of a single person (or small group of people) to unduly influence market prices.
ANSWER: d. the power of a single person (or small group of people) to unduly influence market prices.
62
. An example of a monopoly would be
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.
ANSWER: 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
60
ANSWER:
61
ANSWER:
d. the power of a single person (or small group of people) to unduly influence market prices.
62 ANSWER:
a. a sole provider of electrical power in a city.
63
ANSWER:
d. The invisible hand is more effective at ensuring efficiency than it is at ensuring equity.
64
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Chapter 1/The Ten Principles of Economics 17
a. efficiency.
b. equity.
ANSWER: b. equity.
65
. Taxing high incomes at a higher rate than low incomes is most likely to do which of the following?
66
. Upon what does a country’s standard of living depend?
67
. In 1997 the average American had an income of about
a. $35,000.
b. $29,000.
c. $20,000.
d. $15,000.
ANSWER: b. $29,000.
ANSWER:
b. equity.
65
ANSWER:
66
ANSWER:
67
ANSWER:
b. $29,000.
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18 Chapter 1/The Ten Principles of Economics
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.
ANSWER: c. 35 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
ANSWER: c. productivity
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.
ANSWER: b. Labor is more productive when making cotton cloth with a mechanical loom than with a hand loom.
68
ANSWER:
c. 35 years.
69
ANSWER:
c. productivity
70
ANSWER:
71
ANSWER:
b. Labor is more productive when making cotton cloth with a mechanical loom than with a hand loom.
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Chapter 1/The Ten Principles of Economics 19
72
. In the United States, incomes have historically grown
73
. Almost all variation in living standards is attributable to
74
. Productivity is defined as
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.
ANSWER: d. the amount of goods and services produced from each hour of a worker’s time.
75
. The primary determinant of a country’s standard of living is
a. the government.
b. labor unions.
c. productivity.
ANSWER: c. productivity.
72
ANSWER:
73
ANSWER:
74
ANSWER:
d. the amount of goods and services produced from each hour of a worker’s time.
75
ANSWER:
c. productivity.
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20 Chapter 1/The Ten Principles of Economics
76
. The historical rise in living standards of American workers is primarily a result of
c. minimum-wage laws.
d. tariff protection.
77
. To increase living standards, public policy should
c. ensure that workers are well educated and have the necessary tools and technology.
ANSWER: 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.
79
. Which of the following tends to decrease productivity?
a. budget deficits
b. education
c. competition
d. investment
76
ANSWER:
77
ANSWER:
c. ensure that workers are well educated and have the necessary tools and technology.
78
ANSWER:
79
ANSWER:
a. budget deficits
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Chapter 1/The Ten Principles of Economics 21
80
. In the United States, government deficits are financed by
b. borrowing, which reduces funds available for investment in human and physical capital.
ANSWER: b. borrowing, which reduces funds available for investment in human and physical capital.
81
. Inflation is defined as
82
. One of the worst episodes of inflation occurred
83
. Large or persistent inflation is almost always caused by
a. inefficiency.
b. low productivity.
c. foreign competition.
80
ANSWER:
b. borrowing, which reduces funds available for investment in human and physical capital.
81
ANSWER:
82 ANSWER:
b. in Germany in the 1920s.
83
ANSWER:
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22 Chapter 1/The Ten Principles of Economics
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.
85
. In the 1990’s, inflation in the United States
86
. Inflation causes
b. productivity to increase.
87
. Which of the following is the most correct statement about the relationship between inflation and unemployment?
ANSWER: a. In the short run, reducing inflation is associated with rising unemployment.
84
ANSWER:
c. Gerald Ford.
85
ANSWER:
86
ANSWER:
87
ANSWER:
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Chapter 1/The Ten Principles of Economics 23
88
. The tradeoff between inflation and unemployment is called
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
88
ANSWER:
89
ANSWER:
90
ANSWER:
91
ANSWER:
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24 Chapter 1/The Ten Principles of Economics
92
. The word economy comes from the Greek word for “conservation.”
ANSWER: F
93
. Scarcity means that society has less to offer than people wish to have.
ANSWER: T
94
. Economics is the study of how fairly goods and services are distributed within society.
ANSWER: F
95
. Economists study how individuals make decisions, how they interact with each other, and the factors which affect the economy as a whole.
ANSWER: T
96
. With careful planning, we can usually get something that we like without having to give up something else that we like.
ANSWER: F
97
. Individuals face tradeoffs, but societies do not.
ANSWER: F
92
ANSWER:
93
ANSWER:
94
ANSWER:
95
ANSWER:
96
ANSWER:
97
ANSWER:
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Chapter 1/The Ten Principles of Economics 25
98
. Equity means everyone in the economy should receive an equal share of the goods and services produced.
ANSWER: F
99
. People are likely to make good decisions only if they understand the options that they have available.
ANSWER: T
100
. Pollution regulations make society better off by raising incomes.
ANSWER: F
101
. Equity refers to the size of the economic pie, and efficiency refers to how the pie is divided.
ANSWER: F
102
. In economic policymaking, there is often a conflict between the goal of efficiency and the goal of equity.
ANSWER: T
103
. When the government redistributes income from the rich to the poor, society benefits since there are more poor than rich.
ANSWER: F
98
ANSWER:
99
ANSWER:
100
ANSWER:
101
ANSWER:
102
ANSWER:
103
ANSWER:
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26 Chapter 1/The Ten Principles of Economics
104
. For most students, tuition is the single largest cost of attending college.
ANSWER: F
105
. The opportunity cost of something is what you give up to get it.
ANSWER: T
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
ANSWER: T
107
. A marginal change is a small incremental adjustment to an existing plan of action.
ANSWER: T
108
. If the average cost of transporting a passenger on a night train from Kansas City to St. Louis is $50, it would be irrational for the railroad to allow any passenger to ever ride
ANSWER: F
109
. A rational decisionmaker takes an action if and only if the marginal cost exceeds the marginal benefit.
ANSWER: F
104
ANSWER:
105
ANSWER:
106
ANSWER:
107
ANSWER:
108
ANSWER:
109
ANSWER:
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Chapter 1/The Ten Principles of Economics 27
110
. Public policies often alter the costs and benefits of private actions.
ANSWER: T
111
. Economist Sam Peltzman found that seat belt laws caused more accidents and more pedestrian deaths.
ANSWER: T
112
. Policy makers cannot directly affect public behavior; they can only affect public behavior indirectly.
ANSWER: F
113
. In international trade, if one party gains, the other party loses.
ANSWER: F
114
. Trade allows each person to specialize in the activities he or she does best, thus increasing each individual’s productivity.
ANSWER: T
115
. Trade makes rich nations richer and poor nations poorer.
ANSWER: F
110 ANSWER:
T
111
ANSWER:
112
ANSWER:
113
ANSWER:
114
ANSWER:
115
ANSWER:
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28 Chapter 1/The Ten Principles of Economics
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
ANSWER: T
117
. When the government prevents prices from adjusting naturally to supply and demand, efficiency is improved in the economy.
ANSWER: F
118
. A market economy cannot possibly produce a socially desirable outcome because individuals are motivated by their own selfish interests.
ANSWER: F
119
. While the invisible hand cannot guarantee efficiency, it is better at guaranteeing equity.
ANSWER: F
120
. The two broad reasons for a government to intervene in the economy are to promote efficiency and to promote equity.
ANSWER: T
121
. Market failure refers to a situation in which the market does not allocate resources efficiently.
ANSWER: T
116
ANSWER:
117
ANSWER:
118
ANSWER:
119
ANSWER:
120
ANSWER:
121
ANSWER:
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Chapter 1/The Ten Principles of Economics 29
122
. Since taxes affect only the price paid by the buyer, they cannot have an adverse impact on the allocation of society’s resources.
ANSWER: F
123
. A monopolist has market power.
ANSWER: T
124
. A market economy rewards people according to their ability to produce things that other people are willing to pay for.
ANSWER: T
125
. Monopoly power and income inequality are examples of market failure.
ANSWER: F
126
. Productivity is defined as the quantity of goods and services produced from each hour of a worker’s time.
ANSWER: T
127
. Better tools and technology can increase productivity and therefore living standards in countries.
ANSWER: T
122
ANSWER:
123 ANSWER:
T
124
ANSWER:
125
ANSWER:
126
ANSWER:
127
ANSWER:
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30 Chapter 1/The Ten Principles of Economics
128
. Almost all variation in living standards is a result of differences in countries’ productivity.
ANSWER: T
129
. Protecting domestic jobs from foreign competition is the best way to raise labor productivity.
ANSWER: F
130
. During the 1970s, the United States experienced stable prices and robust economic growth.
ANSWER: F
131
. Inflation increases the value of money.
ANSWER: F
132
. If the government prints too much money, it will cause inflation.
ANSWER: T
133
. The Phillips Curve shows the short-run tradeoff between inflation and economic growth.
ANSWER: F
128
ANSWER:
129
ANSWER:
130
ANSWER:
131
ANSWER:
132
ANSWER:
133
ANSWER:
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Chapter 1/The Ten Principles of Economics 31
134
. Economists agree that monetary and fiscal policy, although not very powerful, are necessary instruments for controlling the economy.
ANSWER: F
135
. The major cause of inflation in an economy is too much government debt.
ANSWER: F
SHORT ANSWER
APPLICATION/SCENARIO
136
. Give three examples each of household and societal decisions regarding the allocation of resources.
ANSWER: For households, examples would include such things as who feeds the cat, who takes out the garbage, who fixes meals, who runs errands, etc. For society, examples
would include such things as who will produce food, who will produce computers, how land will be allocated to produce food, locate housing, and factories, use for recreation, etc.
137
. Households face many of the same decisions that societies face. Explain why this is true.
ANSWER: Like households, societies must decide which members do which tasks and what each member gets in return for doing those tasks. Like societies, households must
allocate their scarce resources among their members given each member's abilities, efforts and desires.
138
. What would happen to the study of economics if scarcity disappeared?
ANSWER: Since economics is the study of how society allocates its scarce resources, if there was no scarcity, there would be no need for economics. Everyone could have all the
goods and services they wanted. No one would have to make decisions based on tradeoffs, because there would be no opportunity cost. (It is difficult to conceive of a situation where
134
ANSWER:
135
ANSWER:
136
ANSWER:
For households, examples would include such things as who feeds the cat, who takes out the garbage, who fixes meals, who runs errands, etc. For society, examples would include
such things as who will produce food, who will produce computers, how land will be allocated to produce food, locate housing, and factories, use for recreation, etc.
137
ANSWER:
Like households, societies must decide which members do which tasks and what each member gets in return for doing those tasks. Like societies, households must allocate their
scarce resources among their members given each member's abilities, efforts and desires.
138
ANSWER:
Since economics is the study of how society allocates its scarce resources, if there was no scarcity, there would be no need for economics. Everyone could have all the goods and
services they wanted. No one would have to make decisions based on tradeoffs, because there would be no opportunity cost. (It is difficult to conceive of a situation where time is not
scarce, however).
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32 Chapter 1/The Ten Principles of Economics
139
. What does the phrase, “There is no such thing as a free lunch,” illustrate?
ANSWER: This phrase illustrates the concept of tradeoffs. It means that to get one thing that we like, we usually have to give up another thing that we like.
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.
ANSWER: Policies aimed at achieving a more equal distribution of economic well-being, such as the welfare system, try to help those members of society who are most in need. The
individual income tax asks the financially successful to contribute more than others to support the government. When the government redistributes income from the rich to the poor,
it reduces the reward for working hard. Fewer goods and services are produced and the economic pie gets smaller. As a result, equity increases and efficiency decreases.
141
. One tradeoff that society faces is between efficiency and equity. Define each term and explain this tradeoff.
ANSWER: Efficiency is the property of society getting the most it can from its scarce resources.
Equity is defined as the property of distributing economic prosperity fairly among the members of society. Often, these two goals conflict. When the government
redistributes income from the rich to the poor, it reduces the reward for working hard. Fewer goods and services are produced and the economic pie gets smaller. When the
government tries to cut the economic pie into more equal slices, the pie gets smaller.
142
. Define opportunity cost. What is the opportunity cost to you of attending college?
ANSWER: The value of the best alternative use of your time. For most students this would be the income the student gives up by not working.
139
ANSWER:
This phrase illustrates the concept of tradeoffs. It means that to get one thing that we like, we usually have to give up another thing that we like.
140
ANSWER:
Policies aimed at achieving a more equal distribution of economic well-being, such as the welfare system, try to help those members of society who are most in need. The individual
income tax asks the financially successful to contribute more than others to support the government. When the government redistributes income from the rich to the poor, it reduces
the reward for working hard. Fewer goods and services are produced and the economic pie gets smaller. As a result, equity increases and efficiency decreases.
141
ANSWER:
Efficiency is the property of society getting the most it can from its scarce resources.
Equity is defined as the property of distributing economic prosperity fairly among the members of society. Often, these two goals conflict. When the government redistributes income
from the rich to the poor, it reduces the reward for working hard. Fewer goods and services are produced and the economic pie gets smaller. When the government tries to cut the
economic pie into more equal slices, the pie gets smaller.
142
ANSWER:
The value of the best alternative use of your time. For most students this would be the income the student gives up by not working.
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Chapter 1/The Ten Principles of Economics 33
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.
ANSWER: To Regan, there is non-monetary value to living in an area which can afford her the hiking, skiing, and solitude she enjoys. The decision to take the lower-paying job is
rational if the additional hiking, skiing, and solitude opportunities are worth at least $15,000 per year to Regan.
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?
ANSWER: Stan should be indifferent between finishing the project and selling the car now. The marginal cost of finishing the project is $4,000 and the marginal benefit of finishing
the project is $13,000, for a net marginal benefit of $9,000. The marginal cost of stopping the project now is zero, and the marginal benefit is the $9,000 he can obtain from selling the
car as is. Hence, the net marginal benefit from stopping the project now is also $9,000.
145
. What is the general rule for rational decision making?
ANSWER: An action is taken only if the marginal benefit of the action exceeds the marginal cost.
146
. A cookie shop in a mall is open from 9am to 7pm Monday through Friday. The cost of making and selling cookies averages $.50 per cookie. At 6:30 pm Friday evening, the
owner still has several dozen unsold cookies. The cookies will not be saleable on Monday. What is the best price strategy for the cookie shop to take? Justify your answer.
ANSWER: The owner should continually reduce the price of the cookies so that all the cookies are sold by closing time, even if the price falls below $.50.
143
ANSWER:
To Regan, there is non-monetary value to living in an area which can afford her the hiking, skiing, and solitude she enjoys. The decision to take the lower-paying job is rational if the
additional hiking, skiing, and solitude opportunities are worth at least $15,000 per year to Regan.
144
ANSWER:
Stan should be indifferent between finishing the project and selling the car now. The marginal cost of finishing the project is $4,000 and the marginal benefit of finishing the project is
$13,000, for a net marginal benefit of $9,000. The marginal cost of stopping the project now is zero, and the marginal benefit is the $9,000 he can obtain from selling the car as is. Hence,
the net marginal benefit from stopping the project now is also $9,000.
145
ANSWER:
An action is taken only if the marginal benefit of the action exceeds the marginal cost.
146
ANSWER:
The owner should continually reduce the price of the cookies so that all the cookies are sold by closing time, even if the price falls below $.50.
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34 Chapter 1/The Ten Principles of Economics
147
. You must decide whether or not to attend graduate school next semester. How might you use marginal analysis to make your decision?
ANSWER: A rational decision maker takes an action if and only if the marginal benefit of the action exceeds the marginal cost. You will need to know the additional benefits that
more education would offer and the additional costs that you would incur. By comparing these marginal benefits and marginal costs, you can determine whether the additional
education is worthwhile.
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
ANSWER: The concept of working longer per year would be perceived by many teachers as a definite increase in the cost of teaching. Even with additional compensation, many
teachers look at summers off as a major benefit of the education profession. If this benefit were eliminated or even diminished, some teachers may perceive that the marginal cost of
teaching would now be greater than the marginal benefit and choose to leave teaching.
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?
ANSWER: If policy makers don't consider how behavior might change both directly and indirectly, their policies can have effects that they did not intend. The example used in the
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 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?
ANSWER: The fur breeders would have incentive to feed their mink and sable meat intended for humans instead of animal products. They would continue to buy bread and meat for
their families. (In fact, this is what actually happened in many instances in the old Soviet Union.)
147
ANSWER:
A rational decisionmaker takes an action if and only if the marginal benefit of the action exceeds the marginal cost. You will need to know the additional benefits that more education
would offer and the additional costs that you would incur. By comparing these marginal benefits and marginal costs, you can determine whether the additional education is
worthwhile.
148
ANSWER:
The concept of working longer per year would be perceived by many teachers as a definite increase in the cost of teaching. Even with additional compensation, many teachers look at
summers off as a major benefit of the education profession. If this benefit were eliminated or even diminished, some teachers may perceive that the marginal cost of teaching would
now be greater than the marginal benefit and choose to leave teaching.
149
ANSWER:
If policy makers don't consider how behavior might change both directly and indirectly, their policies can have effects that they did not intend. The example used in the text is the seat
belt law.
150
ANSWER:
The fur breeders would have incentive to feed their mink and sable meat intended for humans instead of animal products. They would continue to buy bread and meat for their
families. (In fact, this is what actually happened in many instances in the old Soviet Union.)
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Chapter 1/The Ten Principles of Economics 35
151
. Why is it that two individuals or nations can both gain from trade when they trade things of equal value?
ANSWER: Trade allows individuals and societies to specialize in what they do best. By trading with others, they can obtain a variety of goods and services at a lower cost than if they
152
. What benefits can a family realize by choosing to trade instead of being self-sufficient?
ANSWER: Trade allows each person to specialize in the activities he or she does best. By trading with others, people can buy a greater variety of goods and services at lower cost.
153
. Why does the United States continue to trade with a country like Japan, which places tariffs and other barriers on U.S. goods?
ANSWER: Trade between the U.S. and Japan allows both countries to specialize in what they do best, and to purchase goods at lower costs than they can produce the goods
themselves. Although the tariffs and other barriers reduce the gains from trade, as long as trade between the U.S. and Japan takes place, both nations must be benefitting from trade.
Japan must be able to produce some goods cheaper than the U.S. can.
154
. Under what conditions might a government intervention in an economy improve the market outcome?
ANSWER: If there is a market failure, such as an externality or monopoly, government regulation might improve the well-being of society by promoting efficiency. If the distribution
of income or wealth is considered to be unfair by society, government intervention might achieve a more equitable distribution of economic well-being.
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
ANSWER: Because households and firms look at prices when deciding what to buy and sell, they unknowingly take into account the social benefits and costs of their actions. As a
result, prices guide these individual decisionmakers to reach outcomes that maximize the welfare of society as a whole.
151
ANSWER:
Trade allows individuals and societies to specialize in what they do best. By trading with others, they can obtain a variety of goods and services at a lower cost than if they produced
152
ANSWER:
Trade allow each person to specialize in the activities he or she does best. By trading with others, people can buy a greater variety of goods and services at lower cost.
153
ANSWER:
Trade between the U.S. and Japan allows both countries to specialize in what they do best, and to purchase goods at lower costs than they can produce the goods themselves.
Although the tariffs and other barriers reduce the gains from trade, as long as trade between the U.S. and Japan takes place, both nations must be benefitting from trade. Japan must
154
ANSWER:
If there is a market failure, such as an externality or monopoly, government regulation might improve the well-being of society by promoting efficiency. If the distribution of income
or wealth is considered to be unfair by society, government intervention might achieve a more equitable distribution of economic well-being.
155
ANSWER:
Because households and firms look at prices when deciding what to buy and sell, they unknowingly take into account the social benefits and costs of their actions. As a result, prices
guide these individual decisionmakers to reach outcomes that maximize the welfare of society as a whole.
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36 Chapter 1/The Ten Principles of Economics
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?
ANSWER: While pollution creates an external cost to society, there is also a cost to society of eliminating the pollution. A law which prohibits pollution considers the marginal benefit
to society of eliminating pollution, but not the marginal cost. Hence, the enforcement of the law could actually harm society, if the cost of eliminating the pollution were greater than
the benefit. In fact, such a law would eliminate all people, because people emit CO2, a greenhouse gas.
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
ANSWER: Efficient allocation of resources depends on information which reflects the true marginal benefit to society of consuming products and the true marginal cost to society of
producing products. Market prices contain this information. These prices are determined automatically in a market economy through the interactions of the decisions of millions of
households and firms. Since the central planners do not have access to all of the information the market uses in determining prices, it is impossible for the planners to set prices which
reflect marginal benefit and marginal cost. Therefore, it is impossible for the 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?
ANSWER: Productivity is the primary determinant of the standard of living of a nation, and productivity growth is the primary determinant of the growth of average income in a
nation. The government can increase productivity by ensuring that workers are well educated, have the tools needed to produce goods and services, and have access to the best
available technology.
156
ANSWER:
While pollution creates an external cost to society, there is also a cost to society of eliminating the pollution. A law which prohibits pollution considers the marginal benefit to society
of eliminating pollution, but not the marginal cost. Hence, the enforcement of the law could actually harm society, if the cost of eliminating the pollution were greater than the benefit.
In fact, such a law would eliminate all people, because people emit CO2, a greenhouse gas.
157
ANSWER:
Efficient allocation of resources depends on information which reflects the true marginal benefit to society of consuming products and the true marginal cost to society of producing
products. Market prices contain this information. These prices are determined automatically in a market economy through the interactions of the decisions of millions of households
and firms. Since the central planners do not have access to all of the information the market uses in determining prices, it is impossible for the planners to set prices which reflect
marginal benefit and marginal cost. Therefore, it is impossible for the central planners to allocate resources efficiently.
158
ANSWER:
Productivity is the primary determinant of the standard of living of a nation, and productivity growth is the primary determinant of the growth of average income in a nation. The
government can increase productivity by ensuring that workers are well educated, have the tools needed to produce goods and services, and have access to the best available
technology.
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Chapter 1/The Ten Principles of Economics 37
159
. Explain how an attempt by the government to lower inflation could cause unemployment to increase in the short-run.
ANSWER: To lower inflation, the government may choose to reduce the money supply in the economy. When the money supply is reduced, prices don’t adjust immediately. Lower
spending combined with prices which are too high reduces sales and causes workers to be laid off. Hence, the lower price level is associated with higher unemployment.
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 explain this situation to Russell?
ANSWER: Income is based on productivity, not effort. Russell was able to be more productive working with a machine than working with a shovel.
159
ANSWER:
To lower inflation, the government may choose to reduce the money supply in the economy. When the money supply is reduced, prices don’t adjust immediately. Lower spending
combined with prices which are too high reduces sales and causes workers to be laid off. Hence, the lower price level is associated with higher unemployment.
160
ANSWER:
Income is based on productivity, not effort. Russell was able to be more productive working with a machine than working with a shovel.
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