Chapter 1

Ten Principles of Economics

Multiple Choice

1. The word that comes from the Greek word for \a. market. b. consumer. c. producer. d. economy. ANS: D DIF: 1 REF: 1-0 TOP: Economy MSC: Definitional

2. The word “economy” comes from the Greek word oikonomos, which means a. “environment.” b. “production.”

c. “one who manages a household.” d. “one who makes decisions.” ANS: C DIF: 1 REF: 1-0 TOP: Economy MSC: Definitional

3. Resources are

a. scarce for households but plentiful for economies. b. plentiful for households but scarce for economies. c. scarce for households and scarce for economies. d. plentiful for households and plentiful for economies. ANS: C DIF: 1 REF: 1-0 TOP: Resources, Scarcity MSC: Interpretive

4. Economics deals primarily with the concept of

a. scarcity. b. poverty. c. change. d. power. ANS: A DIF: 1 REF: 1-0 TOP: Scarcity MSC: Definitional

5. Which of the following questions is not answered by the decisions that every society must make? a. What determines consumer preferences? b. What goods will be produced? c. Who will produce the goods? d. Who will consume the goods? ANS: A DIF: 2 REF: 1-0 TOP: Economies MSC: Interpretive

6. The overriding reason as to why households and societies face many decisions is that a. resources are scarce.

b. goods and services are not scarce.

c. incomes fluctuate with business cycles. d. people, by nature, tend to disagree. ANS: A DIF: 2 REF: 1-0 TOP: Scarcity MSC: Interpretive

7. The phenomenon of scarcity stems from the fact that

a. most economies’ production methods are not very good.

b. in most economies, wealthy people consume disproportionate quantities of goods and services. c. governments restricts production of too many goods and services. d. resources are limited. ANS: D DIF: 2 REF: 1-0 TOP: Scarcity MSC: Interpretive

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8. Approximately what percentage of the world's economies experience scarcity?

a. 25% b. 50% c. 75% d. 100% ANS: D DIF: 1 REF: 1-0 TOP: Scarcity MSC: Interpretive

9. When a society cannot produce all the goods and services people wish to have, it is said that the economy is experiencing a. scarcity. b. shortages. c. inefficiencies. d. inequities. ANS: A DIF: 2 REF: 1-0 TOP: Scarcity MSC: Interpretive

10. For society, a good is not scarce if

a. at least one individual in society can obtain all he or she wants of the good. b. firms are producing the good at full capacity.

c. all members of society can have all they want of the good.

d. those who have enough income can buy all they want of the good. ANS: C DIF: 1 REF: 1-0 TOP: Scarcity MSC: Interpretive

11. Which of the following products would be considered scarce?

a. golf clubs

b. Picasso paintings c. apples

d. All of the above are correct. ANS: D DIF: 2 REF: 1-0 TOP: Scarcity MSC: Interpretive

12. Economics is the study of

a. production methods.

b. how society manages its scarce resources.

c. how households decide who performs which tasks. d. the interaction of business and government. ANS: B DIF: 1 REF: 1-0 TOP: Economies, Scarcity MSC: Definitional 13. Economics is the study of

a. how society manages its scarce resources. b. the government's role in society. c. how a market system functions. d. how to increase production. ANS: A DIF: 1 REF: 1-0 TOP: Economies, Scarcity MSC: Definitional

14. In most societies, resources are allocated by

a. a single central planner.

b. a small number of central planners.

c. those firms that use resources to provide goods and services. d. the combined actions of millions of households and firms. ANS: D DIF: 1 REF: 1-0 TOP: Resource allocation MSC: Interpretive

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15. The adage, \

a. goods are scarce. b. people face tradeoffs. c. income must be earned.

d. households face many decisions. ANS: B DIF: 2 REF: 1-1 TOP: Tradeoffs MSC: Interpretive

16. The adage, \

a. even people on welfare have to pay for food. b. the cost of living is always increasing.

c. to get something we like, we usually have to give up another thing we like. d. all costs are included in the price of a product. ANS: C DIF: 1 REF: 1-1 TOP: Tradeoffs MSC: Definitional

17. Economists use the phrase \

a. inflation almost always results in higher prices over time. b. nothing is free in a market economy.

c. making decisions requires trading off one goal against another.

d. if something looks too good to be true, it probably is not worth pursuing. ANS: C DIF: 2 REF: 1-1 TOP: Tradeoffs MSC: Interpretive

18. Which of the following statements best represents the principle represented by the adage, \

a free lunch\

a. Melissa can attend the concert only if she takes her sister with her. b. Greg is hungry and homeless.

c. Brian must repair the tire on his bike before he can ride it to class.

d. Kendra must decide between going to Colorado or Cancun for spring break. ANS: D DIF: 3 REF: 1-1 TOP: Tradeoffs MSC: Applicative

19. The principle that \

a. individuals. b. families. c. societies.

d. All of the above are correct. ANS: D DIF: 1 REF: 1-1 TOP: Tradeoffs MSC: Applicative

20. A typical society strives to get the most it can from its scarce resources. At the same time, the society attempts to

distribute the benefits of those resources to the members of the society in a fair manner. In other words, the society faces a tradeoff between a. guns and butter.

b. efficiency and equity.

c. inflation and unemployment. d. work and leisure. ANS: B DIF: 1 REF: 1-1 TOP: Efficiency, Equity MSC: Interpretive 21. Guns and butter are used to represent the classic societal tradeoff between spending on

a. durable and nondurable goods. b. imports and exports.

c. national defense and consumer goods. d. law enforcement and agriculture. ANS: C DIF: 1 REF: 1-1 TOP: Tradeoffs MSC: Interpretive

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22. When society requires that firms reduce pollution, there is

a. a tradeoff because of reduced incomes to the firms' owners and workers. b. a tradeoff only if some firms are forced to close.

c. no tradeoff, since the cost of reducing pollution falls only on the firms affected by the requirements. d. no tradeoff, since everyone benefits from reduced pollution. ANS: A DIF: 3 REF: 1-1 TOP: Tradeoffs MSC: Applicative

23. A tradeoff exists between a clean environment and a higher level of income in that

a. studies show that individuals with higher levels of income actually pollute less than low-income individuals. b. efforts to reduce pollution typically are not completely successful.

c. laws that reduce pollution raise costs of production and reduce incomes.

d. by employing individuals to clean up pollution, employment and income both rise. ANS: C DIF: 2 REF: 1-1 TOP: Tradeoffs MSC: Applicative

24. Which of the following phrases best captures the notion of efficiency?

a. absolute fairness b. equal distribution c. minimum waste d. equitable outcome ANS: C DIF: 1 REF: 1-1 TOP: Efficiency MSC: Interpretive

25. Which of the following is true?

a. Efficiency refers to the size of the economic pie; equity refers to how the pie is divided. b. Government policies usually improve upon both equity and efficiency.

c. As long as the economic pie continually gets larger, no one will have to go hungry. d. Efficiency and equity can both be achieved if the economic pie is cut into equal pieces. ANS: A DIF: 2 REF: 1-1 TOP: Efficiency, Equity MSC: Interpretive

26. Efficiency means that

a. society is conserving resources in order to save them for the future.

b. society's goods and services are distributed equally among society's members.

c. society's goods and services are distributed fairly, though not necessarily equally, among society's members. d. society is getting the maximum benefits from its scarce resources. ANS: D DIF: 1 REF: 1-1 TOP: Efficiency MSC: Definitional

27. Economists use the word equity to describe a situation in which

a. each member of society has the same income.

b. each member of society has access to abundant quantities of goods and services, regardless of his or her income. c. society is getting the maximum benefits from its scarce resources.

d. the benefits of society's resources are distributed fairly among society's members. ANS: D DIF: 2 REF: 1-1 TOP: Equity MSC: Interpretive 28. Senator Smith wants to increase taxes on people with high incomes and use the money to help the poor. Senator Jones

argues that such a tax 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 Jones.

c. a good decision requires that we recognize both viewpoints. d. there are no tradeoffs between equity and efficiency. ANS: C DIF: 2 REF: 1-1 TOP: Efficiency, Equity MSC: Applicative

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29. Which of the following words and phrases best captures the notion of equity?

a. minimum waste b. maximum benefit c. sameness d. fairness ANS: D DIF: 1 REF: 1-1 TOP: Equity MSC: Definitional

30. When government policies are enacted,

a. equity can usually be enhanced without an efficiency loss, but efficiency can never be enhanced without an

equity loss.

b. efficiency can usually be enhanced without an equity loss, but equity can never be enhanced without an

efficiency loss.

c. it is always the case that either efficiency and fairness are both enhanced, or efficiency and equity are both

diminished.

d. None of the above are correct. ANS: D DIF: 2 REF: 1-1 TOP: Government, Efficiency, Equity MSC: Applicative 31. A likely effect of government policies that redistribute income and wealth from the wealthy to the poor is that those

policies

a. enhance equity. b. reduce efficiency.

c. reduce the reward for working hard. d. All of the above are correct. ANS: D DIF: 2 REF: 1-1 TOP: Government, Efficiency, Equity MSC: Interpretive 32. When the government implements programs such as progressive income tax rates, which of the following is likely to

occur?

a. Equity is increased and efficiency is increased. b. Equity is increased and efficiency is decreased. c. Equity is decreased and efficiency is increased. d. Equity is decreased and efficiency is decreased. ANS: B DIF: 2 REF: 1-1 TOP: Government, Efficiency, Equity MSC: Interpretive 33. As a result of a successful attempt by government to cut the economic pie into more equal slices,

a. it is easier to cut the pie, and therefore the economy can produce a larger pie. b. the government can more easily allocate the pie to those most in need. c. the pie gets smaller, and there will be less pie overall.

d. government will spend too much time cutting and it causes the economy to lose the ability to produce enough pie

for everyone.

ANS: C DIF: 3 REF: 1-1 TOP: Government, Efficiency, Equity MSC: Analytical 34. When the government attempts to improve equity in an economy the result is often

a. an increase in overall output in the economy.

b. additional government revenue since overall income will increase. c. a reduction in equity. d. a reduction in efficiency. ANS: D DIF: 2 REF: 1-1 TOP: Government, Efficiency, Equity MSC: Interpretive

35. When the government redistributes income from the wealthy to the poor,

a. efficiency is improved, but equity is not.

b. both wealthy people and poor people benefit directly. c. people work less and produce fewer goods and services.

d. wealthy people consume fewer goods, but poor people consume more goods, resulting in no real change. ANS: C DIF: 2 REF: 1-1 TOP: Government, Efficiency, Equity MSC: Interpretive

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36. In economics, the cost of something is

a. the dollar amount of obtaining it.

b. always measured in units of time given up to get it. c. what you give up to get it.

d. often impossible to quantify, even in principle. ANS: C DIF: 1 REF: 1-1 TOP: Opportunity cost MSC: Definitional 37. What you give up to obtain an item is called your

a. opportunity cost. b. explicit cost. c. true cost. d. direct cost. ANS: A DIF: 1 REF: 1-1 TOP: Opportunity cost MSC: Definitional

38. The opportunity cost of going to college is

a. the total spent on food, clothing, books, transportation, tuition, lodging, and other expenses. b. the value of the best opportunity a student gives up to attend college.

c. zero for students who are fortunate enough to have all of their college expenses paid by someone else. d. zero, since a college education will allow a student to earn a larger income after graduation. ANS: B DIF: 2 REF: 1-1 TOP: Opportunity cost MSC: Interpretive 39. Maurice receives $100 as a birthday gift. In deciding how to spend the money, he narrows his options down to four

choices: Option A, Option B, Option C, and Option D. Each option costs $100. Finally he decides on Option B. The opportunity cost of this decision is

a. the value to Maurice of the option he would have chosen had Option B not been available. b. the value to Maurice of Options A, C and D combined. c. $100. d. $300. ANS: A DIF: 2 REF: 1-1 TOP: Opportunity cost MSC: Applicative 40. A furniture maker currently produces 100 tables per week and sells them for a profit. She is considering expanding

her operation in order to make more tables. Should she expand? a. Yes, because making tables is profitable.

b. No, because she may not be able to sell the additional tables.

c. It depends on the marginal cost of producing more tables and the marginal revenue she will earn from selling

more tables.

d. It depends on the average cost of producing more tables and the average revenue she will earn from selling more

tables.

ANS: C DIF: 2 REF: 1-1 TOP: Marginal changes MSC: Applicative 41. For most students, the largest single cost of a college education is

a. the wages given up to attend school. b. tuition, fees, and books. c. room and board.

d. transportation, parking, and entertainment. ANS: A DIF: 2 REF: 1-1 TOP: Opportunity cost MSC: Interpretive

42. For a college student who wishes to calculate the true costs of going to college, the costs of room and board

a. should be counted in full, regardless of the costs of eating and sleeping elsewhere.

b. should be counted only to the extent that they are more expensive at college than elsewhere. c. usually exceed the opportunity cost of going to college.

d. plus the cost of tuition, equals the opportunity cost of going to college. ANS: B DIF: 2 REF: 1-1 TOP: Opportunity cost MSC: Applicative

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43. For which of the following individuals would the opportunity cost of going to college be highest?

a. a promising young mathematician who will command a high salary once she earns her college degree b. a student with average grades who has never held a job

c. a famous, highly-paid actor who wants to take time away from show business to finish college and earn a degree d. a student who is the best player on his college basketball team, but who lacks the skills necessary to play

professional basketball

ANS: C DIF: 2 REF: 1-1 TOP: Opportunity cost MSC: Applicative 44. When you calculate your true costs of going to college, what portion of your room-and-board expenses should be

included?

a. Your full room-and-board expenses should always be included. b. None of your room-and-board expenses should ever be included.

c. You should include only the amount by which your room-and-board expenses exceed the income you earn while

attending college.

d. You should include only the amount by which your room-and-board expenses exceed the expenses for rent and

food if you were not in college.

ANS: D DIF: 2 REF: 1-1 TOP: Opportunity cost MSC: Applicative 45. The opportunity cost of an item is

a. the number of hours needed to earn money to buy the item. b. what you give up to get that item.

c. usually less than the dollar value of the item. d. the dollar value of the item. ANS: B DIF: 1 REF: 1-1 TOP: Opportunity cost MSC: Definitional

46. Mallory decides to spend three hours working overtime rather than watching a video with her friends. She earns $8 an

hour. Her opportunity cost of working is a. the $24 she earns working.

b. the $24 minus the enjoyment she would have received from watching the video. c. the enjoyment she would have received had she watched the video.

d. nothing, since she would have received less than $24 of enjoyment from the video. ANS: C DIF: 3 REF: 1-1 TOP: Opportunity cost MSC: Applicative 47. Russell spends an hour studying instead of playing tennis. The opportunity cost to him of studying is

a. the improvement in his grades from studying for the hour.

b. the improvement in his grades from studying minus the enjoyment of playing tennis. c. the enjoyment and exercise he would have received had he played tennis.

d. zero. Since Russell chose to study rather than to play tennis, the value of studying must have been greater than the

value of playing tennis.

ANS: C DIF: 3 REF: 1-1 TOP: Opportunity cost MSC: Applicative 48. College-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 very high. c. are concerned more about present circumstances than their future. d. underestimate the value of a college education. ANS: B DIF: 2 REF: 1-1 TOP: Opportunity cost MSC: Interpretive

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49. A rational decisionmaker

a. ignores marginal changes and focuses instead on “the big picture.”

b. ignores the likely effects of government policies when he or she makes choices.

c. takes an action only if the marginal benefit of that action exceeds the marginal cost of that action.

d. takes an action only if the combined benefits of that action and previous actions exceed the combined costs of that

action and previous actions.

ANS: C DIF: 2 REF: 1-1 TOP: Marginal changes MSC: Interpretive 50. Rational people make decisions at the margin by

a. following marginal traditions. b. behaving in a random fashion. c. thinking in black-and-white terms.

d. comparing marginal costs and marginal benefits. ANS: D DIF: 1 REF: 1-1 TOP: Marginal changes MSC: Interpretive 51. The word \

a. edge. b. distance. c. space. d. measure. ANS: A DIF: 1 REF: 1-1 TOP: Marginal changes MSC: Definitional

52. Making rational decisions \

a. make those decisions that do not impose a marginal cost.

b. evaluate how easily a decision can be reversed if problems arise. c. compare the marginal costs and marginal benefits of each decision. d. always calculate the marginal dollar costs for each decision. ANS: C DIF: 2 REF: 1-1 TOP: Marginal changes MSC: Interpretive

53. A person’s willingness to pay for a good is based on

a. the availability of the good.

b. the marginal benefit that an extra unit of the good would provide for that person. c. the marginal cost of producing an extra unit of the good.

d. esoteric factors, the study of which lies beyond the boundaries of economics. ANS: B DIF: 2 REF: 1-1 TOP: Marginal changes MSC: Interpretive

54. To say that \

a. changes in costs (but not changes in benefits) influence people's decisions and their behavior. b. changes in benefits (but not changes in costs) influence people's decisions and their behavior. c. changes in benefits or changes in costs influence people's decisions and their behavior. d. tradeoffs can be eliminated by rational people who think at the margin. ANS: C DIF: 1 REF: 1-1 TOP: Incentives MSC: Definitional

55. A marginal change is a

a. change that involves little, if anything, that is important. b. large, significant adjustment.

c. change for the worse, and so it is usually a short-term change. d. small, incremental adjustment. ANS: D DIF: 1 REF: 1-1 TOP: Marginal changes MSC: Definitional

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56. Which of the following is the best example of a marginal change?

a. After graduating college, Audrey's income increases from $500 per month to $3,000 per month. b. Morgan gets a raise at her part-time job and is now paid $7.25 per hour instead of $7.00.

c. Housing prices in an area increase by 40 percent when a new interstate is built that passes nearby. d. A hard freeze wipes out half of the orange crop in Florida and the price of orange juice doubles. ANS: B DIF: 2 REF: 1-1 TOP: Marginal changes MSC: Applicative

57. Which of the following is the best example of a marginal change?

a. The price of housing in Denver increased by 6 percent last year.

b. Kim gets a big promotion at work. She also gets a raise from $35,000 per year to $55,000 per year.

c. Mark graduates from college and takes a job. His income increases from $10,000 per year to $35,000 per year. d. A drought hits the upper Midwest and the price of wheat increases from $4.00 per bushel to $6.50 per bushel. ANS: A DIF: 2 REF: 1-1 TOP: Marginal changes MSC: Applicative 58. A marginal change is best illustrated by which of the following?

a. Nancy retires and takes a part-time job. She was working 40 hours per week and now works 15 hours per week. b. A large, state-supported university has announced that due to state budget deficits, tuition must rise by 20 percent

next year.

c. Ryan moved to a new apartment and now pays 40 percent more rent than before.

d. Arizona, which usually receives 10 inches of rain per year, received 11 inches last year. ANS: D DIF: 2 REF: 1-1 TOP: Marginal changes MSC: Interpretive 59. Teresa eats three oranges during a particular day. The marginal benefit she enjoys from eating the third orange

a. can be thought of as the total benefit Teresa enjoys by eating three oranges minus the total benefit she would have

enjoyed by eating just the first two oranges.

b. determines Teresa’s willingness to pay for the first, second, and third oranges. c. does not depend on how many oranges Teresa has already eaten. d. All of the above are correct. ANS: A DIF: 3 REF: 1-1 TOP: Marginal changes MSC: Applicative 60. A rational decisionmaker takes an action if and only if

a. the marginal benefit of the action exceeds the marginal cost of the action. b. the marginal cost of the action exceeds the marginal benefit of the action. c. the marginal cost of the action is zero. d. the opportunity cost of the action is zero. ANS: A DIF: 1 REF: 1-1 TOP: Marginal changes MSC: Interpretive

61. After much consideration, you have chosen Cancun over Ft. Lauderdale as your Spring Break destination this year.

However, Spring Break is still months away, and you may reverse this decision. Which of the following events would prompt you to reverse this decision?

a. The marginal benefit of going to Cancun increases. b. The marginal cost of going to Cancun decreases.

c. The marginal benefit of going to Ft. Lauderdale decreases. d. The marginal cost of going to Ft. Lauderdale decreases. ANS: D DIF: 3 REF: 1-1 TOP: Marginal changes MSC: Applicative 62. The average cost per seat on the 50-passenger Floating-On-Air Bus company's trip from Kansas City to St. Louis, on

which no refreshments are served, is $45. In advance of a particular trip, three seats remain unsold. The bus company could increase its profit only if it

a. charged any ticket price above $0 for the three remaining seats. b. charged at least $15 for each of the three remaining seats. c. charged at least $45 for each of the three remaining seats. d. paid three people to occupy the three remaining seats. ANS: A DIF: 2 REF: 1-1 TOP: Marginal cost MSC: Applicative

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63. Warren drinks four cups of coffee during a particular day. The marginal benefit he enjoys from drinking the fourth

cup

a. can be thought of as the total benefit Warren enjoys by drinking four cups minus the total benefit he would have

enjoyed by drinking just three cups.

b. determines Warren’s willingness to pay for the fourth cup.

c. is likely different from the marginal benefit provided to Warren by the third cup. d. All of the above are correct. ANS: D DIF: 3 REF: 1-1 TOP: Marginal changes MSC: Applicative 64. 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. average benefit is greater than the average cost.

d. marginal benefit is greater than both the average cost and the marginal cost. ANS: B DIF: 2 REF: 1-1 TOP: Marginal changes MSC: Interpretive

65. A construction company has built 50 houses so far this year at a total cost to the company of $8 million. If the

company builds a 51st house, its total cost will increase to $8.18 million. Which of the following statements is correct?

a. For the first 50 houses, the average cost per house was $160,000. b. The marginal cost of the 51st house, if it is built, will be $180,000.

c. If the company can experience a marginal benefit of $190,000 by building the 51st house, then the company

should build it.

d. All of the above are correct. ANS: D DIF: 3 REF: 1-1 TOP: Marginal cost, Marginal benefit MSC: Applicative 66. Mike has spent $500 purchasing and repairing an old fishing boat, which he expects to sell for $800 once the repairs

are complete. Mike discovers that, in addition to the $500 he has already spent, he needs to make an additional repair, which will cost another $400, in order to make the boat worth $800 to potential buyers. He can sell the boat as it is now for $300. What should he do?

a. He should sell the boat as it is now for $300.

b. He should keep the boat since it would not be rational to spend $900 on repairs and then sell the boat for $800. c. He should complete the repairs and sell the boat for $800.

d. It does not matter which action he takes; the outcome is the same either way. ANS: C DIF: 3 REF: 1-1 TOP: Marginal cost MSC: Analytical 67. A donut shop sells fresh baked donuts from 5 a.m. until 3 p.m. every day. The shop does not sell day-old donuts, so

all unsold donuts are thrown away at 3 p.m. each day. The cost of making and selling a dozen donuts is $1.50; there are no costs associated with throwing donuts away. If the manager has 10 dozen donuts left at 2:30 p.m. on a particular day, which of the following alternatives is most attractive?

a. Lower the price of the remaining donuts, even if the price falls below $1.50 per dozen.

b. Lower the price of the remaining donuts, but under no circumstances should the price fall below $1.50 per dozen. c. Throw the donuts away and produce 10 fewer dozen donuts tomorrow.

d. Starting tomorrow, lower the price on all donuts so they will all be sold earlier in the day. ANS: A DIF: 3 REF: 1-1 TOP: Marginal changes MSC: Analytical 68. Stan buys a 1966 Mustang for $2,000, planning to restore and sell the car. He goes on to spend $8,000 restoring the

car. At this point he can sell the car for $9,000. As an alternative, he can spend an additional $3,000 replacing the engine. With a new engine the car would sell for $12,000. Stan should a. complete the repairs and sell the car for $12,000. b. sell the car now for $9, 000.

c. never try such an expensive project again.

d. be indifferent between (i) selling the car now and (ii) replacing the engine and then selling it. ANS: D DIF: 3 REF: 1-1 TOP: Marginal cost MSC: Analytical

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69. Sarah buys and sells real estate. Two weeks ago, she paid $140,000 for a house on Oak Street, intending to spend

$20,000 on repairs sell the house for $175,000. Last week, the city government announced a plan to build a “halfway house” for convicted criminals on Oak Street. As a result of the city’s announced plan, Sarah is weighing two

alternatives: She can go ahead with the $20,000 in repairs and then sell the house for $135,000, or she can forgo the repairs and sell the house as it is for $120,000. Sarah should a. keep the house and live in it.

b. go ahead with the $20,000 in repairs and sell the house for $135,000. c. forgo the repairs and sell the house as it is for $120,000.

d. move the house from Oak Street to a more desirable location, irrespective of the cost of doing so. ANS: C DIF: 3 REF: 1-1 TOP: Marginal cost MSC: Analytical 70. People are willing to pay more for a diamond than for a bottle of water because

a. the marginal cost of producing an extra diamond far exceeds the marginal cost of producing an extra bottle of

water.

b. the marginal benefit of an extra diamond far exceeds the marginal benefit of an extra bottle of water.

c. producers of diamonds have a much greater ability to manipulate diamond prices than producers of water have to

manipulate water prices.

d. water prices are held artificially low by governments, since water is necessary for life. ANS: B DIF: 2 REF: 1-1 TOP: Marginal changes MSC: Interpretive 71. Economists are particularly adept at understanding that people respond to

a. laws.

b. incentives.

c. punishments more than rewards. d. rewards more than punishments. ANS: B DIF: 1 REF: 1-1 TOP: Incentives MSC: Interpretive

72. Government policies can change the costs and benefits that people face. Those policies have the potential to

a. alter people’s behavior.

b. alter people’s decisions at the margin.

c. produce results that policymakers did not intend. d. All of the above are correct. ANS: D DIF: 2 REF: 1-1 TOP: Incentives MSC: Interpretive

73. Ralph Nader's book Unsafe at Any Speed caused Congress to require

a. safety glass in all new cars. b. seat belts in all new cars. c. air bags in all new cars.

d. stricter drunk driving laws in all states. ANS: B DIF: 1 REF: 1-1 TOP: Incentives MSC: Interpretive

74. U.S. laws requiring that drivers wear seat belts have resulted in

a. a reduction in both driver deaths and pedestrian deaths. b. fewer accidents and fewer deaths per accident.

c. fewer driver deaths, fewer accidents and fewer pedestrian deaths.

d. little change in the number of driver deaths, but more accidents and more pedestrian deaths. ANS: D DIF: 2 REF: 1-1 TOP: Incentives MSC: Interpretive

75. Evidence indicates that seat belt laws have led to

a. fewer pedestrian deaths. b. fewer automobile accidents.

c. fewer deaths per automobile accident. d. All of the above are correct. ANS: C DIF: 1 REF: 1-1 TOP: Seat belt laws MSC: Definitional

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76. One effect of the government-imposed seat belt law in the U.S. has been

a. a dramatic decrease in the number of pedestrian deaths. b. safer driving.

c. an increase in the number of accidents.

d. a dramatic decrease in the number of driver deaths. ANS: C DIF: 2 REF: 1-1 TOP: Incentives MSC: Interpretive

77. Based on what we know about the effects of mandatory seat belt laws, which of the following groups would be most

likely to mount a campaign to repeal those laws? a. Owners of collision-repair shops. b. People who walk rather than drive.

c. Policemen who have better things to do than investigate collisions. d. All of the above are correct. ANS: B DIF: 3 REF: 1-1 TOP: Incentives MSC: Analytical

78. Based on the available evidence, which of the following groups benefits most from mandatory seat belt laws?

a. automakers b. pedestrians c. drivers

d. owners of collision-repair shops ANS: D DIF: 3 REF: 1-1 TOP: Incentives MSC: Analytical

79. 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 would benefit from the resources used b. to conserve on costs, so as to maintain efficiency in the economy

c. to produce enough to meet the output target, without regard for quality or cost d. to produce those products that society desires most ANS: C DIF: 2 REF: 1-1 TOP: Incentives MSC: Interpretive

80. Your professor loves her work, teaching economics. She has been offered other positions in the corporate world that

would increase her income by 25 percent, but she has decided to continue working as a professor. Her decision would not change unless the marginal a. cost of teaching increased. b. benefit of teaching increased. c. cost of teaching decreased.

d. cost of a corporate job increased. ANS: A DIF: 2 REF: 1-1 TOP: Marginal changes MSC: Interpretive 81. Suppose your management professor has been offered a corporate job with a 30 percent pay increase. He has decided

to take the job. For him, the marginal

a. cost of leaving was greater than the marginal benefit. b. benefit of leaving was greater than the marginal cost. c. benefit of teaching was greater than the marginal cost. d. All of the above are correct. ANS: B DIF: 2 REF: 1-1 TOP: Marginal changes MSC: Interpretive 82. When policymakers implement policies that alter incentives, they usually

a. have carefully weighed the direct and indirect effects of the policy. b. do not observe the intended result of the policies.

c. have considered all possible effects of the incentive changes when they developed the policy, which will make

the policy effective.

d. correctly anticipate the indirect effects, but often miss the direct effects. ANS: B DIF: 2 REF: 1-1 TOP: Incentives MSC: Interpretive

Chapter 1/Ten Principles of Economics ? 13

83. Which of the following principles is not one of the four principles of individual decisionmaking?

a. People face tradeoffs.

b. Trade can make everyone better off. c. People respond to incentives.

d. Rational people think at the margin. ANS: B DIF: 1 REF: 1-1, 1-2 TOP: Tradeoffs, Trade, Marginal changes MSC: Definitional 84. Which of the following is a principle concerning how people interact?

a. Markets are usually a good way to organize economic activity. b. Rational people think at the margin. c. People respond to incentives. d. All of the above are correct. ANS: A DIF: 2 REF: 1-1, 1-2 TOP: Markets MSC: Interpretive

85. Which of the following statements exemplifies a principle of individual decisionmaking?

a. Trade can make everyone better off.

b. Governments can sometimes improve market outcomes. c. The cost of something is what you give up to get it. d. All of the above are correct. ANS: C DIF: 2 REF: 1-1, 1-2 TOP: Opportunity cost MSC: Interpretive

86. Which is the most accurate statement about trade?

a. Trade can make every nation better off.

b. Trade makes some nations better off and others worse off.

c. Trading for a good can make a nation better off only if the nation cannot produce that good itself. d. Trade helps rich nations and hurts poor nations. ANS: A DIF: 2 REF: 1-2 TOP: Trade MSC: Interpretive 87. The principle that \

a. families.

b. states within the United States. c. nations.

d. All of the above are correct. ANS: D DIF: 1 REF: 1-2 TOP: Trade MSC: Applicative 88. Which of the following statements about trade is false?

a. Trade increases competition.

b. With trade, one country wins and one country loses.

c. Bulgaria can benefit, potentially, from trade with any other country.

d. Trade allows people to buy a greater variety of goods and services at lower cost. ANS: B DIF: 2 REF: 1-2 TOP: Trade MSC: Interpretive

89. Senator Smart, who understands economic principles, is trying to convince workers in her district that trade with

other countries is beneficial. Senator Smart should argue that trade can be beneficial a. only if it allows us to obtain things that we couldn't make for ourselves. b. because it allows specialization, which increases total output. c. to us if we can gain and the others involved in the trade lose.

d. in only a limited number of circumstances because others are typically self-interested. ANS: B DIF: 2 REF: 1-2 TOP: Trade MSC: Interpretive

14 ? Chapter 1/Ten Principles of Economics

90. Benefits from trade would not include

a. the ability of people and nations to specialize.

b. a greater variety of goods and services becoming available. c. less competition. d. lower prices. ANS: C DIF: 2 REF: 1-2 TOP: Trade MSC: Interpretive

91. Trade between the United States and India

a. benefits both the United States and India.

b. is a losing proposition for the United States because India has cheaper labor.

c. is a losing proposition for India because capital is much more abundant in the U.S. than in India. d. is a losing proposition for India because U.S. workers are more productive. ANS: A DIF: 2 REF: 1-2 TOP: Trade MSC: Interpretive 92. Canada can benefit from trade

a. only with nations that can produce goods Canada cannot produce. b. only with less developed nations.

c. only with nations outside of North America. d. with any nation. ANS: D DIF: 2 REF: 1-2 TOP: Trade MSC: Interpretive

93. If Japan chooses to engage in trade, it

a. will only benefit if it trades with countries that produce goods Japan cannot produce. b. cannot benefit if it trades with less developed countries. c. should first attempt to produce the good itself. d. can benefit by trading with any other country. ANS: D DIF: 2 REF: 1-2 TOP: Trade MSC: Interpretive

94. If the United States decides to trade with Mexico, we know that

a. Mexico will benefit, but trade with a less developed country could not benefit the United States. b. it will not benefit Mexico because workers in the United States are more productive. c. Mexico and the United States can both benefit.

d. it will not benefit either country because their cultural differences are too vast. ANS: C DIF: 2 REF: 1-2 TOP: Trade MSC: Interpretive

95. Which of the following statements about markets is most accurate?

a. Markets are usually a good way to organize economic activity.

b. Markets are usually inferior to central planning as a way to organize economic activity. c. Markets fail 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. ANS: A DIF: 1 REF: 1-2 TOP: Markets MSC: Interpretive

96. Which of the following statements does not apply to a market economy?

a. Firms decide whom to hire and what to produce.

b. No one is looking out for the economic well-being of society as a whole.

c. Households decide which firms to work for and what to buy with their incomes.

d. Government policies are the primary forces that guide the decisions of firms and households. ANS: D DIF: 2 REF: 1-2 TOP: Market economy MSC: Interpretive

Chapter 1/Ten Principles of Economics ? 15

97. In a market economy, who makes the decisions that guide most economic activity?

a. firms only

b. households only

c. firms and households d. government ANS: C DIF: 1 REF: 1-2 TOP: Markets MSC: Definitional

98. The decisions of firms and households are guided by prices and self-interest in a

a. command economy.

b. centrally-planned economy. c. market economy.

d. All of the above are correct. ANS: C DIF: 1 REF: 1-2 TOP: Market economy MSC: Definitional 99. In a market economy, economic activity is guided by

a. the government. b. corporations. c. central planners.

d. self-interest and prices. ANS: D DIF: 1 REF: 1-2 TOP: Market economy MSC: Definitional

100. The term used to describe a situation in which markets fail to allocate resources efficiently is called

a. economic meltdown. b. market failure. c. disequilibrium.

d. the effect of the invisible hand. ANS: B DIF: 1 REF: 1-2 TOP: Market failure MSC: Definitional

101. In an economy in which decisions are guided by prices and individual self-interest, there is

a. the potential to achieve efficiency in production.

b. a strong need for government intervention in the market.

c. less efficiency than would be observed in a centrally-planned economy.

d. more need for a strong legal system to control individual greed than would be needed in a centrally-planned

economy.

ANS: A DIF: 2 REF: 1-2 TOP: Market economy MSC: Interpretive 102. Prices direct economic activity in a market economy by

a. influencing the actions of buyers and sellers.

b. reducing scarcity of the goods and services produced. c. eliminating the need for government intervention.

d. allocating goods and services in the most equitable way. ANS: A DIF: 2 REF: 1-2 TOP: Market economy MSC: Interpretive

103. A friend of yours asks you why market prices are better than government-determined prices. Because you understand

economic principles, you say that market-determined prices are better because they generally reflect a. the value of a good to society, but not the cost of making it. b. the cost of making a good to society, but not its value.

c. both the value of a good to society and the cost of making it. d. neither the value of a good to society nor the cost of making it. ANS: C DIF: 2 REF: 1-2 TOP: Markets, Prices MSC: Interpretive

16 ? Chapter 1/Ten Principles of Economics

104. Which of the following firms is most likely to have market power?

a. a fast food restaurant in a college town b. a wheat farm in Kansas

c. the last gas station in New Mexico for 100 miles d. a shoe store in Kentucky ANS: C DIF: 2 REF: 1-2 TOP: Market power MSC: Interpretive 105. An example of a firm with market power is a

a. delicatessen in New York. b. cable TV provider in St. Louis. c. clothing store in Los Angeles. d. family farm in Illinois. ANS: B DIF: 2 REF: 1-2 TOP: Market power MSC: Interpretive

106. One advantage market economies have over centrally-planned economies is that market economies

a. provide an equal distribution of goods and services to households.

b. establish a significant role for government in the allocation of resources. c. solve the problem of scarcity. d. are more efficient. ANS: D DIF: 2 REF: 1-2 TOP: Market economy MSC: Interpretive

107. Which of the following statements best characterizes a basic difference between market economies and

centrally-planned economies?

a. Society relies more upon prices to allocate resources when the economy is centrally-planned than when it is

market-based.

b. The self-interest of households is reflected more fully in the outcome of a centrally-planned economy than in the

outcome of a market economy.

c. Government plays a larger role in the economic affairs of a market economy than in the economic affairs of a

centrally-planned economy. d. None of the above are correct. ANS: D DIF: 2 REF: 1-2 TOP: Market economy MSC: Interpretive 108. The collapse of communism in the Soviet Union and Eastern Europe took place mainly in the

a. 1960s. b. 1970s. c. 1980s. d. 1990s. ANS: C DIF: 1 REF: 1-2 TOP: Communism MSC: Definitional 109. The economy of the former Soviet Union is best described as a

a. primitive economy. b. market economy. c. hybrid economy.

d. centrally-planned economy. ANS: D DIF: 1 REF: 1-2 TOP: Market economy MSC: Definitional

110. Prior to the collapse of communism, communist countries worked on the premise that economic well-being could be

best attained by

a. a market economy.

b. a strong reliance on prices and individuals’ self-interests.

c. a system of large, government-operated, privately-owned firms. d. the actions of government central planners. ANS: D DIF: 2 REF: 1-2 TOP: Communism MSC: Interpretive

Chapter 1/Ten Principles of Economics ? 17

111. Which of the following observations was made famous by Adam Smith in his book The Wealth of Nations?

a. There is no such thing as a free lunch.

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 \

outcomes.

ANS: D DIF: 1 REF: 1-2 TOP: Invisible hand MSC: Definitional 112. The term \

a. Adam Smith. b. David Ricardo. c. Karl Marx.

d. Benjamin Franklin. ANS: A DIF: 1 REF: 1-2 TOP: Invisible hand MSC: Definitional 113. The \

a. advertising. b. prices.

c. central planning.

d. government regulations. ANS: B DIF: 2 REF: 1-2 TOP: Invisible hand MSC: Interpretive

114. The idea that only the government can organize economic activity in a way that promotes economic well-being for a

country as a whole

a. is a basic principle regarding individual decisionmaking.

b. amounts to a denial of one of the basic principles regarding interactions among people. c. supports the idea that the \d. was promoted by the economist Adam Smith in a well-known 1776 book. ANS: B DIF: 2 REF: 1-2 TOP: Markets MSC: Interpretive

115. Adam Smith argued that in a market system, when people act in their own self-interest, they typically

a. help only themselves. b. harm others.

c. help others, but not as much as they would have if they were not self-interested. d. help others even more than when they deliberately try to help others. ANS: D DIF: 2 REF: 1-2 TOP: Invisible hand MSC: Interpretive

116. The invisible hand's ability to coordinate the decisions of the firms and households in the economy can be hindered

by

a. government actions that distort prices. b. increased competition in markets. c. enforcement of property rights.

d. too much attention paid to efficiency. ANS: A DIF: 2 REF: 1-2 TOP: Invisible hand MSC: Interpretive 117. When the \

a. only the values that society places on those products. b. only the costs to society of producing those products.

c. both the values that society places on those products and the costs to society of producing those products. d. none of the above; when the \

government in a manner that is thought to be \

ANS: C DIF: 2 REF: 1-2 TOP: Invisible hand, Markets MSC: Interpretive

18 ? Chapter 1/Ten Principles of Economics

118. Adam Smith's book The Wealth of Nations was published in

a. 1692. b. 1776. c. 1816. d. 1936. ANS: B DIF: 1 REF: 1-2 TOP: Invisible hand MSC: Definitional

119. Both The Wealth of Nations and the Declaration of Independence share the point of view that

a. every person is entitled to life, liberty, and the pursuit of happiness.

b. individuals are best left to their own devices without the government guiding their actions. c. the government plays a central role in organizing a market economy.

d. because of human nature a strong legal system is necessary for a market system to survive. ANS: B DIF: 2 REF: 1-2 TOP: Invisible hand MSC: Interpretive 120. The invisible hand works to promote general well-being in the economy primarily through

a. government intervention. b. the political process.

c. people’s pursuit of self-interest. d. altruism. ANS: C DIF: 1 REF: 1-2 TOP: Invisible hand MSC: Interpretive 121. Taxes adversely affect the allocation of resources in society because

a. they do not always fall more heavily on the rich than on the poor. b. the taxes collected are not enough to finance government spending. c. not everyone pays taxes.

d. they distort prices and thus distort the decisions of households and firms. ANS: D DIF: 2 REF: 1-2 TOP: Taxes MSC: Interpretive 122. A primary function of prices in a market economy is to provide participants with

a. relevant economic information. b. relevant spending limits.

c. an equitable distribution of goods and services. d. All of the above are correct. ANS: A DIF: 2 REF: 1-2 TOP: Market economy, Prices MSC: Interpretive 123. When the government prevents prices from adjusting naturally to supply and demand,

a. it stabilizes the economy by reducing market uncertainties. b. it adversely affects the allocation of resources.

c. the improvement in equity justifies the reduction in efficiency. d. the improvement in efficiency justifies the reduction in equity. ANS: B DIF: 2 REF: 1-2 TOP: Prices, Government MSC: Applicative

124. With respect to the attainment of an efficient allocation of resources, which of the following statements is correct?

a. Markets are always a good way to organize economic activity. b. Markets are often a good way to organize economic activity. c. Markets are seldom a good way to organize economic activity. d. Markets are never a good way to organize economic activity. ANS: B DIF: 1 REF: 1-2 TOP: Markets MSC: Interpretive

Chapter 1/Ten Principles of Economics ? 19

125. For markets to work well, there must be

a. market power. b. a central planner. c. property rights.

d. abundant, not scarce, resources. ANS: C DIF: 2 REF: 1-2 TOP: Markets, Property rights MSC: Interpretive

126. One reason we need government, even in a market economy, is that

a. there are insufficient quantities of externalities in the absence of government. b. property rights become too entrenched in the absence of government.

c. the invisible hand seldom leads to an efficient allocation of resources in any market. d. the invisible hand, while powerful, is not perfect. ANS: D DIF: 2 REF: 1-2 TOP: Market economy, Government MSC: Interpretive

127. The basic principles of economics suggest that

a. markets are seldom, if ever, a good way to organize economic activity.

b. government should become involved in markets when trade between countries is involved.

c. government should become involved in markets when those markets fail to produce efficient or equitable

outcomes.

d. All of the above are correct. ANS: C DIF: 1 REF: 1-2

TOP: Markets, Government, Trade MSC: Interpretive

128. One necessary role of government in a market economy is to

a. impose taxes on those goods and services that are most desired by consumers. b. maintain welfare programs for the poor.

c. provide services such as mail delivery and garbage collection. d. enforce property rights. ANS: D DIF: 2 REF: 1-2

TOP: Government, Property rights MSC: Interpretive 129. The government enforces property rights by

a. requiring property owners to pay property taxes. b. providing police and courts. c. forcing people to own property.

d. providing public parks and recreation facilities. ANS: B DIF: 2 REF: 1-2

TOP: Government, Property rights MSC: Interpretive

130. To say that government intervenes in the economy to promote efficiency is to say that government is attempting to

a. create a more fair distribution of income.

b. change the way in which the economic pie is divided. c. enlarge the economic pie. d. All of the above are correct. ANS: C DIF: 2 REF: 1-2 TOP: Efficiency, Government MSC: Interpretive 131. A company that formerly produced software went out of business because too many potential customers bought

illegally-produced copies of the software instead of buying the product directly from the company. This instance serves as an example of a. market power. b. market failure.

c. inadequate enforcement of property rights. d. the invisible hand at work. ANS: C DIF: 2 REF: 1-2 TOP: Property rights MSC: Interpretive

20 ? Chapter 1/Ten Principles of Economics

132. A rationale for government involvement in a market economy is as follows:

a. Markets sometimes fail to produce a fair distribution of economic well-being. b. Markets sometimes fail to produce an efficient allocation of resources. c. Property rights have to be enforced. d. All of the above are correct. ANS: D DIF: 1 REF: 1-2 TOP: Government, Markets MSC: Interpretive 133. The term market failure refers to

a. a situation in which the market on its own fails to allocate resources efficiently. b. an unsuccessful advertising campaign which reduces demand for a product. c. a situation in which competition among firms becomes ruthless. d. a firm which is forced out of business because of losses. ANS: A DIF: 1 REF: 1-2 TOP: Market failure MSC: Definitional

134. Which of the following is not generally regarded as a legitimate reason for the government to intervene in a market?

a. to promote efficiency b. to promote equity

c. to enforce property rights

d. to protect an industry from foreign competition ANS: D DIF: 2 REF: 1-2 TOP: Government, Markets MSC: Interpretive 135. Causes of market failure include

a. externalities and market power.

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

d. incorrect forecasts of consumer demand and foreign competition. ANS: A DIF: 2 REF: 1-2 TOP: Market failure MSC: Interpretive

136. Which of the following statements is not true?

a. In the presence of a market failure, government action will always improve on the market outcome. b. In the presence of a market failure, government action can sometimes improve on the market outcome.

c. In the presence of a market failure, government action might not improve on the market outcome because some

leaders are not fully informed about the effects of their actions.

d. In the presence of a market failure, government action might not improve on the market outcome because

sometimes public policies simply reward the politically powerful.

ANS: A DIF: 2 REF: 1-2

TOP: Market failure, Government MSC: Interpretive 137. Market failure can be caused by

a. low consumer demand.

b. government intervention and price controls. c. externalities and market power. d. high prices and foreign competition. ANS: C DIF: 2 REF: 1-2 TOP: Market failure MSC: Interpretive

138. The term \

a. means the same thing as \

b. refers to the dissolution of a market when firms decide to quit producing a certain product. c. refers to the failure of a market to produce an efficient allocation of resources.

d. refers to government's failure to enforce the property rights of households or firms that participate in a certain

market.

ANS: C DIF: 2 REF: 1-2 TOP: Market failure MSC: Interpretive

Chapter 1/Ten Principles of Economics ? 21

139. An example of an externality is the impact of

a. John’s actions on Jane’s well-being.

b. John’s actions on John’s own well-being. c. society's decisions on society’s well-being. d. society's decisions on John’s well-being. ANS: A DIF: 1 REF: 1-2 TOP: Externalities MSC: Definitional

140. An example of an externality is the impact of

a. bad weather on the income of farmers.

b. the personal income tax on a person's ability to purchase goods and services. c. pollution from a factory on the health of people in the vicinity of the factory. d. increases in health care costs on the health of individuals in society. ANS: C DIF: 2 REF: 1-2 TOP: Externalities MSC: Interpretive 141. If an externality is present in a market, economic efficiency may be enhanced by

a. government intervention. b. increased competition.

c. better informed market participants. d. weaker property rights. ANS: A DIF: 2 REF: 1-2 TOP: Externalities, Efficiency MSC: Interpretive

142. Which of these statements concerning externalities is correct?

a. There would be no justification for government involvement in the economy if it were not for externalities. b. An externality can only arise when one person (or a small group of persons) has the ability to unduly influence

market prices.

c. An externality can arise only when two or more countries are engaged in trade with one another. d. An externality arises when one person's actions have an impact on the well-being of others. ANS: D DIF: 2 REF: 1-2 TOP: Government, Markets MSC: Interpretive 143. If a copper refinery does not bear the entire cost of the smoke it emits, it will

a. not emit any smoke so as to avoid the entire cost of the smoke. b. emit lower levels of smoke.

c. emit an acceptable level of smoke. d. emit too much smoke. ANS: D DIF: 2 REF: 1-2 TOP: Externalities MSC: Interpretive

144. Laws that restrict the smoking of cigarettes in public places are examples of government intervention that is intended

to reduce

a. the influence of the invisible hand. b. trade.

c. externalities. d. market power. ANS: C DIF: 2 REF: 1-2

TOP: Externalities, Government MSC: Applicative

145. A market economy rewards people according to their

a. need for goods and services. b. willingness to work.

c. ability to produce things that other people are willing to pay for. d. ability to produce things of cultural importance. ANS: C DIF: 2 REF: 1-2 TOP: Market economy MSC: Interpretive

22 ? Chapter 1/Ten Principles of Economics

146. Market economies are distinguished from other types of economies largely on the basis of

a. the political affiliations of government officials.

b. the process by which government officials are elected or appointed. c. the ways in which scarce resources are allocated. d. the number of retail outlets available to consumers. ANS: C DIF: 2 REF: 1-2 TOP: Market economy MSC: Interpretive 147. Which of these consumption activities will most likely impose an external cost?

a. An executive plays a vigorous game of golf.

b. A student in a dorm plays her CDs at 120 decibels late at night. c. A young mother exercises to an aerobics video.

d. A construction worker eats a sandwich during his lunch break. ANS: B DIF: 2 REF: 1-2 TOP: Externalities MSC: Interpretive 148. Which of these activities will most likely result in an external benefit?

a. A college student buys a deck of cards to play solitaire in her dorm room. b. An elderly woman plants a flower garden on the vacant lot next to her house. c. An executive purchases a book to read on a business trip. d. A ten-year-old uses his allowance to buy new Nike shoes. ANS: B DIF: 2 REF: 1-2 TOP: Externalities MSC: Interpretive

149. If education produces external benefits for society, which of the following might NOT be an appropriate policy for

society to adopt regarding education? a. tax incentives for schooling

b. mandatory minimum levels of education

c. programs which promote the hiring of high school dropouts d. public subsidies of education ANS: C DIF: 2 REF: 1-2 TOP: Externalities MSC: Applicative 150. When a single person (or small group) has the ability to influence market prices, there is

a. competition. b. market power. c. an externality.

d. a lack of property rights. ANS: B DIF: 1 REF: 1-2 TOP: Market power MSC: Definitional 151. Market power refers to the

a. power of a single person or small group to influence market prices. b. ability of a person or small group to successfully market new products. c. power of the government to regulate a market.

d. importance of a certain market in relation to the overall economy. ANS: A DIF: 1 REF: 1-2 TOP: Market power MSC: Definitional

152. Which is the most correct statement about the invisible hand?

a. The invisible hand always ensures both equity and efficiency.

b. The invisible hand is more effective at ensuring equity than it is at ensuring efficiency. c. The invisible hand is more effective at ensuring efficiency than it is at ensuring equity. d. Market power is the instrument with which the invisible hand directs economic activity. ANS: C DIF: 2 REF: 1-2 TOP: Invisible hand MSC: Interpretive

Chapter 1/Ten Principles of Economics ? 23

153. According to Adam Smith, the success of decentralized market economies is primarily due to

a. the basic benevolence of society. b. society's legal system.

c. individuals' pursuit of self-interest.

d. partnerships that are forged between business and government. ANS: C DIF: 2 REF: 1-2 TOP: Invisible hand MSC: Interpretive

154. The self-interest of the participants in an economy is guided into promoting general economic self-interest by

a. the invisible hand. b. market power.

c. government intervention. d. oikonomos. ANS: A DIF: 1 REF: 1-2 TOP: Invisible hand MSC: Interpretive 155. In the United States, higher income tax rates on rich people could be justified on the basis of

a. superior decision-making by market participants. b. superior resource allocation. c. enhanced market efficiency. d. enhanced equity for society. ANS: D DIF: 2 REF: 1-2 TOP: Taxes MSC: Applicative

156. The basic principles of economics imply that policymakers should

a. rely on markets to guide economic activity, except when markets produce inefficient or inequitable outcomes. b. enact policies that discourage people from specializing in particular economic activities. c. enact policies that lead to high rates of growth of the quantity of money. d. All of the above are correct. ANS: A DIF: 2 REF: 1-2, 1-3 TOP: Efficiency, Specialization, Inflation MSC: Analytical 157. The primary determinant of a country's standard of living is

a. the country’s ability to prevail over foreign competition. b. the country’s ability to produce goods and services. c. the total supply of money in the economy. d. the average age of the country's labor force. ANS: B DIF: 2 REF: 1-3 TOP: Standard of living MSC: Interpretive 158. In 2000 the average American had an income of about

a. $28,400. b. $34,100. c. $39,800. d. $44,500. ANS: B DIF: 1 REF: 1-3 TOP: Income MSC: Definitional

159. In the United States, incomes historically have grown about 2 percent per year. At this rate, average income doubles

every

a. 10 years. b. 25 years. c. 35 years. d. 50 years. ANS: C DIF: 2 REF: 1-3 TOP: Income MSC: Interpretive

24 ? Chapter 1/Ten Principles of Economics

160. The income of a typical worker in a country is most closely linked to which of the following?

a. population b. productivity c. market power

d. government policies ANS: B DIF: 2 REF: 1-3 TOP: Producitvity, Income MSC: Interpretive 161. The term \

a. means the same thing as \

b. is seldom used by economists, as its meaning is not precise.

c. refers to the quantity of goods and services produced from each hour of a worker's time.

d. refers to the variety of goods and services from which households can choose when they shop. ANS: C DIF: 1 REF: 1-3 TOP: Productivity MSC: Definitional

162. If the average income of an Australian is higher than the average income of a Russian, it is most likely because

a. productivity is higher in Australia than in Russia. b. Australia has a more industrial economy than Russia. c. there is more competition in Australia than in Russia.

d. labor unions are more powerful in Australia than in Russia. ANS: A DIF: 2 REF: 1-3 TOP: Productivity, Income MSC: Interpretive 163. Suppose that the average income of a Kenyan is higher than the average income of a South African. You might

conclude that

a. South African firms are faced with stricter government regulations than Kenyan firms.

b. total income is divided among fewer workers in Kenya since it has a smaller labor force than South Africa. c. Kenya's climate allows for longer growing seasons and therefore Kenya can produce large quantities of grain and

other crops.

d. productivity in Kenya is higher than in South Africa. ANS: D DIF: 2 REF: 1-3 TOP: Productivity, Income MSC: Applicative 164. A typical worker in Italy can produce 24 units of product in an eight-hour day, while a typical worker in Poland can

produce 25 units of product in a 10-hour day. We can conclude that a. worker productivity in Poland is higher than in Italy.

b. the standard of living will likely be higher in Italy than in Poland.

c. productivity is 3 units per hour for the Polish worker and 21/2 units per hour for the Italian worker. d. there will be no difference between the standard of living in Italy and Poland. ANS: B DIF: 3 REF: 1-3 TOP: Productivity, Standard of living MSC: Applicative 165. 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 mechanical loom. What accounts for the difference in wages? a. U.S. textile workers belong to a union.

b. There is little demand for cotton cloth in Bangladesh and great demand in the U.S.

c. Labor is more productive making cotton cloth with a mechanical loom than with a hand loom. d. Bangladesh has a low-wage policy to make its textile industry more competitive in world markets. ANS: C DIF: 3 REF: 1-3 TOP: Productivity MSC: Applicative 166. Over the past century, the average income in the United States has risen about

a. twofold. b. fivefold. c. eightfold. d. tenfold. ANS: C DIF: 1 REF: 1-3 TOP: Income MSC: Definitional

Chapter 1/Ten Principles of Economics ? 25

167. In the United States, incomes have historically grown

a. about 10 percent per year. b. about 5 percent per year. c. about 2 percent per year. d. about 0.5 percent per year. ANS: C DIF: 1 REF: 1-3 TOP: Income MSC: Definitional

168. Almost all variation in living standards is attributable to differences in countries'

a. population growth rates. b. productivity.

c. systems of public education. d. taxes. ANS: B DIF: 2 REF: 1-3 TOP: Standard of living MSC: Interpretive 169. Productivity is defined as the

a. amount of goods and services produced from each hour of a worker's time. b. number of workers required to produce a given amount of goods and services. c. amount of labor which can be saved by replacing workers with machines. d. actual amount of effort workers put into an hour of working time. ANS: A DIF: 2 REF: 1-3 TOP: Productivity MSC: Definitional 170. The amount of goods and services produced from each hour of a worker's time is called

a. total output. b. productivity. c. marginal product. d. efficiency. ANS: B DIF: 1 REF: 1-3 TOP: Productivity MSC: Definitional 171. A direct or positive relationship exists between a country's

a. productivity and its standard of living.

b. amount of government spending and its productivity. c. total population and its average citizen’s income.

d. rate of population growth and the extent of its trade with other countries. ANS: A DIF: 2 REF: 1-3 TOP: Productivity, Standard of living MSC: Interpretive 172. The historical rise in living standards of American workers is primarily a result of

a. the influence of labor unions in America.

b. tariff protection imposed by the American government. c. the enactment of minimum-wage laws in America. d. the rise in American productivity. ANS: D DIF: 2 REF: 1-3 TOP: Productivity, Standard of living MSC: Interpretive

173. The fact that different countries experience different standards of living is largely explained by differences in those

countries'

a. populations.

b. productivity levels. c. locations.

d. none of the above; economists are puzzled by differences in standards of living around the world. ANS: B DIF: 1 REF: 1-3 TOP: Standard of living, Productivity MSC: Interpretive

26 ? Chapter 1/Ten Principles of Economics

174. The slow growth of U.S. incomes during the 1970s and 1980s can best be explained by

a. unstable economic conditions in Eastern Europe. b. increased competition from abroad.

c. a decline in the rate of increase in U.S. productivity. d. a strong U.S. dollar abroad, hurting U.S. exports. ANS: C DIF: 3 REF: 1-3 TOP: Productivity, Income MSC: Applicative

175. Incomes of U.S. households in the 1970s and 1980s

a. grew rapidly, due to the widespread success of labor unions in pushing up wages during those decades. b. grew rapidly, due to several increases in the minimum wage during those decades.

c. grew rapidly, due to government policies that discouraged the importation of foreign products during those

decades.

d. grew slowly, due to slow growth of the output of goods and services per hour of U.S. workers' time during those

decades.

ANS: D DIF: 2 REF: 1-3 TOP: Productivity, Income MSC: Applicative 176. To improve living standards, policymakers should

a. impose restriction on foreign competition.

b. formulate policies designed to increase productivity. c. impose tougher immigration policies. d. provide tax breaks for the middle class. ANS: B DIF: 2 REF: 1-3 TOP: Productivity, Standard of living MSC: Applicative

177. Policies to enhance living standards should be designed to ensure that workers

a. have access to the best available methods of producing goods and services. b. have the appropriate equipment to produce goods and services. c. receive good educations. d. All of the above are correct. ANS: D DIF: 2 REF: 1-3 TOP: Productivity MSC: Interpretive 178. To increase living standards, public policy should

a. ensure that workers are well educated and have the necessary tools and technology. b. make unemployment benefits more generous. c. move workers into jobs directly from high school.

d. ensure a greater degree of equity, taking all income-earners into account. ANS: A DIF: 2 REF: 1-3 TOP: Productivity, Standard of living MSC: Applicative 179. To raise productivity, policymakers could

a. increase spending on education.

b. provide tax credits to firms for capital improvements. c. fund research and development. d. All of the above are correct. ANS: D DIF: 3 REF: 1-3

TOP: Productivity, Government MSC: Applicative

180. An increase in the overall level of prices in an economy is referred to as

a. economic growth. b. inflation.

c. the price effect. d. the demand effect. ANS: B DIF: 1 REF: 1-3 TOP: Inflation MSC: Definitional

Chapter 1/Ten Principles of Economics ? 27

181. Inflation is defined as

a. a period of rising productivity in the economy. b. a period of rising income in the economy.

c. an increase in the overall level of output in the economy. d. an increase in the overall level of prices in the economy. ANS: D DIF: 1 REF: 1-3 TOP: Inflation MSC: Definitional

182. In the early 1920s,

a. Germany experienced a very high rate of inflation. b. the quantity of German money was declining rapidly. c. the value of German money remained almost constant. d. All of the above are correct. ANS: A DIF: 2 REF: 1-3 TOP: Inflation, Money MSC: Interpretive

183. In Germany in the early 1920s, on average,

a. prices were rising 50 percent every month, while the quantity of money was rising 20 percent every month. b. prices were doubling every month, while the quantity of money fell 10 percent every month.

c. prices were tripling every month, while the quantity of money remained almost constant every month. d. prices and the quantity of money both tripled every month. ANS: D DIF: 2 REF: 1-3 TOP: Inflation, Money MSC: Interpretive 184. During the early 1920s in Germany, prices

a. doubled annually. b. doubled monthly. c. tripled monthly. d. tripled annually. ANS: C DIF: 2 REF: 1-3 TOP: Inflation MSC: Definitional

185. One of the 20th century’s worst episodes of inflation occurred in

a. the United States in the 1960s. b. Italy in the 1950s. c. Russia in the 1930s. d. Germany in the 1920s. ANS: D DIF: 1 REF: 1-3 TOP: Inflation MSC: Definitional

186. In the United States, the overall level of prices more than doubled during the

a. 1950s. b. 1960s. c. 1970s. d. 1980s. ANS: C DIF: 1 REF: 1-3 TOP: Inflation MSC: Definitional

187. Large or persistent inflation is almost always caused by

a. excessive government spending.

b. excessive growth in the quantity of money. c. foreign competition.

d. higher-than-normal levels of productivity. ANS: B DIF: 2 REF: 1-3 TOP: Inflation MSC: Interpretive

28 ? Chapter 1/Ten Principles of Economics

188. President Gerald Ford referred to inflation as

a. a blight on our nation's economy.

b. a necessary evil to combat high unemployment. c. public enemy number one. d. a fly in the ointment. ANS: C DIF: 2 REF: 1-3 TOP: Inflation MSC: Interpretive

189. The U.S. president who referred to inflation as “public enemy number one” was

a. Richard Nixon. b. Gerald Ford. c. Jimmy Carter. d. Ronald Reagan. ANS: B DIF: 1 REF: 1-3 TOP: Inflation MSC: Interpretive

190. In the 1990s, inflation in the United States was

a. very close to zero.

b. about 3 percent per year. c. about 6 percent per year.

d. commonly referred to as “public enemy number one.” ANS: B DIF: 2 REF: 1-3 TOP: Inflation MSC: Interpretive

191. Low rates of inflation are generally associated with

a. low rates of government spending.

b. small or nonexistent government budget deficits. c. low rates of productivity growth.

d. low rates of growth of the quantity of money. ANS: D DIF: 2 REF: 1-3 TOP: Inflation MSC: Interpretive

192. Which of the following is the most correct statement about the relationship between inflation and unemployment?

a. In the short run, falling inflation is associated with falling unemployment. b. In the short run, falling inflation is associated with rising unemployment. c. In the long run, falling inflation is associated with falling unemployment. d. In the long run, falling inflation is associated with rising unemployment. ANS: B DIF: 2 REF: 1-3 TOP: Inflation, Unemployment, Tradeoffs MSC: Applicative 193. The mainstream view among economists is that

a. society faces a tradeoff between unemployment and inflation, but only in the short run. b. society faces a tradeoff between unemployment and inflation, but only in the long run.

c. society faces a tradeoff between unemployment and inflation, both in the short run and in the long run. d. no tradeoff exists between unemployment and inflation, either in the short run or in the long run. ANS: A DIF: 2 REF: 1-3 TOP: Inflation, Unemployment, Tradeoffs MSC: Applicative 194. In the early 1980s, U.S. economic policy was directed toward reducing inflation. What would you have expected to

observe during this short period of time? a. Inflation fell and unemployment fell.

b. Inflation and unemployment were both unaffected. c. Inflation fell and unemployment increased.

d. Inflation fell and unemployment was unchanged. ANS: C DIF: 2 REF: 1-3 TOP: Inflation, Unemployment, Tradeoffs MSC: Applicative

Chapter 1/Ten Principles of Economics ? 29

195. Between 1929 and 1933, the U.S. economy went from a situation of full employment to one of 25 percent

unemployment. Which of the following events would you have expected to observe over this relatively short period of time?

a. The overall price level remained unchanged. b. The overall price level decreased. c. The overall price level increased.

d. It is impossible to speculate on what happened to the overall level of prices from the information given. ANS: B DIF: 2 REF: 1-3 TOP: Inflation, Unemployment, Tradeoffs MSC: Applicative 196. The business cycle is the

a. relationship between unemployment and inflation. b. irregular fluctuations in economic activity.

c. positive relationship between the quantity of money in an economy and inflation.

d. predictable changes in economic activity due to changes in government spending and taxes. ANS: B DIF: 1 REF: 1-3 TOP: Business cycle MSC: Definitional

197. Which of the following is most likely to raise the average material standard of living in the United States?

a. an increase in investment in new capital

b. a continuation of the economic problems experienced by China, with whom the United States competes in world

markets

c. an increase in the minimum legal wage d. a shortening of the average work week ANS: A DIF: 2 REF: 1-3 TOP: Standard of living MSC: Applicative 198. During the 1990s, the United Kingdom experienced low levels of inflation while Turkey experienced high levels of

inflation. A likely explanation of these facts is that

a. the United Kingdom is more industrialized than Turkey.

b. the rate of growth of the quantity of money was slower in the United Kingdom than in Turkey. c. workers in the United Kingdom are less productive than workers in Turkey. d. there were more cases of market failure in Turkey than in the United Kingdom. ANS: B DIF: 2 REF: 1-3 TOP: Inflation, Money MSC: Interpretive 199. Which of the following claims is consistent with the views of mainstream economists?

a. If we increase the rate of inflation from 3 percent to 6 percent, then the rate of unemployment will temporarily

fall.

b. If we increase the rate of inflation from 3 percent to 6 percent, then the rate of unemployment will temporarily

rise.

c. If we increase the rate of inflation from 3 percent to 6 percent, then the rate of unemployment will permanently

fall.

d. If we increase the rate of inflation from 3 percent to 6 percent, then the rate of unemployment will permanently

rise.

ANS: A DIF: 2 REF: 1-3 TOP: Inflation, Unemployment, Tradeoffs MSC: Applicative 200. To promote good economic outcomes, policymakers should strive to enact policies that

a. enhance productivity.

b. enhance individuals' market power.

c. result in a rapidly-growing quantity of money. d. All of the above are correct. ANS: A DIF: 2 REF: 1-2, 1-3 TOP: Productivity, Market power, Inflation MSC: Applicative

30 ? Chapter 1/Ten Principles of Economics

201. The tradeoff between inflation and unemployment

a. implies that policies designed to reduce unemployment also reduce inflation. b. was eliminated by improved economic policies in the 1900s.

c. is a long-run tradeoff, persisting for decades, according to most economists. d. None of the above are correct. ANS: D DIF: 2 REF: 1-3 TOP: Inflation, Unemployment, Tradeoffs MSC: Interpretive 202. One of history's most severe episodes of inflation occurred

a. in the U.S. in the 1920s. b. in Germany in the 1920s. c. in the U.S. in the 1970s. d. in Germany in the 1970s. ANS: B DIF: 1 REF: 1-3 TOP: Inflation MSC: Definitional

203. During which decade did the United States experience an inflationary episode similar to that experienced by

Germany during the 1920s? a. the 1880s b. the 1930s c. the 1970s

d. None of the above are correct. ANS: D DIF: 2 REF: 1-3 TOP: Inflation MSC: Interpretive

204. The relatively low inflation experienced in the United States in the 1990s is attributable to

a. slow growth of U.S. productivity during the 1990s.

b. slow growth of the quantity of money in the U.S. in the 1990s.

c. low levels of government spending in the U.S. in the 1980s and 1990s. d. the eight-year presidency of William Jefferson Clinton during the 1990s. ANS: B DIF: 2 REF: 1-3 TOP: Inflation, Money MSC: Interpretive 205. Germany could have avoided the high inflation that it experienced in the 1920s by

a. not directing so many of its resources toward preparation for World War II. b. not increasing taxes so much on the German middle class. c. not allowing the quantity of money to increase so rapidly.

d. using government policies to stimulate the economy more so than what was done. ANS: C DIF: 2 REF: 1-3 TOP: Inflation, Money MSC: Applicative

206. In a particular country in 1995, the average worker needed to work 25 hours to produce 40 units of output. In that

same country in 2005, the average worker needed to work 40 hours to produce 68 units of output. In that country, the productivity of the average worker

a. decreased by 1.7 percent between 1995 and 2005. b. remained unchanged between 1995 and 2005. c. increased by 4.75 percent between 1995 and 2005. d. increased by 6.25 percent between 1995 and 2005. ANS: D DIF: 3 REF: 1-3 TOP: Productivity MSC: Analytical 207. In a particular country in 1995, the average worker needed to work 30 hours to produce 40 units of output. In that

same country in 2005, the average worker needed to work 20 hours to produce 29 units of output. In that country, the productivity of the average worker

a. decreased between 1995 and 2005, so we would expect the standard of living to have decreased accordingly. b. increased between 1995 and 2005, so we would expect the standard of living to have increased accordingly. c. decreased between 1995 and 2005, so we would expect inflation to have decreased accordingly. d. increased between 1995 and 2005, so we would expect inflation to have increased accordingly. ANS: B DIF: 3 REF: 1-3 TOP: Productivity, Standard of living MSC: Analytical

Chapter 1/Ten Principles of Economics ? 31

208. In the imaginary country of Countriana, in 1996, the average worker had to work 10 hours to produce 20 units of

output. In that same country in 2006, the average worker needed to work 18 hours to produce 36 units of output. In that country, the productivity of the average worker a. increased by 2 percent between 1996 and 2006. b. increased by 5 percent between 1996 and 2006. c. remained unchanged between 1996 and 2006. d. decreased by 3 percent between 1996 and 2006. ANS: C DIF: 3 REF: 1-3 TOP: Productivity MSC: Analytical 209. Which of the following statements is correct about how economists view the effects of increases in the quantity of

money?

a. The short-run effects are well understood, but the long-run effects are still the subject of controversy among

economists.

b. The long-run effects are well understood, but the short-run effects are still the subject of controversy among

economists.

c. Both the short-run effects and the long-run effects are well understood. d. Neither the short-run effects nor the long-run effects are well understood. ANS: B DIF: 2 REF: 1-3

TOP: Money, Short run, Long run MSC: Interpretive

210. Most economists believe that an increase in the quantity of money results in

a. an increase in the demand for goods and services. b. lower unemployment in the short run. c. higher inflation in the long run. d. All of the above are correct. ANS: D DIF: 3 REF: 1-3 TOP: Money, Inflation, Unemployment MSC: Applicative

211. The short-run tradeoff between inflation and unemployment implies that, in the short run,

a. a decrease in the growth rate of the quantity of money will be accompanied by an increase in the unemployment

rate.

b. an increase in the growth rate of the quantity of money will be accompanied by an increase in the unemployment

rate.

c. policymakers are able to reduce the inflation rate and, at the same time, reduce the unemployment rate. d. policymakers can influence the inflation rate, but not the unemployment rate. ANS: A DIF: 3 REF: 1-3 TOP: Inflation, Unemployment, Tradeoffs MSC: Applicative

True/False

1. Scarcity means that there is less of a good or resource available than people wish to have. ANS: T PTS: 1 DIF: 1 REF: 1-1 TOP: Scarcity MSC: Definitional

2. Economics is the study of how fairly goods and services are distributed within society. ANS: F PTS: 1 DIF: 1 REF: 1-1 TOP: Economics MSC: Definitional

3. With careful planning, we can usually get something that we like without having to give up something else that we like. ANS: F PTS: 1 DIF: 2 REF: 1-1 TOP: Tradeoffs MSC: Interpretive

4. Equity means everyone in the economy should receive an equal share of the goods and services produced. ANS: F PTS: 1 DIF: 2 REF: 1-1 TOP: Equity MSC: Definitional 5. Equity refers to how the pie is divided, and efficiency refers to the size of the economic pie. ANS: T PTS: 1 DIF: 2 REF: 1-1 TOP: Equity | Efficiency MSC: Definitional

32 ? Chapter 1/Ten Principles of Economics

6. Tuition is the single-largest cost of attending college for most students. ANS: F PTS: 1 DIF: 1 REF: 1-1 TOP: Opportunity cost MSC: Interpretive 7. The cost of an action is measured in terms of foregone opportunities. ANS: T PTS: 1 DIF: 1 REF: 1-1 TOP: Opportunity cost MSC: Interpretive

8. A marginal change is a small incremental adjustment to an existing plan of action. ANS: T PTS: 1 DIF: 1 REF: 1-1 TOP: Marginal changes MSC: Definitional

9. If the average cost of transporting a passenger on the train from Chicago to St. Louis is $75, it would be irrational for

the railroad to allow any passenger to ride for less than $75. ANS: F PTS: 1 DIF: 2 REF: 1-1 TOP: Marginal changes MSC: Applicative 10. A rational decisionmaker takes an action if and only if the marginal cost exceeds the marginal benefit. ANS: F PTS: 1 DIF: 2 REF: 1-1 TOP: Marginal changes MSC: Interpretive 11. Trade allows each person to specialize in the activities he or she does best, thus increasing each individual's

productivity. ANS: T PTS: 1 DIF: 2 REF: 1-2 TOP: Trade | Productivity MSC: Interpretive 12. Trade with any nation can be mutually beneficial. ANS: T PTS: 1 DIF: 2 REF: 1-2 TOP: Trade MSC: Interpretive

13. A market economy cannot produce a socially desirable outcome because individuals are motivated by their own

selfish interests. ANS: F PTS: 1 DIF: 2 REF: 1-2 TOP: Market economy MSC: Interpretive 14. The government can potentially improve market outcomes if market inequalities or market failure exists. ANS: T PTS: 1 DIF: 2 REF: 1-2 TOP: Government | Market economy MSC: Interpretive 15. Market failure refers to a situation in which the market does not allocate resources efficiently. ANS: T PTS: 1 DIF: 1 REF: 1-2 TOP: Market failure MSC: Definitional

16. Since taxes affect only the price paid by the buyer, they cannot have an adverse impact on the allocation of society's

resources. ANS: F PTS: 1 DIF: 2 REF: 1-2 TOP: Taxes MSC: Interpretive 17. Productivity is defined as the quantity of goods and services produced from each hour of a worker's time. ANS: T PTS: 1 DIF: 1 REF: 1-3 TOP: Productivity MSC: Definitional 18. Productivity is the primary determinant of a country's living standards. ANS: T PTS: 1 DIF: 2 REF: 1-3 TOP: Productivity | Standard of living MSC: Interpretive 19. Inflation increases the value of money. ANS: F PTS: 1 DIF: 2 TOP: Inflation MSC: Interpretive

REF: 1-3

20. Government spending is the ultimate source of inflation. ANS: F PTS: 1 DIF: 2 REF: 1-3 TOP: Inflation | Government MSC: Interpretive

Chapter 1/Ten Principles of Economics ? 33

Short Answer

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

ANS:

Since economics is the study of how society allocates its scarce resources, if there were 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 associated with the decision. (It is difficult to conceive of a situation where time is not scarce, however).PTS: 1 DIF: 2 REF: 1-1 TOP: Economics | Scarcity MSC: Applicative

2. One tradeoff society faces is between efficiency and equity. Define each term. If 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. ANS:

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. 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.PTS: 1 DIF: 2 REF: 1-1 TOP: Tradeoffs | Efficiency | Equity MSC: Interpretive

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

coming to class today? ANS:

Whatever must be given up to obtain some item it its opportunity cost. Basically, this would be a person's second choice. The opportunity cost of a person attending college is the value of the best alternative use of that person's time. For most students this would be the income the student gives up by not working. A student's opportunity cost of coming to class was the value of the best opportunity the student gave up. (For most students, that seems to be sleep.)PTS: 1 DIF: 2 REF: 1-1 TOP: Opportunity cost MSC: Interpretive

4. With the understanding that people respond to incentives, outline the possible outcome for teachers if the K-12

school year is extended to 11 months per year instead of the existing 9 months per year. ANS:

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 diminished, some teachers may perceive that the marginal cost of teaching would now be greater than the marginal benefit and would choose to leave teaching.PTS: 1 DIF: 3 REF: 1-1 TOP: Incentives MSC: Analytical

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

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.PTS: 1 DIF: 2 REF: 1-2 TOP: Market economy | Government MSC: Applicative

6. Explain how an attempt by the government to lower inflation could cause unemployment to increase in the short-run. ANS:

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 that are too high, reduces sales and causes workers to be laid off. Hence, the lower price level is associated with higher unemployment.PTS: 1 DIF: 2 REF: 1-3 TOP: Inflation | Unemployment | Tradeoffs MSC: Applicative

34 ? Chapter 1/Ten Principles of Economics