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

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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

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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