Chapter 1
The word economy comes from the Greek word for
“environment.”
“one who participates in a market.”
“one who manages a household.”
“conservation.”
Economics deals primarily with the concept of
poverty.
scarcity.
change.
power.
Which of the following is NOT included in the decisions that every society must make?
what goods will be produced
what determines consumer preferences
who will produce goods
who will consume the goods
Scarcity exists when
there is less than an infinite amount of a resource or good.
there is less of a good or resource available than people wish to have.
society can meet the wants of every individual.
the price of a good rises.
Which of the following goods best meets the definition of scarcity?
air
wood in a forest
water in the ocean
water in a city
Economics is defined as
the study of business.
the study of how society manages its scarce resources.
the study of central planning.
the study of government regulation.
The adage, “There is no such thing as a free lunch,” means:
To get something we like, we usually have to give up another thing we like.
Even people on welfare have to pay for food these days.
The cost of living is always increasing.
All costs are measured in dollars.
Daniel decides to spend an hour playing basketball rather than working at $6 per hour. His tradeoff is
nothing, because he enjoys playing basketball more than working.
the increase in skill he obtains from playing basketball for that hour.
the $6 he could have earned.
nothing, because he spent $6 for admission into the sports complex to play basketball.
Efficiency means that
Society is getting the most it can from its scarce resources.
society is conserving resources in order to save them for the future.
society’s goods and services are distributed fairly among society’s members.
society has lessened its dependence on foreign energy sources.
Equity means that
all members of society have the same income.
society is getting the most it can from its scarce resources.
society’s goods and services are distributed according to need.
the benefits of society’s resources are distributed fairly among society’s members.
A good definition of equity would be
everyone receiving the same income.
fairness.
efficiency.
eliminating extreme affluence.
When government policies are being designed,
equity and efficiency goals are usually independent of each other.
there is usually a tradeoff between equity and efficiency.
equity can usually be achieved without an efficiency loss.
increasing efficiency usually results in more equity.
When the government redistributes income from the rich to the poor,
efficiency is improved.
both rich people and poor people benefit directly.
people work less and produce fewer goods and services.
rich people consume fewer goods and poor people consume more goods, resulting in no real change.
In economics, the cost of something is
the out-of-pocket expense of obtaining it.
what you give up to get it.
always measured in units of time.
always higher than people think.
The opportunity cost of going to college is
the total spent on food, clothing, books, transportation, tuition, lodging, and other expenses.
zero for students who are fortunate enough to have all of their college expenses paid by someone else.
the value of the best opportunity a student gives up to attend college.
zero, since a college education will allow a student to earn a larger income after graduation.
Carolyn decides to spend an additional hour working overtime rather than watching a video with her friends. She earns $8 for her hour’s work. Her opportunity cost of working is
a. the $8 she earns.
b. the enjoyment she would have received had she watched the video.
c. the $8 minus the enjoyment she would have received from watching the video.
d. nothing, since she would have received less than $8 of enjoyment from the video.
17. Ryan spends an hour studying instead of going for a bike ride. The opportunity cost to him of studying is
a. the improvement in his grades from studying for the hour.
b. the difference between the improvement in his grades from studying minus the enjoyment of a bike ride.
c. the enjoyment and exercise he would have received had he gone for a bike ride.
d. zero. Since Ryan chose to study rather than to ride his bike, the value of studying must have been greater than the value of the bike ride.
18. People make decisions at the margin by
a. following tradition.
b. comparing costs and benefits.
c. experience.
d. calculating dollar costs.
19. A marginal change is
a. a long-term trend.
b. a large, significant adjustment.
c. a change for the worse.
d. a small incremental adjustment.
20. Which of the following is the best example of a marginal change?
a. Mark graduates from college and takes a job. His income increases from $10,000 per year to $50,000 per year.
b. The price of housing rises in Seattle by 25% in one year.
c. Kim works at the college bookstore. She gets a raise from $5.15 per hour to $5.20 per hour.
d. A drought hits the upper Midwest and the price of wheat increases from $4.00 per bushel to $8.00 per bushel.
ANSWER: c. Kim works at the college bookstore. She gets a raise from $5.15 per hour to $5.20 per hour.
21. A rational decisionmaker takes an action only if
a. the marginal benefit is greater than the marginal cost.
b. the marginal benefit is less than the marginal cost.
c. the average benefit is greater than the average cost.
d. the marginal benefit is greater than both the average cost and the marginal cost.
ANSWER: a. the marginal benefit is greater than the marginal cost.
22. You have spent $500 purchasing and repairing an old car which you expect to sell for $800 once the repairs are complete. You discover that you need an additional part, which will cost $400, including labor, in order to complete the repairs. You can sell the car as it is now for $300. What should you do?
a. You should complete the repairs and sell the car.
b. You should cut your losses and take the $300.
c. You should never sell something for less than it costs.
d. It doesn’t matter which action you take; the outcome is the same either way.
ANSWER: a. You should complete the repairs and sell the car.
TYPE: M KEY1: E SECTION: 1 OBJECTIVE: 4 RANDOM: Y
23. Economists understand that people respond to
a. the wishes of policymakers.
b. incentives.
c. threats more than rewards.
d. tax breaks, but not tax hikes.
ANSWER: b. incentives.
24. One effect of a government imposed seat belt law has been
a. fewer pedestrian deaths.
b. safer driving.
c. an increase in the number of accidents.
d. that everyone now wears seat belts.
ANSWER: c. an increase in the number of accidents.
25. Trade can benefit a family
a. by allowing the family to buy a greater variety of goods and services at a lower cost.
b. by allowing each person to specialize in the activities he or she does best.
c. a and b
d. only if the family is not in economic competition with other families.
ANSWER: c. a and b
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 6 RANDOM: Y
26. Which is the most accurate statement about trade?
a. Trade makes some nations better off and others worse off.
b. Trade can make every nation better off.
c. Trading for a good can make a nation better off only if the nation cannot produce that good.
d. Trade helps rich nations and hurts poor nations.
ANSWER: b. Trade can make every nation better off.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 6 RANDOM: Y
27. If Canada is better than the U.S. at producing hockey sticks, but the U.S. is better than Canada at producing roller blades,
a. the U.S. should impose a tariff on Canadian hockey sticks in order to protect jobs in the U.S. roller blade industry.
b. the U.S. should sell roller blades to Canada, and should buy Canadian hockey sticks.
c. the U.S. should subsidize its hockey stick industry so that it can compete with Canadian hockey sticks.
d. the U.S. should put a quota on the amount of Canadian hockey sticks imported.
ANSWER: b. the U.S. should sell roller blades to Canada, and should buy Canadian hockey sticks.
TYPE: M KEY1: C SECTION: 2 OBJECTIVE: 6 RANDOM: Y
28. Which of the following is the best statement about markets?
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 are flawed and are therefore not an acceptable way to organize economic activity.
d. Markets are a good way to organize economic activity in developed nations, but not in less-developed nations.
ANSWER: a. Markets are usually a good way to organize economic activity.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 7 RANDOM: Y
29. In a market economy,
a. firms decide whom to hire and what to produce.
b. profit and self-interest guide the decisions of firms and households.
c. households decide which firms to work for and what to buy with their incomes.
d. all of the above
ANSWER: d. all of the above
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 7 RANDOM: Y
30. 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 “invisible hand” that leads them to desirable market outcomes.
ANSWER: d. Households and firms interacting in markets are guided by an “invisible hand” that leads them to desirable market outcomes.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 7 RANDOM: Y
31. The “invisible hand” directs economic activity through
a. prices.
b. mass media.
c. subliminal messages.
d. government regulations.
ANSWER: a. prices.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 7 RANDOM: Y
32. Taxes adversely affect the allocation of resources in society because
a. they do not always fall more heavily on the rich.
b. the taxes collected are not enough to finance government.
c. they distort prices and thus the decisions of households and firms.
d. not everyone pays taxes.
ANSWER: c. they distort prices and thus the decisions of households and firms.
33. The term market failure refers to
a. a firm which is forced out of business because of losses.
b. an unsuccessful advertising campaign.
c. a situation in which competition among firms becomes ruthless.
d. a situation in which the market on its own fails to allocate resources efficiently.
ANSWER: d. a situation in which the market on its own fails to allocate resources efficiently.
34. The two best reasons for a government to intervene in a market are
a. to raise revenues and to promote stability.
b. to promote equity and to raise revenues.
c. to promote efficiency and to raise revenues.
d. to promote equity and to promote efficiency.
ANSWER: d. to promote equity and to promote efficiency.
TYPE: M KEY1: C SECTION: 2 OBJECTIVE: 7 RANDOM: Y
35. Causes of market failure include
a. externalities and foreign competition.
b. market power and incorrect forecasts of consumer demand.
c. externalities and market power.
d. incorrect forecasts of consumer demand and foreign competition.
ANSWER: c. externalities and market power.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 7 RANDOM: Y
36. An externality is
a. the impact of society’s decisions on the well-being of society.
b. the impact of a person’s actions on that person’s well-being.
c. the impact of society’s decisions on the well-being of one person.
d. the impact of one person’s actions on the well-being of a bystander.
ANSWER: d. the impact of one person’s actions on the well-being of a bystander.
37. An example of an externality is
a. the impact of bad weather on the income of farmers.
b. the impact of the personal income tax on a person’s ability to purchase goods and services.
c. the impact of pollution from a factory on the health of people in the vicinity of the factory.
d. the impact of increases in health care costs on the health of individuals in society.
ANSWER: c. the impact of pollution from a factory on the health of people in the vicinity of the factory.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 7 RANDOM: Y
38. A situation in which a market left on its own fails to allocate resources efficiently is known as
a. scarcity.
b. opportunity cost.
c. market failure.
d. market power.
ANSWER: c. market failure.
TYPE: M KEY1: C SECTION: 2 OBJECTIVE: 7 RANDOM: Y
39. Market power refers to
a. the relative importance of a market to the overall economy.
b. the ability of a person or group of people to successfully market new products.
c. the power of the government to regulate a market.
d. the power of a single person (or small group of people) to unduly influence market prices.
ANSWER: d. the power of a single person (or small group of people) to unduly influence market prices.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 7 RANDOM: Y
40. An example of a monopoly would be
a. a sole provider of electrical power in a city.
b. a gasoline service station in Los Angeles.
c. a grocery store in Chicago.
d. a hospital in Missouri.
ANSWER: a. a sole provider of electrical power in a city.
41. The income of a typical worker in a country is most closely linked to which of the following?
a. population
b. labor unions
c. productivity
d. government policies
ANSWER: c. productivity
42. Productivity is defined as
a. the actual amount of effort workers put into an hour of working time.
b. the number of workers required to produce a given amount of goods and services.
c. the amount of labor which can be saved by replacing workers with machines.
d. the amount of goods and services produced from each hour of a worker’s time.
ANSWER: d. the amount of goods and services produced from each hour of a worker’s time.
43. The primary determinant of a country’s standard of living is
a. the government.
b. labor unions.
c. productivity.
d. minimum wage laws.
44. Inflation is defined as
a. a period of rising productivity in the economy.
b. an increase in the overall level of output in the economy.
c. a period of rising income in the economy.
d. an increase in the overall level of prices in the economy.
ANSWER: d. an increase in the overall level of prices in the economy.
45. The tradeoff between inflation and unemployment is called
a. the Laffer curve.
b. the Lorenz curve.
c. the Demand curve.
d. the Phillips curve.
ANSWER: d. the Phillips curve.