Chapter 1. Introduction to Economic Theory. Economic analysis and models

Introduction to Economic Theory.

1. Economics is the study of

1. how to fully satisfy our unlimited wants.

2. how society manages its scarce resources.

3. how to reduce our wants until we are satisfied.

4. how to avoid having to make trade-offs.

5. how society manages its unlimited resources.

2. Economic theory assumes that:

1. everything that happens to a person is a result of his/her rational choice

2. the actions of government could not control the outcomes of market processes

3. social groups are less influential than individuals

4. people cannot have everything they want because of scarcity

5. no true answer

2. Which of the following statements is true about a market economy?

1. Market participants act as if guided by an "invisible hand" to produce outcomes that maximise social welfare.

2. Taxes help prices communicate costs and benefits to producers and consumers.

3. With a large enough computer, central planners could guide production more efficiently then markets.

4. The strength of a market system is that it tends to distribute resources evenly across consumers.

5. The strength of a market system is that it tends to distribute resources evenly across producers.

2. The term “market process” refers to:

1. anything that takes place between people through the use of money

2. social interaction not controlled by government

3. the buying and selling of commodities

4. the interactions or exchanges in which people engage in the course of pursuing their goals

5. all of the above

2. Which of the following is most important for the successful functioning of any economy:

1. clearly understood and generally accepted rules

2. common and reasonably specific goals for people to pursue

3. low taxes relative to income

4. sufficient purchasing power to buy everything that is produced

5. government intervention

2. Property rights can usefully be thought of as

1. Characteristics exclusively of the private sector in economies.

2. Obstacles to government coordination of the economy.

3. Rules of the game that facilitate social cooperation.

4. Social institutions that create additional uncertainty.

5. Substitutes for markets.

2. In a free market prices are used to:

A. provide information about the relative scarcity of a product

B. determine income distribution in society

C. ration scarce resources

1. Only A is true

2. A and B are true

3. Only B is true

4. A and C are true

5. A, B and C are true

Scarcity of resourses. Opportunity costs.

2. Scarcity is correctly described by which of the following statements:

1. Scarcity exists if there are more uses for resources than can be satisfied at one time.

2. Scarcity exists if decisions must be made about alternative uses for resources.

3. Scarcity would not exist in a society in which people wanted to help others instead of themselves.

1. Only a is true

2. Only B is true

3. Only C is true

4. A, B, and C are true

5. A and C are true

2. Trade-offs are required because wants are unlimited and resources are

1. efficient.

2. economical.

3. scarce.

4. unlimited.

5. marginal.

2. Which of the following involve a trade-off?

1. buying a new car.

2. going to college.

3. watching a football game on Saturday afternoon.

4. taking a nap.

5. All of the above involve trade-offs.

2. The opportunity cost of anything is measured by:

1. the value of every other alternative available

2. the highest value of any forgone alternatives

3. the value of all the resource used in the activity

4. the value of variable resources used in the activity

5. none of the above

12. A high school graduate is moving to a new town and deciding whether to get a job or to enrol in college. If getting a job or going to college are the only choices for this graduate, the opportunity cost of this person going to college can be measured by which of the following?

1. Expenditures on tuition and books

2. Expenditures on meals and rent

3. The salary the student could have earned from a job

1. I only

2. II only

3. I and II only

4. I and III only

5. I, II, and III

12. Suppose you find $20. If you choose to use the $20 to go to the football game, your opportunity cost of going to the game is

1. nothing, because you found the money.

2. $20 (because you could have used the $20 to buy other things).

3. $20 (because you could have used the $20 to buy other things) plus the value of the time spent at the game.

4. $20 (because you could have used the $20 to buy other things) plus the value of the time spent at the game, plus the cost of the soda and hot dog you consumed at the game.

5. none of the above.

12. Which of the following is not part of the opportunity cost of going on vacation?

1. the money you could have made if you had stayed home and worked.

2. the money you spent on food.

3. the money you spent on airplane tickets.

4. the money you spent on a Broadway show.

5. Everything is a part of the opportunity cost.

12. One unit of labour can produce either 1 unit of x or 4 units of y. One unit of capital can produce either 4 units of x or 1 unit of y. Both labour and capital are needed in the production process and there are 100 units of each means of production.

1. the opportunity cost of x is 1/4 units of y per x when the economy produces 95 units of x and 1/2 units of y per x when it is producing 35 units of x;

2. the opportunity cost of y is 1/4 units of x per y when the economy produces 50 units of y and 4 units of x per y when the economy produces 90 units of y;

3. the opportunity cost of x is 1/4 units of y per x when the economy produces 85 units of x and 4 units of y per x when it is producing 95 units of x;

4. the opportunity cost of y is 1/4 units of x per y when the economy produces 90 units of y and 4 units of x per y when the economy produces 40 units of y;

5. the opportunity costs of x and of y are equal to 1.

12. One unit of labour can produce either 1 unit of x or 4 units of y. One unit of capital can produce either 4 units of x or 1 unit of y. There are 100 units of each means of production. However, only one means of production is needed for the production of either x or y.

1. the opportunity cost of producing x will be the same everywhere and will stand on 4 units of y per x;

2. the opportunity cost of producing y will be 1/4 unit of x per y whenever we produce less than 80 units of y and 4 units of x per y whenever we produce more than 80 units of y;

3. the opportunity cost of producing x will be 1/4 unit of y per x whenever we produce less than 80 units of x and 4 units of y per x whenever we produce more than 80 units of x;

4. the opportunity cost of x will be the same everywhere and be equal to 1 unit of y per x;

5. No true answer.

12. Andrew is a tax accountant. He receives $100 per hour doing tax returns. He can type 10,000 characters per hour into spreadsheets. He can hire an assistant who types 2,500 characters per hour into spreadsheets. Which of the following statements is true?

1. Andrew should not hire an assistant because the assistant can't type as fast as he.

2. Andrew should hire the assistant as long as he pays the assistant less than $100 per hour.

3. Andrew should hire the assistant as long as he pays the assistant less than $50 per hour.

4. Andrew should hire the assistant as long as he pays the assistant less than $25 per hour.

5. none of the above.