Chapter1 TenPrinciplesofEconomics

MULTIPLECHOICE 1. ThewordthatcomesfromtheGreekwordforonewhomanagesahouseholdis a. market. b. consumer. c. producer. d. economy. ANSWER:d. economy. TYPE:MSECTION:1DIFFICULTY:1 2. ThewordeconomycomesfromtheGreekwordfor a. environment. b. onewhomanagesahousehold. c. onewhoparticipatesinamarket. d. conservation. ANSWER:b. onewhomanagesahousehold. TYPE:MSECTION:1DIFFICULTY:1 3. HouseholdsandeconomieshaveeachofthefollowingincommonEXCEPTboth a. mustallocatescarceresources. b. facemanydecisions. c. mustallocatethegoodsandservicestheyproduce. d. musthaveacentraldecisionmaker. ANSWER:d. musthaveacentraldecisionmaker. TYPE:MSECTION:1DIFFICULTY:2 4. Economicsdealsprimarilywiththeconceptof a. scarcity. b. poverty. c. change. d. power. ANSWER:a. scarcity. TYPE:MSECTION:1DIFFICULTY:1 5. WhichofthefollowingisNOTincludedinthedecisionsthateverysocietymustmake? a. whatgoodswillbeproduced b. whowillproducegoods c. whatdeterminesconsumerpreferences d. whowillconsumethegoods ANSWER:c. whatdeterminesconsumerpreferences TYPE:MSECTION:1DIFFICULTY:2

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6. Bothhouseholdsandsocietiesfacemanydecisionsbecause a. resourcesarescarce. b. populationsmayincreaseordecreaseovertime. c. wagesforhouseholdsandthereforesocietyfluctuatewithbusinesscycles. d. people,bynature,tendtodisagree. ANSWER:a. resourcesarescarce. TYPE:MSECTION:1DIFFICULTY:2 7. Agoodisconsideredscarceinasocietywhen a. moreoutputofthegoodispossible. b. everyoneinthatsocietycannothavealltheywantofthegood. c. thegovernmentrestrictsproductionofthegood. d. onlytherichestpeopleintheeconomycanbuyalltheywantofthegood. ANSWER:b. everyoneinthatsocietycannothavealltheywantofthegood. TYPE:MSECTION:1DIFFICULTY:2 8. Scarcityexistswhen a. thereislessthananinfiniteamountofaresourceorgood. b. societycanmeetthewantsofeveryindividual. c. thereislessofagoodorresourceavailablethanpeoplewishtohave. d. thegovernmentfailstoproducegoods. ANSWER:c. thereislessofagoodorresourceavailablethanpeoplewishtohave. TYPE:MSECTION:1DIFFICULTY:2 9. WhichofthefollowingwouldNOTbetrueinaworldwithoutscarcity? a. Therewouldbenoneedforthescienceofeconomics. b. Everyonewouldhaveallthegoodsandservicestheywanted. c. Therewouldhavetobeaninfinitesupplyofeveryresource. d. Therewouldbeopportunitycosts. ANSWER:c. Therewouldhavetobeaninfinitesupplyofeveryresource. TYPE:MSECTION:1DIFFICULTY:2 10. Approximatelywhatpercentageoftheworldseconomiesexperiencescarcity? a. 25% b. 50% c. 75% d. 100% ANSWER:d. 100% TYPE:MSECTION:1DIFFICULTY:1 11. Whenasocietycannotproduceallthegoodsandservicespeoplewishtohaveitissaidthattheeconomyis experiencing a. scarcity. b. communism. c. externalities. d. marketfailure. ANSWER:a. scarcity. TYPE:MSECTION:1DIFFICULTY:1

Chapter 1/Ten Principles of Economics 3 3

12. Forsociety,agoodisnotscarceif a. atleastoneindividualinsocietycanobtainallheorshewantsofthegood. b. firmsareproducingatfullcapacity. c. allmembersofsocietycanhavealltheywantofit. d. thosewhohaveenoughincomecanbuyalltheywantofthegood. ANSWER:c. allmembersofsocietycanhavealltheywantofit. TYPE:MSECTION:1DIFFICULTY:2 13. Whichproductwouldbeconsideredscarce? a. Nikeshoes b. Monetpaintings c. 1caratdiamonds d. Alloftheabovearecorrect. ANSWER:d. Alloftheabovearecorrect. TYPE:MSECTION:1DIFFICULTY:2 14. Whichofthefollowinggoodsbestmeetsthedefinitionofscarcity? a. air b. waterintheocean c. waterinacity d. woodinaforest ANSWER:c. waterinacity TYPE:MSECTION:1DIFFICULTY:2 15. Economicsisdefinedasthestudyof a. business. b. howsocietymanagesitsscarceresources. c. centralplanning. d. governmentregulation. ANSWER:b. howsocietymanagesitsscarceresources. TYPE:MSECTION:1DIFFICULTY:1 16. Economicsisthestudyof a. howsocietymanagesitsscarceresources. b. thegovernmentsroleinsociety. c. howamarketsystemfunctions. d. howtoincreaseproduction. ANSWER:a. howsocietymanagesitsscarceresources. TYPE:MSECTION:1DIFFICULTY:1 17. Inmostsocieties,resourcesareallocatedby a. asinglecentralplanner. b. thosewhoowntheresources. c. thosefirmsthatuseresourcestoprovidegoodsandservices. d. thecombinedactionsofmillionsofhouseholdsandfirms. ANSWER:d. thecombinedactionsofmillionsofhouseholdsandfirms. TYPE:MSECTION:1DIFFICULTY:2

4 3 Chapter 1/Ten Principles of Economics

18. EconomistsstudyallofthefollowingEXCEPT a. howpeoplemakedecisions. b. howpeopleinteractwithoneanother. c. theforcesandtrendsthataffecttheeconomyasawhole. d. howsocietieschangeovertime. ANSWER:d. howsocietieschangeovertime. TYPE:MSECTION:1DIFFICULTY:2 19. WhichofthefollowingisNOTamajorareaofstudyforeconomists? a. howpeoplemakedecisions b. howcountrieschoosenationalleaders c. howpeopleinteractwitheachother d. howforcesandtrendsaffecttheoveralleconomy ANSWER:b. howcountrieschoosenationalleaders TYPE:MSECTION:1DIFFICULTY:2 20. Theadage,Thereisnosuchthingasafreelunch,isusedtoillustratetheconceptof a. tradeoffs. b. scarcity. c. productivity. d. efficiency. ANSWER:a. tradeoffs. TYPE:MSECTION:1DIFFICULTY:2 21. Theadage,Thereisnosuchthingasafreelunch,means a. evenpeopleonwelfarehavetopayforfood. b. thecostoflivingisalwaysincreasing. c. togetsomethingwelike,weusuallyhavetogiveupanotherthingwelike. d. allcostsareincludedinthepriceofaproduct. ANSWER:c. togetsomethingwelike,weusuallyhavetogiveupanotherthingwelike. TYPE:MSECTION:1DIFFICULTY:2 22. EconomistsusethephraseThereisnosuchthingasafreelunch,toillustrate a. howinflationincreasesprices. b. thattogetonething,wemustgiveupsomethingelse. c. thatnothingisfreeinamarketeconomy. d. thatifsomethinglookstoogoodtobetrue,itprobablyis. ANSWER:b. thattogetonething,wemustgiveupsomethingelse. TYPE:MSECTION:1DIFFICULTY:2 23. Whichbestrepresentstheconceptrepresentedbytheadage,Thereisnosuchthingasafreelunch? a. Melissacanonlyattendtheconcertifshetakeshersisterwithher. b. Gregishungryandhomeless. c. Brianmustrepairthetireonhisbikebeforehecanrideittoclass. d. KendramustdecidebetweengoingtoColoradoorCancunforspringbreak. ANSWER:d. KendramustdecidebetweengoingtoColoradoorCancunforspringbreak. TYPE:MSECTION:1DIFFICULTY:3

Chapter 1/Ten Principles of Economics 3 5

24. Gunsandbutterareusedtorepresenttheclassicsocietaltradeoffbetweenspendingon a. durableandnondurablegoods. b. importsandexports. c. nationaldefenseandconsumergoods. d. lawenforcementandagriculture. ANSWER:c. nationaldefenseandconsumergoods. TYPE:MSECTION:1DIFFICULTY:2 25. Henrydecidestospendtwohoursplayinggolfratherthanworkingathisjobwhichpays$8perhour.Henrys tradeoffis a. the$16hecouldhaveearnedworkingfortwohours. b. nothing,becauseheenjoysplayinggolfmorethanworking. c. theincreaseinskillheobtainsfromplayinggolfforthosetwohours. d. nothing,becausehespent$16forgreenfeestoplaygolf. ANSWER:a. the$16hecouldhaveearnedworkingfortwohours. TYPE:MSECTION:1DIFFICULTY:2 26. Whensocietyrequiresthatfirmsreducepollution,thereis a. atradeoffbecauseofreducedincomestothefirmsowners,workers,andcustomers. b. notradeoff,sinceeveryonebenefitsfromreducedpollution. c. notradeoffforsocietyasawhole,sincethecostofreducingpollutionfallsonlyonthefirmsaffectedbythe requirements. d. atradeoffonlyifsomefirmsareforcedtoclose. ANSWER:a. atradeoffbecauseofreducedincomestothefirmsowners,workers,andcustomers. TYPE:MSECTION:1DIFFICULTY:3 27. Danieldecidestospendthelasttwohoursofthenightbeforehiseconomicsexamstudyinginsteadofsleeping.For Daniel,histradeoffwouldbe a. nothing,sincenodollarvaluecanbeputonsleep. b. nothing,sincestudyingwouldbemorebeneficialthansleep. c. thesixhoursofsleephecouldhavehadifhehadgonetobedbeforemidnight. d. thetwohoursofresthewouldhavegotten. ANSWER:d. thetwohoursofresthewouldhavegotten. TYPE:MSECTION:1DIFFICULTY:2 28. Atradeoffexistsbetweenacleanenvironmentandahigherlevelofincomeinthat a. studiesshowthatindividualswithhigherlevelsofincomeactuallypollutelessthanlowincomeindividuals. b. topayforpollutioncleanup,thegovernmentmustincreasetaxeswhichlowersincome. c. lawsthatreducepollutionraisecostsofproductionandreduceincomes. d. byemployingindividualstocleanuppollution,employmentandincomebothrise. ANSWER:c. lawsthatreducepollutionraisecostsofproductionandreduceincomes. TYPE:MSECTION:1DIFFICULTY:3 29. WhichofthefollowingwouldNOTbearesultoflawsthatrequirefirmstoreducepollution? a. lowerspendingbygovernment b. higherpricestoconsumers c. lowerwagestoworkers d. smallerprofittofirms ANSWER:a. lowerspendingbygovernment TYPE:MSECTION:1DIFFICULTY:2

6 3 Chapter 1/Ten Principles of Economics

30. Pollutionregulationswill a. increaseprofittofirms. b. imposeatradeoffonsociety. c. allowfirmstoraiseworkerswages. d. lowerpricesforconsumers. ANSWER:b. imposeatradeoffonsociety. TYPE:MSECTION:1DIFFICULTY:2 31. Whichofthefollowingbestdefinesefficiency? a. absolutefairness b. equaldistribution c. minimumwaste d. consumersovereignty ANSWER:c. minimumwaste TYPE:MSECTION:1DIFFICULTY:1 32. Whichofthefollowingistrue? a. Efficiencyreferstothesizeoftheeconomicpie;equityreferstohowthepieisdivided. b. Fortunately,governmentpoliciesaredesignedtopromotebothequityandefficiency. c. Aslongastheeconomicpiecontinuallygetslarger,noonewillhavetogohungry. d. Efficiencyandequitycanbothbeachievediftheeconomicpieiscutintoequalpieces. ANSWER:a. Efficiencyreferstothesizeoftheeconomicpie;equityreferstohowthepieisdivided. TYPE:MSECTION:1DIFFICULTY:3 33. Efficiencymeansthat a. societyisconservingresourcesinordertosavethemforthefuture. b. societysgoodsandservicesaredistributedfairlyamongsocietysmembers. c. societyhaslesseneditsdependenceonforeignenergysources. d. societyisgettingthemostitcanfromitsscarceresources. ANSWER:d. societyisgettingthemostitcanfromitsscarceresources. TYPE:MSECTION:1DIFFICULTY:2 34. Economistsusethewordequitytodescribeasituationinwhich a. eachmemberofsocietyhasthesameincome. b. societyisgettingthemostitcanfromitsscarceresources. c. thoseinsocietywhohavetheleastwillreceivethemost. d. thebenefitsofsocietysresourcesaredistributedfairlyamongsocietysmembers. ANSWER:d. thebenefitsofsocietysresourcesaredistributedfairlyamongsocietysmembers. TYPE:MSECTION:1DIFFICULTY:2 35. Onedefinitionofequitywouldbe a. equality. b. efficiency. c. fairness. d. similarity. ANSWER:c. fairness. TYPE:MSECTION:1DIFFICULTY:1

Chapter 1/Ten Principles of Economics 3 7

36. Whengovernmentpoliciesarebeingdesigned, a. thereisusuallyatradeoffbetweenequityandefficiency. b. equityandefficiencygoalsareusuallyindependentofeachother. c. equitycanusuallybeachievedwithoutanefficiencyloss. d. increasingefficiencyusuallyresultsinmoreequity. ANSWER:a. thereisusuallyatradeoffbetweenequityandefficiency. TYPE:MSECTION:1DIFFICULTY:2 37. Whengovernmentpoliciessuchasthewelfaresystemtrytohelpthemostneedymembersofsociety,it a. increasesequityandreducesefficiency. b. reducescharitablecontributionsinaneconomy. c. increasestheproductivityoftheneedyinthesociety. d. causesmarketfailuretooccur. ANSWER:a. increasesequityandreducesefficiency. TYPE:MSECTION:2DIFFICULTY:2 38. Whenthegovernmentimplementsprogramssuchasprogressiveincometaxrates,whichofthefollowingislikely tooccur? a. Equityisincreasedandefficiencyisincreased. b. Equityisincreasedandefficiencyisdecreased. c. Equityisdecreasedandefficiencyisincreased. d. Equityisdecreasedandefficiencyisdecreased. ANSWER:b. Equityisincreasedandefficiencyisdecreased. TYPE:MSECTION:2DIFFICULTY:2 39. Whenthegovernmentattemptstocuttheeconomicpieintomoreequalslices, a. itiseasiertocutthepie,andthereforetheeconomycanproducealargerpie. b. thegovernmentcanmoreeasilyallocatethepietothosemostinneed. c. thepiegetssmaller,andtherewillbelesspieforeveryone. d. theeconomywillspendtoomuchtimecuttingandlosestheabilitytoproduceenoughpieforeveryone. ANSWER:c. thepiegetssmaller,andtherewillbelesspieforeveryone. TYPE:MSECTION:2DIFFICULTY:3 40. Whenthegovernmentattemptstoimproveequityinaneconomytheresultisoften a. anincreaseinoveralloutputintheeconomy. b. additionalgovernmentrevenuesinceoverallincomewillincrease. c. anactualreductioninequity. d. reducedefficiencyintheeconomy. ANSWER:d. reducedefficiencyintheeconomy. TYPE:MSECTION:2DIFFICULTY:2 41. Whenthegovernmentredistributesincomefromtherichtothepoor, a. efficiencyisimproved,butequityisnot. b. bothrichpeopleandpoorpeoplebenefitdirectly. c. peopleworklessandproducefewergoodsandservices. d. richpeopleconsumefewergoods,butpoorpeopleconsumemoregoods,resultinginnorealchange. ANSWER:c. peopleworklessandproducefewergoodsandservices. TYPE:MSECTION:1DIFFICULTY:2

8 3 Chapter 1/Ten Principles of Economics

42. Ineconomics,thecostofsomethingis a. thedollaramountofobtainingit. b. alwaysmeasuredinunitsoftimegivenuptogetit. c. whatyougiveuptogetit. d. usuallyhigherthanpeoplethinkitwillbe. ANSWER:c. whatyougiveuptogetit. TYPE:MSECTION:1DIFFICULTY:1 43. Whatyougiveuptoobtainanitemiscalledyour a. opportunitycost. b. explicitcost. c. truecost. d. directcost. ANSWER:a. opportunitycost. TYPE:MSECTION:1DIFFICULTY:1 44. Theopportunitycostofgoingtocollegeis a. thetotalspentonfood,clothing,books,transportation,tuition,lodging,andotherexpenses. b. thevalueofthebestopportunityastudentgivesuptoattendcollege. c. zeroforstudentswhoarefortunateenoughtohavealloftheircollegeexpensespaidbysomeoneelse. d. zero,sinceacollegeeducationwillallowastudenttoearnalargerincomeaftergraduation. ANSWER:b. thevalueofthebestopportunityastudentgivesuptoattendcollege. TYPE:MSECTION:1DIFFICULTY:2 45. Formoststudents,thelargestsinglecostofacollegeeducationis a. thewagesgivenuptoattendschool. b. tuition,fees,andbooks. c. roomandboard. d. transportation,parking,andentertainment. ANSWER:a. thewagesgivenuptoattendschool. TYPE:MSECTION:1DIFFICULTY:2 46. Thelargestsinglecostofgoingtocollegeisusually a. books. b. roomandboard. c. tuition. d. lostwages. ANSWER:d. lostwages. TYPE:MSECTION:1DIFFICULTY:1 47. Theopportunitycostofanitemis a. thenumberofhoursneededtoearnmoneytobuyit. b. whatyougiveuptogetthatitem. c. usuallylessthanthedollarvalueoftheitem. d. thedollarvalueoftheitem. ANSWER:b. whatyougiveuptogetthatitem. TYPE:MSECTION:1DIFFICULTY:1

Chapter 1/Ten Principles of Economics 3 9

48. Mallorydecidestospend3hoursworkingovertimeratherthanwatchingavideowithherfriends.Sheearns$8an hour.Heropportunitycostofworkingis a. the$24sheearnsworking. b. the$24minustheenjoymentshewouldhavereceivedfromwatchingthevideo. c. theenjoymentshewouldhavereceivedhadshewatchedthevideo. d. nothing,sinceshewouldhavereceivedlessthan$24ofenjoymentfromthevideo. ANSWER:c. theenjoymentshewouldhavereceivedhadshewatchedthevideo. TYPE:MSECTION:1DIFFICULTY:3 49. Russellspendsanhourstudyinginsteadofplayingtennis.Theopportunitycosttohimofstudyingis a. theimprovementinhisgradesfromstudyingforthehour. b. thedifferencebetweentheimprovementinhisgradesfromstudyingminustheenjoymentofplayingtennis. c. theenjoymentandexercisehewouldhavereceivedhadheplayedtennis. d. zero.SinceRussellchosetostudyratherthantoplaytennis,thevalueofstudyingmusthavebeengreaterthan thevalueofplayingtennis. ANSWER:c. theenjoymentandexercisehewouldhavereceivedhadheplayedtennis. TYPE:MSECTION:1DIFFICULTY:2 50. Collegeageathleteswhodropoutofcollegetoplayprofessionalsports a. arenotrationaldecisionmakers. b. arewellawarethattheiropportunitycostofattendingcollegeisveryhigh. c. areconcernedmoreaboutpresentcircumstancesthantheirfuture. d. underestimatethevalueofacollegeeducation. ANSWER:b. arewellawarethattheiropportunitycostofattendingcollegeisveryhigh. TYPE:MSECTION:1DIFFICULTY:2 51. Peoplemakedecisionsatthemarginby a. followingtradition. b. experience. c. calculatingdollarcosts. d. comparingcostsandbenefits. ANSWER:d. comparingcostsandbenefits. TYPE:MSECTION:1DIFFICULTY:1 52. Thewordmarginmeans a. edge. b. distance. c. space. d. measure. ANSWER:a. edge. TYPE:MSECTION:1DIFFICULTY:1 53. Makingdecisionsatthemarginmeansthatpeople a. makethosedecisionsthatdonotimposeamarginalcost. b. evaluatehoweasilyadecisioncanbereversedifproblemsarise. c. comparethemarginalcostsandmarginalbenefitsofeachdecision. d. alwayscalculatethemarginaldollarcostsforeachdecision. ANSWER:c. comparethemarginalcostsandmarginalbenefitsofeachdecision. TYPE:MSECTION:1DIFFICULTY:2

10 3 Chapter 1/Ten Principles of Economics

54. Amarginalchangeisa a. longtermtrend. b. large,significantadjustment. c. changefortheworse,andsoisusuallyshortterm. d. smallincrementaladjustment. ANSWER:d. smallincrementaladjustment. TYPE:MSECTION:1DIFFICULTY:1 55. Whichofthefollowingisthebestexampleofamarginalchange? a. Aftergraduatingcollege,Audreysincomeincreasesfrom$500permonthto$3,000permonth. b. Morgangetsaraiseatherparttimejobandisnowpaid$7.25perhourinsteadof$7.00. c. Housingpricesinanareaincreaseby40%whenanewinterstateisbuiltinasmalltown. d. AhardfreezewipesouthalfoftheorangecropinFloridaandthepriceoforangejuicedoubles. ANSWER:b. Morgangetsaraiseatherparttimejobandisnowpaid$7.25perhourinsteadof$7.00. TYPE:MSECTION:1DIFFICULTY:3 56. Whichofthefollowingisthebestexampleofamarginalchange? a. ThepriceofhousingroseinSeattleby5%inlastyear. b. Kimgetsabigpromotionatwork.Shealsogetsaraisefrom$25,000peryearto$40,000peryear. c. Markgraduatesfromcollegeandtakesajob.Hisincomeincreasesfrom$10,000peryearto$50,000peryear. d. AdroughthitstheupperMidwestandthepriceofwheatincreasesfrom$4.00perbushelto$8.00perbushel. ANSWER:a. ThepriceofhousingroseinSeattleby5%inlastyear. TYPE:MSECTION:1DIFFICULTY:3 57. Amarginalchangeisillustratedbywhichofthefollowing? a. Nancyretiresandtakesaparttimejob.Shewasworking40hoursperweekandnowworks10hoursperweek. b. StateUniversityhasannouncedthatduetostatebudgetdeficits,tuitionmustriseby25%nextyear. c. Ryanmovedtoanewapartmentandnowpays40%morerentthanbefore. d. Arizona,whichusuallyreceives10inchesofrainperyear,received11incheslastyear. ANSWER:d. Arizona,whichusuallyreceives10inchesofrainperyear,received11incheslastyear. TYPE:MSECTION:1DIFFICULTY:3 58. Aftermuchconsideration,youhavechosenCancunoverFt.LauderdaleforyourSpringBreaktripthisyear.Forthis decisiontochange,whichofthefollowingmustoccur? a. ThemarginalbenefitofCancunmustincrease. b. ThemarginalcostofCancunmustdecrease. c. ThemarginalbenefitofFt.Lauderdalemustincrease. d. ThemarginalcostofFt.Lauderdalemustincrease. ANSWER:c. ThemarginalbenefitofFt.Lauderdalemustincrease. TYPE:MSECTION:1DIFFICULTY:3 59. Theaveragecostperseatonthe50passengerFloatingOnAirBuscompanystripfromKansasCitytoSt.Louisis $40.Ifnorefreshmentsareservedand3seatsareempty,thebuscompanycouldincreaseitsprofitonlyifit a. chargednolessthan$40forthe3remainingseats. b. chargedmorethan$40forthe3remainingseats. c. chargedanyticketpriceabove$0fortheremainingseats. d. lefttheseatsempty. ANSWER:c. chargedanyticketpriceabove$0fortheremainingseats. TYPE:MSECTION:1DIFFICULTY:2

Chapter 1/Ten Principles of Economics 3 11

60. Arationaldecisionmakertakesanactiononlyifthe a. marginalbenefitislessthanthemarginalcost. b. marginalbenefitisgreaterthanthemarginalcost. c. averagebenefitisgreaterthantheaveragecost. d. marginalbenefitisgreaterthanboththeaveragecostandthemarginalcost. ANSWER:b. marginalbenefitisgreaterthanthemarginalcost. TYPE:MSECTION:1DIFFICULTY:2 61. Mikehasspent$500purchasingandrepairinganoldfishingboat,whichheexpectstosellfor$800oncetherepairs arecomplete.Hediscoversthatheneedsanadditionalrepair,whichwillcost$400,inordertocompletetherepairs. Hecanselltheboatasitisnowfor$300.Whatshouldhedo? a. Heshouldcuthislossesandtakethe$300. b. Heshouldneversellsomethingforlessthanitcost. c. Heshouldcompletetherepairsandselltheboat. d. Itdoesntmatterwhichactionhetakes;theoutcomeisthesameeitherway. ANSWER:c. Heshouldcompletetherepairsandselltheboat. TYPE:MSECTION:1DIFFICULTY:3 62. Stanbuysa1966Mustang,whichheplanstorestoreandsell.Heanticipatesthatthecostofthecarandtherepairs willbe$10,000andthathecansellitfor$13,000.Whenhehasspent$10,000,hediscoversheneedstoreplacethe engine,whichwillcost$4,000.Hecansellthecarwithoutthenewenginefor$9,000.Stanshould a. completetherepairsandsellthecarfor$13,000. b. cuthislossesandsellthecarnowfor$9,000. d. nevertrysuchanexpensiveprojectagain. c. betotallyindifferentbetweenfinishingtheprojectandsellingthecarnow. ANSWER:d. betotallyindifferentbetweenfinishingtheprojectandsellingthecarnow. TYPE:MSECTION:1DIFFICULTY:3 63. Adonutshopsellsfreshbakeddonutsfrom5a.m.until3p.m.everydaybutSunday.Thecostofmakingand sellingadozenglazeddonutsis$1.00.Sincethisshopdoesnotselldayolddonutsthenextday,whatshouldthe managerdoifhestillhas10dozenleftat2:30p.m.? a. lowerthepriceoftheremainingdonutsevenifthepricefallsbelow$1.00 b. lowerthepriceoftheremainingdonutsaslongasitsmorethan$1.00 c. Lowerthepriceonalldonutssotheywillallbesoldearlierintheday d. throwthemawayandproduce10fewerdozentomorrow ANSWER:a. lowerthepriceoftheremainingdonutsevenifthepricefallsbelow$1.00 TYPE:MSECTION:1DIFFICULTY:3 64. Economistsunderstandthatpeoplerespondto a. laws. b. incentives. c. threatsmorethanrewards. d. positives,butnotnegatives. ANSWER:b. incentives. TYPE:MSECTION:1DIFFICULTY:1 65. Whenpolicymakersmakepoliciesthatchangethecostsandbenefitsthatpeopleface,theycan a. alterbehaviors. b. makepeopleignoreincentives. c. createinflation. d. reducegovernmentrevenue. ANSWER:a. alterbehaviors. TYPE:SECTION:1DIFFICULTY:2

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66. RalphNadersbookUnsafeatAnySpeedcausedCongresstorequire a. safetyglassinallnewcars. b. seatbeltsinallnewcars. c. airbagsinallnewcars. d. stricterdrunkdrivinglawsinallstates. ANSWER:b. seatbeltsinallnewcars. TYPE:MSECTION:1DIFFICULTY:1 67. U.S.lawsrequiringthatdriverswearseatbeltshaveresultedin a. areductioninbothdriverdeathsandpedestriandeaths. b. feweraccidentsandfewerdeathsperaccident. c. fewerdriverdeaths,feweraccidentsandfewerpedestriandeaths. d. littlechangeinthenumberofdriverdeaths,butmoreaccidentsandmorepedestriandeaths. ANSWER:d. littlechangeinthenumberofdriverdeaths,butmoreaccidentsandmorepedestriandeaths. TYPE:MSECTION:1DIFFICULTY:2 68. Oneeffectofagovernmentimposedseatbeltlawhasbeen a. fewerpedestriandeaths. b. saferdriving. c. anincreaseinthenumberofaccidents. d. thateveryonenowwearsseatbelts. ANSWER:c. anincreaseinthenumberofaccidents. TYPE:MSECTION:1DIFFICULTY:1 69. WhichofthefollowingdoesNOTresultwhenseatbeltlawsalteradriverscostbenefitcalculation? a. Fewerdriversarekilled. b. Morepedestriansarekilled. c. Driversdrivefaster. d. Moreaccidentsoccur. ANSWER:a. Fewerdriversarekilled. TYPE:MSECTION:1DIFFICULTY:2 70. IntheformerSovietUnion,producerswerepaidformeetingoutputtargets,notforsellingproducts.Underthose circumstances,whatweretheeconomicincentivesforproducers? a. toproducegoodqualityproductssothatsocietybenefitsfromtheresourcesused b. toconserveoncosts,soastomaintainefficiencyintheeconomy c. toproduceenoughtomeettheoutputtarget,withoutregardforqualityorcost d. toproducethoseproductsthatsocietydesiresmost ANSWER:c. toproduceenoughtomeettheoutputtarget,withoutregardforqualityorcost TYPE:MSECTION:1DIFFICULTY:2 71. Yourprofessorlovesherwork,teachingeconomics.Shehasbeenofferedotherpositionsinthecorporateworld making25percentmore,buthasdecidedtostayinteaching.Herdecisionwouldnotchangeunlessthemarginal a. costofteachingincreased. b. benefitofteachingincreased. c. costofteachingdecreased. d. costofacorporatejobincreased. ANSWER:a. costofteachingincreased. TYPE:MSECTION:1DIFFICULTY:3

Chapter 1/Ten Principles of Economics 3 13

72. Supposeyourmanagementprofessorhasbeenofferedacorporatejobwitha30%payincrease.Hehasdecidedto takethejob.Forhim,themarginal a. costofleavingwasgreaterthanthemarginalbenefit. b. benefitofleavingwasgreaterthanthemarginalcost. c. benefitofteachingwasgreaterthanthemarginalcost. d. Alloftheabovearecorrect. ANSWER:b. benefitofleavingwasgreaterthanthemarginalcost. TYPE:MSECTION:1DIFFICULTY:3 73. Whenpolicymakersimplementpoliciesthatalterincentives,they a. havecarefullyweighedthedirectandindirecteffectsofthepolicy. b. oftendonotalwaysgettheintendedresult. c. haveconsideredallpossibleeffectsoftheincentivechangeswhentheydevelopedthepolicy,whichwillmake thepolicyeffective. d. generallycorrectlyanticipatetheindirecteffects,butoftenmissthedirecteffects. ANSWER:b. oftendonotalwaysgettheintendedresult. TYPE:MSECTION:1DIFFICULTY:2 74. Tradecanbenefitafamily a. byallowingthefamilytobuyagreatervarietyofgoodsandservicesatalowercost. b. byallowingeachpersontospecializeintheactivitiesheorshedoesbest. c. onlyifthefamilyisnotineconomiccompetitionwithotherfamilies. d. Alloftheabovearecorrect. e. Bothaandbarecorrect. ANSWER:e. Bothaandbarecorrect. TYPE:MSECTION:2DIFFICULTY:2 75. Whichisthemostaccuratestatementabouttrade? a. Tradecanmakeeverynationbetteroff. b. Trademakessomenationsbetteroffandothersworseoff. c. Tradingforagoodcanmakeanationbetteroffonlyifthenationcannotproducethatgooditself. d. Tradehelpsrichnationsandhurtspoornations. ANSWER:a. Tradecanmakeeverynationbetteroff. TYPE:MSECTION:2DIFFICULTY:2 76. EachofthefollowingstatementsabouttradeistrueEXCEPT a. Tradeincreasescompetition. b. Onecountrywinsandonecountryloses. c. TheUnitedStatescanbenefitfromtradewithanycountry. d. Tradeallowspeopletobuyagreatervarietyofgoodsandservicesatlowercost. ANSWER:b. Onecountrywinsandonecountryloses. TYPE:MSECTION:2DIFFICULTY:2 77. BenefitsfromtradewouldNOTinclude a. theabilitytospecialize. b. agreatervarietyofgoodsandservicesbecomingavailable. c. lesscompetition. d. lowerprices. ANSWER:c. lesscompetition. TYPE:MSECTION:2DIFFICULTY:2

14 3 Chapter 1/Ten Principles of Economics

78. TradebetweentheUnitedStatesandIndia a. benefitsboththeUnitedStatesandIndia. b. isalosingpropositionfortheUnitedStatesbecauseIndiahascheaperlabor. c. islikeasportscontest:onesidewinsandtheothersideloses. d. isalosingpropositionforIndiabecauseU.S.workersaremoreproductive. ANSWER:a. benefitsboththeUnitedStatesandIndia. TYPE:MSECTION:2DIFFICULTY:2 79. Canadacanbenefitfromtrade a. onlywithnationswhichcanproducegoodsCanadacannotproduce. b. withanynation. c. withanynationnotineconomiccompetitionwithCanada. d. onlywithlessdevelopednations. ANSWER:b. withanynation. TYPE:MSECTION:2DIFFICULTY:2 80. IfJapanchoosestoengageintrade,it a. willonlybenefitifittradeswithcountrieswhichproducegoodsitcannotproduce. b. cannotbenefitifittradeswithlessdevelopedcountries. c. shouldfirstattempttoproducethegooditself. d. canbenefitbytradingwithanyothercountry. ANSWER:d. canbenefitbytradingwithanyothercountry. TYPE:MSECTION:2DIFFICULTY:2 81. IftheUnitedStatesdecidestotradewithMexico,weknowthat a. Mexicowillbebetteroff,buttradewithalessdevelopedcountrycouldnothelptheUnitedStates. b. itwillnotbenefitMexicobecauseworkersintheUnitedStatesaremoreproductive. c. MexicoandtheUnitedStatescanbothbebetteroff. d. itwillnotbenefiteithercountrybecausetheyaretoodifferentculturally. ANSWER:c. MexicoandtheUnitedStatescanbothbebetteroff. TYPE:MSECTION:2DIFFICULTY:2 82. IfFranceisbetterthanBelarusatproducingwine,butBelarusisbetterthanFranceatproducingcrystal, a. BelarusshouldsellcrystaltoFrance,andshouldbuyFrenchwine. b. BelarusshouldimposeatariffonFrenchwineinordertoprotectjobsintheBelarusiancrystalindustry. c. BelarusshouldsubsidizeitswineindustrysothatitcancompetewithFrenchwine. d. BelarusshouldputaquotaontheamountofFrenchwineimported. ANSWER:a. BelarusshouldsellcrystaltoFrance,andshouldbuyFrenchwine. TYPE:MSECTION:2DIFFICULTY:3 83. Whichofthefollowingisthebeststatementaboutmarkets? a. Marketsareusuallyagoodwaytoorganizeeconomicactivity. b. Marketsareusuallyinferiortocentralplanningasawaytoorganizeeconomicactivity. c. Marketsfailandarethereforenotanacceptablewaytoorganizeeconomicactivity. d. Marketsareagoodwaytoorganizeeconomicactivityindevelopednations,butnotinlessdevelopednations. ANSWER:a. Marketsareusuallyagoodwaytoorganizeeconomicactivity. TYPE:MSECTION:2DIFFICULTY:2

Chapter 1/Ten Principles of Economics 3 15

84. WhichwouldNOTbetrueinamarketeconomy? a. Firmsdecidewhomtohireandwhattoproduce. b. Governmentpoliciesdonotaffectthedecisionsoffirmsandhouseholds. c. Householdsdecidewhichfirmstoworkforandwhattobuywiththeirincomes. d. Profitandselfinterestguidethedecisionsoffirmsandhouseholds. ANSWER:b. Governmentpoliciesdonotaffectthedecisionsoffirmsandhouseholds. TYPE:MSECTION:2DIFFICULTY:2 85. Thedecisionsoffirmsandhouseholdsareguidedbyprofitandselfinterestina a. commandeconomy. b. traditionaleconomy. c. marketeconomy. d. Alloftheabovearecorrect. ANSWER:c. marketeconomy. TYPE:MSECTION:2DIFFICULTY:1 86. Inamarketeconomy,economicactivityisguidedby a. thegovernment. b. corporations. c. centralplanners. d. prices. ANSWER:d. prices. TYPE:MSECTION:2DIFFICULTY:2 87. Thetermusedtodescribeasituationinwhichmarketsfailtoallocateresourcesefficientlyiscalled a. economicmeltdown. b. marketfailure. c. corporatebankruptcy. d. disequilibrium. ANSWER:b. marketfailure. TYPE:MSECTION:2DIFFICULTY:1 88. Inamarketeconomydecisionsareguidedbyindividualselfinterest.Hence,thereis a. stilltheabilitytoachievedesirableeconomicwellbeingforsocietyasawhole. b. astrongneedforgovernmentinterventioninthemarket. c. lessefficiencyinmarketeconomiesthanincommandeconomies. d. moreneedforastronglegalsystemtocontrolindividualgreed. ANSWER:a. stilltheabilitytoachievedesirableeconomicwellbeingforsocietyasawhole. TYPE:MSECTION:2DIFFICULTY:3 89. Pricesdirecteconomicactivityinamarketeconomyby a. influencingtheactionsofbuyersandsellers. b. reducingscarcityofthegoodsandservicesproduced. c. eliminatingtheneedforgovernmentintervention. d. allocatinggoodsandservicesproducedinthemostequitableway. ANSWER:a. influencingtheactionsofbuyersandsellers. TYPE:MSECTION:2DIFFICULTY:2

16 3 Chapter 1/Ten Principles of Economics

90. Inamarketeconomy,pricesreflectthe a. valueofagoodtosociety. b. costtosocietyofmakingthegood. c. quantitysocietywillultimatelychoosetoproduce. d. Bothaandbarecorrect. ANSWER:d. Bothaandbarecorrect. TYPE:MSECTION:2DIFFICULTY:2 91. Anexampleofmarketpoweris a. afastfoodrestaurantinacollegetown. b. awheatfarmerinKansas. c. thelastgasstationinNewMexicofor100miles. d. ashoestoreinKentucky. ANSWER:c. thelastgasstationinNewMexicofor100miles. TYPE:MSECTION:2DIFFICULTY:2 92. Anexampleofafirmwithmarketpowerisa a. deliinNewYork. b. cableTVproviderinSt.Louis. c. clothingstoreinLosAngeles. d. farmerinIllinois. ANSWER:b. cableTVproviderinSt.Louis. TYPE:MSECTION:2DIFFICULTY:2 93. Oneadvantagemarketeconomieshaveovercentralplanningisthatmarketeconomies a. provideanequaldistributionofgoodsandservicestoconsumers. b. establishgovernmenteconomiccontrol. c. solvetheproblemofscarcity. d. aremoreefficient. ANSWER:d. aremoreefficient. TYPE:MSECTION:2DIFFICULTY:2 94. Amarketeconomydiffersfromacommunisteconomyinthateconomicdecisionsaremadeby a. acentralplanner. b. millionsoffirmsandhouseholds. c. primarilythegovernment. d. largecorporations. ANSWER:b. millionsoffirmsandhouseholds. TYPE:MSECTION:2DIFFICULTY:1 95. ThecollapseofcommunismintheSovietUnionandEasternEuropetookplaceinthe a. 1960s b. 1970s c. 1980s d. 1990s ANSWER:c. 1980s TYPE:MSECTION:2DIFFICULTY:1

Chapter 1/Ten Principles of Economics 3 17

96. Priortoitscollapse,communistcountriesworkedonthepremisethateconomicwellbeingcouldbeorganizedonly through/by a. amarketeconomy. b. governmentcentralplanners. c. governmentimposedprivatemonopolies. d. increasedcompetition. ANSWER:b. governmentcentralplanners. TYPE:MSECTION:2DIFFICULTY:2 97. WhichofthefollowingobservationswasmadefamousbyAdamSmithinhisbookTheWealthofNations? a. Thereisnosuchthingasafreelunch. b. Peoplebuymorewhenpricesarelowthanwhenpricesarehigh. c. Nomatterhowmuchpeopleearn,theytendtospendmorethantheyearn. d. Householdsandfirmsinteractinginmarketsareguidedbyaninvisiblehandthatleadsthemtodesirable marketoutcomes. ANSWER:d. Householdsandfirmsinteractinginmarketsareguidedbyaninvisiblehandthatleadsthemto desirablemarketoutcomes. TYPE:MSECTION:2DIFFICULTY:2 98. Theterminvisiblehandwascoinedby a. AdamSmith. b. DavidRicardo. c. JohnMaynardKeynes. d. ThomasJefferson. ANSWER:a. AdamSmith. TYPE:MSECTION:2DIFFICULTY:1 99. Theinvisiblehanddirectseconomicactivitythrough a. advertising. b. prices. c. centralplanning. d. governmentregulations. ANSWER:b. prices. TYPE:MSECTION:2DIFFICULTY:2 100. Theinvisiblehandsabilitytocoordinatethedecisionsofthefirmsandhouseholdsintheeconomycanbehindered by a. governmentactionsthatdistortprices. b. increasedcompetitioninthemarket. c. extendedperiodsofunemployment. d. adramaticreductioninconsumerspending. ANSWER:a. governmentactionsthatdistortprices. TYPE:MSECTION:2DIFFICULTY:3 101. AdamSmithsbookTheWealthofNationswaspublishedin a. 1692. b. 1776. c. 1816. d. 1936. ANSWER:b. 1776. TYPE:MSECTION:2DIFFICULTY:1

18 3 Chapter 1/Ten Principles of Economics

102. BothTheWealthofNationsandtheDeclarationofIndependencesharethepointofviewthat a. everypersonisentitledtolife,liberty,andthepursuitofhappiness. b. individualsarebestlefttotheirowndeviceswithoutthegovernmentguidingtheiractions. c. thegovernmenthasacentralroleinorganizingamarketeconomy. d. becauseofhumannatureastronglegalsystemisnecessaryforamarketsystemtosurvive. ANSWER:b. individualsarebestlefttotheirowndeviceswithoutthegovernmentguidingtheiractions. TYPE:MSECTION:2DIFFICULTY:2 103. Theinvisiblehandworkstopromotegeneralwellbeingintheeconomyprimarilythrough a. governmentintervention. b. thepoliticalprocess. c. selfinterest. d. altruism. ANSWER:c. selfinterest. TYPE:MSECTION:2DIFFICULTY:1 104. Taxesadverselyaffecttheallocationofresourcesinsocietybecause a. theydonotalwaysfallmoreheavilyontherich. b. thetaxescollectedarenotenoughtofinancegovernmentspending. c. noteveryonepaystaxes. d. theydistortpricesandthusthedecisionsofhouseholdsandfirms. ANSWER:d. theydistortpricesandthusthedecisionsofhouseholdsandfirms. TYPE:MSECTION:2DIFFICULTY:2 105. Aprimaryfunctionofpricesinamarketeconomyistoprovideparticipantswith a. economicinformation. b. spendinglimits. c. accountingcapabilities. d. anequitabledistributionofgoods. ANSWER:a. economicinformation. TYPE:MSECTION:2DIFFICULTY:2 106. Whenthegovernmentpreventspricesfromadjustingnaturallytosupplyanddemand, a. itstabilizestheeconomybyreducingmarketuncertainties. b. itadverselyaffectstheallocationofresources. c. theimprovementinequityjustifiesthereductioninefficiency. d. theimprovementinefficiencyjustifiesthereductioninequity. ANSWER:b. itadverselyaffectstheallocationofresources. TYPE:MSECTION:2DIFFICULTY:3 107. Onecomponentnecessaryformarketstoworkis a. governmentintervention. b. abenevolentsociety. c. propertyrights. d. abundantresources. ANSWER:c. propertyrights. TYPE:MSECTION:2DIFFICULTY:2

Chapter 1/Ten Principles of Economics 3 19

108. Onenecessaryroleofgovernmentinamarketeconomyisto a. taxgoodsandserviceswhicharemostdesiredbyconsumers. b. maintainwelfareprogramsforthepoor. c. provideservicessuchasmaildelivery. d. enforcepropertyrights. ANSWER:d. enforcepropertyrights. TYPE:MSECTION:2DIFFICULTY:2 109. Thegovernmentenforcespropertyrightsby a. requiringpropertyownerstopaypropertytaxes. b. providingpoliceandcourts. c. allowingpeopletodecidewhetherornottheywishtoownproperty. d. providingasystemofrecordingpropertydeeds. ANSWER:b. providingpoliceandcourts. TYPE:MSECTION:2DIFFICULTY:1 110. Withoutgovernmentsprotectionofpropertyrights a. businesseswouldhavelessincentivetoprovidegoodsandservices. b. therewouldbelessgovernmentregulationofbusinessesandpriceswouldbelowerforconsumers. c. taxeswouldbelowercausinglessmarketinefficiencies. d. businesseswouldhavemorefreedomwithproductionprocesses. ANSWER:a. businesseswouldhavelessincentivetoprovidegoodsandservices. TYPE:MSECTION:2DIFFICULTY:3 111. Thetermmarketfailurerefersto a. asituationinwhichthemarketonitsownfailstoallocateresourcesefficiently. b. anunsuccessfuladvertisingcampaignwhichreducesbuyerdemand. c. asituationinwhichcompetitionamongfirmsbecomesruthless. d. afirmwhichisforcedoutofbusinessbecauseoflosses. ANSWER:a. asituationinwhichthemarketonitsownfailstoallocateresourcesefficiently. TYPE:MSECTION:2DIFFICULTY:2 112. WhichofthefollowingisNOTareasonforthegovernmenttointerveneinthemarket? a. topromoteefficiency b. toenforcepropertyrights c. topromoteequity d. toprotectanindustry ANSWER:d. toprotectanindustry TYPE:MSECTION:2DIFFICULTY:2 113. Tworeasonsforagovernmenttointerveneinamarketareto a. raiserevenuesandtopromotestability. b. promoteequityandtopromoteefficiency. c. promoteequityandtopromotestability. d. promoteefficiencyandtopromotestability. ANSWER:b. promoteequityandtopromoteefficiency. TYPE:MSECTION:2DIFFICULTY:2

20 3 Chapter 1/Ten Principles of Economics

114. Causesofmarketfailureinclude a. externalitiesandmarketpower. b. marketpowerandincorrectforecastsofconsumerdemand. c. externalitiesandforeigncompetition. d. incorrectforecastsofconsumerdemandandforeigncompetition. ANSWER:a. externalitiesandmarketpower. TYPE:MSECTION:2DIFFICULTY:2 115. Marketfailurecanbecausedby a. lowconsumerdemand. b. governmentinterventionandpricecontrols. c. externalitiesandmarketpower. d. highpricesandforeigncompetition. ANSWER:c. externalitiesandmarketpower. TYPE:MSECTION:2DIFFICULTY:2 116. Anexternalityistheimpactof a. onepersonsactionsonthewellbeingofabystander. b. apersonsactionsonthatpersonswellbeing. c. societysdecisionsonthewellbeingofsociety. d. societysdecisionsonthewellbeingofonepersoninthesociety. ANSWER:a. onepersonsactionsonthewellbeingofabystander. TYPE:M2SECTION:2DIFFICULTY:1 117. Anexampleofanexternalityistheimpactof a. badweatherontheincomeoffarmers. b. thepersonalincometaxonapersonsabilitytopurchasegoodsandservices. c. pollutionfromafactoryonthehealthofpeopleinthevicinityofthefactory. d. increasesinhealthcarecostsonthehealthofindividualsinsociety. ANSWER:c. pollutionfromafactoryonthehealthofpeopleinthevicinityofthefactory. TYPE:MSECTION:2DIFFICULTY:2 118. Whichofthefollowingismostlikelytogenerateanexternality? a. TeachersatalocalhighschoolhavepizzadeliveredeveryFridayforlunch. b. Ayoungmanfromasmalltownattendsmedicalschooltobecomeadoctor. c. AnewlywedcouplebuysaTVfortheirfamilyroom. d. Johnbuysatractortomowhisnewlypurchased5acrelot. ANSWER:b. Ayoungmanfromasmalltownattendsmedicalschooltobecomeadoctor. TYPE:MSECTION:2DIFFICULTY:3 119. Ifanexternalityispresentinamarket,economicefficiencymaybeenhancedby a. governmentintervention. b. increasedcompetition. c. betterinformedmarketparticipants. d. moredefinedpropertyrights. ANSWER:a. governmentintervention. TYPE:MSECTION:2DIFFICULTY:2

Chapter 1/Ten Principles of Economics 3 21

120. IfacopperrefinerydoesNOTbeartheentirecostofthesmokeitemits,itwill a. notemitanysmokesoastoavoidtheentirecostofthesmoke. b. emitlowerlevelsofsmoke. c. emitanacceptablelevelofsmoke. d. emittoomuchsmoke. ANSWER:d. emittoomuchsmoke. TYPE:MSECTION:2DIFFICULTY:2 121. Amarketeconomyrewardspeopleaccordingto a. theirneedforgoodsandservices. b. howwillingtheyaretowork. c. theirabilitytoproducethingsthatotherpeoplearewillingtopayfor. d. theirabilitytoproducethingsofculturalimportance. ANSWER:c. theirabilitytoproducethingsthatotherpeoplearewillingtopayfor. TYPE:MSECTION:2DIFFICULTY:2 122. Whichoftheseconsumptionactivitieswillmostlikelyimposeanexternalcost? a. Anexecutiveplaysavigorousgameofgolf. b. AstudentinadormplaysherCDsat120decibelslateatnight. c. Ayoungmotherexercisestoanaerobicsvideo. d. Aconstructionworkereatsasandwichduringhislunchbreak. ANSWER:b. AstudentinadormplaysherCDsat120decibelslateatnight. TYPE:MSECTION:2DIFFICULTY:2 123. Whichoftheseactivitieswillmostlikelyresultinanexternalbenefit? a. Acollegestudentbuysadeckofcardstoplaysolitaireinherdormroom. b. Anelderlywomanplantsaflowergardenonthevacantlotnexttoherhouse. c. Anexecutivepurchasesabooktoreadonabusinesstrip. d. AtenyearoldbuysnewNikeswithhisallowancemoneyhehassaved. ANSWER:b. Anelderlywomanplantsaflowergardenonthevacantlotnexttoherhouse. TYPE:MSECTION:2DIFFICULTY:2 124. Ifeducationproducesexternalbenefitsforsociety,whichofthefollowingmightNOTbeanappropriatepolicyfor societytoestablishregardingeducation? a. taxincentivesforschooling b. mandatoryminimumlevelsofeducation c. programswhichpromotethehiringofhighschooldropouts d. publicsubsidiesofeducation ANSWER:c. programswhichpromotethehiringofhighschooldropouts TYPE:MSECTION:2DIFFICULTY:2 125. Ifasawmillcreatestoomuchairpollution, a. interferencebythegovernmentwillsurelymakethematterworse. b. asenseofsocialresponsibilitywillcausetheownersofthemilltoreducepollution. c. thegovernmentcanraiseeconomicwellbeingbyprovidinghealthcaretothoseaffectedbythepollution. d. thegovernmentcanraiseeconomicwellbeingthroughenvironmentalregulation. ANSWER:d. thegovernmentcanraiseeconomicwellbeingthroughenvironmentalregulation. TYPE:MSECTION:2DIFFICULTY:2

22 3 Chapter 1/Ten Principles of Economics

126. Whenasingleentityhastheabilitytoinfluencemarketprices,thereis a. competition. b. marketpower. c. efficiency. d. productivity. ANSWER:b. marketpower. TYPE:MSECTION:2DIFFICULTY:1 127. Marketpowerreferstothe a. powerofasinglepersonorgrouptoinfluencemarketprices. b. abilityofapersonorgroupofpeopletosuccessfullymarketnewproducts. c. powerofthegovernmenttoregulateamarket. d. relativeimportanceofamarkettotheoveralleconomy. ANSWER:a. powerofasinglepersonorgrouptoinfluencemarketprices. TYPE:MSECTION:2DIFFICULTY:1 128. Anexampleofamonopolywouldbe a. ajewelrystoreinMiami,Florida. b. asouvenirshopinCancun,Mexico. c. anelectriccompanyinDelight,Arkansas. d. adoctorinDallas,Texas. ANSWER:c. anelectriccompanyinDelight,Arkansas. TYPE:MSECTION:2DIFFICULTY:2 129. Whichofthefollowingbusinessesmostlikelyhasmarketpower? a. afurniturestoreinGreensboro,NorthCarolina. b. avineyardintheNapaValleyofCalifornia. c. amaplesugarcandystoreinBurlington,Vermont. d. ahospitalinKearney,Nebraska. ANSWER:d. ahospitalinKearney,Nebraska. TYPE:MSECTION:2DIFFICULTY:2 130. Whichisthemostcorrectstatementabouttheinvisiblehand? a. Theinvisiblehandalwaysensuresbothequityandefficiency. b. Theinvisiblehandcannotensureeitherequityorefficiency. c. Theinvisiblehandismoreeffectiveatensuringefficiencythanitisatensuringequity. d. Theinvisiblehandismoreeffectiveatensuringequitythanitisatensuringefficiency. ANSWER:c. Theinvisiblehandismoreeffectiveatensuringefficiencythanitisatensuringequity. TYPE:MSECTION:2DIFFICULTY:3 131. AccordingtoAdamSmith,thesuccessofdecentralizedmarketeconomiesisprimarilydueto a. thebasicbenevolenceofsociety. b. societysjustice(legal)system. c. individualsselfinterest. d. basichumansurvivalinstincts. ANSWER:c. individualsselfinterest. TYPE:MSECTION:2DIFFICULTY:2

Chapter 1/Ten Principles of Economics 3 23

132. Theselfinterestoftheparticipantsinaneconomyisguidedintopromotinggeneraleconomicselfinterestby a. theinvisiblehand. b. marketpower. c. governmentintervention. d. propertyrights. ANSWER:a. theinvisiblehand. TYPE:MSECTION:2DIFFICULTY:1 133. IntheUnitedStates,higherincometaxratesonrichpeoplecouldbejustifiedonthebasisof a. marketefficiency. b. thelackofothersourcesofgovernmentrevenue. c. equityforsociety. d. governmentbiasagainstthewealthy. ANSWER:c. equityforsociety. TYPE:MSECTION:2DIFFICULTY:2 134. Theprimarydeterminantofacountrysstandardoflivingis a. theabilitytoreduceforeigncompetition. b. itsabilitytoproducegoodsandservices. c. thetotalsupplyofmoneyintheeconomy. d. theaverageageofthecountryslaborforce. ANSWER:b. itsabilitytoproducegoodsandservices. TYPE:MSECTION:3DIFFICULTY:2 135. In2000theaverageAmericanhadanincomeofabout a. $34,000. b. $29,000. c. $20,000. d. $15,000. ANSWER:a. $34,000. TYPE:MSECTION:3DIFFICULTY:1 136. IntheUnitedStates,incomeshavehistoricallygrownabout2%peryear.Atthisrateincomeswilldoubleevery a. 10years. b. 25years. c. 35years. d. 50years. ANSWER:c. 35years. TYPE:MSECTION:3DIFFICULTY:2 137. Theincomeofatypicalworkerinacountryismostcloselylinkedtowhichofthefollowing? a. population b. productivity c. thenumberoflaborunions d. governmentpolicies ANSWER:b. productivity TYPE:MSECTION:3DIFFICULTY:2

24 3 Chapter 1/Ten Principles of Economics

138. IftheaverageincomeofanAustralianishigherthantheaverageincomeofaRussian,itismostlikelybecause a. productivityishigherinAustraliathaninRussia. b. AustraliahasamoreindustrialeconomythanRussia. c. thereismorecompetitioninAustraliathaninRussia. d. laborunionsaremoreaggressiveinAustraliathaninRussia. ANSWER:a. productivityishigherinAustraliathaninRussia. TYPE:MSECTION:3DIFFICULTY:3 139. SupposethattheaverageincomeofaKenyanishigherthantheaverageincomeofaSouthAfrican.Youmight concludethat a. SouthAfricanfirmsarefacedwithstrictergovernmentregulationsthanKenyanfirms. b. totalincomeisdividedamongfewerworkersinKenyasinceithasasmallerlaborforcethanSouthAfrica. c. KenyasclimateallowsforlongergrowingseasonsandthereforeKenyacanproducelargequantitiesofgrain. d. productivityinKenyaishigherthaninSouthAfrica. ANSWER:d. productivityinKenyaishigherthaninSouthAfrica. TYPE:MSECTION:3DIFFICULTY:3 140. AtypicalworkerinItalycanproduce24unitsofproductinan8hourday,whereatypicalworkerinPoland produces25unitsofproductina10hourday.Wecanconcludethat a. workerproductivityinPolandishigherthaninItaly. b. thestandardoflivingwillbehigherinItalythaninPoland. c. productivityforthePolishworkeris3unitsperhourand21/2unitsperhourfortheItalianworker. d. therewillbenodifferencebetweenthestandardoflivinginItalyandPoland. ANSWER:b. thestandardoflivingwillbehigherinItalythaninPoland. TYPE:MSECTION:3DIFFICULTY: 141. AworkerinBangladeshcanearn$1perdaymakingcottonclothonahandloom.AworkerintheUnitedStatescan earn$100perdaymakingcottonclothwithamechanicalloom.Whataccountsforthedifferenceinwages? a. U.S.textileworkersbelongtoaunion. b. ThereislittledemandforcottonclothinBangladeshandgreatdemandintheU.S. c. Laborismoreproductivemakingcottonclothwithamechanicalloomthanwithahandloom. d. Bangladeshhasalowwagepolicytomakeitstextileindustrymorecompetitiveinworldmarkets. ANSWER:c. Laborismoreproductivemakingcottonclothwithamechanicalloomthanwithahandloom. TYPE:MSECTION:3DIFFICULTY:3 142. Overthepastcentury,theaverageincomeintheUnitedStateshasrisen a. twofold. b. fivefold. c. eightfold. d. tenfold. ANSWER:c. eightfold. TYPE:MSECTION:3DIFFICULTY:1 143. IntheUnitedStates,incomeshavehistoricallygrown a. about10percentperyear. b. about5percentperyear. c. about2percentperyear. d. about0.5percentperyear. ANSWER:c. about2percentperyear. TYPE:MSECTION:3DIFFICULTY:1

Chapter 1/Ten Principles of Economics 3 25

144. Almostallvariationinlivingstandardsisattributabletodifferencesincountries a. populationgrowthrates. b. endowmentsofnaturalresources. c. nationalgovernmentbudgets. d. productivity. ANSWER:d. productivity. TYPE:MSECTION:3DIFFICULTY:2 145. Productivityisdefinedasthe a. amountofgoodsandservicesproducedfromeachhourofaworkerstime. b. numberofworkersrequiredtoproduceagivenamountofgoodsandservices. c. amountoflaborwhichcanbesavedbyreplacingworkerswithmachines. d. actualamountofeffortworkersputintoanhourofworkingtime. ANSWER:a. amountofgoodsandservicesproducedfromeachhourofaworkerstime. TYPE:MSECTION:3DIFFICULTY:1 146. Theamountofgoodsandservicesproducedfromeachhourofaworkerstimeiscalled a. totaloutput. b. productivity. c. marginalproduct. d. efficiency. ANSWER:b. productivity. TYPE:MSECTION:3DIFFICULTY:1 147. Adirectorpositiverelationshipexistsbetweenacountrys a. productivityanditsstandardofliving. b. governmentspendinganditstaxrates. c. totalpopulationanditspercapitaincome. d. pricesforitsgoodsandservicesanditsexports. ANSWER:a. productivityanditsstandardofliving. TYPE:MSECTION:3DIFFICULTY:2 148. ThehistoricalriseinlivingstandardsofAmericanworkersisprimarilyaresultof a. theinfluenceoflaborunions. b. tariffprotectionimposedbytheU.S.government. c. theenactmentofminimumwagelaws. d. theriseinlaborproductivity. ANSWER:d. theriseinlaborproductivity. TYPE:MSECTION:3DIFFICULTY:2 149. Ifthegovernmentwantedtoenactapolicytoincreaselivingstandardsinthecountry,itmight a. allowcorporatetaxwriteoffsformoneyspentonworkersafety. b. makeitmoredifficulttoreceiveunemploymentbenefits. c. increaseeducationalopportunitiesforworkers. d. prohibitunionsfromorganizing. ANSWER:c. increaseeducationalopportunitiesforworkers. TYPE:MSECTION:3DIFFICULTY:2

26 3 Chapter 1/Ten Principles of Economics

150. TheslowgrowthofU.S.incomesduringthe1970sand1980scanbestbeexplainedby a. unstableeconomicconditionsinEasternEurope. b. increasedcompetitionfromabroad. c. adeclineintherateofincreaseinU.S.productivity. d. astrongU.S.dollarabroad,hurtingU.S.exports. ANSWER:c. adeclineintherateofincreaseinU.S.productivity. TYPE:MSECTION:3DIFFICULTY:2 151. Toimprovelivingstandards,policymakersshould a. imposerestrictiononforeigncompetition. b. formulatepoliciesdesignedtoincreaseproductivity. c. imposetougherimmigrationpolicies. d. providetaxbreaksforthemiddleclass. ANSWER:b. formulatepoliciesdesignedtoincreaseproductivity. TYPE:MSECTION:3DIFFICULTY:2 152. Toincreaselivingstandards,publicpolicyshould a. ensurethatworkersarewelleducatedandhavethenecessarytoolsandtechnology. b. makeunemploymentbenefitsmoreliberal. c. moveworkersintojobsdirectlyfromhighschool. d. ensurethatworkershaveaccesstounionmembershipandbenefits. ANSWER:a. ensurethatworkersarewelleducatedandhavethenecessarytoolsandtechnology. TYPE:MSECTION:3DIFFICULTY:2 153. Toraiseproductivity,policymakerscould a. increasespendingoneducation. b. providetaxcreditstofirmsforcapitalimprovements. c. fundresearchanddevelopment. d. Bothaandcarecorrect. e. Alloftheabovearecorrect. ANSWER:e. Alloftheabovearecorrect. TYPE:MSECTION:3DIFFICULTY:2 154. Anincreaseintheoveralllevelofpricesinaneconomyisreferredtoas a. economicgrowth. b. inflation. c. monetarypolicy. d. supplyshocks ANSWER:b. inflation. TYPE:MSECTION:3DIFFICULTY:1 155. Inflationisdefinedas a. aperiodofrisingproductivityintheeconomy. b. aperiodofrisingincomeintheeconomy. c. anincreaseintheoveralllevelofoutputintheeconomy. d. anincreaseintheoveralllevelofpricesintheeconomy. ANSWER:d. anincreaseintheoveralllevelofpricesintheeconomy. TYPE:MSECTION:3DIFFICULTY:1

Chapter 1/Ten Principles of Economics 3 27

156. WhentheGermangovernmentincreasedthequantityofmoneyintheGermaneconomyinthe1920s, a. Germanyexperiencedhyperinflation. b. manypeopleinGermanybecamerich. c. unemploymentincreased. d. Germanywasabletorepayallitsforeigndebts. ANSWER:a. Germanyexperiencedhyperinflation. TYPE:MSECTION:3DIFFICULTY:1 157. Duringtheearly1920sinGermany,prices a. doubledannually. b. doubledmonthly. c. tripledmonthly. d. tripledannually. ANSWER:c. tripledmonthly. TYPE:MSECTION:3DIFFICULTY:2 158. Oneoftheworstepisodesofinflationoccurredin a. theUnitedStatesinthe1960s. b. Argentinainthe1950s. c. Russiainthe1930s. d. Germanyinthe1920s. ANSWER:d. Germanyinthe1920s. TYPE:MSECTION:3DIFFICULTY:2 159. IntheUnitedStates,theoveralllevelofpricesmorethandoubledduringthe a. 1950s. b. 1960s. c. 1970s. d. 1980s. ANSWER:c. 1970s. TYPE:MSECTION:3DIFFICULTY:1 160. Largeorpersistentinflationisalmostalwayscausedby a. anincreaseindemandfordomesticproduction. b. growthinthequantityofmoney. c. foreigncompetition. d. higherworkerproductivity. ANSWER:b. growthinthequantityofmoney. TYPE:MSECTION:3DIFFICULTY:2 161. PresidentGeraldFordreferredtoinflationas a. thenationalthief. b. ablightonournationseconomy. c. publicenemynumberone. d. atorpedothatcouldsinkoureconomy. ANSWER:c. publicenemynumberone. TYPE:MSECTION:3DIFFICULTY:2

28 3 Chapter 1/Ten Principles of Economics

162. Thepersonwhoreferredtoinflationaspublicenemynumberonewas a. GeraldFord. b. AlanGreenspan. c. RichardNixon. d. JohnF.Kennedy. ANSWER:a. GeraldFord. TYPE:MSECTION:3DIFFICULTY:1 163. Inthe1990s,inflationintheUnitedStates a. wasalmostzero. b. wasabout3percentperyear. c. approacheddoubledigits. d. wascausedbytoomuchconsumerspending. ANSWER:b. wasabout3percentperyear. TYPE:MSECTION:3DIFFICULTY:2 164. Inflationcauses a. incomestofall. b. productivitytoincrease. c. thegovernmenttolowertaxes. d. thevalueofmoneytofall. ANSWER:d. thevalueofmoneytofall. TYPE:MSECTION:3DIFFICULTY:2 165. Whichofthefollowingisthemostcorrectstatementabouttherelationshipbetweeninflationandunemployment? a. Intheshortrun,reducinginflationisassociatedwithfallingunemployment. b. Intheshortrun,reducinginflationisassociatedwithrisingunemployment. c. Inthelongrun,reducinginflationisassociatedwithfallingunemployment. d. Inthelongrun,reducinginflationisassociatedwithrisingunemployment. ANSWER:b. Intheshortrun,reducinginflationisassociatedwithrisingunemployment. TYPE:MSECTION:3DIFFICULTY:3 166. Thecurvethatillustratesthetradeoffbetweeninflationandunemploymentiscalledthe a. Laffercurve. b. Lorenzcurve. c. Phillipscurve. d. Demandcurve. ANSWER:c. Phillipscurve. TYPE:MSECTION:3DIFFICULTY:1 167. Intheshortrun,thePhillipscurveillustrates a. thetradeoffbetweeninflationandunemployment. b. thetradeoffbetweenequityandefficiency. c. laborproductivityinaneconomy. d. thelevelofgovernmentinterventioninamarketeconomy. ANSWER:a. thetradeoffbetweeninflationandunemployment. TYPE:MSECTION:3DIFFICULTY:2

Chapter 1/Ten Principles of Economics 3 29

168. AlthoughthePhillipscurveiscontroversial,mosteconomistsbelievethat a. societyfacesatradeoffbetweenunemploymentandinflationintheshortrunonly. b. societyfacesatradeoffbetweenunemploymentandinflationinthelongrunonly. c. notradeoffexistsbetweenunemploymentandinflation. d. societyfacesacontinuoustradeoffbetweenunemploymentandinflation. ANSWER:a. societyfacesatradeoffbetweenunemploymentandinflationintheshortrunonly. TYPE:MSECTION:3DIFFICULTY:3 169. Policymakerscaninfluencethecombinationofinflationandunemploymenttheeconomyexperiencesbyadjusting eachofthefollowingEXCEPT a. taxes. b. governmentspending. c. themoneysupply. d. marketprices. ANSWER:d. marketprices. TYPE:MSECTION:3DIFFICULTY:2 170. Intheearly1980s,U.S.economicpolicywasdirectedtowardreducinginflation.Whatwouldyouassumeabout inflationandunemploymentduringthisperiod? a. Inflationfellandunemploymentfell. b. Inflationandunemploymentwerebothunaffected. c. Inflationfellandunemploymentincreased. d. Inflationfellandunemploymentwasunchanged. ANSWER:c. Inflationfellandunemploymentincreased. TYPE:MSECTION:3DIFFICULTY:3 171. Between1929and1933,theU.S.economywentfromasituationoffullemploymenttooneof25percent unemployment.Whatdoyouassumehappenedtoprices? a. Priceswereunaffected. b. Pricesfellastheeconomyexperienceddeflation. c. Pricesroseastheeconomyexperiencedinflation. d. Itisimpossibletoguesswhathappenedtopricesfromtheinformationgiven. ANSWER:b. Pricesfellastheeconomyexperienceddeflation. TYPE:MSECTION:3DIFFICULTY:3 172. ThePhillipscurveisimportantforunderstanding a. thebusinesscycle. b. supplyanddemand. c. governmentspending. d. moneysupplychanges. ANSWER:a. thebusinesscycle. TYPE:MSECTION:3DIFFICULTY:1 173. Thebusinesscycleisthe a. relationshipbetweenunemploymentandinflation. b. irregularfluctuationsineconomicactivity. c. positiverelationshipbetweenthequantityofmoneyinaneconomyandinflation. d. predictablechangesineconomicactivityduetochangesingovernmentspendingandtaxes. ANSWER:b. irregularfluctuationsineconomicactivity. TYPE:MSECTION:3DIFFICULTY:1

30 3 Chapter 1/Ten Principles of Economics

174. SenatorSmithwantstoincreasetaxesonpeoplewithhighincomesandusethemoneytohelpthepoor.Senator Jonesarguesthatsuchataxwilldiscouragesuccessfulpeoplefromworkingandwillthereforemakesocietyworse off.Aneconomistwouldsaythat a. weshouldagreewithSenatorSmith. b. weshouldagreewithSenatorJones. c. agooddecisionrequiresthatwerecognizebothviewpoints. d. therearenotradeoffsbetweenequityandefficiency. ANSWER:c. agooddecisionrequiresthatwerecognizebothviewpoints. TYPE:MSECTION:1DIFFICULTY:2 175. Mauricereceives$100asabirthdaygift.Indecidinghowtospendthemoney,henarrowshisoptionsdowntofour choices,OptionA,OptionB,OptionCandOptionD.Eachoptioncosts$100.FinallyhedecidesonOptionB.The opportunitycostofOptionBis a. thevaluetohimoftheOptionhewouldhavechosenifOptionBwerenotavailable. b. thevaluetohimofOptionsA,CandDcombined. c. $300. d. $100. ANSWER:a: thevaluetohimoftheOptionhewouldhavechosenifOptionBwerenotavailable. TYPE:MSECTION:1DIFFICULTY:2 176. Afurnituremakercurrentlyproduces100tablesperweekandsellsthemforaprofit.Sheisconsideringexpanding heroperationinordertomakemoretables.Shouldsheexpand? a. Yes,becausemakingtablesisprofitable. b. No,becauseshemaynotbeabletoselltheadditionaltables. c. Itdependsonthemarginalcostofproducingmoretablesandthemarginalrevenueshewillearnfromselling moretables. d. Itdependsontheaveragecostofproducingmoretablesandtheaveragerevenueshewillearnfromsellingmore tables. ANSWER:c. Itdependsonthemarginalcostofproducingmoretablesandthemarginalrevenueshewillearnfrom sellingmoretables. TYPE:MSECTION:1DIFFICULTY:2 177. InthenationofDictatorland,farmerstraditionallyfeedgraintotheirlivestock.Centralplanners,however,decided toincreasethepriceofgraintomakegrainfarmershappyandtoreducethepriceofbreadmadefromthatgrainto makecitydwellershappy.Nowthepriceofbreadislowerthanthepriceofgrain.Wemightnowexpect a. farmerstocontinuetofeedgraintotheirlivestock. b. farmerstostartfeedingbreadtotheirlivestock. c. citydwellerstostartbuyinggraintomakebreadtoeat. d. citydwellerstostartbuyinggraintomakebreadtosell. ANSWER:b. farmerstostartfeedingbreadtotheirlivestock. TYPE:MSECTION:1DIFFICULTY:2 178. SenatorSmartistryingtoconvinceworkersinherdistrictthattradewithothercountriesisbeneficial.SenatorSmart arguesthattradecanbebeneficial a. onlyifitallowsustoobtainthingsthatwecouldntmakeforourselves. b. becauseitallowsspecialization,whichincreasestotaloutput. c. tousifwecangainandtheothersinvolvedinthetradelose. d. inonlyalimitednumberofcircumstancesbecauseothersaretypicallyselfinterested. ANSWER:b. becauseitallowsspecialization,whichincreasestotaloutput. TYPE:MSECTION:2DIFFICULTY:2

Chapter 1/Ten Principles of Economics 3 31

179. AdamSmitharguedthatinamarketsystem,whenpeopleactintheirownselfinterest,theytypically a. helponlythemselves. b. harmothers. c. helpothers,butnotasmuchastheywouldhaveiftheywerenotselfinterested. d. helpothersevenmorethanwhentheyseektohelpothers. ANSWER:d. helpothersevenmorethanwhentheyseektohelpothers. TYPE:MSECTION:2DIFFICULTY:2 180. Afriendofyoursasksyouwhymarketpricesarebetterthangovernmentdeterminedprices.Yousaythatmarket determinedpricesarebetterbecausetheygenerallyreflect a. thevalueofagoodtosociety,butnotthecostofmakingit. b. thecostofmakingagoodtosociety,butnotitsvalue. c. boththevalueofagoodtosocietyandthecostofmakingit. d. neitherthevalueofagoodtosocietynorthecostofmakingit. ANSWER:c. boththevalueofagoodtosocietyandthecostofmakingit. TYPE:MSECTION:2DIFFICULTY:1 181. WhichofthefollowingisNOTtrue? a. Inthepresenceofamarketfailure,governmentactionmightnotimproveonthemarketoutcomebecause sometimespublicpoliciessimplyrewardthepoliticallypowerful. b. Inthepresenceofamarketfailure,governmentactionmightnotimproveonthemarketoutcomebecausesome leadersarenotfullyinformedabouttheeffectsoftheiractions. c. Inthepresenceofamarketfailure,governmentactioncansometimesimproveonthemarketoutcome. d. Inthepresenceofamarketfailure,governmentactionwillalwaysimproveonthemarketoutcome. ANSWER:d. Inthepresenceofamarketfailure,governmentactionwillalwaysimproveonthemarketoutcome. TYPE:MSECTION:2DIFFICULTY:1 182. WhichofthefollowingismostlikelytoraisetheaveragestandardoflivingintheUnitedStates? a. anincreaseininvestmentinnewcapital b. acontinuationoftheeconomicproblemsexperiencedbyJapan,withwhomtheUnitedStatescompetesinworld markets c. anincreaseintheminimumlegalwage d. shorteningtheaverageworkweek ANSWER:a. anincreaseininvestmentinnewcapital TYPE:MSECTION:3DIFFICULTY:1 183. Duringthe1990s,theUnitedKingdomexperiencedlowlevelsofinflationwhileTurkeyexperiencedhighlevelsof inflation.Thedifferencecanbestbeexplainedbythefactthat a. theUnitedKingdomismoreindustrializedthanTurkey. b. theUnitedKingdomprintedmoneyataslowerratethanTurkey. c. workersintheUnitedKingdomaremoreproductivethanworkersinTurkey. d. thereweremorecasesofmarketfailureinTurkeythanintheUnitedKingdom. ANSWER:b. theUnitedKingdomprintedmoneyataslowerratethanTurkey. TYPE:MSECTION:3DIFFICULTY:1

32 3 Chapter 1/Ten Principles of Economics

184. WhichofthefollowingisconsistentwiththePhillipsCurve? a. Ifweincreasetherateofinflationfrom3percentto6percent,thentherateofunemploymentwilltemporarily fall. b. Ifweincreasetherateofinflationfrom3percentto6percent,thentherateofunemploymentwilltemporarily rise. c. Ifweincreasetherateofinflationfrom3percentto6percent,thentherateofunemploymentwillpermanently fall. d. Ifweincreasetherateofinflationfrom3percentto6percent,thentherateofunemploymentwillpermanently rise. ANSWER:a. Ifweincreasetherateofinflationfrom3percentto6percent,thentherateofunemploymentwill temporarilyfall. TYPE:MSECTION:3DIFFICULTY:2 TRUE/FALSE 1. Scarcitymeansthatthereislessofagoodorresourceavailablethanpeoplewishtohave. ANSWER:TTYPE:TSECTION:1RANDOM:Y 2. Economicsisthestudyofhowfairlygoodsandservicesaredistributedwithinsociety. ANSWER:FTYPE:TSECTION:1RANDOM:Y 3. Withcarefulplanning,wecanusuallygetsomethingthatwelikewithouthavingtogiveupsomethingelsethatwe like. ANSWER:FTYPE:TSECTION:1RANDOM:Y 4. Equitymeanseveryoneintheeconomyshouldreceiveanequalshareofthegoodsandservicesproduced. ANSWER:FTYPE:TSECTION:1RANDOM:Y 5. Equityreferstohowthepieisdivided,andefficiencyreferstothesizeoftheeconomicpie. ANSWER:TTYPE:TSECTION:1RANDOM:Y 6. Tuitionisthesinglelargestcostofattendingcollegeformoststudents. ANSWER:FTYPE:TSECTION:1RANDOM:Y 7. Thecostofanactionismeasuredintermsofforegoneopportunities. ANSWER:TTYPE:TSECTION:1RANDOM:Y 8. Amarginalchangeisasmallincrementaladjustmenttoanexistingplanofaction. ANSWER:TTYPE:TSECTION:1RANDOM:Y 9. IftheaveragecostoftransportingapassengeronthetrainfromChicagotoSt.Louisis$75,itwouldbeirrationalfor therailroadtoallowanypassengertorideforlessthan$75. ANSWER:FTYPE:TSECTION:1RANDOM:Y 10. Arationaldecisionmakertakesanactionifandonlyifthemarginalcostexceedsthemarginalbenefit. ANSWER:FTYPE:TSECTION:1RANDOM:Y 11. Tradeallowseachpersontospecializeintheactivitiesheorshedoesbest,thusincreasingeachindividuals productivity. ANSWER:TTYPE:TSECTION:2RANDOM:Y 12. Tradewithanynationcanbemutuallybeneficial. ANSWER:TTYPE:TSECTION:2RANDOM:Y

Chapter 1/Ten Principles of Economics 3 33

13. Amarketeconomycannotproduceasociallydesirableoutcomebecauseindividualsaremotivatedbytheirown selfishinterests. ANSWER:FTYPE:TSECTION:2RANDOM:Y 14. Thegovernmentcanpotentiallyimprovemarketoutcomesifmarketinequalitiesormarketfailureexists. ANSWER:TTYPE:TSECTION:2RANDOM:Y 15. Marketfailurereferstoasituationinwhichthemarketdoesnotallocateresourcesefficiently. ANSWER:TTYPE:TSECTION:2RANDOM:Y 16. Sincetaxesaffectonlythepricepaidbythebuyer,theycannothaveanadverseimpactontheallocationofsocietys resources. ANSWER:FTYPE:TSECTION:2RANDOM:Y 17. Productivityisdefinedasthequantityofgoodsandservicesproducedfromeachhourofaworkerstime. ANSWER:TTYPE:TSECTION:3RANDOM:Y 18. Productivityistheprimarydeterminantofacountryslivingstandards. ANSWER:TTYPE:TSECTION:3RANDOM:Y 19. Inflationincreasesthevalueofmoney. ANSWER:FTYPE:TSECTION:3RANDOM:Y 20. Governmentspendingistheultimatesourceofinflation. ANSWER:FTYPE:TSECTION:3RANDOM:Y 21. ThePhillipsCurveshowstheshortruntradeoffbetweeninflationandeconomicgrowth. ANSWER:FTYPE:TSECTION:3RANDOM:Y SHORTANSWER APPLICATION/SCENARIO 1. Whatwouldhappentothestudyofeconomicsifscarcitydisappeared? ANSWER:Sinceeconomicsisthestudyofhowsocietyallocatesitsscarceresources,iftherewerenoscarcity,therewould benoneedforeconomics.Everyonecouldhaveallthegoodsandservicestheywanted.Noonewouldhavetomake decisionsbasedontradeoffs,becausetherewouldbenoopportunitycostassociatedwiththedecision.(Itisdifficult toconceiveofasituationwheretimeisnotscarce,however). TYPE:SSECTION:1RANDOM:Y 2. Onetradeoffsocietyfacesisbetweenefficiencyandequity.Defineeachterm.IftheU.S.governmentredistributes incomefromtherichtothepoor,explainhowthisactionaffectsequityaswellasefficiencyintheeconomy. ANSWER:Efficiencyisthepropertyofsocietygettingthemostitcanfromitsscarceresources.Equityisdefinedasthe propertyofdistributingeconomicprosperityfairlyamongthemembersofsociety.Often,thesetwogoalsconflict. Whenthegovernmentredistributesincomefromtherichtothepoor,itreducestherewardforworkinghard.Fewer goodsandservicesareproducedandtheeconomicpiegetssmaller.Whenthegovernmenttriestocuttheeconomic pieintomoreequalslices,thepiegetssmaller.Policiesaimedatachievingamoreequaldistributionofeconomic wellbeing,suchasthewelfaresystem,trytohelpthosemembersofsocietywhoaremostinneed.Theindividual incometaxasksthefinanciallysuccessfultocontributemorethanotherstosupportthegovernment. TYPE:SSECTION:1RANDOM:Y 3. Defineopportunitycost.Whatistheopportunitycosttoyouofattendingcollege?Whatwasyouropportunitycost ofcomingtoclasstoday? ANSWER:Whatevermustbegivenuptoobtainsomeitemititsopportunitycost.Basically,thiswouldbeapersons secondchoice.Theopportunitycostofapersonattendingcollegeisthevalueofthebestalternativeuseofthat personstime.Formoststudentsthiswouldbetheincomethestudentgivesupbynotworking.Astudents opportunitycostofcomingtoclasswasthevalueofthebestopportunitythestudentgaveup.(Formoststudents, thatseemstobesleep.) TYPE:SSECTION:1RANDOM:Y

34 3 Chapter 1/Ten Principles of Economics

4. Withtheunderstandingthatpeoplerespondtoincentives,outlinethepossibleoutcomeforteachersiftheK12 schoolyearisextendedto11monthsperyearinsteadoftheexisting9monthsperyear. ANSWER:Theconceptofworkinglongerperyearwouldbeperceivedbymanyteachersasadefiniteincreaseinthecost ofteaching.Evenwithadditionalcompensation,manyteacherslookatsummersoffasamajorbenefitofthe educationprofession.Ifthisbenefitwereeliminatedorevendiminished,someteachersmayperceivethatthe marginalcostofteachingwouldnowbegreaterthanthemarginalbenefitandwouldchoosetoleaveteaching. TYPE:SSECTION:1RANDOM:Y 5. Underwhatconditionsmightgovernmentinterventioninaneconomyimprovethemarketoutcome? ANSWER:Ifthereisamarketfailure,suchasanexternalityormonopoly,governmentregulationmightimprovethewell beingofsocietybypromotingefficiency.Ifthedistributionofincomeorwealthisconsideredtobeunfairbysociety, governmentinterventionmightachieveamoreequitabledistributionofeconomicwellbeing. TYPE:SSECTION:2RANDOM:Y 6. Explainhowanattemptbythegovernmenttolowerinflationcouldcauseunemploymenttoincreaseintheshort run. ANSWER:Tolowerinflation,thegovernmentmaychoosetoreducethemoneysupplyintheeconomy.Whenthemoney supplyisreduced,pricesdontadjustimmediately.Lowerspendingcombinedwithprices,whicharetoohigh, reducessalesandcausesworkerstobelaidoff.Hence,thelowerpricelevelisassociatedwithhigher unemployment. TYPE:SSECTION:3RANDOM:Y