Chapter 1

Ten Principles of Economics

MULTIPLECHOICE

1. ThewordthatcomesfromtheGreekwordforonewhomanagesahouseholdis
a. market.
b. consumer.
c. producer.
d. economy.
ANSWER:d. economy.
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2. ThewordeconomycomesfromtheGreekwordfor
a. environment.
b. onewhomanagesahousehold.
c. onewhoparticipatesinamarket.
d. conservation.
ANSWER:b. onewhomanagesahousehold.
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3. HouseholdsandeconomieshaveeachofthefollowingincommonEXCEPTboth
a. mustallocatescarceresources.
b. facemanydecisions.
c. mustallocatethegoodsandservicestheyproduce.
d. musthaveacentraldecisionmaker.
ANSWER:d. musthaveacentraldecisionmaker.
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4. Economicsdealsprimarilywiththeconceptof
a. scarcity.
b. poverty.
c. change.
d. power.
ANSWER:a. scarcity.
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5. WhichofthefollowingisNOTincludedinthedecisionsthateverysocietymustmake?
a. whatgoodswillbeproduced
b. whowillproducegoods
c. whatdeterminesconsumerpreferences
d. whowillconsumethegoods
ANSWER:c. whatdeterminesconsumerpreferences
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6. Bothhouseholdsandsocietiesfacemanydecisionsbecause
a. resourcesarescarce.
b. populationsmayincreaseordecreaseovertime.
c. wagesforhouseholdsandthereforesocietyfluctuatewithbusinesscycles.
d. people,bynature,tendtodisagree.
ANSWER:a. resourcesarescarce.
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7. Agoodisconsideredscarceinasocietywhen
a. moreoutputofthegoodispossible.
b. everyoneinthatsocietycannothavealltheywantofthegood.
c. thegovernmentrestrictsproductionofthegood.
d. onlytherichestpeopleintheeconomycanbuyalltheywantofthegood.
ANSWER:b. everyoneinthatsocietycannothavealltheywantofthegood.
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8. Scarcityexistswhen
1
Chapt er 1/ Ten Pr i nci pl es of Economi cs 2
a. thereislessthananinfiniteamountofaresourceorgood.
b. societycanmeetthewantsofeveryindividual.
c. thereislessofagoodorresourceavailablethanpeoplewishtohave.
d. thegovernmentfailstoproducegoods.
ANSWER:c. thereislessofagoodorresourceavailablethanpeoplewishtohave.
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9. WhichofthefollowingwouldNOTbetrueinaworldwithoutscarcity?
a. Therewouldbenoneedforthescienceofeconomics.
b. Everyonewouldhaveallthegoodsandservicestheywanted.
c. Therewouldhavetobeaninfinitesupplyofeveryresource.
d. Therewouldbeopportunitycosts.
ANSWER:c. Therewouldhavetobeaninfinitesupplyofeveryresource.
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10. Approximatelywhatpercentageoftheworldseconomiesexperiencescarcity?
a. 25%
b. 50%
c. 75%
d. 100%
ANSWER:d. 100%
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11. Whenasocietycannotproduceallthegoodsandservicespeoplewishtohaveitissaidthattheeconomyis
experiencing
a. scarcity.
b. communism.
c. externalities.
d. marketfailure.
ANSWER:a. scarcity.
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12. Forsociety,agoodisnotscarceif
a. atleastoneindividualinsocietycanobtainallheorshewantsofthegood.
b. firmsareproducingatfullcapacity.
c. allmembersofsocietycanhavealltheywantofit.
d. thosewhohaveenoughincomecanbuyalltheywantofthegood.
ANSWER:c. allmembersofsocietycanhavealltheywantofit.
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13. Whichproductwouldbeconsideredscarce?
a. Nikeshoes
b. Monetpaintings
c. 1caratdiamonds
d. Alloftheabovearecorrect.
ANSWER:d. Alloftheabovearecorrect.
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14. Whichofthefollowinggoodsbestmeetsthedefinitionofscarcity?
a. air
b. waterintheocean
c. waterinacity
d. woodinaforest
ANSWER:c. waterinacity
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15. Economicsisdefinedasthestudyof
a. business.
b. howsocietymanagesitsscarceresources.
c. centralplanning.
d. governmentregulation.
ANSWER:b. howsocietymanagesitsscarceresources.
Chapt er 1/ Ten Pr i nci pl es of Economi cs 3
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16. Economicsisthestudyof
a. howsocietymanagesitsscarceresources.
b. thegovernmentsroleinsociety.
c. howamarketsystemfunctions.
d. howtoincreaseproduction.
ANSWER:a. howsocietymanagesitsscarceresources.
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17. Inmostsocieties,resourcesareallocatedby
a. asinglecentralplanner.
b. thosewhoowntheresources.
c. thosefirmsthatuseresourcestoprovidegoodsandservices.
d. thecombinedactionsofmillionsofhouseholdsandfirms.
ANSWER:d. thecombinedactionsofmillionsofhouseholdsandfirms.
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18. EconomistsstudyallofthefollowingEXCEPT
a. howpeoplemakedecisions.
b. howpeopleinteractwithoneanother.
c. theforcesandtrendsthataffecttheeconomyasawhole.
d. howsocietieschangeovertime.
ANSWER:d. howsocietieschangeovertime.
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19. WhichofthefollowingisNOTamajorareaofstudyforeconomists?
a. howpeoplemakedecisions
b. howcountrieschoosenationalleaders
c. howpeopleinteractwitheachother
d. howforcesandtrendsaffecttheoveralleconomy
ANSWER:b. howcountrieschoosenationalleaders
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20. Theadage,Thereisnosuchthingasafreelunch,isusedtoillustratetheconceptof
a. tradeoffs.
b. scarcity.
c. productivity.
d. efficiency.
ANSWER:a. tradeoffs.
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21. Theadage,Thereisnosuchthingasafreelunch,means
a. evenpeopleonwelfarehavetopayforfood.
b. thecostoflivingisalwaysincreasing.
c. togetsomethingwelike,weusuallyhavetogiveupanotherthingwelike.
d. allcostsareincludedinthepriceofaproduct.
ANSWER:c. togetsomethingwelike,weusuallyhavetogiveupanotherthingwelike.
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22. EconomistsusethephraseThereisnosuchthingasafreelunch,toillustrate
a. howinflationincreasesprices.
b. thattogetonething,wemustgiveupsomethingelse.
c. thatnothingisfreeinamarketeconomy.
d. thatifsomethinglookstoogoodtobetrue,itprobablyis.
ANSWER:b. thattogetonething,wemustgiveupsomethingelse.
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23. Whichbestrepresentstheconceptrepresentedbytheadage,Thereisnosuchthingasafreelunch?
a. Melissacanonlyattendtheconcertifshetakeshersisterwithher.
b. Gregishungryandhomeless.
c. Brianmustrepairthetireonhisbikebeforehecanrideittoclass.
d. KendramustdecidebetweengoingtoColoradoorCancunforspringbreak.
Chapt er 1/ Ten Pr i nci pl es of Economi cs 4
ANSWER:d. KendramustdecidebetweengoingtoColoradoorCancunforspringbreak.
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24. Gunsandbutterareusedtorepresenttheclassicsocietaltradeoffbetweenspendingon
a. durableandnondurablegoods.
b. importsandexports.
c. nationaldefenseandconsumergoods.
d. lawenforcementandagriculture.
ANSWER:c. nationaldefenseandconsumergoods.
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25. Henrydecidestospendtwohoursplayinggolfratherthanworkingathisjobwhichpays$8perhour.Henrys
tradeoffis
a. the$16hecouldhaveearnedworkingfortwohours.
b. nothing,becauseheenjoysplayinggolfmorethanworking.
c. theincreaseinskillheobtainsfromplayinggolfforthosetwohours.
d. nothing,becausehespent$16forgreenfeestoplaygolf.
ANSWER:a. the$16hecouldhaveearnedworkingfortwohours.
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26. Whensocietyrequiresthatfirmsreducepollution,thereis
a. atradeoffbecauseofreducedincomestothefirmsowners,workers,andcustomers.
b. notradeoff,sinceeveryonebenefitsfromreducedpollution.
c. notradeoffforsocietyasawhole,sincethecostofreducingpollutionfallsonlyonthefirmsaffectedby
therequirements.
d. atradeoffonlyifsomefirmsareforcedtoclose.
ANSWER:a. atradeoffbecauseofreducedincomestothefirmsowners,workers,andcustomers.
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27. Danieldecidestospendthelasttwohoursofthenightbeforehiseconomicsexamstudyinginsteadofsleeping.
ForDaniel,histradeoffwouldbe
a. nothing,sincenodollarvaluecanbeputonsleep.
b. nothing,sincestudyingwouldbemorebeneficialthansleep.
c. thesixhoursofsleephecouldhavehadifhehadgonetobedbeforemidnight.
d. thetwohoursofresthewouldhavegotten.
ANSWER:d. thetwohoursofresthewouldhavegotten.
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28. Atradeoffexistsbetweenacleanenvironmentandahigherlevelofincomeinthat
a. studiesshowthatindividualswithhigherlevelsofincomeactuallypollutelessthanlowincome
individuals.
b. topayforpollutioncleanup,thegovernmentmustincreasetaxeswhichlowersincome.
c. lawsthatreducepollutionraisecostsofproductionandreduceincomes.
d. byemployingindividualstocleanuppollution,employmentandincomebothrise.
ANSWER:c. lawsthatreducepollutionraisecostsofproductionandreduceincomes.
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29. WhichofthefollowingwouldNOTbearesultoflawsthatrequirefirmstoreducepollution?
a. lowerspendingbygovernment
b. higherpricestoconsumers
c. lowerwagestoworkers
d. smallerprofittofirms
ANSWER:a. lowerspendingbygovernment
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30. Pollutionregulationswill
a. increaseprofittofirms.
b. imposeatradeoffonsociety.
c. allowfirmstoraiseworkerswages.
d. lowerpricesforconsumers.
ANSWER:b. imposeatradeoffonsociety.
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Chapt er 1/ Ten Pr i nci pl es of Economi cs 5
31. Whichofthefollowingbestdefinesefficiency?
a. absolutefairness
b. equaldistribution
c. minimumwaste
d. consumersovereignty
ANSWER:c. minimumwaste
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32. Whichofthefollowingistrue?
a. Efficiencyreferstothesizeoftheeconomicpie;equityreferstohowthepieisdivided.
b. Fortunately,governmentpoliciesaredesignedtopromotebothequityandefficiency.
c. Aslongastheeconomicpiecontinuallygetslarger,noonewillhavetogohungry.
d. Efficiencyandequitycanbothbeachievediftheeconomicpieiscutintoequalpieces.
ANSWER:a. Efficiencyreferstothesizeoftheeconomicpie;equityreferstohowthepieisdivided.
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33. Efficiencymeansthat
a. societyisconservingresourcesinordertosavethemforthefuture.
b. societysgoodsandservicesaredistributedfairlyamongsocietysmembers.
c. societyhaslesseneditsdependenceonforeignenergysources.
d. societyisgettingthemostitcanfromitsscarceresources.
ANSWER:d. societyisgettingthemostitcanfromitsscarceresources.
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34. Economistsusethewordequitytodescribeasituationinwhich
a. eachmemberofsocietyhasthesameincome.
b. societyisgettingthemostitcanfromitsscarceresources.
c. thoseinsocietywhohavetheleastwillreceivethemost.
d. thebenefitsofsocietysresourcesaredistributedfairlyamongsocietysmembers.
ANSWER:d. thebenefitsofsocietysresourcesaredistributedfairlyamongsocietysmembers.
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35. Onedefinitionofequitywouldbe
a. equality.
b. efficiency.
c. fairness.
d. similarity.
ANSWER:c. fairness.
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36. Whengovernmentpoliciesarebeingdesigned,
a. thereisusuallyatradeoffbetweenequityandefficiency.
b. equityandefficiencygoalsareusuallyindependentofeachother.
c. equitycanusuallybeachievedwithoutanefficiencyloss.
d. increasingefficiencyusuallyresultsinmoreequity.
ANSWER:a. thereisusuallyatradeoffbetweenequityandefficiency.
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37. Whengovernmentpoliciessuchasthewelfaresystemtrytohelpthemostneedymembersofsociety,it
a. increasesequityandreducesefficiency.
b. reducescharitablecontributionsinaneconomy.
c. increasestheproductivityoftheneedyinthesociety.
d. causesmarketfailuretooccur.
ANSWER:a. increasesequityandreducesefficiency.
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38. Whenthegovernmentimplementsprogramssuchasprogressiveincometaxrates,whichofthefollowingis
likelytooccur?
a. Equityisincreasedandefficiencyisincreased.
b. Equityisincreasedandefficiencyisdecreased.
c. Equityisdecreasedandefficiencyisincreased.
d. Equityisdecreasedandefficiencyisdecreased.
Chapt er 1/ Ten Pr i nci pl es of Economi cs 6
ANSWER:b. Equityisincreasedandefficiencyisdecreased.
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39. Whenthegovernmentattemptstocuttheeconomicpieintomoreequalslices,
a. itiseasiertocutthepie,andthereforetheeconomycanproducealargerpie.
b. thegovernmentcanmoreeasilyallocatethepietothosemostinneed.
c. thepiegetssmaller,andtherewillbelesspieforeveryone.
d. theeconomywillspendtoomuchtimecuttingandlosestheabilitytoproduceenoughpieforeveryone.
ANSWER:c. thepiegetssmaller,andtherewillbelesspieforeveryone.
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40. Whenthegovernmentattemptstoimproveequityinaneconomytheresultisoften
a. anincreaseinoveralloutputintheeconomy.
b. additionalgovernmentrevenuesinceoverallincomewillincrease.
c. anactualreductioninequity.
d. reducedefficiencyintheeconomy.
ANSWER:d. reducedefficiencyintheeconomy.
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41. Whenthegovernmentredistributesincomefromtherichtothepoor,
a. efficiencyisimproved,butequityisnot.
b. bothrichpeopleandpoorpeoplebenefitdirectly.
c. peopleworklessandproducefewergoodsandservices.
d. richpeopleconsumefewergoods,butpoorpeopleconsumemoregoods,resultinginnorealchange.
ANSWER:c. peopleworklessandproducefewergoodsandservices.
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42. Ineconomics,thecostofsomethingis
a. thedollaramountofobtainingit.
b. alwaysmeasuredinunitsoftimegivenuptogetit.
c. whatyougiveuptogetit.
d. usuallyhigherthanpeoplethinkitwillbe.
ANSWER:c. whatyougiveuptogetit.
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43. Whatyougiveuptoobtainanitemiscalledyour
a. opportunitycost.
b. explicitcost.
c. truecost.
d. directcost.
ANSWER:a. opportunitycost.
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44. Theopportunitycostofgoingtocollegeis
a. thetotalspentonfood,clothing,books,transportation,tuition,lodging,andotherexpenses.
b. thevalueofthebestopportunityastudentgivesuptoattendcollege.
c. zeroforstudentswhoarefortunateenoughtohavealloftheircollegeexpensespaidbysomeoneelse.
d. zero,sinceacollegeeducationwillallowastudenttoearnalargerincomeaftergraduation.
ANSWER:b. thevalueofthebestopportunityastudentgivesuptoattendcollege.
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45. Formoststudents,thelargestsinglecostofacollegeeducationis
a. thewagesgivenuptoattendschool.
b. tuition,fees,andbooks.
c. roomandboard.
d. transportation,parking,andentertainment.
ANSWER:a. thewagesgivenuptoattendschool.
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46. Thelargestsinglecostofgoingtocollegeisusually
a. books.
b. roomandboard.
c. tuition.
Chapt er 1/ Ten Pr i nci pl es of Economi cs 7
d. lostwages.
ANSWER:d. lostwages.
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47. Theopportunitycostofanitemis
a. thenumberofhoursneededtoearnmoneytobuyit.
b. whatyougiveuptogetthatitem.
c. usuallylessthanthedollarvalueoftheitem.
d. thedollarvalueoftheitem.
ANSWER:b. whatyougiveuptogetthatitem.
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48. Mallorydecidestospend3hoursworkingovertimeratherthanwatchingavideowithherfriends.Sheearns$8
anhour.Heropportunitycostofworkingis
a. the$24sheearnsworking.
b. the$24minustheenjoymentshewouldhavereceivedfromwatchingthevideo.
c. theenjoymentshewouldhavereceivedhadshewatchedthevideo.
d. nothing,sinceshewouldhavereceivedlessthan$24ofenjoymentfromthevideo.
ANSWER:c. theenjoymentshewouldhavereceivedhadshewatchedthevideo.
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49. Russellspendsanhourstudyinginsteadofplayingtennis.Theopportunitycosttohimofstudyingis
a. theimprovementinhisgradesfromstudyingforthehour.
b. thedifferencebetweentheimprovementinhisgradesfromstudyingminustheenjoymentofplaying
tennis.
c. theenjoymentandexercisehewouldhavereceivedhadheplayedtennis.
d. zero.SinceRussellchosetostudyratherthantoplaytennis,thevalueofstudyingmusthavebeen
greaterthanthevalueofplayingtennis.
ANSWER:c. theenjoymentandexercisehewouldhavereceivedhadheplayedtennis.
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50. Collegeageathleteswhodropoutofcollegetoplayprofessionalsports
a. arenotrationaldecisionmakers.
b. arewellawarethattheiropportunitycostofattendingcollegeisveryhigh.
c. areconcernedmoreaboutpresentcircumstancesthantheirfuture.
d. underestimatethevalueofacollegeeducation.
ANSWER:b. arewellawarethattheiropportunitycostofattendingcollegeisveryhigh.
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51. Peoplemakedecisionsatthemarginby
a. followingtradition.
b. experience.
c. calculatingdollarcosts.
d. comparingcostsandbenefits.
ANSWER:d. comparingcostsandbenefits.
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52. Thewordmarginmeans
a. edge.
b. distance.
c. space.
d. measure.
ANSWER:a. edge.
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53. Makingdecisionsatthemarginmeansthatpeople
a. makethosedecisionsthatdonotimposeamarginalcost.
b. evaluatehoweasilyadecisioncanbereversedifproblemsarise.
c. comparethemarginalcostsandmarginalbenefitsofeachdecision.
d. alwayscalculatethemarginaldollarcostsforeachdecision.
ANSWER:c. comparethemarginalcostsandmarginalbenefitsofeachdecision.
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Chapt er 1/ Ten Pr i nci pl es of Economi cs 8
54. Amarginalchangeisa
a. longtermtrend.
b. large,significantadjustment.
c. changefortheworse,andsoisusuallyshortterm.
d. smallincrementaladjustment.
ANSWER:d. smallincrementaladjustment.
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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.
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56. Whichofthefollowingisthebestexampleofamarginalchange?
a. ThepriceofhousingroseinSeattleby5%inlastyear.
b. Kimgetsabigpromotionatwork.Shealsogetsaraisefrom$25,000peryearto$40,000peryear.
c. Markgraduatesfromcollegeandtakesajob.Hisincomeincreasesfrom$10,000peryearto$50,000per
year.
d. AdroughthitstheupperMidwestandthepriceofwheatincreasesfrom$4.00perbushelto$8.00per
bushel.
ANSWER:a. ThepriceofhousingroseinSeattleby5%inlastyear.
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57. Amarginalchangeisillustratedbywhichofthefollowing?
a. Nancyretiresandtakesaparttimejob.Shewasworking40hoursperweekandnowworks10hours
perweek.
b. StateUniversityhasannouncedthatduetostatebudgetdeficits,tuitionmustriseby25%nextyear.
c. Ryanmovedtoanewapartmentandnowpays40%morerentthanbefore.
d. Arizona,whichusuallyreceives10inchesofrainperyear,received11incheslastyear.
ANSWER:d. Arizona,whichusuallyreceives10inchesofrainperyear,received11incheslastyear.
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58. Aftermuchconsideration,youhavechosenCancunoverFt.LauderdaleforyourSpringBreaktripthisyear.For
thisdecisiontochange,whichofthefollowingmustoccur?
a. ThemarginalbenefitofCancunmustincrease.
b. ThemarginalcostofCancunmustdecrease.
c. ThemarginalbenefitofFt.Lauderdalemustincrease.
d. ThemarginalcostofFt.Lauderdalemustincrease.
ANSWER:c. ThemarginalbenefitofFt.Lauderdalemustincrease.
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59. Theaveragecostperseatonthe50passengerFloatingOnAirBuscompanystripfromKansasCitytoSt.Louis
is$40.Ifnorefreshmentsareservedand3seatsareempty,thebuscompanycouldincreaseitsprofitonlyifit
a. chargednolessthan$40forthe3remainingseats.
b. chargedmorethan$40forthe3remainingseats.
c. chargedanyticketpriceabove$0fortheremainingseats.
d. lefttheseatsempty.
ANSWER:c. chargedanyticketpriceabove$0fortheremainingseats.
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60. Arationaldecisionmakertakesanactiononlyifthe
a. marginalbenefitislessthanthemarginalcost.
b. marginalbenefitisgreaterthanthemarginalcost.
c. averagebenefitisgreaterthantheaveragecost.
d. marginalbenefitisgreaterthanboththeaveragecostandthemarginalcost.
ANSWER:b. marginalbenefitisgreaterthanthemarginalcost.
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Chapt er 1/ Ten Pr i nci pl es of Economi cs 9
61. Mikehasspent$500purchasingandrepairinganoldfishingboat,whichheexpectstosellfor$800oncethe
repairsarecomplete.Hediscoversthatheneedsanadditionalrepair,whichwillcost$400,inordertocompletethe
repairs.Hecanselltheboatasitisnowfor$300.Whatshouldhedo?
a. Heshouldcuthislossesandtakethe$300.
b. Heshouldneversellsomethingforlessthanitcost.
c. Heshouldcompletetherepairsandselltheboat.
d. Itdoesntmatterwhichactionhetakes;theoutcomeisthesameeitherway.
ANSWER:c. Heshouldcompletetherepairsandselltheboat.
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62. Stanbuysa1966Mustang,whichheplanstorestoreandsell.Heanticipatesthatthecostofthecarandthe
repairswillbe$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.
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63. Adonutshopsellsfreshbakeddonutsfrom5a.m.until3p.m.everydaybutSunday.Thecostofmakingand
sellingadozenglazeddonutsis$1.00.Sincethisshopdoesnotselldayolddonutsthenextday,whatshouldthemanager
doifhestillhas10dozenleftat2:30p.m.?
a. lowerthepriceoftheremainingdonutsevenifthepricefallsbelow$1.00
b. lowerthepriceoftheremainingdonutsaslongasitsmorethan$1.00
c. Lowerthepriceonalldonutssotheywillallbesoldearlierintheday
d. throwthemawayandproduce10fewerdozentomorrow
ANSWER:a. lowerthepriceoftheremainingdonutsevenifthepricefallsbelow$1.00
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64. Economistsunderstandthatpeoplerespondto
a. laws.
b. incentives.
c. threatsmorethanrewards.
d. positives,butnotnegatives.
ANSWER:b. incentives.
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65. Whenpolicymakersmakepoliciesthatchangethecostsandbenefitsthatpeopleface,theycan
a. alterbehaviors.
b. makepeopleignoreincentives.
c. createinflation.
d. reducegovernmentrevenue.
ANSWER:a. alterbehaviors.
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66. RalphNadersbookUnsafeatAnySpeedcausedCongresstorequire
a. safetyglassinallnewcars.
b. seatbeltsinallnewcars.
c. airbagsinallnewcars.
d. stricterdrunkdrivinglawsinallstates.
ANSWER:b. seatbeltsinallnewcars.
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67. U.S.lawsrequiringthatdriverswearseatbeltshaveresultedin
a. areductioninbothdriverdeathsandpedestriandeaths.
b. feweraccidentsandfewerdeathsperaccident.
c. fewerdriverdeaths,feweraccidentsandfewerpedestriandeaths.
d. littlechangeinthenumberofdriverdeaths,butmoreaccidentsandmorepedestriandeaths.
ANSWER:d. littlechangeinthenumberofdriverdeaths,butmoreaccidentsandmorepedestriandeaths.
TYPE:MSECTION:1DIFFICULTY:2
Chapt er 1/ Ten Pr i nci pl es of Economi cs 10
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
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,whichwill
makethepolicyeffective.
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?
Chapt er 1/ Ten Pr i nci pl es of Economi cs 11
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
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
Chapt er 1/ Ten Pr i nci pl es of Economi cs 12
83. Whichofthefollowingisthebeststatementaboutmarkets?
a. Marketsareusuallyagoodwaytoorganizeeconomicactivity.
b. Marketsareusuallyinferiortocentralplanningasawaytoorganizeeconomicactivity.
c. Marketsfailandarethereforenotanacceptablewaytoorganizeeconomicactivity.
d. Marketsareagoodwaytoorganizeeconomicactivityindevelopednations,butnotinlessdeveloped
nations.
ANSWER:a. Marketsareusuallyagoodwaytoorganizeeconomicactivity.
TYPE:MSECTION:2DIFFICULTY:2
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
90. Inamarketeconomy,pricesreflectthe
a. valueofagoodtosociety.
b. costtosocietyofmakingthegood.
c. quantitysocietywillultimatelychoosetoproduce.
d. Bothaandbarecorrect.
Chapt er 1/ Ten Pr i nci pl es of Economi cs 13
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
96. Priortoitscollapse,communistcountriesworkedonthepremisethateconomicwellbeingcouldbeorganized
onlythrough/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. Householdsandfirmsinteractinginmarketsareguidedbyaninvisiblehandthatleadsthemto
desirablemarketoutcomes.
ANSWER:d. Householdsandfirmsinteractinginmarketsareguidedbyaninvisiblehandthatleadsthemto
desirablemarketoutcomes.
TYPE:MSECTION:2DIFFICULTY:2
98. Theterminvisiblehandwascoinedby
Chapt er 1/ Ten Pr i nci pl es of Economi cs 14
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. Theinvisiblehandsabilitytocoordinatethedecisionsofthefirmsandhouseholdsintheeconomycanbe
hinderedby
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
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.
Chapt er 1/ Ten Pr i nci pl es of Economi cs 15
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
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.
Chapt er 1/ Ten Pr i nci pl es of Economi cs 16
ANSWER:b. promoteequityandtopromoteefficiency.
TYPE:MSECTION:2DIFFICULTY:2
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
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.
Chapt er 1/ Ten Pr i nci pl es of Economi cs 17
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,whichofthefollowingmightNOTbeanappropriatepolicy
forsocietytoestablishregardingeducation?
a. taxincentivesforschooling
b. mandatoryminimumlevelsofeducation
c. programswhichpromotethehiringofhighschooldropouts
d. publicsubsidiesofeducation
ANSWER:c. programswhichpromotethehiringofhighschooldropouts
TYPE:MSECTION:2DIFFICULTY:2
125. Ifasawmillcreatestoomuchairpollution,
a. interferencebythegovernmentwillsurelymakethematterworse.
b. asenseofsocialresponsibilitywillcausetheownersofthemilltoreducepollution.
c. thegovernmentcanraiseeconomicwellbeingbyprovidinghealthcaretothoseaffectedbythe
pollution.
d. thegovernmentcanraiseeconomicwellbeingthroughenvironmentalregulation.
ANSWER:d. thegovernmentcanraiseeconomicwellbeingthroughenvironmentalregulation.
TYPE:MSECTION:2DIFFICULTY:2
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?
Chapt er 1/ Ten Pr i nci pl es of Economi cs 18
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
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
Chapt er 1/ Ten Pr i nci pl es of Economi cs 19
137. Theincomeofatypicalworkerinacountryismostcloselylinkedtowhichofthefollowing?
a. population
b. productivity
c. thenumberoflaborunions
d. governmentpolicies
ANSWER:b. productivity
TYPE:MSECTION:3DIFFICULTY:2
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. totalincomeisdividedamongfewerworkersinKenyasinceithasasmallerlaborforcethanSouth
Africa.
c. KenyasclimateallowsforlongergrowingseasonsandthereforeKenyacanproducelargequantitiesof
grain.
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.AworkerintheUnitedStates
canearn$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
144. Almostallvariationinlivingstandardsisattributabletodifferencesincountries
Chapt er 1/ Ten Pr i nci pl es of Economi cs 20
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
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
Chapt er 1/ Ten Pr i nci pl es of Economi cs 21
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
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.
Chapt er 1/ Ten Pr i nci pl es of Economi cs 22
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
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. Whichofthefollowingisthemostcorrectstatementabouttherelationshipbetweeninflationand
unemployment?
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.
Chapt er 1/ Ten Pr i nci pl es of Economi cs 23
c. laborproductivityinaneconomy.
d. thelevelofgovernmentinterventioninamarketeconomy.
ANSWER:a. thetradeoffbetweeninflationandunemployment.
TYPE:MSECTION:3DIFFICULTY:2
168. AlthoughthePhillipscurveiscontroversial,mosteconomistsbelievethat
a. societyfacesatradeoffbetweenunemploymentandinflationintheshortrunonly.
b. societyfacesatradeoffbetweenunemploymentandinflationinthelongrunonly.
c. notradeoffexistsbetweenunemploymentandinflation.
d. societyfacesacontinuoustradeoffbetweenunemploymentandinflation.
ANSWER:a. societyfacesatradeoffbetweenunemploymentandinflationintheshortrunonly.
TYPE:MSECTION:3DIFFICULTY:3
169. Policymakerscaninfluencethecombinationofinflationandunemploymenttheeconomyexperiencesby
adjustingeachofthefollowingEXCEPT
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
174. SenatorSmithwantstoincreasetaxesonpeoplewithhighincomesandusethemoneytohelpthepoor.Senator
Jonesarguesthatsuchataxwilldiscouragesuccessfulpeoplefromworkingandwillthereforemakesocietyworseoff.An
economistwouldsaythat
a. weshouldagreewithSenatorSmith.
b. weshouldagreewithSenatorJones.
c. agooddecisionrequiresthatwerecognizebothviewpoints.
Chapt er 1/ Ten Pr i nci pl es of Economi cs 24
d. therearenotradeoffsbetweenequityandefficiency.
ANSWER:c. agooddecisionrequiresthatwerecognizebothviewpoints.
TYPE:MSECTION:1DIFFICULTY:2
175. Mauricereceives$100asabirthdaygift.Indecidinghowtospendthemoney,henarrowshisoptionsdownto
fourchoices,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.Sheisconsidering
expandingheroperationinordertomakemoretables.Shouldsheexpand?
a. Yes,becausemakingtablesisprofitable.
b. No,becauseshemaynotbeabletoselltheadditionaltables.
c. Itdependsonthemarginalcostofproducingmoretablesandthemarginalrevenueshewillearnfrom
sellingmoretables.
d. Itdependsontheaveragecostofproducingmoretablesandtheaveragerevenueshewillearnfrom
sellingmoretables.
ANSWER:c. Itdependsonthemarginalcostofproducingmoretablesandthemarginalrevenueshewillearnfrom
sellingmoretables.
TYPE:MSECTION:1DIFFICULTY:2
177. InthenationofDictatorland,farmerstraditionallyfeedgraintotheirlivestock.Centralplanners,however,
decidedtoincreasethepriceofgraintomakegrainfarmershappyandtoreducethepriceofbreadmadefromthatgrain
tomakecitydwellershappy.Nowthepriceofbreadislowerthanthepriceofgrain.Wemightnowexpect
a. farmerstocontinuetofeedgraintotheirlivestock.
b. farmerstostartfeedingbreadtotheirlivestock.
c. citydwellerstostartbuyinggraintomakebreadtoeat.
d. citydwellerstostartbuyinggraintomakebreadtosell.
ANSWER:b. farmerstostartfeedingbreadtotheirlivestock.
TYPE:MSECTION:1DIFFICULTY:2
178. SenatorSmartistryingtoconvinceworkersinherdistrictthattradewithothercountriesisbeneficial.Senator
Smartarguesthattradecanbebeneficial
a. onlyifitallowsustoobtainthingsthatwecouldntmakeforourselves.
b. becauseitallowsspecialization,whichincreasestotaloutput.
c. tousifwecangainandtheothersinvolvedinthetradelose.
d. inonlyalimitednumberofcircumstancesbecauseothersaretypicallyselfinterested.
ANSWER:b. becauseitallowsspecialization,whichincreasestotaloutput.
TYPE:MSECTION:2DIFFICULTY:2
179. AdamSmitharguedthatinamarketsystem,whenpeopleactintheirownselfinterest,theytypically
a. helponlythemselves.
b. harmothers.
c. helpothers,butnotasmuchastheywouldhaveiftheywerenotselfinterested.
d. helpothersevenmorethanwhentheyseektohelpothers.
ANSWER:d. helpothersevenmorethanwhentheyseektohelpothers.
TYPE:MSECTION:2DIFFICULTY:2
180. Afriendofyoursasksyouwhymarketpricesarebetterthangovernmentdeterminedprices.Yousaythat
marketdeterminedpricesarebetterbecausetheygenerallyreflect
a. thevalueofagoodtosociety,butnotthecostofmakingit.
b. thecostofmakingagoodtosociety,butnotitsvalue.
c. boththevalueofagoodtosocietyandthecostofmakingit.
d. neitherthevalueofagoodtosocietynorthecostofmakingit.
ANSWER:c. boththevalueofagoodtosocietyandthecostofmakingit.
TYPE:MSECTION:2DIFFICULTY:1
Chapt er 1/ Ten Pr i nci pl es of Economi cs 25
181. WhichofthefollowingisNOTtrue?
a. Inthepresenceofamarketfailure,governmentactionmightnotimproveonthemarketoutcome
becausesometimespublicpoliciessimplyrewardthepoliticallypowerful.
b. Inthepresenceofamarketfailure,governmentactionmightnotimproveonthemarketoutcome
becausesomeleadersarenotfullyinformedabouttheeffectsoftheiractions.
c. Inthepresenceofamarketfailure,governmentactioncansometimesimproveonthemarketoutcome.
d. Inthepresenceofamarketfailure,governmentactionwillalwaysimproveonthemarketoutcome.
ANSWER:d. Inthepresenceofamarketfailure,governmentactionwillalwaysimproveonthemarketoutcome.
TYPE:MSECTION:2DIFFICULTY:1
182. WhichofthefollowingismostlikelytoraisetheaveragestandardoflivingintheUnitedStates?
a. anincreaseininvestmentinnewcapital
b. acontinuationoftheeconomicproblemsexperiencedbyJapan,withwhomtheUnitedStatescompetes
inworldmarkets
c. anincreaseintheminimumlegalwage
d. shorteningtheaverageworkweek
ANSWER:a. anincreaseininvestmentinnewcapital
TYPE:MSECTION:3DIFFICULTY:1
183. Duringthe1990s,theUnitedKingdomexperiencedlowlevelsofinflationwhileTurkeyexperiencedhighlevels
ofinflation.Thedifferencecanbestbeexplainedbythefactthat
a. theUnitedKingdomismoreindustrializedthanTurkey.
b. theUnitedKingdomprintedmoneyataslowerratethanTurkey.
c. workersintheUnitedKingdomaremoreproductivethanworkersinTurkey.
d. thereweremorecasesofmarketfailureinTurkeythanintheUnitedKingdom.
ANSWER:b. theUnitedKingdomprintedmoneyataslowerratethanTurkey.
TYPE:MSECTION:3DIFFICULTY:1
184. WhichofthefollowingisconsistentwiththePhillipsCurve?
a. Ifweincreasetherateofinflationfrom3percentto6percent,thentherateofunemploymentwill
temporarilyfall.
b. Ifweincreasetherateofinflationfrom3percentto6percent,thentherateofunemploymentwill
temporarilyrise.
c. Ifweincreasetherateofinflationfrom3percentto6percent,thentherateofunemploymentwill
permanentlyfall.
d. Ifweincreasetherateofinflationfrom3percentto6percent,thentherateofunemploymentwill
permanentlyrise.
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,wecanusuallygetsomethingthatwelikewithouthavingtogiveupsomethingelsethat
welike.
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
Chapt er 1/ Ten Pr i nci pl es of Economi cs 26
9. IftheaveragecostoftransportingapassengeronthetrainfromChicagotoSt.Louisis$75,itwouldbeirrational
fortherailroadtoallowanypassengertorideforlessthan$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
13. Amarketeconomycannotproduceasociallydesirableoutcomebecauseindividualsaremotivatedbytheirown
selfishinterests.
ANSWER:FTYPE:TSECTION:2RANDOM:Y
14. Thegovernmentcanpotentiallyimprovemarketoutcomesifmarketinequalitiesormarketfailureexists.
ANSWER:TTYPE:TSECTION:2RANDOM:Y
15. Marketfailurereferstoasituationinwhichthemarketdoesnotallocateresourcesefficiently.
ANSWER:TTYPE:TSECTION:2RANDOM:Y
16. Sincetaxesaffectonlythepricepaidbythebuyer,theycannothaveanadverseimpactontheallocationof
societysresources.
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.(Itisdifficultto
conceiveofasituationwheretimeisnotscarce,however).
TYPE:SSECTION:1RANDOM:Y
2. Onetradeoffsocietyfacesisbetweenefficiencyandequity.Defineeachterm.IftheU.S.governmentredistributes
incomefromtherichtothepoor,explainhowthisactionaffectsequityaswellasefficiencyintheeconomy.
ANSWER:Efficiencyisthepropertyofsocietygettingthemostitcanfromitsscarceresources.Equityisdefinedasthe
propertyofdistributingeconomicprosperityfairlyamongthemembersofsociety.Often,thesetwogoalsconflict.When
thegovernmentredistributesincomefromtherichtothepoor,itreducestherewardforworkinghard.Fewergoodsand
servicesareproducedandtheeconomicpiegetssmaller.Whenthegovernmenttriestocuttheeconomicpieintomore
equalslices,thepiegetssmaller.Policiesaimedatachievingamoreequaldistributionofeconomicwellbeing,suchasthe
welfaresystem,trytohelpthosemembersofsocietywhoaremostinneed.Theindividualincometaxasksthefinancially
successfultocontributemorethanotherstosupportthegovernment.
TYPE:SSECTION:1RANDOM:Y
3. Defineopportunitycost.Whatistheopportunitycosttoyouofattendingcollege?Whatwasyouropportunity
costofcomingtoclasstoday?
ANSWER:Whatevermustbegivenuptoobtainsomeitemititsopportunitycost.Basically,thiswouldbeapersons
secondchoice.Theopportunitycostofapersonattendingcollegeisthevalueofthebestalternativeuseofthatpersons
time.Formoststudentsthiswouldbetheincomethestudentgivesupbynotworking.Astudentsopportunitycostof
comingtoclasswasthevalueofthebestopportunitythestudentgaveup.(Formoststudents,thatseemstobesleep.)
TYPE:SSECTION:1RANDOM:Y
Chapt er 1/ Ten Pr i nci pl es of Economi cs 27
4. Withtheunderstandingthatpeoplerespondtoincentives,outlinethepossibleoutcomeforteachersiftheK12
schoolyearisextendedto11monthsperyearinsteadoftheexisting9monthsperyear.
ANSWER:Theconceptofworkinglongerperyearwouldbeperceivedbymanyteachersasadefiniteincreaseinthecost
ofteaching.Evenwithadditionalcompensation,manyteacherslookatsummersoffasamajorbenefitoftheeducation
profession.Ifthisbenefitwereeliminatedorevendiminished,someteachersmayperceivethatthemarginalcostof
teachingwouldnowbegreaterthanthemarginalbenefitandwouldchoosetoleaveteaching.
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,reduces
salesandcausesworkerstobelaidoff.Hence,thelowerpricelevelisassociatedwithhigherunemployment.
TYPE:SSECTION:3RANDOM:Y