Chapter 1 Ten Principles of Economics

TRUE/FALSE 1. Scarcity means that there is less of a good or resource available than people wish to have. ANS: T DI : 1 !" : 1#$ NAT: Analytic %&': Scarcity( tradeoffs( and opportunity cost T&): Scarcity *S': Definitional +. "conomics is the study of how evenly goods and services are distributed within society. ANS: DI : 1 !" : 1#$ NAT: Analytic %&': The Study of economics( and definitions in economics T&): "conomics *S': Definitional ,. "conomics is the study of how society allocates its unlimited resources. ANS: DI : 1 !" : 1#$ NAT: Analytic %&': The Study of economics( and definitions in economics T&): "conomics *S': Definitional -. .ith careful planning( we can usually get something that we li/e without having to give up something else that we li/e. ANS: DI : + !" : 1#1 NAT: Analytic %&': Scarcity( tradeoffs( and opportunity cost T&): Tradeoffs *S': Interpretive 0. 'hoosing not to attend a concert so that you can study for your e1am is an e1ample of a tradeoff. ANS: T DI : + !" : 1#1 NAT: Analytic %&': Scarcity( tradeoffs( and opportunity cost T&): Tradeoffs *S': Applicative 2. "fficiency means everyone in the economy should receive an e3ual share of the goods and services produced. ANS: DI : + !" : 1#1 NAT: Analytic %&': "fficiency and "3uity T&): "3uality *S': Definitional 4. "3uality refers to how the pie is divided( and efficiency refers to the si5e of the economic pie. ANS: T DI : + !" : 1#1 NAT: Analytic %&': "fficiency and "3uity T&): "3uality 6 "fficiency *S': Definitional 7. 8overnment policies that improve e3uality usually increase efficiency at the same time. ANS: DI : 1 !" : 1#1 NAT: Analytic %&': "fficiency and "3uity T&): "fficiency 6 "3uality *S': Interpretive 9. An individual deciding how to allocate her limited time is dealing with both scarcity and trade#offs. ANS: T DI : 1 !" : 1#1 NAT: Analytic %&': Scarcity( tradeoffs( and opportunity cost T&): &pportunity cost *S': Interpretative 1$. The cost of an action is measured in terms of foregone opportunities. ANS: T DI : 1 !" : 1#1 NAT: Analytic %&': Scarcity( tradeoffs( and opportunity cost T&): &pportunity cost *S': Interpretive 11. Tuition is the single#largest cost of attending college for most students. ANS: DI : 1 !" : 1#1 NAT: Analytic %&': Scarcity( tradeoffs( and opportunity cost T&): &pportunity cost *S': Interpretive

'hapter 1:Ten )rinciples of "conomics

1+. If wages for accountants rose( then accountants; leisure time would have a lower opportunity cost. ANS: DI : 1 !" : 1#1 NAT: Analytic %&': Scarcity( tradeoffs( and opportunity cost T&): &pportunity cost *S': Applicative 1,. A marginal change is a small incremental ad<ustment to an e1isting plan of action. ANS: T DI : 1 !" : 1#1 NAT: Analytic %&': *arginal costs = benefits T&): *arginal changes *S': Definitional 1-. An increase in the marginal cost of an activity necessarily means that people will no longer engage in any of that activity. ANS: DI : + !" : 1#1 NAT: Analytic %&': *arginal costs = benefits T&): *arginal changes *S': Applicative 10. If the average cost of transporting a passenger on the train from 'hicago to St. %ouis is >40( it would be irrational for the railroad to allow any passenger to ride for less than >40. ANS: DI : + !" : 1#1 NAT: Analytic %&': *arginal costs = benefits T&): *arginal changes *S': Applicative 12. The fact that people are willing to pay much more for a diamond( which is not needed for survival( than they are willing to pay for a cup of water( which is needed for survival( is an e1ample of irrational behavior. ANS: DI : + !" : 1#1 NAT: Analytic %&': *arginal costs = benefits T&): *arginal changes *S': Interpretive 14. A rational decisionma/er ta/es an action if and only if the marginal cost e1ceeds the marginal benefit. ANS: DI : + !" : 1#1 NAT: Analytic %&': *arginal costs = benefits T&): *arginal changes *S': Interpretive 17. Suppose one county in *issouri decides it wants to reduce alcohol consumption( so the county passes a law that raises the price of a bottle of beer by >1. As a result( people drive to other counties to drin/ alcohol( which results in an increase in drun/ driving. This illustrates the principle that people respond to incentives. ANS: T DI : + !" : 1#1 NAT: Analytic %&': The role of incentives T&): Incentives *S': Applicative 19. A ta1 on gasoline is an incentive that encourages people to drive smaller more fuel#efficient cars. ANS: T DI : 1 !" : 1#1 NAT: Analytic %&': The role of incentives T&): Incentives *S': Applicative +$. Trade allows each person to speciali5e in the activities he or she does best( thus increasing each individual?s productivity. ANS: T DI : + !" : 1#+ NAT: Analytic %&': 8ains from trade( speciali5ation and trade T&): Trade 6 )roductivity *S': Interpretive +1. Trade with any nation can be mutually beneficial. ANS: T DI : + !" : 1#+ NAT: Analytic %&': 8ains from trade( speciali5ation and trade T&): Trade *S': Interpretive ++. Trade can ma/e everyone better off e1cept in the case where one person is better at doing everything. ANS: DI : 1 !" : 1#+ NAT: Analytic %&': 8ains from trade( speciali5ation and trade T&): Trade *S': Interpretive

'hapter 1:Ten )rinciples of "conomics +,. The invisible hand ensures that economic prosperity is distributed e3ually. ANS: DI : + !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities T&): The invisible hand *S': Definitional +-. A mar/et economy cannot produce a socially desirable outcome because individuals are motivated by their own selfish interests. ANS: DI : + !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities T&): *ar/et economy *S': Interpretive +0. The government can potentially improve mar/et outcomes if mar/et ine3ualities or mar/et failure e1ists. ANS: T DI : + !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities 6 The role of government T&): 8overnment 6 *ar/et economy *S': Interpretive +2. &ne way that governments can improve mar/et outcomes is to ensure that individuals are able to own and e1ercise control over their scarce resources. ANS: T DI : + !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities 6 The role of government T&): )roperty rights *S': Interpretive +4. *ar/et failure refers to a situation in which the mar/et does not allocate resources efficiently. ANS: T DI : 1 !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities T&): *ar/et failure *S': Definitional +7. *ar/et power and e1ternalities are two possible causes of mar/et failure. ANS: T DI : 1 !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities T&): *ar/et failure *S': Definitional +9. )roductivity is defined as the 3uantity of goods and services produced from each unit of labor input. ANS: T DI : 1 !" : 1#, NAT: Analytic %&': )roductivity and growthT&): )roductivity *S': Definitional ,$. Inflation is the primary determinant of a country?s living standards. ANS: DI : + !" : 1#, NAT: Analytic %&': )roductivity and growth T&): )roductivity 6 Standard of living *S': Interpretive ,1. Inflation increases the value of money. ANS: DI : + !" : 1#, NAT: Analytic %&': @nemployment and Inflation *S': Interpretive ,+.

T&):

Inflation

Inflation measures the increase in the 3uantity of goods and services produced from each hour of a wor/er;s time. ANS: DI : 1 !" : 1#, NAT: Analytic %&': @nemployment and Inflation T&): Inflation 6 )roductivity *S': Definitional ,,. In the long run the primary effect of increasing the 3uantity of money is higher prices. ANS: T DI : + !" : 1#, NAT: Analytic %&': @nemployment and Inflation T&): Inflation *S': Interpretative

'hapter 1:Ten )rinciples of "conomics

,-. The business cycle refers to fluctuations in economic activity such as employment and production. ANS: T DI : 1 !" : 1#, NAT: Analytic %&': @nemployment and Inflation T&): The business cycle *S': Definitional SHORT ANSWER 1. Aow does the study of economics depend upon the phenomenon of scarcityB ANS: Cecause economics is the study of how society allocates its scarce resources( if there were no scarcity( there would be no need for economics. "veryone could have all the goods and services they wanted. No one would have to ma/e decisions based on tradeoffs( because there would be no opportunity cost associated with the decision. DIt is difficult to conceive of a situation where time is not scarce( howeverE. DI : + !" : 1#1 NAT: Analytic %&': Scarcity( tradeoffs( and opportunity cost T&): *S': Applicative +. "conomics 6 Scarcity

&ne tradeoff society faces is between efficiency and e3uality. Define each term. If the @.S. government redistributes income from the rich to the poor( e1plain how this action affects e3uality as well as efficiency in the economy.

ANS: "fficiency is the property of society getting the most it can from its scarce resources. "3uality is defined as the property of distributing economic prosperity fairly among the members of society. &ften( these two goals conflict. .hen the government redistributes income from the rich to the poor( it reduces the reward for wor/ing hard. ewer goods and services are produced and the economic pie gets smaller. .hen the government tries to cut the economic pie into more e3ual slices( the pie gets smaller. )olicies aimed at achieving a more e3ual distribution of economic well#being( such as the welfare system( try to help those members of society who are most in need. The individual income ta1 as/s the financially successful to contribute more than others to support the government. DI : + !" : 1#1 NAT: Analytic %&': Scarcity( tradeoffs( and opportunity cost 6 "fficiency and "3uity T&): Tradeoffs 6 "fficiency 6 "3uality *S': Interpretive ,. Define opportunity cost. .hat is the opportunity cost to you of attending collegeB .hat was your opportunity cost of coming to class todayB

ANS: .hatever must be given up to obtain some item it its opportunity cost. Casically( this would be a person?s second choice. The opportunity cost of a person attending college is the value of the best alternative use of that person?s time( as well as the additional costs the person incurs by ma/ing the choice to attend college. or most students this would be the income the student gives up by not wor/ing plus the cost of tuition and boo/s( and any other costs they incur by attending college that they would not incur if they chose not to attend college. A student?s opportunity cost of coming to class was the value of the best opportunity the student gave up. D or most students( that seems to be sleep.E DI : + !" : 1#1 NAT: Analytic %&': Scarcity( tradeoffs( and opportunity cost T&): *S': Interpretive -. &pportunity cost

.ith the understanding that people respond to incentives( outline the possible outcome for teachers if the F#1+ school year is e1tended to 11 months per year instead of the e1isting 9 months per year.

ANS: The concept of wor/ing longer per year would be perceived by many teachers as a definite increase in the cost of teaching. "ven with additional compensation( many teachers loo/ at summers off as a ma<or benefit of the education profession. If this benefit were eliminated or diminished( some teachers may perceive that the marginal cost of teaching would now be greater than the marginal benefit and would choose to leave teaching. DI : , !" : %&': The role of incentives 1#1 NAT: Analytic T&): Incentives *S': Analytical

'hapter 1:Ten )rinciples of "conomics 0. @nder what conditions might government intervention in a mar/et economy improve the economy;s performanceB

ANS: If there is a mar/et failure( such as an e1ternality or monopoly( government regulation might improve the well#being of society by promoting efficiency. If the distribution of income or wealth is considered to be unfair by society( government intervention might achieve a more e3ual distribution of economic well#being. DI : + !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities 6 The role of government T&): *ar/et economy 6 8overnment *S': Applicative 2. "1plain how an attempt by the government to lower inflation could cause unemployment to increase in the short#run.

ANS: To lower inflation( the government may choose to reduce the money supply in the economy. .hen the money supply is reduced( prices don?t ad<ust immediately. %ower spending( combined with prices that are too high( reduces sales and causes wor/ers to be laid off. Aence( the lower price level is associated with higher unemployment. DI : + !" : 1#, NAT: Analytic %&': @nemployment and Inflation 6 "fficiency and "3uity T&): Inflation 6 @nemployment 6 Tradeoffs *S':

Applicative

!ltiple Choice"Sec##
ULT$PLE CHO$CE 1. The word that comes from the 8ree/ word for Gone who manages a householdG is a. mar/et. b. consumer. c. producer. d. economy. DI : 1 !" : 1#$ %&': The Study of economics( and definitions in economics *S': Definitional

ANS: D NAT: Analytic T&): "conomy +.

The word HeconomyI comes from the 8ree/ word oikonomos( which means a. Henvironment.I b. Hproduction.I c. Hone who manages a household.I d. Hone who ma/es decisions.I DI : 1 !" : 1#$ %&': The Study of economics( and definitions in economics *S': Definitional

ANS: ' NAT: Analytic T&): "conomy ,.

!esources are a. scarce for households but plentiful for economies. b. plentiful for households but scarce for economies. c. scarce for households and scarce for economies. d. plentiful for households and plentiful for economies.

ANS: ' DI : 1 !" : 1#$ NAT: Analytic %&': Scarcity( tradeoffs( and opportunity cost T&): !esources 6 Scarcity *S': Interpretive -. In considering how to allocate its scarce resources among its various members( a household considers a. each member;s abilities. b. each member;s efforts. c. each member;s desires. d. all of the above

'hapter 1:Ten )rinciples of "conomics DI : 1 !" : 1#$ %&': Scarcity( tradeoffs( and opportunity cost *S': Interpretive

ANS: D NAT: Analytic T&): Scarcity 0.

"conomics deals primarily with the concept of a. scarcity. b. money. c. poverty. d. ban/ing. DI : 1 !" : 1#$ %&': The Study of economics( and definitions in economics *S': Definitional

ANS: A NAT: Analytic T&): Scarcity 2.

.hich of the following is correctB a. The word economy comes from the 8ree/ word for Hrational thin/er.I b. "conomists study the management of scarce resources. c. Cecause economists believe that people pursue their best interests( they are not interested in how people interact. d. All of the above are correct. DI : 1 !" : 1#$ %&': The Study of economics( and definitions in economics *S': Definitional

ANS: C NAT: Analytic T&): "conomics 4.

The overriding reason as to why households and societies face many decisions is that a. resources are scarce. b. goods and services are not scarce. c. incomes fluctuate with business cycles. d. people( by nature( tend to disagree. DI : + !" : 1#$ %&': Scarcity( tradeoffs( and opportunity cost *S': Interpretive

ANS: A NAT: Analytic T&): Scarcity 7.

The phenomenon of scarcity stems from the fact that a. most economies; production methods are not very good. b. in most economies( wealthy people consume disproportionate 3uantities of goods and services. c. governments restrict production of too many goods and services. d. resources are limited. DI : + !" : 1#$ %&': Scarcity( tradeoffs( and opportunity cost *S': Interpretive

ANS: D NAT: Analytic T&): Scarcity 9.

Appro1imately what percentage of the world?s economies e1perience scarcityB a. +0J b. 0$J c. 40J d. 1$$J DI : 1 !" : 1#$ %&': Scarcity( tradeoffs( and opportunity cost *S': Interpretive

ANS: D NAT: Analytic T&): Scarcity 1$.

.hen a society cannot produce all the goods and services people wish to have( it is said that the economy is e1periencing a. scarcity. b. surpluses. c. inefficiencies. d. ine3ualities. DI : + !" : 1#$ %&': Scarcity( tradeoffs( and opportunity cost *S': Interpretive

ANS: A NAT: Analytic T&): Scarcity

'hapter 1:Ten )rinciples of "conomics 11. .hich of the following products would be considered scarceB a. golf clubs b. )icasso paintings c. apples d. All of the above are correct. DI : + !" : 1#$ %&': Scarcity( tradeoffs( and opportunity cost *S': Interpretive

ANS: D NAT: Analytic T&): Scarcity 1+.

"conomics is the study of a. production methods. b. how society manages its scarce resources. c. how households decide who performs which tas/s. d. the interaction of business and government.

ANS: C DI : 1 !" : 1#$ NAT: Analytic %&': The Study of economics( and definitions in economics T&): "conomies 6 Scarcity *S': Definitional 1,. In most societies( resources are allocated by a. a single central planner. b. a small number of central planners. c. those firms that use resources to provide goods and services. d. the combined actions of millions of households and firms.

ANS: D DI : 1 !" : 1#$ NAT: Analytic %&': The Study of economics( and definitions in economics T&): !esource allocation *S': Interpretive

!ltiple Choice"Sec#1"Ho% People

ULT$PLE CHO$CE 1.

a&e 'ecisions

The adage( GThere is no such thing as a free lunch(G means a. even people on welfare have to pay for food. b. the cost of living is always increasing. c. people face tradeoffs. d. all costs are included in the price of a product. DI : 1 !" : 1#1 %&': Scarcity( tradeoffs( and opportunity cost *S': Definitional

ANS: ' NAT: Analytic T&): Tradeoffs +.

The adage( GThere is no such thing as a free lunch(G is used to illustrate the principle that a. goods are scarce. b. people face tradeoffs. c. income must be earned. d. households face many decisions. DI : + !" : 1#1 %&': Scarcity( tradeoffs( and opportunity cost *S': Interpretive

ANS: C NAT: Analytic T&): Tradeoffs ,.

.hich of the following statements best represents the principle represented by the adage( GThere is no such thing as a free lunchGB a. *elissa can attend the concert only if she ta/es her sister with her. b. 8reg is hungry and homeless. c. Crian must repair the tire on his bi/e before he can ride it to class. d. Fendra must decide between going to 'olorado or 'ancun for spring brea/. DI : , !" : 1#1 %&': Scarcity( tradeoffs( and opportunity cost *S': Applicative

ANS: D NAT: Analytic T&): Tradeoffs

7
-.

'hapter 1:Ten )rinciples of "conomics The principle that Gpeople face tradeoffsG applies to a. individuals. b. families. c. societies. d. All of the above are correct. DI : 1 !" : 1#1 %&': Scarcity( tradeoffs( and opportunity cost *S': Applicative

ANS: D NAT: Analytic T&): Tradeoffs 0.

Sophia is planning her activities for a hot summer day. She would li/e to go to the local swimming pool and see the latest bloc/buster movie( but because she can only get tic/ets to the movie for the same time that the pool is open she can only choose one activity. This illustrates the basic principle that a. people respond to incentives. b. rational people thin/ at the margin. c. people face tradeoffs. d. improvements in efficiency sometimes come at the e1pense of e3uality. DI : 1 !" : 1#1 %&': Scarcity( tradeoffs( and opportunity cost *S': Interpretive

ANS: ' NAT: Analytic T&): Tradeoffs 2.

*itch has >1$$ to spend and wants to buy either a new amplifier for his guitar or a new mp, player to listen to music while wor/ing out. Coth the amplifier and the mp, player cost >1$$( so he can only buy one. This illustrates the basic concept that a. trade can ma/e everyone better off. b. people face trade#offs c. rational people thin/ at the margin. d. people respond to incentives. DI : 1 !" : 1#1 %&': Scarcity( tradeoffs( and opportunity cost *S': Interpretive

ANS: C NAT: Analytic T&): Tradeoffs 4.

8uns and butter are used to represent the classic societal tradeoff between spending on a. durable and nondurable goods. b. imports and e1ports. c. national defense and consumer goods. d. law enforcement and agriculture. DI : 1 !" : 1#1 %&': Scarcity( tradeoffs( and opportunity cost *S': Interpretive

ANS: ' NAT: Analytic T&): Tradeoffs 7.

A tradeoff e1ists between a clean environment and a higher level of income in that a. studies show that individuals with higher levels of income pollute less than low#income individuals. b. efforts to reduce pollution typically are not completely successful. c. laws that reduce pollution raise costs of production and reduce incomes. d. employing individuals to clean up pollution causes increases in employment and income. DI : + !" : 1#1 %&': Scarcity( tradeoffs( and opportunity cost *S': Applicative

ANS: ' NAT: Analytic T&): Tradeoffs 9.

.hen society re3uires that firms reduce pollution( there is a. a tradeoff because of reduced incomes to the firms? owners and wor/ers. b. a tradeoff only if some firms are forced to close. c. no tradeoff( since the cost of reducing pollution falls only on the firms affected by the re3uirements. d. no tradeoff( since everyone benefits from reduced pollution. DI : , !" : 1#1 %&': Scarcity( tradeoffs( and opportunity cost *S': Applicative

ANS: A NAT: Analytic T&): Tradeoffs

'hapter 1:Ten )rinciples of "conomics 1$. "conomists use the word equality to describe a situation in which a. each member of society has the same income. b. each member of society has access to abundant 3uantities of goods and services( regardless of his or her income. c. society is getting the ma1imum benefits from its scarce resources. d. society?s resources are used efficiently. DI : + !" : %&': "fficiency and e3uity 1#1 T&): "3uality

ANS: A NAT: Analytic *S': Interpretive 11.

"fficiency means that a. society is conserving resources in order to save them for the future. b. society?s goods and services are distributed e3ually among society?s members. c. society?s goods and services are distributed fairly( though not necessarily e3ually( among society?s members. d. society is getting the ma1imum benefits from its scarce resources. DI : 1 !" : %&': "fficiency and e3uity 1#1 T&): "fficiency

ANS: D NAT: Analytic *S': Definitional 1+.

The terms e3uality and efficiency are similar in that they both refer to benefits to society. Aowever they are different in that a. e3uality refers to uniform distribution of those benefits and efficiency refers to ma1imi5ing benefits from scarce resources. b. e3uality refers to ma1imi5ing benefits from scarce resources and efficiency refers to uniform distribution of those benefits. c. e3uality refers to everyone facing identical tradeoffs and efficiency refers to the opportunity cost of the benefits. d. e3uality refers to the opportunity cost of the benefits and efficiency refers to everyone facing identical tradeoffs. DI : + !" : %&': "fficiency and e3uity 1#1 T&): "fficiency 6 "3uality

ANS: A NAT: Analytic *S': Definitional 1,.

.hich of the following phrases best captures the notion of efficiencyB a. absolute fairness b. e3ual distribution c. minimum waste d. e3uitable outcome DI : 1 !" : %&': "fficiency and e3uity 1#1 T&): "fficiency

ANS: ' NAT: Analytic *S': Interpretive 1-.

.hich of the following words and phrases best captures the notion of equalityB a. minimum waste b. ma1imum benefit c. sameness d. efficiency DI : 1 !" : %&': "fficiency and e3uity 1#1 T&): "3uality

ANS: ' NAT: Analytic *S': Definitional 10.

A typical society strives to get the most it can from its scarce resources. At the same time( the society attempts to distribute the benefits of those resources to the members of the society in a fair manner. In other words( the society faces a tradeoff between a. guns and butter. b. efficiency and e3uality. c. inflation and unemployment. d. wor/ and leisure.

1$

'hapter 1:Ten )rinciples of "conomics DI : 1 !" : %&': "fficiency and e3uity 1#1 T&): "fficiency 6 "3uality

ANS: C NAT: Analytic *S': Interpretive 12.

.hich of the following is trueB a. "fficiency refers to the si5e of the economic pieK e3uality refers to how the pie is divided. b. 8overnment policies usually improve upon both e3uality and efficiency. c. As long as the economic pie continually gets larger( no one will have to go hungry. d. "fficiency and e3uality can both be achieved if the economic pie is cut into e3ual pieces. DI : + !" : %&': "fficiency and e3uity 1#1 T&): "fficiency 6 "3uality

ANS: A NAT: Analytic *S': Interpretive 14.

As a result of a successful attempt by government to cut the economic pie into more e3ual slices( a. it is easier to cut the pie( and therefore the economy can produce a larger pie. b. those who earn more income pay less in ta1es. c. the pie gets smaller( and there will be less pie overall. d. government will spend too much time cutting and it causes the economy to lose the ability to produce enough pie for everyone. DI : , !" : %&': "fficiency and e3uity 1#1 T&): "fficiency 6 "3uality

ANS: ' NAT: Analytic *S': Analytical 17.

.hen the government redistributes income from the wealthy to the poor( a. efficiency is improved( but e3uality is not. b. both wealthy people and poor people benefit directly. c. people wor/ less and produce fewer goods and services. d. the government collects less revenue in total. DI : + !" : %&': "fficiency and e3uity 1#1 T&): "fficiency 6 "3uality

ANS: ' NAT: Analytic *S': Interpretive 19.

.hen the government attempts to improve e3uality in an economy the result is often a. an increase in overall output in the economy. b. additional government revenue since overall income will increase. c. a reduction in e3uality. d. a reduction in efficiency. DI : + !" : %&': "fficiency and e3uity 1#1 T&): "fficiency 6 "3uality

ANS: D NAT: Analytic *S': Interpretive +$.

.hen the government implements programs such as progressive income ta1 rates( which of the following is li/ely to occurB a. e3uality is increased and efficiency is increased. b. e3uality is increased and efficiency is decreased. c. e3uality is decreased and efficiency is increased. d. e3uality is decreased and efficiency is decreased. DI : + !" : %&': "fficiency and e3uity 1#1 T&): "fficiency 6 "3uality

ANS: C NAT: Analytic *S': Interpretive +1.

A li/ely effect of government policies that redistribute income and wealth from the wealthy to the poor is that those policies a. enhance e3uality. b. reduce efficiency. c. reduce the reward for wor/ing hard. d. All of the above are correct.

'hapter 1:Ten )rinciples of "conomics ANS: D NAT: Analytic *S': Interpretive ++. DI : + !" : %&': "fficiency and e3uity 1#1 T&): "fficiency 6 "3uality

11

.hen government policies are enacted( a. e3uality can usually be enhanced without an efficiency loss( but efficiency can never be enhanced without a reduction in e3uality. b. efficiency can usually be enhanced without a reduction in e3uality( but e3uality can never be enhanced without an efficiency loss. c. it is always the case that either efficiency and e3uality are both enhanced( or efficiency and e3uality are both diminished. d. None of the above are correct. DI : + !" : %&': "fficiency and e3uity 1#1 T&): "fficiency 6 "3uality

ANS: D NAT: Analytic *S': Applicative +,.

Senator Smith wants to increase ta1es on people with high incomes and use the money to help the poor. Senator Lones argues that such a ta1 will discourage successful people from wor/ing and will therefore ma/e society worse off. An economist would say that a. we should agree with Senator Smith. b. we should agree with Senator Lones. c. a good decision re3uires that we recogni5e both viewpoints. d. there are no tradeoffs between e3uity and efficiency. DI : + !" : %&': "fficiency and e3uity 1#1 T&): "fficiency 6 "3uality

ANS: ' NAT: Analytic *S': Applicative +-.

Senator Smith argues that replacing the income ta1 with a national sales ta1 would increase the level of output. Senator .ells ob<ects that this policy would benefit the rich at the e1pense of the poor. a. Coth Senators; arguments are primarily about e3uality. b. Coth Senators; arguments are primarily about efficiency. c. Senator Smith;s argument is primarily about e3uality( while Senator .ell;s argument is primarily about efficiency. d. Senator Smith;s argument is primarily about efficiency( while Senator .ell;s argument is primarily about e3uality. DI : 1 !" : %&': "fficiency and e3uity 1#1 T&): "3uality 6 "fficiency

ANS: D NAT: Analytic *S': Interpretative +0.

Suppose the government ta1es the wealthy at a higher rate than it ta1es the poor and then develops programs to redistribute the ta1 revenue from the wealthy to the poor. This redistribution of wealth a. is more efficient and more e3ual for society. b. is more efficient but less e3ual for society. c. is more e3ual but less efficient for society. d. is less e3ual and less efficient for society. DI : + !" : %&': "fficiency and e3uity 1#1 T&): "fficiency 6 "3uality

ANS: ' NAT: Analytic *S': Interpretive +2.

The government has <ust passed a law re3uiring that all residents earn the same annual income regardless of wor/ effort. This law is li/ely to a. increase efficiency and increase e3uality. b. increase efficiency but decrease e3uality. c. decrease efficiency but increase e3uality. d. decrease efficiency and decrease e3uality. DI : 1 !" : %&': "fficiency and e3uity 1#1 T&): "fficiency 6 "3uality

ANS: ' NAT: Analytic *S': Interpretive

1+
+4.

'hapter 1:Ten )rinciples of "conomics The opportunity cost of an item is a. the number of hours needed to earn money to buy the item. b. what you give up to get that item. c. usually less than the dollar value of the item. d. the dollar value of the item.

ANS: C DI : 1 !" : 1#1 NAT: Analytic %&': Scarcity( tradeoffs( and opportunity cost T&): &pportunity cost *S': Definitional +7. In economics( the cost of something is a. the dollar amount of obtaining it. b. always measured in units of time given up to get it. c. what you give up to get it. d. often impossible to 3uantify( even in principle.

ANS: ' DI : 1 !" : 1#1 NAT: Analytic %&': Scarcity( tradeoffs( and opportunity cost T&): &pportunity cost *S': Definitional +9. .hat you give up to obtain an item is called your a. opportunity cost. b. e1plicit cost. c. true cost. d. direct cost.

ANS: A DI : 1 !" : 1#1 NAT: Analytic %&': Scarcity( tradeoffs( and opportunity cost T&): &pportunity cost *S': Definitional ,$. .hich of the following is correct concerning opportunity costB a. "1cept to the e1tent that you pay more for them( opportunity costs should not include the cost of things you would have purchased anyway. b. To compute opportunity costs( you should subtract benefits from costs. c. &pportunity costs and the idea of trade#offs are not closely related. d. !ational people should compare various options without considering opportunity costs.

ANS: A DI : 1 !" : 1#1 NAT: Analytic %&': Scarcity( tradeoffs( and opportunity cost T&): &pportunity cost *S': Interpretive ,1. Aigh#school athletes who s/ip college to become professional athletes a. obviously do not understand the value of a college education. b. usually do so because they cannot get into college. c. understand that the opportunity cost of attending college is very high. d. are not ma/ing a rational decision since the marginal benefits of college outweigh the marginal costs of college for high#school athletes.

ANS: ' DI : 1 !" : 1#1 NAT: Analytic %&': Scarcity( tradeoffs( and opportunity cost T&): &pportunity cost *S': Applicative ,+. .hen computing the opportunity cost of attending a concert you should include a. the price you pay for the tic/et and the value of your time. b. the price you pay for the tic/et( but not the value of your time. c. the value of your time( but not the price you pay for the tic/et. d. neither the price of the tic/et nor the value of your time.

ANS: A DI : + !" : 1#1 NAT: Analytic %&': Scarcity( tradeoffs( and opportunity cost T&): &pportunity cost *S': Applicative

'hapter 1:Ten )rinciples of "conomics ,,. *allory decides to spend three hours wor/ing overtime rather than watching a video with her friends. She earns >7 an hour. Aer opportunity cost of wor/ing is a. the >+- she earns wor/ing. b. the >+- minus the en<oyment she would have received from watching the video. c. the en<oyment she would have received had she watched the video. d. nothing( since she would have received less than >+- of en<oyment from the video.

1,

ANS: ' DI : , !" : 1#1 NAT: Analytic %&': Scarcity( tradeoffs( and opportunity cost T&): &pportunity cost *S': Applicative ,-. *oira decides to spend two hours ta/ing a nap rather than attending her classes. Aer opportunity cost of napping is a. the value of the /nowledge she would have received had she attended class. b. the >,$ she could have earned if she had wor/ed at her <ob for those two hours. c. the value of her nap less the value of attending class. d. nothing( since she would valued sleep more than attendance at class.

ANS: A DI : , !" : 1#1 NAT: Analytic %&': Scarcity( tradeoffs( and opportunity cost T&): &pportunity cost *S': Applicative ,0. !ussell spends an hour studying instead of playing tennis. The opportunity cost to him of studying is a. the improvement in his grades from studying for the hour. b. the improvement in his grades from studying minus the en<oyment of playing tennis. c. the en<oyment and e1ercise he would have received had he played tennis. d. 5ero. Since !ussell chose to study rather than to play tennis( the value of studying must have been greater than the value of playing tennis.

ANS: ' DI : , !" : 1#1 NAT: Analytic %&': Scarcity( tradeoffs( and opportunity cost T&): &pportunity cost *S': Applicative ,2. or most students( the largest single cost of a college education is a. the wages given up to attend school. b. tuition( fees( and boo/s. c. room and board. d. transportation( par/ing( and entertainment.

ANS: A DI : + !" : 1#1 NAT: Analytic %&': Scarcity( tradeoffs( and opportunity cost T&): &pportunity cost *S': Interpretive ,4. The opportunity cost of going to college is a. the total spent on food( clothing( boo/s( transportation( tuition( lodging( and other e1penses. b. the value of the best opportunity a student gives up to attend college. c. 5ero for students who are fortunate enough to have all of their college e1penses paid by someone else. d. 5ero( since a college education will allow a student to earn a larger income after graduation.

ANS: C DI : + !" : 1#1 NAT: Analytic %&': Scarcity( tradeoffs( and opportunity cost T&): &pportunity cost *S': Interpretive ,7. or a college student who wishes to calculate the true costs of going to college( the costs of room and board a. should be counted in full( regardless of the costs of eating and sleeping elsewhere. b. should be counted only to the e1tent that they are more e1pensive at college than elsewhere. c. usually e1ceed the opportunity cost of going to college. d. plus the cost of tuition( e3uals the opportunity cost of going to college.

ANS: C DI : + !" : 1#1 NAT: Analytic %&': Scarcity( tradeoffs( and opportunity cost T&): &pportunity cost *S': Applicative

1-
,9.

'hapter 1:Ten )rinciples of "conomics Suppose after graduating from college you get a <ob wor/ing at a ban/ earning >,$($$$ per year. After two years of wor/ing at the ban/ earning the same salary( you have an opportunity to enroll in a one#year graduate program that would re3uire you to 3uit your <ob at the ban/. .hich of the following should not be included in a calculation of your opportunity costB a. the cost of tuition and boo/s to attend the graduate program b. the >,$($$$ salary that you could have earned if you retained your <ob at the ban/ c. the >-0($$$ salary that you will be able to earn after having completed your graduate program d. the value of insurance coverage and other employee benefits you would have received if you retained your <ob at the ban/.

ANS: ' DI : + !" : 1#1 NAT: Analytic %&': Scarcity( tradeoffs( and opportunity cost T&): &pportunity cost *S': Applicative -$. or which of the following individuals would the opportunity cost of going to college be highestB a. a promising young mathematician who will command a high salary once she earns her college degree b. a student with average grades who has never held a <ob c. a famous( highly#paid actor who wants to ta/e time away from show business to finish college and earn a degree d. a student who is the best player on his college bas/etball team( but who lac/s the s/ills necessary to play professional bas/etball

ANS: ' DI : + !" : 1#1 NAT: Analytic %&': Scarcity( tradeoffs( and opportunity cost T&): &pportunity cost *S': Applicative -1. .hen you calculate your true costs of going to college( what portion of your room#and#board e1penses should be includedB a. Mour full room#and#board e1penses should always be included. b. None of your room#and#board e1penses should ever be included. c. Mou should include only the amount by which your room#and#board e1penses e1ceed the income you earn while attending college. d. Mou should include only the amount by which your room#and#board e1penses e1ceed the e1penses for rent and food if you were not in college.

ANS: D DI : + !" : 1#1 NAT: Analytic %&': Scarcity( tradeoffs( and opportunity cost T&): &pportunity cost *S': Applicative -+. Samantha;s college raises the cost of room and board per semester. This increase raises Samantha;s opportunity cost of attending college a. even if the amount she would have to pay for room and board if she didn;t attend college rose by the same amount. An increase in opportunity cost reduces Samantha;s incentive to attend college. b. even if the amount she would have to pay for room and board if she didn;t attend college rose by the same amount. An increase in opportunity cost increases Samantha;s incentive to attend college. c. only if the amount she would have to pay for room and board if she didn;t attend college rose by less than the increase in the amount her college charges. An increase in opportunity cost reduces Samantha;s incentive to attend college. d. only if the amount she would have to pay for room and board if she didn;t attend college rose by less than the increase in the amount her college charges. An increase in opportunity cost increases Samantha;s incentive to attend college.

ANS: ' DI : + !" : 1#1 NAT: Analytic %&': Scarcity( tradeoffs( and opportunity cost T&): &pportunity cost *S': Interpretive -,. .hen calculating the cost of college( which of the following should you probably not includeB a. The cost of tuition b. The cost of boo/s re3uired for college classes c. The income you would have earned had you not gone to college d. The cost of rent for your off#campus apartment.

'hapter 1:Ten )rinciples of "conomics ANS: D DI : + !" : 1#1 NAT: Analytic %&': Scarcity( tradeoffs( and opportunity cost T&): &pportunity cost *S': Interpretive --. .hen calculating the cost of college( which of the following should you probably includeB a. The cost of your meal plan for the cafeteria. b. The cost of boo/s re3uired for college classes c. The income you earn at your part#time <ob. d. The cost of living in the dormitory.

10

ANS: C DI : + !" : 1#1 NAT: Analytic %&': Scarcity( tradeoffs( and opportunity cost T&): &pportunity cost *S': Interpretive -0. Suppose your college institutes a new policy re3uiring you to pay for a permit to par/ your car in a campus par/ing lot. a. The cost of the par/ing permit is not part of the opportunity cost of attending college if you would not have to pay for par/ing otherwise. b. The cost of the par/ing permit is part of the opportunity cost of attending college if you would not have to pay for par/ing otherwise. c. &nly half of the cost of the par/ing permit is part of the opportunity cost of attending college. d. The cost of the par/ing permit is not part of the opportunity cost of attending college under any circumstances.

ANS: C DI : , !" : 1#1 NAT: Analytic %&': Scarcity( tradeoffs( and opportunity cost T&): &pportunity cost *S': Interpretive -2. Mou have driven 1($$$ miles on a vacation and then you notice that you are only 0$ miles from an attraction you hadn;t /nown about( but would really li/e to see. In computing the opportunity cost of visiting this attraction you had not planned to visit( you should include a. both the cost of driving the first 1($$$ and the ne1t 0$ miles. b. the cost of driving the first 1($$$ miles( but not the cost of driving the ne1t 0$. c. the cost of driving the ne1t 0$ miles( but not the cost of driving the first 1($$$. d. neither the cost of driving the first 1($$$ miles nor the cost of driving the ne1t 0$ miles.

ANS: ' DI : 1 !" : 1#1 NAT: Analytic %&': Scarcity( tradeoffs( and opportunity cost T&): &pportunity cost *S': Analytical -4. )ete receives >0$ as a birthday gift. In deciding how to spend the money( he narrows his options down to four choices: &ption A( &ption C( &ption '( and &ption D. "ach option costs >0$. inally he decides on &ption C. The opportunity cost of this decision is a. the value to )ete of the option he would have chosen had &ption C not been available. b. the value to )ete of &ptions A( ' and D combined. c. >0$. d. >1$$.

ANS: A DI : + !" : 1#1 NAT: Analytic %&': Scarcity( tradeoffs( and opportunity cost T&): &pportunity cost *S': Applicative -7. 'ollege#age athletes who drop out of college to play professional sports a. are not rational decision ma/ers. b. are well aware that their opportunity cost of attending college is very high. c. are concerned more about present circumstances than their future. d. underestimate the value of a college education.

ANS: C DI : + !" : 1#1 NAT: Analytic %&': Scarcity( tradeoffs( and opportunity cost T&): &pportunity cost *S': Interpretive

12
-9.

'hapter 1:Ten )rinciples of "conomics A rational decisionma/er a. ignores marginal changes and focuses instead on Hthe big picture.I b. ignores the li/ely effects of government policies when he or she ma/es choices. c. ta/es an action only if the marginal benefit of that action e1ceeds the marginal cost of that action. d. ta/es an action only if the combined benefits of that action and previous actions e1ceed the combined costs of that action and previous actions. DI : + !" : 1#1 %&': *arginal costs = benefits T&): *arginal changes

ANS: ' NAT: Analytic *S': Interpretive 0$.

A rational decision ma/er ta/es an action only if the a. marginal benefit is less than the marginal cost. b. marginal benefit is greater than the marginal cost. c. average benefit is greater than the average cost. d. marginal benefit is greater than both the average cost and the marginal cost. DI : + !" : 1#1 %&': *arginal costs = benefits T&): *arginal changes

ANS: C NAT: Analytic *S': Interpretive 01.

A rational decisionma/er ta/es an action if and only if a. the marginal benefit of the action e1ceeds the marginal cost of the action. b. the marginal cost of the action e1ceeds the marginal benefit of the action. c. the marginal cost of the action is 5ero. d. the opportunity cost of the action is 5ero. DI : 1 !" : 1#1 %&': *arginal costs = benefits T&): *arginal changes

ANS: A NAT: Analytic *S': Interpretive 0+.

!ational people ma/e decisions at the margin by a. following marginal traditions. b. behaving in a random fashion. c. thin/ing in blac/#and#white terms. d. comparing marginal costs and marginal benefits. DI : 1 !" : 1#1 %&': *arginal costs = benefits T&): *arginal changes

ANS: D NAT: Analytic *S': Interpretive 0,.

*a/ing rational decisions Gat the marginG means that people a. ma/e those decisions that do not impose a marginal cost. b. evaluate how easily a decision can be reversed if problems arise. c. compare the marginal costs and marginal benefits of each decision. d. always calculate the marginal dollar costs for each decision. DI : + !" : 1#1 %&': *arginal costs = benefits T&): *arginal changes

ANS: ' NAT: Analytic *S': Interpretive 0-.

A marginal change is a a. change that involves little( if anything( that is important. b. large( significant ad<ustment. c. change for the worse( and so it is usually a short#term change. d. small( incremental ad<ustment. DI : 1 !" : 1#1 %&': *arginal costs = benefits T&): *arginal changes

ANS: D NAT: Analytic *S': Definitional

'hapter 1:Ten )rinciples of "conomics 00. )eople are willing to pay more for a diamond than for a bottle of water because a. the marginal cost of producing an e1tra diamond far e1ceeds the marginal cost of producing an e1tra bottle of water. b. the marginal benefit of an e1tra diamond far e1ceeds the marginal benefit of an e1tra bottle of water. c. producers of diamonds have a much greater ability to manipulate diamond prices than producers of water have to manipulate water prices. d. water prices are held artificially low by governments( since water is necessary for life. DI : + !" : 1#1 %&': *arginal costs = benefits T&): *arginal changes

14

ANS: C NAT: Analytic *S': Interpretive 02.

It costs a company >-$($$$ to produce -$$$ bas/etballs. The company;s cost will be >-$($$9 if it produces an additional bas/etball. If the company produces -($$$ bas/etballs then a. its average cost is greater than its marginal cost. b. its average cost and its marginal cost are e3ual. c. its average cost is less than its marginal cost. d. there is insufficient information to compute average and marginal costs.. DI : + !" : 1#1 %&': *arginal costs = benefits T&): *arginal cost

ANS: A NAT: Analytic *S': Analytical 04.

The marginal benefit Lohn gets from eating a fourth cheeseburger at a picnic is a. the total benefit Lohn gets from eating four cheeseburgers minus the total benefit Lohn gets from eating three cheeseburgers. b. the same as the total benefit of eating four cheeseburgers. c. less than the marginal cost of eating the fourth cheeseburger since he chose to eat the fourth cheeseburger. d. the total benefit Lohn gets from eating five cheeseburgers minus the total benefit Lohn gets from eating four cheeseburgers. DI : 1 !" : 1#1 %&': *arginal costs = benefits T&): *arginal changes

ANS: A NAT: Analytic *S': Applicative 07.

Teresa eats three oranges during a particular day. The marginal benefit she en<oys from eating the third orange a. can be thought of as the total benefit Teresa en<oys by eating three oranges minus the total benefit she would have en<oyed by eating <ust the first two oranges. b. determines Teresa;s willingness to pay for the first( second( and third oranges. c. does not depend on how many oranges Teresa has already eaten. d. All of the above are correct. DI : , !" : 1#1 %&': *arginal costs = benefits T&): *arginal changes

ANS: A NAT: Analytic *S': Applicative 09.

After much consideration( you have chosen 'ancun over t. %auderdale as your Spring Crea/ destination this year. Aowever( Spring Crea/ is still months away( and you may reverse this decision. .hich of the following events would prompt you to reverse this decisionB a. The marginal benefit of going to 'ancun increases. b. The marginal cost of going to 'ancun decreases. c. The marginal benefit of going to t. %auderdale decreases. d. The marginal cost of going to t. %auderdale decreases. DI : , !" : 1#1 %&': *arginal costs = benefits T&): *arginal changes

ANS: D NAT: Analytic *S': Applicative

17
2$.

'hapter 1:Ten )rinciples of "conomics A furniture ma/er currently produces 1$$ tables per wee/ and sells them for a profit. She is considering e1panding her operation in order to ma/e more tables. Should she e1pandB a. Mes( because ma/ing tables is profitable. b. No( because she may not be able to sell the additional tables. c. It depends on the marginal cost of producing more tables and the marginal revenue she will earn from selling more tables. d. It depends on the average cost of producing more tables and the average revenue she will earn from selling more tables. DI : + !" : 1#1 %&': *arginal costs = benefits T&): *arginal changes

ANS: ' NAT: Analytic *S': Applicative 21.

The average cost per seat on the 0$#passenger loating#&n#Air Cus company?s trip from Fansas 'ity to St. %ouis( on which no refreshments are served( is >-0. In advance of a particular trip( three seats remain unsold. The bus company could increase its profit only if it a. charged any tic/et price above >$ for the three remaining seats. b. charged at least >10 for each of the three remaining seats. c. charged at least >-0 for each of the three remaining seats. d. paid three people to occupy the three remaining seats. DI : + !" : 1#1 %&': *arginal costs = benefits T&): *arginal cost

ANS: A NAT: Analytic *S': Applicative 2+.

Tom is restoring a car and has already spent >,0$$ on the restoration. Ae e1pects to be able to sell the car for >0$$$. Tom discovers that he needs to do an additional >+$$$ of wor/ to ma/e the table worth >0$$$ to potential buyers. Ae could also sell the car now( without completing the additional wor/( for >+7$$. .hat should he doB a. Ae should sell the car now for >+7$$. b. Ae should /eep the car since it wouldn;t be rational to spend >00$$ restoring a car and then sell it for only >0$$$. c. Ae should complete the additional wor/ and sell the car for >0$$$. d. It does not matter which action he ta/es since the outcome will be the same either way. DI : , !" : 1#1 %&': *arginal costs = benefits T&): *arginal changes

ANS: ' NAT: Analytic *S': Analytical 2,.

Traci is planning to sell her house( and she is considering ma/ing two upgrades to the house before listing it for sale. !eplacing the carpeting will cost her >,($$$ and replacing the roof will cost her >2($$$. Traci e1pects the new carpeting to increase the value of her house by >+(0$$ and the new roof to increase the value of her house by >4(0$$. a. Traci should ma/e both improvements to her house. b. Traci should replace the carpeting but not replace the roof. c. Traci should replace the roof but not replace the carpeting. d. Traci should not ma/e either improvement to her house. DI : 1 !" : 1#1 %&': *arginal costs = benefits T&): *arginal changes

ANS: ' NAT: Analytic *S': Applicative 2-.

Sue drin/s three sodas during a particular day. The marginal benefit she en<oys from drin/ing the third soda a. can be thought of as the total benefit Sue en<oys by drin/ing three sodas minus the total benefit she would have en<oyed by drin/ing <ust two sodas. b. determines Sue;s willingness to pay for the third soda. c. is li/ely different from the marginal benefit provided to Sue by the second soda. d. All of the above are correct. DI : , !" : 1#1 %&': *arginal costs = benefits T&): *arginal changes

ANS: D NAT: Analytic *S': Applicative

'hapter 1:Ten )rinciples of "conomics 20.

19

A construction company has built 0$ houses so far this year at a total cost to the company of >7 million. If the company builds a 01st house( its total cost will increase to >7.17 million. .hich of the following statements is correctB a. or the first 0$ houses( the average cost per house was >12$($$$. b. The marginal cost of the 01st house( if it is built( will be >17$($$$. c. If the company can e1perience a marginal benefit of >19$($$$ by building the 01st house( then the company should build it. d. All of the above are correct.

ANS: D DI : , !" : 1#1 NAT: Analytic %&': *arginal costs = benefits T&): *arginal cost 6 *arginal benefit *S': Applicative 22. *i/e has spent >0$$ purchasing and repairing an old fishing boat( which he e1pects to sell for >7$$ once the repairs are complete. *i/e discovers that( in addition to the >0$$ he has already spent( he needs to ma/e an additional repair( which will cost another >-$$( in order to ma/e the boat worth >7$$ to potential buyers. Ae can sell the boat as it is now for >,$$. .hat should he doB a. Ae should sell the boat as it is now for >,$$. b. Ae should /eep the boat since it would not be rational to spend >9$$ on repairs and then sell the boat for >7$$. c. Ae should complete the repairs and sell the boat for >7$$. d. It does not matter which action he ta/esK the outcome is the same either way. DI : , !" : 1#1 %&': *arginal costs = benefits T&): *arginal cost

ANS: ' NAT: Analytic *S': Analytical 24.

Cill;s Ca/ery ba/es fresh bread every morning. Any bread not sold by the end of the day is thrown away. A loaf of bread costs Cill >1.0$ to produce( and he prices loaves of bread at >- per loaf. Suppose near the end of one day Cill still has 1+ loaves of bread on hand. .hich of the following is correctB a. Cill should only sell the remaining bread for >- per loaf since that is the regular price. b. Cill should only sell the remaining bread for >1.0$ per loaf or more since that is what the bread costs to ma/e. c. Cill should be willing to sell the remaining bread for any price above >$ per loaf since he will have to throw it away if he does not sell it for something. d. Cill should <ust throw the bread away and change the price of his bread starting tomorrow to ma/e sure he sells all of his bread each day. DI : + !" : 1#1 %&': *arginal costs = benefits T&): *arginal changes

ANS: ' NAT: Analytic *S': Analytical 27.

A bagel shop sells fresh ba/ed bagels from 0 a.m. until 4 p.m. every day. The shop does not sell day#old bagels( so all unsold bagels are thrown away at 4 p.m. each day. The cost of ma/ing and selling a do5en bagels is >1.$$K there are no costs associated with throwing bagels away. If the manager has 7 do5en bagels left at 2:,$ p.m. on a particular day( which of the following alternatives is most attractiveB a. %ower the price of the remaining bagels( even if the price falls below >1.$$ per do5en. b. %ower the price of the remaining bagels( but under no circumstances should the price fall below >1.$$ per do5en. c. Throw the bagels away and produce 7 fewer do5en bagels tomorrow. d. Starting tomorrow( lower the price on all bagels so they will all be sold earlier in the day. DI : , !" : 1#1 %&': *arginal costs = benefits T&): *arginal changes

ANS: A NAT: Analytic *S': Analytical 29.

Stan buys a 1922 *ustang for >+($$$( planning to restore and sell the car. Ae goes on to spend >7($$$ restoring the car. At this point he can sell the car for >9($$$. As an alternative( he can spend an additional >,($$$ replacing the engine. .ith a new engine the car would sell for >1+($$$. Stan should a. complete the repairs and sell the car for >1+($$$. b. sell the car now for >9( $$$. c. never try such an e1pensive pro<ect again. d. be indifferent between DiE selling the car now and DiiE replacing the engine and then selling it.

+$

'hapter 1:Ten )rinciples of "conomics DI : , !" : 1#1 %&': *arginal costs = benefits T&): *arginal cost

ANS: D NAT: Analytic *S': Analytical 4$.

Sarah buys and sells real estate. Two wee/s ago( she paid >+7$($$$ for a house on )ine Street( intending to spend >-$($$$ on repairs sell the house for >,0$($$$. %ast wee/( the city government announced a plan to build a new landfill on )ine Street <ust down the street from the house Sarah purchased. As a result of the city;s announced plan( Sarah is weighing two alternatives: She can go ahead with the >-$($$$ in repairs and then sell the house for >+4$($$$( or she can forgo the repairs and sell the house as it is for >+-$($$$. Sarah should a. /eep the house and live in it. b. go ahead with the >-$($$$ in repairs and sell the house for >+4$($$$. c. forgo the repairs and sell the house as it is for >+-$($$$. d. move the house from )ine Street to a more desirable location( regardless of the cost of doing so. DI : , !" : 1#1 %&': *arginal costs = benefits T&): *arginal cost

ANS: ' NAT: Analytic *S': Analytical 41.

Mou are considering staying in college another semester so that you can complete a ma<or in economics. In deciding whether or not to stay you should a. compare the total cost of your education to the total benefits of your education. b. compare the total cost of your education to the benefits of staying one more semester. c. compare the cost of staying one more semester to the benefits of staying one more semester. d. compare the total benefits of your education to the cost of staying one more semester. DI : 1 !" : 1#1 %&': *arginal costs = benefits T&): *arginal cost

ANS: ' NAT: Analytic *S': Applicative 4+.

Sam and Sadie charge people to par/ on their lawn while attending a nearby craft fair. At the current price of >1$( eight people par/ on their lawn. If they raise the price to >10( they /now that only si1 people will want to par/ on their lawn. .hether they have eight or si1 cars par/ed on their lawn does not affect their costs. rom this information it follows that a. they should leave the price at >1$. b. it does not matter if they charge >1$ or >10. c. they would do better charging >10 than >1$. d. they should raise the price even more. DI : + !" : 1#1 %&': *arginal costs = benefits T&): *arginal costs and benefits

ANS: ' NAT: Analytic *S': Analytical 4,.

Mour professor loves her wor/( teaching economics. She has been offered other positions in the corporate world that would increase her income by +0 percent( but she has decided to continue wor/ing as a professor. Aer decision would not change unless the marginal a. cost of teaching increased. b. benefit of teaching increased. c. cost of teaching decreased. d. cost of a corporate <ob increased. DI : + !" : 1#1 %&': *arginal costs = benefits T&): *arginal changes

ANS: A NAT: Analytic *S': Interpretive 4-.

Suppose your management professor has been offered a corporate <ob with a ,$ percent pay increase. Ae has decided to ta/e the <ob. or him( the marginal a. cost of leaving was greater than the marginal benefit. b. benefit of leaving was greater than the marginal cost. c. benefit of teaching was greater than the marginal cost. d. All of the above are correct.

'hapter 1:Ten )rinciples of "conomics ANS: C NAT: Analytic *S': Interpretive 40. DI : + !" : 1#1 %&': *arginal costs = benefits T&): *arginal changes

+1

"conomists are particularly adept at understanding that people respond to a. laws. b. incentives. c. punishments more than rewards. d. rewards more than punishments. DI : 1 !" : %&': The role of incentives 1#1 T&): Incentives

ANS: C NAT: Analytic *S': Interpretive 42.

)eople are li/ely to respond to a policy change a. only if they thin/ the policy is a good one. b. only if the policy change changes the costs of their behavior. c. only if the policy change changes the benefits of their behavior. d. if the policy changes either the costs or benefits of their behavior. DI : 1 !" : %&': The role of incentives 1#1 T&): Incentives

ANS: D NAT: Analytic *S': Interpretive 44.

8overnment policies can change the costs and benefits that people face. Those policies have the potential to a. alter people;s behavior. b. alter people;s decisions at the margin. c. produce results that policyma/ers did not intend. d. All of the above are correct. DI : + !" : %&': The role of incentives 1#1 T&): Incentives

ANS: D NAT: Analytic *S': Interpretive 47.

!alph Nader?s boo/ Unsafe at Any Speed caused 'ongress to re3uire a. safety glass in all new cars. b. seat belts in all new cars. c. air bags in all new cars. d. stricter drun/ driving laws in all states. DI : 1 !" : %&': The role of incentives 1#1 T&): Incentives

ANS: C NAT: Analytic *S': Interpretive 49.

ollowing the implementation of laws re3uiring automobiles to have seat belts( which of the following occurredB a. An individual;s probability of surviving an auto accident rose.. b. There was an increase in pedestrian deaths. c. There was an increase in automobile accidents. d. All of the above are correct. DI : + !" : %&': The role of incentives 1#1 T&): Incentives

ANS: D NAT: Analytic *S': Interpretive 7$.

@.S. laws re3uiring that drivers wear seat belts have resulted in a. a reduction in both driver deaths and pedestrian deaths. b. fewer accidents and fewer deaths per accident. c. fewer driver deaths( fewer accidents and fewer pedestrian deaths. d. little change in the number of driver deaths( but more accidents and more pedestrian deaths. DI : + !" : %&': The role of incentives 1#1 T&): Incentives

ANS: D NAT: Analytic *S': Interpretive

++
71.

'hapter 1:Ten )rinciples of "conomics "vidence indicates that seat belt laws have led to a. fewer pedestrian deaths. b. fewer automobile accidents. c. fewer deaths per automobile accident. d. All of the above are correct. DI : 1 !" : %&': The role of incentives 1#1 T&): Incentives

ANS: ' NAT: Analytic *S': Definitional 7+.

&ne effect of the government#imposed seat belt law in the @.S. has been a. a dramatic decrease in the number of pedestrian deaths. b. safer driving. c. an increase in the number of accidents. d. a dramatic decrease in the number of driver deaths. DI : + !" : %&': The role of incentives 1#1 T&): Incentives

ANS: ' NAT: Analytic *S': Interpretive 7,.

Cased on the available evidence( which of the following groups benefits most from mandatory seat belt lawsB a. automa/ers b. pedestrians c. drivers d. owners of collision#repair shops DI : , !" : %&': The role of incentives 1#1 T&): Incentives

ANS: D NAT: Analytic *S': Analytical 7-.

.hich of the following can policy doB a. alter incentives b. alter trade#offs c. change opportunity costs d. All of the above are correct.

ANS: D DI : 1 !" : 1#1 NAT: Analytic %&': The role of incentives 6 Scarcity( tradeoffs( and opportunity cost T&): &pportunity costs( trade#offs( incentives *S': Interpretative 70. Suppose the state of Iowa passes a law that increases the price of cigarettes by >1 per pac/. As a result( residents in Iowa start purchasing their cigarettes in surrounding states. .hich of the following principles does this best illustrateB a. )eople respond to incentives b. !ational people thin/ at the margin c. Trade can ma/e everyone better off d. *ar/ets are usually a good way to organi5e economic activity DI : 1 !" : %&': The role of incentives 1#1 T&): Incentives

ANS: A NAT: Analytic *S': Applicative 72.

Suppose the state of *assachusetts passes a law that bans smo/ing in restaurants. As a result( residents of !hode Island who do not li/e breathing second#hand smo/e begin driving across the border to *assachusetts to eat at restaurants there. .hich of the following principles does this best illustrateB a. )eople respond to incentives b. !ational people thin/ at the margin c. Trade can ma/e everyone better off d. *ar/ets are usually a good way to organi5e economic activity DI : 1 !" : %&': The role of incentives 1#1 T&): Incentives

ANS: A NAT: Analytic *S': Applicative

'hapter 1:Ten )rinciples of "conomics 74. In the former Soviet @nion( producers were paid for meeting output targets( not for selling products. @nder those circumstances( what were the economic incentives for producersB a. to produce good 3uality products so that society would benefit from the resources used b. to conserve on costs( so as to maintain efficiency in the economy c. to produce enough to meet the output target( without regard for 3uality or cost d. to produce those products that society desires most DI : + !" : %&': The role of incentives 1#1 T&): Incentives

+,

ANS: ' NAT: Analytic *S': Interpretive 77.

.hich of the following principles is not one of the four principles of individual decisionma/ingB a. )eople face tradeoffs. b. Trade can ma/e everyone better off. c. )eople respond to incentives. d. !ational people thin/ at the margin. C DI : 1 !" : 1#1 Analytic Scarcity( tradeoffs( and opportunity cost 6 *arginal costs = benefits 6 The role of incentives Tradeoffs 6 Trade 6 *arginal changes *S': Definitional .hich of the following statements e1emplifies a principle of individual decisionma/ingB a. Trade can ma/e everyone better off. b. 8overnments can sometimes improve mar/et outcomes. c. The cost of something is what you give up to get it. d. All of the above are correct.

ANS: NAT: %&': T&): 79.

ANS: ' DI : + !" : 1#1 NAT: Analytic %&': Scarcity( tradeoffs( and opportunity cost T&): &pportunity cost *S': Interpretive

!ltiple Choice"Sec#("Ho% People $nteract

ULT$PLE CHO$CE 1. .hich of the following is a principle concerning how people interactB a. *ar/ets are usually a good way to organi5e economic activity. b. !ational people thin/ at the margin. c. )eople respond to incentives. d. All of the above are correct. DI : + !" : 1#+ %&': *ar/ets( mar/et failure( and e1ternalities *S': Interpretive

ANS: A NAT: Analytic T&): *ar/ets +.

.hich is the most accurate statement about tradeB a. Trade can ma/e every nation better off. b. Trade ma/es some nations better off and others worse off. c. Trading for a good can ma/e a nation better off only if the nation cannot produce that good itself. d. Trade helps rich nations and hurts poor nations. DI : + !" : 1#+ %&': 8ains from trade( speciali5ation and trade *S': Interpretive

ANS: A NAT: Analytic T&): Trade ,.

The principle that Gtrade can ma/e everyone better offG applies to interactions and trade between a. families. b. states within the @nited States. c. nations. d. All of the above are correct. DI : 1 !" : 1#+ %&': 8ains from trade( speciali5ation and trade *S': Applicative

ANS: D NAT: Analytic T&): Trade

+-
-.

'hapter 1:Ten )rinciples of "conomics The principle that trade can ma/e everyone better off applies to a. individuals. b. families. c. countries. d. All of the above

ANS: D DI : 1 !" : 1#+ NAT: Analytic %&': 8ains from trade( speciali5ation and trade T&): 8ains from trade *S': Interpretive 0. .hich of the following statements about trade is falseB a. Trade increases competition. b. .ith trade( one country wins and one country loses. c. Culgaria can benefit( potentially( from trade with any other country. d. Trade allows people to buy a greater variety of goods and services at lower cost. DI : + !" : 1#+ %&': 8ains from trade( speciali5ation and trade *S': Interpretive

ANS: C NAT: Analytic T&): Trade 2.

Trade between the @nited States and India a. benefits both the @nited States and India. b. is a losing proposition for the @nited States because India has cheaper labor. c. is a losing proposition for India because capital is much more abundant in the @.S. than in India. d. is a losing proposition for India because @.S. wor/ers are more productive. DI : + !" : 1#+ %&': 8ains from trade( speciali5ation and trade *S': Interpretive

ANS: A NAT: Analytic T&): Trade 4.

'anada can benefit from trade a. only with nations that can produce goods 'anada cannot produce. b. only with less developed nations. c. only with nations outside of North America. d. with any nation. DI : + !" : 1#+ %&': 8ains from trade( speciali5ation and trade *S': Interpretive

ANS: D NAT: Analytic T&): Trade 7.

If Lapan chooses to engage in trade( it a. will only benefit if it trades with countries that produce goods Lapan cannot produce. b. cannot benefit if it trades with less developed countries. c. should first attempt to produce the good itself. d. can benefit by trading with any other country. DI : + !" : 1#+ %&': 8ains from trade( speciali5ation and trade *S': Interpretive

ANS: D NAT: Analytic T&): Trade 9.

If the @nited States decides to trade with *e1ico( we /now that a. *e1ico will benefit( but trade with a less developed country could not benefit the @nited States. b. it will not benefit *e1ico because wor/ers in the @nited States are more productive. c. *e1ico and the @nited States can both benefit. d. it will not benefit either country because their cultural differences are too vast. DI : + !" : 1#+ %&': 8ains from trade( speciali5ation and trade *S': Interpretive

ANS: ' NAT: Analytic T&): Trade

'hapter 1:Ten )rinciples of "conomics 1$. Senator Smart( who understands economic principles( is trying to convince wor/ers in her district that trade with other countries is beneficial. Senator Smart should argue that trade can be beneficial a. only if it allows us to obtain things that we couldn?t ma/e for ourselves. b. because it allows speciali5ation( which increases total output. c. to us if we can gain and the others involved in the trade lose. d. in only a limited number of circumstances because others are typically self#interested. DI : + !" : 1#+ %&': 8ains from trade( speciali5ation and trade *S': Interpretive

+0

ANS: C NAT: Analytic T&): Trade 11.

Suppose that a country that has a high level of output per person agrees to trade with a country that has a low level of output per person. .hich country can benefitB a. only the one with a low level of output per person. b. only the one with a high level of output per person. c. both d. neither DI : 1 !" : 1#+ %&': 8ains from trade( speciali5ation and trade *S': Interpretative

ANS: ' NAT: Analytic T&): Trade 1+.

Suppose that a country that has a high average wage level agrees to trade with a country that has a low average wage level. .hich country can benefitB a. only the one with a low level of output per person. b. only the one with a high level of output per person. c. both d. neither DI : 1 !" : 1#+ %&': 8ains from trade( speciali5ation and trade *S': Interpretative

ANS: ' NAT: Analytic T&): Trade 1,.

Trade between countries tends to a. reduce both competition and speciali5ation. b. reduce competition and increase speciali5ation. c. increase competition and reduce speciali5ation. d. increase both competition and speciali5ation. DI : + !" : 1#+ %&': 8ains from trade( speciali5ation and trade *S': Definitional

ANS: D NAT: Analytic T&): Trade 1-.

.hen the @nited States trades with Singapore( a. both countries are li/ely made better off. b. only Singapore benefits since the @nited States can produce all goods at a higher level of 3uality than Singapore. c. only the @nited States benefits since Singapore;s low wages guarantee profitable firms in Singapore regardless of trade. d. niether country will benefit since the @nited States is more efficient than Singapore at producing all goods.

ANS: A DI : + !" : 1#+ NAT: Analytic %&': 8ains from trade( speciali5ation and trade T&): 8ains from trade *S': Applicative 10. Cenefits from trade would not include a. the ability of people and nations to speciali5e. b. a greater variety of goods and services becoming available. c. less competition. d. lower prices. DI : + !" : 1#+ %&': 8ains from trade( speciali5ation and trade *S': Interpretive

ANS: ' NAT: Analytic T&): Trade

+2
12.

'hapter 1:Ten )rinciples of "conomics 'entral planning refers to a. mar/ets guiding economic activity. Today many countries that had this system have abandoned it. b. mar/ets guiding economic activity. Today many countries that did not have this system have implemented it. c. government guiding economic activity. Today many countries that had this system have abandoned it. d. government guiding economic activity. Today many countries that did not have this system have implemented it. DI : 1 !" : 1#+ %&': *ar/ets( mar/et failure( and e1ternalities *S': Definitional

ANS: ' NAT: Analytic T&): *ar/ets 14.

&ne advantage mar/et economies have over centrally#planned economies is that mar/et economies a. provide an e3ual distribution of goods and services to households. b. establish a significant role for government in the allocation of resources. c. solve the problem of scarcity. d. are more efficient.

ANS: D DI : + !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities T&): *ar/et economy *S': Interpretive 17. The basic principles of economics suggest that a. mar/ets are seldom( if ever( a good way to organi5e economic activity. b. government should become involved in mar/ets when trade between countries is involved. c. government should become involved in mar/ets when those mar/ets fail to produce efficient or fair outcomes. d. All of the above are correct.

ANS: ' DI : 1 !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities 6 The role of government T&): *ar/ets 6 8overnment 6 Trade *S': Interpretive 19. .hich of the following statements best characteri5es a basic difference between mar/et economies and centrally#planned economiesB a. Society relies more upon prices to allocate resources when the economy is centrally#planned than when it is mar/et#based. b. The self#interest of households is reflected more fully in the outcome of a centrally#planned economy than in the outcome of a mar/et economy. c. 8overnment plays a larger role in the economic affairs of a mar/et economy than in the economic affairs of a centrally#planned economy. d. None of the above are correct.

ANS: D DI : + !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities T&): *ar/et economy *S': Interpretive +$. *ar/et economies are distinguished from other types of economies largely on the basis of a. the political affiliations of government officials. b. the process by which government officials are elected or appointed. c. the ways in which scarce resources are allocated. d. the number of retail outlets available to consumers.

ANS: ' DI : + !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities T&): *ar/et economy *S': Interpretive +1. The collapse of communism in the Soviet @nion and "astern "urope too/ place mainly in the a. 192$s. b. 194$s. c. 197$s. d. 199$s.

'hapter 1:Ten )rinciples of "conomics ANS: ' NAT: Analytic T&): 'ommunism ++. DI : 1 !" : 1#+ %&': *ar/ets( mar/et failure( and e1ternalities *S': Definitional

+4

The economy of the former Soviet @nion is best described as a a. primitive economy. b. mar/et economy. c. hybrid economy. d. centrally#planned economy.

ANS: D DI : 1 !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities T&): *ar/et economy *S': Definitional +,. 'ommunist countries wor/ed under the premise that a. mar/ets were the best way to organi5e economic activity. b. central planners were in the best position to determine the allocation of scarce resources in the economy. c. households and firms( guided by an Hinvisible hand(I could achieve the most efficient allocation of scarce resources. d. allowing the mar/et forces of supply and demand to operate with no government intervention would acheive the most efficient allocation of scarce resources. DI : + !" : 1#+ %&': *ar/ets( mar/et failure( and e1ternalities *S': Interpretive

ANS: C NAT: Analytic T&): *ar/ets +-.

)rior to the collapse of communism( communist countries wor/ed on the premise that economic well#being could be best attained by a. a mar/et economy. b. a strong reliance on prices and individuals; self#interests. c. a system of large privately#owned firms. d. the actions of government central planners. DI : + !" : 1#+ %&': *ar/ets( mar/et failure( and e1ternalities *S': Interpretive

ANS: D NAT: Analytic T&): 'ommunism +0.

The idea that only the government can organi5e economic activity in a way that promotes economic well# being for a country as a whole a. is a basic principle regarding individual decisionma/ing. b. amounts to a denial of one of the basic principles regarding interactions among people. c. supports the idea that the Ginvisible handG should guide economic activity. d. was promoted by the economist Adam Smith in a well#/nown 1442 boo/. DI : + !" : 1#+ %&': *ar/ets( mar/et failure( and e1ternalities *S': Interpretive

ANS: C NAT: Analytic T&): *ar/ets +2.

.hich of the following statements about mar/ets is most accurateB a. *ar/ets are usually a good way to organi5e economic activity. b. *ar/ets are usually inferior to central planning as a way to organi5e economic activity. c. *ar/ets fail and are therefore not an acceptable way to organi5e economic activity. d. *ar/ets are a good way to organi5e economic activity in developed nations( but not in less developed nations. DI : 1 !" : 1#+ %&': *ar/ets( mar/et failure( and e1ternalities *S': Interpretive

ANS: A NAT: Analytic T&): *ar/ets

+7
+4.

'hapter 1:Ten )rinciples of "conomics .hich of the following observations was made famous by Adam Smith in his boo/ The Wealth of Nations? a. There is no such thing as a free lunch. b. )eople buy more when prices are low than when prices are high. c. No matter how much people earn( they tend to spend more than they earn. d. Aouseholds and firms interacting in mar/ets are guided by an Ginvisible handG that leads them to desirable mar/et outcomes.

ANS: D DI : 1 !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities T&): Invisible hand *S': Definitional +7. The term Ginvisible handG was coined by a. Adam Smith. b. David !icardo. c. Farl *ar1. d. Cen<amin ran/lin.

ANS: A DI : 1 !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities T&): Invisible hand *S': Definitional +9. The famous observation that households and firms interacting in mar/ets act as if they are guided by an Hinvisible handI that leads them to desirable mar/et outcomes comes from whose 1442 boo/B a. David !icardo b. Thorstein Neblen c. Lohn *aynard Feynes d. Adam Smith DI : 1 !" : 1#+ %&': *ar/ets( mar/et failure( and e1ternalities *S': Interpretive

ANS: D NAT: Analytic T&): *ar/ets ,$.

Adam Smith?s boo/ The Wealth of Nations was published in a. 129+. b. 1442. c. 1712. d. 19,2.

ANS: C DI : 1 !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities T&): Invisible hand *S': Definitional ,1. Coth The Wealth of Nations and the Declaration of Independence share the point of view that a. every person is entitled to life( liberty( and the pursuit of happiness. b. individuals are best left to their own devices without the government guiding their actions. c. the government plays a central role in organi5ing a mar/et economy. d. because of human nature a strong legal system is necessary for a mar/et system to survive.

ANS: C DI : + !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities T&): Invisible hand *S': Interpretive ,+. The Ginvisible handG directs economic activity through a. advertising. b. prices. c. central planning. d. government regulations.

ANS: C DI : + !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities T&): Invisible hand *S': Interpretive

'hapter 1:Ten )rinciples of "conomics ,,. The invisible hand refers to a. how central planners made economic decisions. b. how the decisions of households and firms lead to desirable mar/et outcomes. c. the control that large firms have over the economy. d. government regulations without which the economy would be less efficient.

+9

ANS: C DI : 1 !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities T&): Invisible hand *S': Definitional ,-. The invisible hand?s ability to coordinate the decisions of the firms and households in the economy can be hindered by a. government actions that distort prices. b. increased competition in mar/ets. c. enforcement of property rights. d. too much attention paid to efficiency.

ANS: A DI : + !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities T&): Invisible hand *S': Interpretive ,0. .hen the Ginvisible handG guides economic activity( prices of products reflect a. only the values that society places on those products. b. only the costs to society of producing those products. c. both the values that society places on those products and the costs to society of producing those products. d. none of the aboveK when the Ginvisible handG guides economic activity( prices of products are set by the government in a manner that is thought to be Gfair.G

ANS: ' DI : + !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities T&): Invisible hand 6 *ar/ets *S': Interpretive ,2. The invisible hand wor/s to promote general well#being in the economy primarily through a. government intervention. b. the political process. c. people;s pursuit of self#interest. d. altruism.

ANS: ' DI : 1 !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities T&): Invisible hand *S': Interpretive ,4. According to Adam Smith( the success of decentrali5ed mar/et economies is primarily due to a. the basic benevolence of society. b. society?s legal system. c. individuals? pursuit of self#interest. d. partnerships that are forged between business and government.

ANS: ' DI : + !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities T&): Invisible hand *S': Interpretive ,7. The self#interest of the participants in an economy is guided into promoting general economic self#interest by a. the invisible hand. b. mar/et power. c. government intervention. d. oikonomos.

ANS: A DI : 1 !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities T&): Invisible hand *S': Interpretive

,$
,9.

'hapter 1:Ten )rinciples of "conomics In an economy in which decisions are guided by prices and individual self#interest( there is a. the potential to achieve efficiency in production. b. a strong need for government intervention in the mar/et. c. less efficiency than would be observed in a centrally#planned economy. d. more need for a strong legal system to control individual greed than would be needed in a centrally# planned economy.

ANS: A DI : + !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities T&): *ar/et economy *S': Interpretive -$. In a mar/et economy( who ma/es the decisions that guide most economic activityB a. firms only b. households only c. firms and households d. government DI : 1 !" : 1#+ %&': *ar/ets( mar/et failure( and e1ternalities *S': Definitional

ANS: ' NAT: Analytic T&): *ar/ets -1.

In a mar/et economy( economic activity is guided by a. the government. b. corporations. c. central planners. d. self#interest and prices.

ANS: D DI : 1 !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities T&): *ar/et economy *S': Definitional -+. .hich of the following statements does not apply to a mar/et economyB a. irms decide whom to hire and what to produce. b. The Hinvisible handI usually ma1imi5es the well#being of society as a whole. c. Aouseholds decide which firms to wor/ for and what to buy with their incomes. d. 8overnment policies are the primary forces that guide the decisions of firms and households.

ANS: D DI : + !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities T&): *ar/et economy *S': Interpretive -,. The decisions of firms and households are guided by prices and self#interest in a a. command economy. b. centrally#planned economy. c. mar/et economy. d. All of the above are correct.

ANS: ' DI : 1 !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities T&): *ar/et economy *S': Definitional --. or mar/ets to wor/ well( there must be a. mar/et power. b. a central planner. c. property rights. d. abundant( not scarce( resources.

ANS: ' DI : + !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities T&): *ar/ets 6 )roperty rights *S': Interpretive

'hapter 1:Ten )rinciples of "conomics -0. )rices usually reflect a. only the value of a good to society. b. only the cost to society of ma/ing a good. c. both the value of a good to society and the cost to society of ma/ing the good. d. neither the value of a good to society nor the cost to society of ma/ing the good. DI : 1 !" : 1#+ %&': *ar/ets( mar/et failure( and e1ternalities *S': Definitional

,1

ANS: ' NAT: Analytic T&): *ar/ets -2.

)rices direct economic activity in a mar/et economy by a. influencing the actions of buyers and sellers. b. reducing scarcity of the goods and services produced. c. eliminating the need for government intervention. d. allocating goods and services in the most e3uitable way.

ANS: A DI : + !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities T&): *ar/et economy *S': Interpretive -4. A friend of yours as/s you why mar/et prices are better than government#determined prices. Cecause you understand economic principles( you say that mar/et#determined prices are better because they generally reflect a. the value of a good to society( but not the cost of ma/ing it. b. the cost of ma/ing a good to society( but not its value. c. both the value of a good to society and the cost of ma/ing it. d. neither the value of a good to society nor the cost of ma/ing it.

ANS: ' DI : + !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities T&): *ar/ets 6 )rices *S': Interpretive -7. If the price of visiting a doctor were fi1ed below the current price( then we would e1pect a. an increase in the number of visits people want to ma/e and an increase in the number of visits health care providers want to provide. b. an increase in the number of visits people want to ma/e and a decrease in the number of visits health care providers want to provide. c. a decrease in the number of visits people want to ma/e and an increase in the number of visits health care providers want to provide. d. a decrease in the number of visits people want to ma/e and a decrease in the number of visits health care providers want to provide. DI : + !" : 1#+ %&': *ar/ets( mar/et failure( and e1ternalities *S': Applicative

ANS: C NAT: Analytic T&): *ar/ets -9.

If the price of a gallon of mil/ were fi1ed above the current price( then we would e1pect a. an increase in the number of gallons of mil/ people want to buy and an increase in the number of gallons of mil/ dairy farmers want to sell. b. an increase in the number of gallons of mil/ people want to buy and a decrease in the number of gallons of mil/ dairy farmers want to sell. c. a decrease in the number of gallons of mil/ people want to buy and an increase in the number of gallons of mil/ dairy farmers want to sell. d. a decrease in the number of gallons of mil/ people want to buy and a decrease in the number of gallons of mil/ dairy farmers want to sell. DI : + !" : 1#+ %&': *ar/ets( mar/et failure( and e1ternalities *S': Applicative

ANS: ' NAT: Analytic T&): *ar/ets

,+
0$.

'hapter 1:Ten )rinciples of "conomics .hen the government prevents prices from ad<usting naturally to supply and demand( a. it e3uates the amount buyers want to buy with the amount sellers want to sell. b. it adversely affects the allocation of resources. c. it improves e3uality and efficiency. d. it improves efficiency but reduces e3uality.

ANS: C DI : + !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities 6 The role of government T&): )rices 6 8overnment *S': Applicative 01. &ne reason we need government( even in a mar/et economy( is that a. there is insufficient mar/et power in the absence of government. b. property rights are too strong in the absence of government. c. the invisible hand is not perfect. d. Coth a and b are correct.

ANS: ' DI : + !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities 6 The role of government T&): *ar/et economy 6 8overnment *S': Interpretive 0+. The government enforces property rights by a. re3uiring property owners to pay property ta1es. b. providing police and courts. c. forcing people to own property. d. providing public par/s and recreation facilities. DI : + !" : 1#+ %&': The role of government T&): 8overnment 6 )roperty rights

ANS: C NAT: Analytic *S': Interpretive 0,.

A company that formerly produced software went out of business because too many potential customers bought illegally#produced copies of the software instead of buying the product directly from the company. This instance serves as an e1ample of a. mar/et power. b. inefficient trade. c. inade3uate enforcement of property rights. d. the invisible hand at wor/. DI : + !" : 1#+ %&': The role of government T&): )roperty rights

ANS: ' NAT: Analytic *S': Interpretive 0-.

or which of the following problems can well#designed public policy enhance economic efficiencyB a. both e1ternalities and mar/et power b. e1ternalities( but not mar/et power c. mar/et power( but not e1ternalities d. neither e1ternalities nor mar/et power

ANS: A DI : + !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities T&): )ublic policy( *ar/et failures *S': Interpretative 00. )ublic policies a. may be able to improve either economic efficiency or e3uality. b. may be able to improve economic efficiency but cannot improve e3uality. c. may be able to improve e3uality but cannot improve economic efficiency. d. cannot improve either e3uality or economic efficiency.

ANS: A DI : + !" : 1#+ NAT: Analytic %&': "fficiency and e3uity T&): )ublic policy( "fficiency( "3uality *S': Interpretative

'hapter 1:Ten )rinciples of "conomics 02. To say that government intervenes in the economy to promote efficiency is to say that government is attempting to a. create a more fair distribution of income. b. change the way in which the economic pie is divided. c. enlarge the economic pie. d. All of the above are correct. DI : + !" : 1#+ %&': The role of government T&): "fficiency 6 8overnment

,,

ANS: ' NAT: Analytic *S': Interpretive 04.

.hich of the following could reduce economic efficiencyB a. laws that encourage lawsuits. b. policies that redistribute income c. policies that impose significant restrictions on international trade d. All of the above are correct DI : 1 !" : %&': "fficiency and e3uity 1#+ T&): "fficiency

ANS: D NAT: Analytic *S': Applicative 07.

The term used to describe a situation in which mar/ets do not allocate resources efficiently is a. economic meltdown. b. mar/et failure. c. e3uilibrium. d. the effect of the invisible hand.

ANS: C DI : 1 !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities T&): *ar/et failure *S': Definitional 09. A rationale for government involvement in a mar/et economy is as follows: a. *ar/ets sometimes fail to produce a fair distribution of economic well#being. b. *ar/ets sometimes fail to produce an efficient allocation of resources. c. )roperty rights have to be enforced. d. All of the above are correct. DI : 1 !" : 1#+ %&': The role of government T&): 8overnment 6 *ar/ets

ANS: D NAT: Analytic *S': Interpretive 2$.

The term mar/et failure refers to a. a situation in which the mar/et on its own fails to allocate resources efficiently. b. an unsuccessful advertising campaign which reduces demand for a product. c. a situation in which competition among firms becomes ruthless. d. a firm which is forced out of business because of losses.

ANS: A DI : 1 !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities T&): *ar/et failure *S': Definitional 21. .hich of the following is not generally regarded by economists as a legitimate reason for the government to intervene in a mar/etB a. to promote efficiency b. to promote e3uality c. to enforce property rights d. to protect an industry from foreign competition DI : + !" : 1#+ %&': The role of government T&): 8overnment 6 *ar/ets

ANS: D NAT: Analytic *S': Interpretive

,-
2+.

'hapter 1:Ten )rinciples of "conomics 'auses of mar/et failure include a. e1ternalities and mar/et power. b. mar/et power and incorrect forecasts of consumer demand. c. e1ternalities and foreign competition. d. incorrect forecasts of consumer demand and foreign competition.

ANS: A DI : + !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities T&): *ar/et failure *S': Interpretive 2,. *ar/et failure can be caused by a. low consumer demand. b. e3uilibrium prices. c. e1ternalities and mar/et power. d. high prices and foreign competition.

ANS: ' DI : + !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities T&): *ar/et failure *S': Interpretive 2-. The term Gmar/et failureG a. means the same thing as Gmar/et power.G b. refers to the dissolution of a mar/et when firms decide to 3uit producing a certain product. c. refers to the failure of a mar/et to produce an efficient allocation of resources. d. refers to government?s failure to enforce the property rights of households or firms that participate in a certain mar/et.

ANS: ' DI : + !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities T&): *ar/et failure *S': Interpretive 20. If an e1ternality is present in a mar/et( economic efficiency may be enhanced by a. government intervention. b. increased competition. c. better informed mar/et participants. d. wea/er property rights.

ANS: A DI : + !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities T&): "1ternalities 6 "fficiency *S': Interpretive 22. An e1ample of an e1ternality is the impact of a. bad weather on the income of farmers. b. the personal income ta1 on a person?s ability to purchase goods and services. c. pollution from a factory on the health of people in the vicinity of the factory. d. increases in health care costs on the health of individuals in society. DI : + !" : 1#+ %&': *ar/ets( mar/et failure( and e1ternalities *S': Interpretive

ANS: ' NAT: Analytic T&): "1ternalities 24.

.hich of the following is an e1ample of an e1ternalityB a. Aaron purchases a new flat screen television. b. Connie cannot catch the flu from Cobby because Cobby got a flu vaccine. c. 'lyde sells a boo/ to 'athy. d. Doug turns up the heat in his apartment. DI : + !" : 1#+ %&': *ar/ets( mar/et failure( and e1ternalities *S': Interpretive

ANS: C NAT: Analytic T&): "1ternalities

'hapter 1:Ten )rinciples of "conomics 27.

,0

The willingness of citi5ens to pay for a vaccinations does not include the benefit society receives from having vaccinated citi5ens who cannot transmit an illness to others. This e1tra benefit society gets from vaccinating its citi5ens is /nown as a. productivity. b. an e1ternality. c. mar/et power. d. property rights. DI : + !" : 1#+ %&': *ar/ets( mar/et failure( and e1ternalities *S': Applicative

ANS: C NAT: Analytic T&): "1ternalities 29.

If a paper factory does not bear the entire cost of the pollution it emits( it will a. not emit any pollution so as to avoid the entire cost of the pollution. b. emit lower levels of pollution. c. emit an acceptable level of pollution. d. emit too much pollution. DI : + !" : 1#+ %&': *ar/ets( mar/et failure( and e1ternalities *S': Interpretive

ANS: D NAT: Analytic T&): "1ternalities 4$.

%aws that restrict the smo/ing of cigarettes in public places are e1amples of government intervention that is intended to reduce a. efficiency. b. e3uality. c. e1ternalities. d. productivity.

ANS: ' DI : + !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities T&): "1ternalities 6 8overnment *S': Applicative 41. .hich of these consumption activities will most li/ely impose an e1ternal costB a. An athlete wor/s out at a gym. b. A secretary smo/es a cigarette in a crowded brea/ room. c. A young mother pushes her baby in a stroller. d. A construction wor/er eats a hotdog during his lunch brea/. DI : + !" : 1#+ %&': *ar/ets( mar/et failure( and e1ternalities *S': Interpretive

ANS: C NAT: Analytic T&): "1ternalities 4+.

.hich of these activities will most li/ely result in an e1ternal benefitB a. A college student buys a dec/ of cards to play solitaire in her dorm room. b. An elderly woman plants a flower garden on the vacant lot ne1t to her house. c. An e1ecutive purchases a boo/ to read on a business trip. d. A ten#year#old uses his allowance to buy new Ni/e shoes. DI : + !" : 1#+ %&': *ar/ets( mar/et failure( and e1ternalities *S': Interpretive

ANS: C NAT: Analytic T&): "1ternalities 4,.

.hen a single person Dor small groupE has the ability to influence mar/et prices( there is a. competition. b. mar/et power. c. an e1ternality. d. a lac/ of property rights.

ANS: C DI : 1 !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities T&): *ar/et power *S': Definitional

,2
4-.

'hapter 1:Ten )rinciples of "conomics *ar/et power refers to the a. power of a single person or small group to influence mar/et prices. b. ability of a person or small group to successfully mar/et new products. c. power of the government to regulate a mar/et. d. importance of a certain mar/et in relation to the overall economy.

ANS: A DI : 1 !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities T&): *ar/et power *S': Definitional 40. .hich of the following firms is li/ely to have the greatest mar/et powerB a. An electric company b. A farmer c. A grocery store d. A local electronics retailer

ANS: A DI : + !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities T&): *ar/et power *S': Applicative 42. .hich of the following firms is most li/ely to have mar/et powerB a. a grocery store in a metropolitan area b. a gas station in a suburb c. a pub in a college town d. the only hotel in a rural area

ANS: D DI : + !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities T&): *ar/et power *S': Interpretive 44. An e1ample of a firm with mar/et power is a a. delicatessen in New Mor/. b. cable TN provider in St. %ouis. c. clothing store in %os Angeles. d. family farm in Illinois.

ANS: C DI : + !" : 1#+ NAT: Analytic %&': *ar/ets( mar/et failure( and e1ternalities T&): *ar/et power *S': Interpretive

!ltiple Choice"Sec#)"Ho% the Econom* as a Whole Wor&s

ULT$PLE CHO$CE 1. In the @nited States( incomes historically have grown about + percent per year. At this rate( average income doubles every a. 10 years. b. +0 years. c. ,0 years. d. -0 years. DI : + !" : 1#, %&': )roductivity and growthT&): Income

ANS: ' NAT: Analytic *S': Interpretive +.

In the @nited States( incomes have historically grown a. about $.0 percent per year. b. about + percent per year. c. about - percent per year. d. about 2 percent per year. DI : 1 !" : 1#, %&': )roductivity and growthT&): Income

ANS: C NAT: Analytic *S': Definitional

'hapter 1:Ten )rinciples of "conomics ,. &ver the past century( the average income in the @nited States has risen about a. twofold. b. fivefold. c. eightfold. d. tenfold. DI : 1 !" : 1#, %&': )roductivity and growthT&): Income

,4

ANS: ' NAT: Analytic *S': Definitional -.

The term GproductivityG a. means the same thing as Gefficiency.G b. is seldom used by economists( as its meaning is not precise. c. refers to the 3uantity of goods and services produced from each unit of labor input. d. refers to the variety of goods and services from which households can choose when they shop. DI : 1 !" : 1#, %&': )roductivity and growthT&): )roductivity

ANS: ' NAT: Analytic *S': Definitional 0.

)roductivity is defined as the a. amount of goods and services produced from each unit of labor input. b. number of wor/ers re3uired to produce a given amount of goods and services. c. amount of labor that can be saved by replacing wor/ers with machines. d. actual amount of effort wor/ers put into an hour of wor/ing time. DI : + !" : 1#, %&': )roductivity and growthT&): )roductivity

ANS: A NAT: Analytic *S': Definitional 2.

The amount of goods and services produced from each unit of labor input is called a. opportunity cost. b. productivity. c. e1ternality. d. marginal benefit. DI : 1 !" : 1#, %&': )roductivity and growthT&): )roductivity

ANS: C NAT: Analytic *S': Definitional 4.

.hat is the most important factor that e1plains differences in living standards across countriesB a. the 3uantity of money b. the level of unemployment c. productivity d. e3uality DI : 1 !" : 1#, %&': )roductivity and growthT&): )roductivity

ANS: ' NAT: Analytic *S': Interpretive 7.

Almost all variation in living standards is attributable to differences in countries? a. population growth rates. b. productivity. c. systems of public education. d. ta1es. DI : + !" : 1#, %&': )roductivity and growthT&): Standard of living

ANS: C NAT: Analytic *S': Interpretive 9.

The income of a typical wor/er in a country is most closely lin/ed to which of the followingB a. population b. productivity c. mar/et power d. government policies

,7

'hapter 1:Ten )rinciples of "conomics DI : + !" : 1#, %&': )roductivity and growthT&): )roductivity 6 Income

ANS: C NAT: Analytic *S': Interpretive 1$.

A direct or positive relationship e1ists between a country?s a. productivity and its standard of living. b. amount of government spending and its productivity. c. total population and its average citi5en;s income. d. rate of population growth and the e1tent of its trade with other countries.

ANS: A DI : + !" : 1#, NAT: Analytic %&': )roductivity and growth T&): )roductivity 6 Standard of living *S': Interpretive 11. The primary determinant of a country?s standard of living is a. the country;s ability to prevail over foreign competition. b. the country;s ability to produce goods and services. c. the total supply of money in the economy. d. the average age of the country?s labor force. DI : + !" : 1#, %&': )roductivity and growthT&): Standard of living

ANS: C NAT: Analytic *S': Interpretive 1+.

The historical rise in living standards of American wor/ers is primarily a result of a. the influence of labor unions in America. b. tariff protection imposed by the American government. c. the enactment of minimum#wage laws in America. d. the rise in American productivity.

ANS: D DI : + !" : 1#, NAT: Analytic %&': )roductivity and growth T&): )roductivity 6 Standard of living *S': Interpretive 1,. The fact that different countries e1perience different standards of living is largely e1plained by differences in those countries? a. populations. b. productivity levels. c. locations. d. none of the aboveK economists are pu55led by differences in standards of living around the world.

ANS: C DI : 1 !" : 1#, NAT: Analytic %&': )roductivity and growth T&): Standard of living 6 )roductivity *S': Interpretive 1-. Suppose that the average income of a Fenyan is higher than the average income of a South African. Mou might conclude that a. Fenyan firms are faced with stricter government regulations than South African firms. b. total income is divided among fewer wor/ers in Fenya since it has a smaller labor force than South Africa. c. Fenya?s climate allows for longer growing seasons and therefore Fenya can produce large 3uantities of grain and other crops. d. productivity in Fenya is higher than in South Africa. DI : + !" : 1#, %&': )roductivity and growthT&): )roductivity 6 Income

ANS: D NAT: Analytic *S': Applicative 10.

The slow growth of @.S. incomes during the 194$s and 197$s can best be e1plained by a. unstable economic conditions in "astern "urope. b. increased competition from abroad. c. a decline in the rate of increase in @.S. productivity. d. a strong @.S. dollar abroad( hurting @.S. e1ports.

'hapter 1:Ten )rinciples of "conomics ANS: ' NAT: Analytic *S': Applicative 12. DI : , !" : 1#, %&': )roductivity and growthT&): )roductivity 6 Income

,9

Suppose a typical wor/er in rance can produce ,+ units of product in an eight#hour day( while a typical wor/er in 8ermany can produce ,$ units of product in a 1$#hour day. .e can conclude that a. wor/er productivity in 8ermany is higher than in rance. b. the standard of living will li/ely be higher in rance than in 8ermany. c. productivity is - units per hour for the 8erman wor/er and , units per hour for the rench wor/er. d. there will be no difference between the standard of living in rance and 8ermany.

ANS: C DI : , !" : 1#, NAT: Analytic %&': )roductivity and growth T&): )roductivity 6 Standard of living *S': Applicative 14. Suppose that in 'hile total annual output is worth >2$$ million and people wor/ 4$ million hours. In Argentina total annual output is worth >-0$ million and people wor/ -$ million hours. )roductivity is higher a. in 'hile. *ost variation in the standard of living across countries is due to differences in productivity. b. in 'hile. Differences in productivity e1plain very little of the variation in the standard of living across countries. c. in Argentina. *ost variation in the standard of living across countries is due to differences in productivity. d. in Argentina. Differences in productivity e1plain very little of the variation in the standard of living across countries.

ANS: ' DI : + !" : 1#, NAT: Analytic %&': )roductivity and growth T&): )roductivity( Standard of living *S': Analytical 17. In a particular country in 1997( the average wor/er needed to wor/ +0 hours to produce -$ units of output. In that same country in +$$7( the average wor/er needed to wor/ -$ hours to produce 27 units of output. In that country( the productivity of the average wor/er a. decreased by 1.4 percent between 1997 and +$$7. b. remained unchanged between 1997 and +$$7. c. increased by -.40 percent between 1997 and +$$7. d. increased by 2.+0 percent between 1997 and +$$7. DI : , !" : 1#, %&': )roductivity and growthT&): )roductivity

ANS: D NAT: Analytic *S': Analytical 19.

In a particular country in +$$$( the average wor/er needed to wor/ -$ hours to produce 00 units of output. In that same country in +$$7( the average wor/er needed to wor/ ,$ hours to produce -0 units of output. In that country( the productivity of the average wor/er a. decreased by about 2 percent between +$$$ and +$$7. b. remained unchanged between +$$$ and +$$7. c. increased by about 9 percent between +$$$ and +$$7. d. increased by about 17 percent between +$$$ and +$$7. DI : , !" : 1#, %&': )roductivity and growthT&): )roductivity

ANS: ' NAT: Analytic *S': Analytical +$.

In a particular country in 1997( the average wor/er needed to wor/ -$ hours to produce 2$ units of output. In that same country in +$$7( the average wor/er needed to wor/ ,0 hours to produce 00 units of output. In that country( the productivity of the average wor/er a. decreased between 1997 and +$$7( so we would e1pect the standard of living to have decreased accordingly. b. increased between 1997 and +$$7( so we would e1pect the standard of living to have increased accordingly. c. decreased between 1997 and +$$7( so we would e1pect inflation to have decreased accordingly. d. increased between 1997 and +$$7( so we would e1pect inflation to have increased accordingly.

-$

'hapter 1:Ten )rinciples of "conomics

ANS: C DI : , !" : 1#, NAT: Analytic %&': )roductivity and growth T&): )roductivity 6 Standard of living *S': Analytical +1. In a particular country in 1994( the average wor/er had to wor/ 17 hours to produce -0 units of output. In that same country in +$$4( the average wor/er needed to wor/ +- hours to produce 2$ units of output. In that country( the productivity of the average wor/er a. increased by + percent between 1994 and +$$4. b. increased by 0 percent between 1994 and +$$4. c. remained unchanged between 1994 and +$$4. d. decreased by , percent between 1994 and +$$4. DI : , !" : 1#, %&': )roductivity and growthT&): )roductivity

ANS: ' NAT: Analytic *S': Analytical ++.

A wor/er in Thailand can earn >+ per day ma/ing cotton cloth on a hand loom. A wor/er in the @nited States can earn >7$ per day ma/ing cotton cloth with a mechanical loom. .hat accounts for the difference in wagesB a. @.S. te1tile wor/ers belong to a union. b. There is little demand for cotton cloth in Thailand and great demand in the @.S. c. %abor is more productive ma/ing cotton cloth with a mechanical loom than with a hand loom. d. Thailand has a low#wage policy to ma/e its te1tile industry more competitive in world mar/ets. DI : , !" : 1#, %&': )roductivity and growthT&): )roductivity

ANS: ' NAT: Analytic *S': Applicative +,.

To promote good economic outcomes( policyma/ers should strive to enact policies that a. enhance productivity. b. enhance individuals? mar/et power. c. result in a rapidly#growing 3uantity of money. d. All of the above are correct.

ANS: A DI : + !" : 1#, NAT: Analytic %&': )roductivity and growth T&): )roductivity 6 *ar/et power 6 Inflation *S': +-. To raise productivity( policyma/ers could a. increase spending on education. b. provide ta1 credits to firms for capital improvements. c. fund research and development. d. All of the above are correct. DI : , !" : 1#, %&': )roductivity and growthT&):

Applicative

ANS: D NAT: Analytic *S': Applicative +0.

)roductivity 6 8overnment

To increase living standards( public policy should a. ensure that wor/ers are well educated and have the necessary tools and technology. b. ma/e unemployment benefits more generous. c. move wor/ers into <obs directly from high school. d. ensure a greater degree of e3uality( ta/ing all income#earners into account.

ANS: A DI : + !" : 1#, NAT: Analytic %&': )roductivity and growth T&): )roductivity 6 Standard of living *S': Applicative +2. To improve living standards( policyma/ers should a. impose restrictions on foreign competition. b. formulate policies designed to increase productivity. c. impose tougher immigration policies. d. provide ta1 brea/s for the middle class.

'hapter 1:Ten )rinciples of "conomics ANS: C DI : + !" : 1#, NAT: Analytic %&': )roductivity and growth T&): )roductivity 6 Standard of living *S': Applicative +4. Incomes of @.S. households in the 194$s and 197$s a. grew rapidly( due to the widespread success of labor unions in pushing up wages during those decades. b. grew rapidly( due to several increases in the minimum wage during those decades. c. grew rapidly( due to government policies that discouraged the importation of foreign products during those decades. d. grew slowly( due to slow growth of the output of goods and services per hour of @.S. wor/ers? time during those decades. DI : + !" : 1#, %&': )roductivity and growthT&): )roductivity 6 Income

-1

ANS: D NAT: Analytic *S': Applicative +7.

An increase in the overall level of prices in an economy is referred to as a. the income effect. b. inflation. c. deflation. d. the substitution effect. DI : 1 !" : 1#, %&': @nemployment and inflation T&): Inflation

ANS: C NAT: Analytic *S': Definitional +9.

Inflation is defined as a. a period of rising productivity in the economy. b. a period of rising income in the economy. c. an increase in the overall level of output in the economy. d. an increase in the overall level of prices in the economy. DI : 1 !" : 1#, %&': @nemployment and inflation T&): Inflation

ANS: D NAT: Analytic *S': Definitional ,$.

In the early 19+$s( a. 8ermany e1perienced a very high rate of inflation. b. the 3uantity of 8erman money was declining rapidly. c. the value of 8erman money remained almost constant. d. All of the above are correct. DI : + !" : 1#, %&': @nemployment and inflation T&): Inflation 6 *oney

ANS: A NAT: Analytic *S': Interpretive ,1.

During the early 19+$s in 8ermany( prices a. doubled annually. b. doubled monthly. c. tripled monthly. d. tripled annually. DI : + !" : 1#, %&': @nemployment and inflation T&): Inflation

ANS: ' NAT: Analytic *S': Definitional ,+.

&ne of the +$th century;s worst episodes of inflation occurred in a. the @nited States in the 192$s. b. Italy in the 190$s. c. !ussia in the 19,$s. d. 8ermany in the 19+$s. DI : 1 *S': Definitional !" : 1#,

ANS: D T&): Inflation

-+
,,.

'hapter 1:Ten )rinciples of "conomics In the @nited States( the overall level of prices more than doubled during the a. 190$s. b. 192$s. c. 194$s. d. 197$s. DI : 1 !" : 1#, %&': @nemployment and inflation T&): Inflation

ANS: ' NAT: Analytic *S': Definitional ,-.

)resident 8erald ord referred to inflation as a. a blight on our nation?s economy. b. a necessary evil to combat high unemployment. c. public enemy number one. d. a fly in the ointment. DI : + !" : 1#, %&': @nemployment and inflation T&): Inflation

ANS: ' NAT: Analytic *S': Interpretive ,0.

The @.S. president who referred to inflation as Hpublic enemy number oneI was a. !ichard Ni1on. b. 8erald ord. c. Limmy 'arter. d. !onald !eagan. DI : 1 !" : 1#, %&': @nemployment and inflation T&): Inflation

ANS: C NAT: Analytic *S': Interpretive ,2.

In which of the following decades was there both high inflation and rapid money supply growth in the @SB a. the 194$;s and the 199$;s b. the 194$;s but not the 199$;s c. the 199$;s but not the 194$;s d. neither the 194$;s nor the 199$;s DI : + !" : %&': The role of money 1#, T&): Inflation

ANS: C NAT: Analytic *S': Definitional ,4.

In the 199$s( inflation in the @nited States was a. very close to 5ero. b. about , percent per year. c. about 2 percent per year. d. commonly referred to as Hpublic enemy number one.I DI : + !" : 1#, %&': @nemployment and inflation T&): Inflation

ANS: C NAT: Analytic *S': Interpretive ,7.

%arge or persistent inflation is almost always caused by a. e1cessive government spending. b. e1cessive growth in the 3uantity of money. c. foreign competition. d. higher#than#normal levels of productivity. DI : + !" : 1#, %&': @nemployment and inflation T&): Inflation

ANS: C NAT: Analytic *S': Interpretive

'hapter 1:Ten )rinciples of "conomics ,9. .hich of the following would a permanent increase in the growth rate of the money supply change permanentlyB a. inflation b. unemployment c. both inflation and unemployment d. neither inflation nor unemployment A DI : + !" : 1#, Analytic %&': @nemployment and inflation The short#run trade#off between inflation and unemployment Applicative

-,

ANS: NAT: T&): *S': -$.

*ost economists believe that an increase in the 3uantity of money results in a. an increase in the demand for goods and services. b. lower unemployment in the short run. c. higher inflation in the long run. d. All of the above are correct.

ANS: D DI : , !" : 1#, NAT: Analytic %&': @nemployment and inflation T&): *oney 6 Inflation 6 @nemployment *S': Applicative -1. In the short run( which of the following rates of growth in the money supply is li/ely to lead to the lowest level of unemployment in the economyB a. , percent per year b. 0 percent per year c. 4 percent per year d. 9 percent per year DI : + !" : 1#, %&': @nemployment and inflation T&): Inflation 6 @nemployment

ANS: D NAT: Analytic *S': Analytical -+.

In the short run( which of the following rates of growth in the money supply is li/ely to lead to the highest level of unemployment in the economyB a. 1 percent per year b. + percent per year c. , percent per year d. - percent per year DI : + !" : 1#, %&': @nemployment and inflation T&): Inflation 6 @nemployment

ANS: A NAT: Analytic *S': Analytical -,.

In the short run( an increase in the money supply is li/ely to lead to a. lower unemployment and lower inflation. b. lower unemployment and higher inflation. c. higher unemployment and lower inflation. d. higher unemployment and higher inflation. DI : + !" : 1#, %&': @nemployment and inflation T&): Inflation 6 @nemployment

ANS: C NAT: Analytic *S': Applicative --.

Suppose that the ederal !eserve Can/ announces that it will be ma/ing a change to a /ey interest rate to increase the money supply. This is li/ely because a. the ederal !eserve Can/ is worried about inflation. b. the ederal !eserve Can/ is worried about unemployment. c. the ederal !eserve Can/ is hoping to reduce the demand for goods and services. d. the ederal !eserve Can/ is worried that the economy is growing too 3uic/ly. DI : + !" : 1#, %&': @nemployment and inflation T&): @nemployment

ANS: C NAT: Analytic *S': Applicative

--
-0.

'hapter 1:Ten )rinciples of "conomics %ow rates of inflation are generally associated with a. low rates of government spending. b. small or none1istent government budget deficits. c. low rates of productivity growth. d. low rates of growth of the 3uantity of money. DI : + !" : 1#, %&': @nemployment and inflation T&): Inflation

ANS: D NAT: Analytic *S': Interpretive -2.

.hich of the following is the most correct statement about the relationship between inflation and unemploymentB a. In the short run( falling inflation is associated with falling unemployment. b. In the short run( falling inflation is associated with rising unemployment. c. In the long run( falling inflation is associated with falling unemployment. d. In the long run( falling inflation is associated with rising unemployment.

ANS: C DI : + !" : 1#, NAT: Analytic %&': @nemployment and inflation T&): Inflation 6 @nemployment 6 Tradeoffs *S': -4.

Applicative

.hich of the following is an important cause of inflation in an economyB a. increases in productivity in the economy b. the influence of positive e1ternalities on the economy c. lac/ of property rights in the economy d. growth in the 3uantity of money in the economy DI : + !" : 1#, %&': @nemployment and inflation T&): Inflation

ANS: D NAT: Analytic *S': Interpretive -7.

The mainstream view among economists is that a. society faces a tradeoff between unemployment and inflation( but only in the short run. b. society faces a tradeoff between unemployment and inflation( but only in the long run. c. society faces a tradeoff between unemployment and inflation( both in the short run and in the long run. d. no tradeoff e1ists between unemployment and inflation( either in the short run or in the long run.

ANS: A DI : + !" : 1#, NAT: Analytic %&': @nemployment and inflation T&): Inflation 6 @nemployment 6 Tradeoffs *S': -9.

Applicative

.hich of the following claims is consistent with the views of mainstream economistsB a. If we increase the rate of inflation from , percent to 2 percent( then the rate of unemployment will temporarily fall. b. If we increase the rate of inflation from , percent to 2 percent( then the rate of unemployment will temporarily rise. c. If we increase the rate of inflation from , percent to 2 percent( then the rate of unemployment will permanently fall. d. If we increase the rate of inflation from , percent to 2 percent( then the rate of unemployment will permanently rise.

ANS: A DI : + !" : 1#, NAT: Analytic %&': @nemployment and inflation T&): Inflation 6 @nemployment 6 Tradeoffs *S': 0$.

Applicative

or a very long time Tropicland has had inflation of 1+J. Suddenly its inflation rate drops to -J. The drop in the inflation rate a. could be due to slower money supply growth. .e would e1pect unemployment to be higher. b. could be due to slower money supply growth. .e would e1pect unemployment to be lower. c. could be due to higher money supply growth. .e would e1pect unemployment to be higher. d. could be due to higher money supply growth. .e would e1pect unemployment to be lower.

'hapter 1:Ten )rinciples of "conomics ANS: NAT: T&): *S': 01. A DI : + !" : 1#, Analytic %&': @nemployment and inflation The short#run trade#off between inflation and unemployment Applicative

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or a number of years country A had inflation of ,J but for the last five years has had inflation of 2J. 'ountry C had inflation of -J for many years( but very recently inflation une1pectedly rose to 9J. &ther things the same( in which of the countries would the higher inflation rate be more li/ely to reduce unemploymentB a. both country A and country C b. neither country A nor country C c. country A but not country C d. country C but not country A

ANS: D DI : , !" : 1#, NAT: Analytic %&': @nemployment and inflation T&): Short#run trade#off between inflation and unemployment 0+.

*S': Interpretive

In the early 197$s( @.S. economic policy was directed toward reducing inflation. .hat would you have e1pected to observe during this short period of timeB a. Inflation fell and unemployment fell. b. Inflation and unemployment were both unaffected. c. Inflation fell and unemployment increased. d. Inflation fell and unemployment was unchanged.

ANS: ' DI : + !" : 1#, NAT: Analytic %&': @nemployment and inflation T&): Inflation 6 @nemployment 6 Tradeoffs *S': 0,.

Applicative

The relatively low inflation e1perienced in the @nited States in the 199$s is attributable to a. slow growth of @.S. productivity during the 199$s. b. slow growth of the 3uantity of money in the @.S. in the 199$s. c. low levels of government spending in the @.S. in the 197$s and 199$s. d. the eight#year presidency of .illiam Lefferson 'linton during the 199$s. DI : + !" : 1#, %&': @nemployment and inflation T&): Inflation 6 *oney

ANS: C NAT: Analytic *S': Interpretive 0-.

During the 199$s( the @nited Fingdom e1perienced low levels of inflation while Tur/ey e1perienced high levels of inflation. A li/ely e1planation of these facts is that a. the @nited Fingdom has a better education system than Tur/ey. b. the rate of growth of the 3uantity of money was slower in the @nited Fingdom than in Tur/ey. c. wor/ers in Tur/ey are more productive than wor/ers in the @nited Fingdom. d. there are more instances of mar/et power in Tur/ey than in the @nited Fingdom. DI : + !" : 1#, %&': @nemployment and inflation T&): Inflation 6 *oney

ANS: C NAT: Analytic *S': Interpretive 00.

The tradeoff between inflation and unemployment a. implies that policies designed to reduce unemployment also reduce inflation. b. was eliminated by improved economic policies in the 19$$s. c. is a long#run tradeoff( persisting for decades( according to most economists. d. None of the above are correct.

ANS: D DI : + !" : 1#, NAT: Analytic %&': @nemployment and inflation T&): Inflation 6 @nemployment 6 Tradeoffs *S':

Interpretive

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02.

'hapter 1:Ten )rinciples of "conomics 8ermany could have avoided the high inflation that it e1perienced in the 19+$s by a. not directing so many of its resources toward preparation for .orld .ar II. b. not increasing ta1es so much on the 8erman middle class. c. not allowing the 3uantity of money to increase so rapidly. d. using government policies to stimulate the economy more so than what was done. DI : + !" : 1#, %&': @nemployment and inflation T&): Inflation 6 *oney

ANS: ' NAT: Analytic *S': Applicative 04.

In the short run( which of the following is not correctB a. Increasing the money supply increases the demand for goods and services. b. Increasing the money supply encourages firms to hire more wor/ers. c. %owering the money supply leads to a higher level of unemployment. d. )olicies that encourage higher employment will also induce a lower rate of inflation. DI : + !" : 1#, %&': @nemployment and inflation T&): Inflation 6 @nemployment

ANS: D NAT: Analytic *S': Interpretive 07.

The short#run tradeoff between inflation and unemployment implies that( in the short run( a. a decrease in the growth rate of the 3uantity of money will be accompanied by an increase in the unemployment rate. b. an increase in the growth rate of the 3uantity of money will be accompanied by an increase in the unemployment rate. c. policyma/ers are able to reduce the inflation rate and( at the same time( reduce the unemployment rate. d. policyma/ers can influence the inflation rate( but not the unemployment rate.

ANS: A DI : , !" : 1#, NAT: Analytic %&': @nemployment and inflation T&): Inflation 6 @nemployment 6 Tradeoffs *S': 09.

Applicative

The business cycle is the a. relationship between unemployment and inflation. b. irregular fluctuations in economic activity. c. positive relationship between the 3uantity of money in an economy and inflation. d. predictable changes in economic activity due to changes in government spending and ta1es. DI : 1 !" : 1#, %&': @nemployment and inflation T&): Cusiness cycle

ANS: C NAT: Analytic *S': Definitional 2$.

The business cycle is measured by the a. production of goods and services. b. number of people employed. c. the interest rate. d. both a and b DI : + !" : 1#, %&': @nemployment and inflation T&): Cusiness cycle

ANS: D NAT: Analytic *S': Definitional 21.

The Hbro/en window fallacyI a. e1plains why inflation is so high. b. is a <ustification for the government to print more money. c. is illustrated when a government program is <ustified not on its merits but on the number of <obs it will create. d. has nothing to do with public policy. DI : 1 !" : 1#, %&': The role of government T&): Cro/en window fallacy

ANS: ' NAT: Analytic *S': Definitional

'hapter 1:Ten )rinciples of "conomics 2+. It once too/ 9$ percent of our population to grow our food. It now ta/es only , percent of the population to grow our food. .hich of the following statements is trueB a. This loss of <obs has been detrimental to our economy. b. The government should provide subsidies to encourage more people to become farmers. c. This reduction in the number of farmers e1plains the increase in the price of food. d. "conomists understand this is progress because the proportion of the population that used to be farmers is now employed in other professions. DI : 1 !" : 1#, %&': The role of government T&): Cro/en window fallacy

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ANS: D NAT: Analytic *S': Definitional