Ch. 1: Ten Principles of Economics

Question 1

____ 1. Economics deals primarily with the concept of

Answer 1

scarcity.

Question 2

____ 2. Both households and societies face many decisions because

Answer 2

a. resources are scarce.

Question 3

____ 3. Which of the following would NOT be true in a world without scarcity?

Answer 3

There would have to be an infinite supply of every resource.

Question 4

____ 4. Which product would be considered scarce?

Answer 4

Nike shoes, Monet paintings ,1-carat diamonds
All of the above are correct.

Question 5

____ 5. Economics is the study of

Answer 5

how society manages its scarce resources.

Question 6

____ 6. Economists study all of the following EXCEPT

Answer 6

d. how societies change over time.

Question 7

____ 7. Guns and butter are used to represent the classic societal tradeoff between spending on

Answer 7

national defense and consumer goods.

Question 8

____ 8. Henry decides to spend two hours playing golf rather than working at his job which pays $8 per hour. Henry’s tradeoff is

Answer 8

the $16 he could have earned working for two hours.

Question 9

____ 9. Economists use the word equity to describe a situation in which

Answer 9

the benefits of society’s resources are distributed fairly among society’s members.

Question 10

____10. When the government attempts to cut the economic pie into more equal slices,

Answer 10

the pie gets smaller, and there will be less pie for everyone.

Question 11

___ 11. In economics, the cost of something is

Answer 11

what you give up to get it.

Question 12

____ 12. For most students, the largest single cost of a college education is

Answer 12

the wages given up to attend school.

Question 13

____ 13. The opportunity cost of an item is

Answer 13

b. what you give up to get that item.

Question 14

___ 14. A marginal change is illustrated by which of the following?

Answer 14

Arizona, which usually receives 10 inches of rain per year, received 11 inches last year.

Question 15

___ 15. When policymakers make policies that change the costs and benefits that people face, they can

Answer 15

a. alter behaviors.

Question 16

____ 16. Ralph Nader’s book Unsafe at Any Speed caused Congress to require

Answer 16

seat belts in all new cars.

Question 17

____ 17. In the former Soviet Union, producers were paid for meeting output targets, not for selling products. Under those circumstances, what were the economic incentives for producers?

Answer 17

to produce enough to meet the output target, without regard for quality or cost

Question 18

____ 18. Your professor loves her work, teaching economics. She has been offered other positions in the corporate world making 25 percent more, but has decided to stay in teaching. Her decision would not change unless the marginal

Answer 18

cost of teaching increased.

Question 19

____ 19. Benefits from trade would NOT include

Answer 19

c. less competition.

Question 20

____ 20. In a market economy, economic activity is guided by

Answer 20

d. prices.

Question 21

____ 21. Which of the following observations was made famous by Adam Smith in his book The Wealth of Nations?

Answer 21

d. Households and firms interacting in markets are guided by an “invisible hand” that leads them to desirable market outcomes.

Question 22

____ 22. The invisible hand works to promote general well-being in the economy primarily through

Answer 22

c. self interest.

Question 23

____ 23. Which of the following is most likely to generate an externality?

Answer 23

b. A young man from a small town attends medical school to become a doctor.

Question 24

____ 24. If an externality is present in a market, economic efficiency may be enhanced by

Answer 24

a. government intervention.

Question 25

____ 25. If a copper refinery does NOT bear the entire cost of the smoke it emits, it will

Answer 25

d. emit too much smoke.

Question 26

____ 26. If a sawmill creates too much air pollution,

Answer 26

d. the government can raise economic well-being through environmental regulation.

Question 27

____ 27. In 2000 the average American had an income of about

Answer 27

a. $34,000.

Question 28

____ 28. In the United States, incomes have historically grown

Answer 28

about 2 percent per year.

Question 29

____ 29. Almost all variation in living standards is attributable to differences in countries’

Answer 29

d. productivity.

Question 30

____ 30. The person who referred to inflation as public enemy number one was

Answer 30

a. Gerald Ford.

Question 31

____ 31. Inflation causes

Answer 31

d. the value of money to fall.

Question 32

____ 32. Which of the following is the most correct statement about the relationship between inflation and
unemployment?

Answer 32

In the short run, reducing inflation is associated with rising unemployment.

Question 33

____ 33. In the short run, the Phillips curve illustrates

Answer 33

the tradeoff between inflation and unemployment.

Question 34

____ 34. Although the Phillips curve is controversial, most economists believe that

Answer 34

society faces a tradeoff between unemployment and inflation in the short run only.

Question 35

____ 35. Between 1929 and 1933, the U.S. economy went from a situation of full employment to one of 25 percent
unemployment. What do you assume happened to prices?

Answer 35

Prices fell as the economy experienced deflation.

Question 36

____ 36. Maurice receives $100 as a birthday gift. In deciding how to spend the money, he narrows his options down to four choices, Option A, Option B, Option C and Option D. Each option costs $100. Finally he decides on
Option B. The opportunity cost of Option B is

Answer 36

the value to him of the Option he would have chosen if Option B were not available.

Question 37

____ 37. A furniture maker currently produces 100 tables per week and sells them for a profit. She is considering expanding her operation in order to make more tables. Should she expand?

Answer 37

It depends on the marginal cost of producing more tables and the marginal revenue she
will earn from selling more tables.

Question 38

____ 38. Adam Smith argued that in a market system, when people act in their own self-interest, they typically

Answer 38

d. help others even more than when they seek to help others.

Question 39

____ 39. Which of the following is NOT true?

Answer 39

In the presence of a market failure, government action will always improve on the market
outcome.

Question 40

____ 40. During the 1990s, the United Kingdom experienced low levels of inflation while Turkey experienced high levels of inflation. The difference can best be explained by the fact that

Answer 40

b. the United Kingdom printed money at a slower rate than Turkey.