(Exercises) Chapter 1 - The Scope and Method of Economics

Question 1

Your opportunity cost of attending college does not include
(a) the money you spend on meals while at college.
(b) your tuition.
(c) the money you spend on traveling between home and college.
(d) the income you could have earned if you’d been employed full-time.

Answer 1

a) the money you spend on meals while at college.

Question 2

_____ may be defined as the extra cost associated with an action.
(a) Marginal cost
(b) Operational cost
(c) Opportunity cost
(d) Action cost

Answer 2

(a) Marginal cost

Question 3

Jean owns a French restaurant—La Crème. Simply to operate this week, he must pay rent, taxes,
wages, food costs, and so on. This amounts to $1,000 per week. This evening, a diner arrives and
orders a bottle of Château Neuf du Pape wine to go with her meal. Jean has none and sends out to
Wine World for a bottle. It costs $20, and Jean charges his guest $30. Which of the following is
true for Jean?
(a) The marginal cost of the wine is $20.
(b) The marginal cost of the wine is $30.
(c) The efficiency cost of the meal is $1,020.
(d) The efficiency cost of the meal is $1,030.

Answer 3

(a) The marginal cost of the wine is $20.

Question 4

Macroeconomics approaches the study of economics from the viewpoint of
(a) individual consumers.
(b) the government.
(c) the entire economy.
(d) the operation of specific markets.

Answer 4

(c) the entire economy.

Question 5

Microeconomics approaches the study of economics from the viewpoint of
(a) the entire economy.
(b) the government.
(c) the operation of specific markets.
(d) the stock market.

Answer 5

(c) the operation of specific markets.

Question 6

Which of the following is most appropriately a microeconomic issue?
(a) The study of the relationship between the unemployment rate and the inflation rate
(b) The forces determining the price level in an individual market
(c) The determination of total output in the economy
(d) The aggregate behavior of all decision-making units in the economy

Answer 6

(b) The forces determining the price level in an individual market

Question 7

A difference between positive statements and normative statements is that
(a) positive statements are true by definition.
(b) only positive statements are subject to empirical verification.
(c) economists use positive statements and politicians use normative statements when
discussing economic matters.
(d) positive statements require value judgments.

Answer 7

(b) only positive statements are subject to empirical verification.

Question 8

“An increase in the price of shampoo will cause less shampoo to be demanded, ceteris paribus.”
Ceteris paribus means that
(a) there is a negative relationship between the price and quantity demanded of shampoo.
(b) the price of shampoo is the only factor that can affect the amount of shampoo demanded.
(c) other factors may affect the amount of shampoo demanded but that these are assumed not
to change in this analysis.
(d) the price of shampoo is equal for all buyers.

Answer 8

(c) other factors may affect the amount of shampoo demanded but that these are assumed not
to change in this analysis.

Question 9

Which of the following is not an example of the fallacy of composition?
(a) Jane leaves work at 4:00 each day and avoids the rush-hour traffic at 5:00. Therefore, if
businesses regularly closed at 4:00, all commuters would avoid the rush-hour traffic.
(b) John stands up so that he can see an exciting football play. Therefore, if the entire crowd
stands up when there is an exciting play, all spectators will get a better view.
(c) Because society benefits from the operation of efficient markets, IBM will benefit if
markets become more efficient.
(d) Because Mary on her own can escape from a burning building by running outside,
individuals in a crowded movie theater are advised to run outside when there is a fire.

Answer 9

(c) Because society benefits from the operation of efficient markets, IBM will benefit if
markets become more efficient.

Question 10

The nation of Arboc claims to have achieved an equitable distribution of income among its
citizens. On visiting Arboc, we would expect to find that
(a) each citizen receives the same amount of income.
(b) Arbocali residents believe that the distribution of income is fair.
(c) Arbocali residents believe that the distribution of income is equal.
(d) each citizen receives the amount of income justified by the value of his or her
contribution to production.

Answer 10

b) Arbocali residents believe that the distribution of income is fair.

Question 11

Nicola and Alexander each have some
dollars and some apples. Nicola values a pound of apples at $3 whereas Alexander values a pound of
apples at $1.
11. In which of the following cases has an allocatively efficient trade taken place?
(a) The market price of apples is $3 per pound. Nicola sells apples to Alexander.
(b) The market price of apples is $1 per pound. Nicola sells apples to Alexander.
(c) The market price of apples is $2 per pound. Nicola sells apples to Alexander.
(d) The market price of apples is $2 per pound. Alexander sells apples to Nicola.

Answer 11

(d) The market price of apples is $2 per pound. Alexander sells apples to Nicola.

Question 12

Nicola and Alexander each have some dollars and some apples. Nicola values a pound of apples at $3 whereas Alexander values a pound of apples at $1.
In which of the following cases has an allocatively efficient trade not taken place?
(a) The market price of apples is $3 per pound. Alexander sells apples to Nicola.
(b) The market price of apples is $1.50 per pound. Alexander sells apples to Nicola.
(c) The market price of apples is $1.50 per pound. Nicola sells apples to Alexander.
(d) The market price of apples is $2 per pound. Alexander sells apples to Nicola.

Answer 12

(c) The market price of apples is $1.50 per pound. Nicola sells apples to Alexander.