chapter 1

Which of the following statements reflects Adam Smith's important insight into marketplace behavior? A) Society benefits when people and firms pursue their own self interests. B) Markets are usually an inefficient way of organizing economic activity. C) Greedy, self-interested behavior needs to be constrained to ensure strong economic growth. D) Trade restrictions on imported goods increase domestic employment.

A) Society benefits when people and firms pursue their own self interests.

What you give up to obtain an item is called your: A) opportunity cost. B) explicit cost. C) true cost. D) direct cost.

A) opportunity cost.

The opportunity cost of a choice is: A) the value of the next best alternative. B) the net value of the opportunities gained. C) the difference between the benefits and costs of the choice. D) sometimes positive or negative.

A) the value of the next best alternative.

In an effort to clean the air, many communities impose restrictions on the burning of garbage. This policy causes more garbage to be buried underground, potentially increasing groundwater contamination. What concept does this example represent? A) trade-offs B) marginal pollution C) sunk costs D) public provision

A) trade-offs

Suppose that there are three methods of financing the transportation of prisoners from Point A to Point B: I. The boat's captain is paid $100 by the government for every live prisoner that is loaded on board at Point A.II. The boat's captain is paid $100 by the government for every live prisoner that is unloaded at Point B. III. The boat's captain is paid $800 by the government for every live prisoner that is loaded on board at Point A. Which financing method will result in the greatest number of prisoners surviving the trip? A) I B) II C) III D) All methods affect prisoner survival equally.

B) II

Economists think that people are self-interested: A) only when monetary incentives are present. B) because they respond to incentives in predictable ways. C) only rarely in response to incentives. D) unless they are being altruistic.

B) because they respond to incentives in predictable ways.

Adam Smith's metaphor of the "invisible hand" refers to the notion that: A) greed is always good when externally motivated. B) behavior based on self-interest can lead to an overall benefit to society. C) market incentive can lead to negative side effects. D) markets always align self-interest with social interest.

B) behavior based on self-interest can lead to an overall benefit to society.

Adam Smith sought to explain the concept of aligning self-interest with the promotion of society's overall interest by: A) using an analysis of wealth as productivity. B) suggesting markets are led by an Invisible Hand. C) arguing that markets were ineffective institutions. D) admitting his own inability to explain how such alignment takes place.

B) suggesting markets are led by an Invisible Hand.

What is meant by the term marginal revolution? A) the public disdain at the institution of marginal tax rates B) the transformation in economic thought that occurred with the discovery of marginal thinking C) the institution of the death penalty for drug dealers D) the effect of policies on crime

B) the transformation in economic thought that occurred with the discovery of marginal thinking

Susan quits her administrative job, which pays $40,000 a year, to finish her four-year college degree. Her annual college expenses are $8,000 for tuition, $900 for books, and $2,500 for food. The opportunity cost of attending college for the year is: A) $11,400. B) $8,900. C) $48,900. D) $51,400.

C) $48,900.

Why do you think researchers sometimes find a positive relationship between the unemployment rate and college enrollment rates? A) The opportunity cost of attending college rises during economic booms, leading to higher college enrollment rates. B) The opportunity cost of attending college rises during recessions, leading to higher college enrollment rates. C) The opportunity cost of attending college falls during recessions, leading to higher college enrollment rates. D) The opportunity cost of attending college falls during economic booms, leading to higher college enrollment rates.

C) The opportunity cost of attending college falls during recessions, leading to higher college enrollment rates.

The opportunity cost of winning a free ticket to the Super Bowl worth $950 and attending the game is: A) zero, since the ticket was free. B) priceless, if the person really loves football. C) at least $950, the lost market value of selling the ticket and the time to go. D) zero, if the person would rather go to the game than do anything else.

C) at least $950, the lost market value of selling the ticket and the time to go.

In several cities around the country, schools are paying cash awards to students who do well on English and Math tests. This practice highlights the idea of: A) pedagogical economics—the continuous assessment of student performance in an effort to maximize student efficiency. B) hidden costs—the costs borne by taxpayers in the form of wasteful school spending. C) incentives—the rewards and penalties that motivate behavior. D) screening theory—the identification of individuals or groups based on various performance measures.

C) incentives—the rewards and penalties that motivate behavior.

Deciding whether to study an additional hour for an exam by comparing the additional benefits to the additional costs of an extra hour of study is an example of: A) normative analysis. B) transformational thought. C) marginal thinking. D) None of the answers is correct.

C) marginal thinking.

Suppose your teacher finishes class 30 minutes early on the day before an exam. She indicates that you may leave, or stay on for an optional study period which will last for the remaining 30 minutes of the scheduled class time. You should: A) always choose to stay for the study period, since you have already paid for the class time. B) only choose to stay if you like the instructor, since the value obtained is higher than if you disliked the instructor. C) only choose to stay if the benefits gained from the extra study session exceed the cost of another 30 minutes in class. D) only choose to stay for the study session if you do not plan to study on your own for the exam.

C) only choose to stay if the benefits gained from the extra study session exceed the cost of another 30 minutes in class.

The main incentive for business activity is: A) government subsidies. B) technological advancement. C) profit. D) employment.

C) profit.

When deciding whether or not to undertake an activity, economists compare: A) the total cost of the activity against the total benefit received. B) the total benefit of the activity against the total cost of production. C) the additional cost of the activity against the additional benefits received. D) the average cost of the activity versus the total benefits received.

C) the additional cost of the activity against the additional benefits received.

Economics: A) teaches us how to make the world a better place. B) increases our understanding of historical events. C) can help you better manage your finances. D) All of the answers are correct.

D) All of the answers are correct.

Why do you think goods are sometimes marked in prices that end in 9s, for example "$29.99" instead of $30, or "$9.99" instead of $10?I. Consumers respond to incentives—they view the products as cheaper and so they buy more.II. Businesses are sneaky and add the extra cent onto taxes on the product. III. It is a sales strategy that makes people think the product is on sale. A) I only B) II only C) III only D) I and III

D) I and III

Which of the following arise as benefits from trade? I. economies of scaleII. cost reduction from mass productionIII. the division of knowledge A) I only B) II and III only C) I and III only D) I, II, and III

D) I, II, and III

Recall the chapter opening story about the British sea captains and the convicted felons. In what way did economics use the idea of incentives to solve the problem of the high mortality rate on board the ships? A) Payment (to ship captains) was to be offered for each prisoner that was taken aboard the ships. B) Payment (to ship captains) was made independent of the regulations passed for prisoner welfare. C) Regulations were passed so that prisoners could get better food, water, and medical care. D) Payment (to ship captains) was made dependent on the survival rate of prisoners.

D) Payment (to ship captains) was made dependent on the survival rate of prisoners.

You must decide whether to attend class tomorrow morning or take your friend to the airport. Your decision highlights the following "big idea" in economics. A) Institutions matter. B) Incentives matter. C) Economics is fun. D) Trade-offs are everywhere.

D) Trade-offs are everywhere.

The basic postulate of economics indicates that changes in incentives influence the: A) actions of producers but not consumers. B) actions of consumers but not producers. C) choices of individuals only when they buy and sell goods in the marketplace. D) choices of individuals with regard to a wide range of activities, including those generally perceived as social or political.

D) choices of individuals with regard to a wide range of activities, including those generally perceived as social or political.

Suppose the U.S. government wants to encourage individuals to save more of their income. The easiest way for the government to realize this goal is to: A) pass a law requiring people to save a larger percentage of their income. B) decrease government spending in order to set an example for individuals. C) increase the tax rate on savings in order to encourage more savings. D) develop incentives such as tax breaks on savings in order to encourage more savings.

D) develop incentives such as tax breaks on savings in order to encourage more savings.

A person has a comparative advantage in activity X when that person's: A) opportunity cost of performing that activity is very high. B) ability to perform that activity exceeds that of all other people. C) government negotiates a favorable trade agreement. D) opportunity cost is lower than other trading partners.

D) opportunity cost is lower than other trading partners.

The real power of trade lies in people's ability to: A) get things they can't produce. B) get the lowest price possible. C) increase their consumption. D) specialize and increase production.

D) specialize and increase production.