Chapter 1
Something that induces a person to act is called
an incentive
A friend of yours asks you why market prices are better than government-determined prices. Because you understand economic principles, you say that market-determined prices are better because they generally reflect
both the value of a good to society and the cost of making it.
Nevaeh decides to spend four hours playing video games rather than attending her classes. Her opportunity cost of playing video games is
the value of the knowledge she would have received had she attended her classes.
The opportunity cost of an item is
what you give up to get that item.
Which of the following examples does not illustrate the principle represented by the adage, "There is no such thing as a free lunch"?
Melissa needs to pay her rent and her electric bill.
Water pollution from pulp and paper mills harms plants, animals, and humans. This is an example of
a market failure caused by an externality.
When society requires that firms reduce pollution, there is
a tradeoff because of reduced incomes to the firms' owners and workers.
If Faith attends college, it will take her four years, during which time she will earn no income. She will pay $50,000 for tuition, $12,000 for room and board, and $5,000 for books. If she spends the four years working rather than attending college, she will pay $18,000 for room and board, pay no intuition, and buy no books. Based on this information, Faith's economic cost of attending college would be $67,000 if, over the four years, she could earn
$18,000 instead of attending college.
Which of the following could reduce economic efficiency? 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
All of the above are correct
Fossil fuels are considered to be nonrenewable energy sources. Which of the following statements is correct?
Fossil fuels are scarce resources.
If China decides to trade with France, we know that
France and China can both benefit.
Which of the following statements about markets is most accurate?
Markets are usually a good way to organize economic activity.
A worker in Vietnam can earn $6 per day making cotton cloth on a hand loom. A worker in the United States can earn $85 per day making cotton cloth with a mechanical loom. What is the likely explanation for the difference in wages?
Labor is more productive making cotton cloth with a mechanical loom than with a hand loom.
Rami Home Builders, Inc., has built 24 houses so far this year at a total cost to the company of $4.2 million. If the company builds a 25th house, its total cost will increase to $4.375 million. Which of the following statements is correct?
The marginal cost of the 25th house, if it is built, will equal $175,000.
For a very long time the country of Tofu has had an inflation rate of 8 percent. Suddenly its inflation rate drops to 3 percent. The drop in the inflation rate
could be due to slower money supply growth. We would expect unemployment to be higher.
A company that formerly produced music CDs went out of business because too many potential customers bought illegally-produced copies of the CDs instead of buying the product directly from the company. This instance serves as an example of
inadequate enforcement of property rights.
In a particular country in 2000, the average worker needed to work 40 hours to produce 55 units of output. In that same country in 2008, the average worker needed to work 30 hours to produce 45 units of output. In that country, the productivity of the average worker
increased by about 9 percent between 2000 and 2008.
Both The Wealth of Nations and the Declaration of Independence share the point of view that
individuals are best left to their own devices without the government guiding their actions.
Efficiency
refers to how much a society can produce with its resources. Equality refers to how evenly the benefits from using resources are distributed among members of society.