Chapter 1

It makes sense that Martha Stewart hires another person to do her ironing because:

her opportunity cost of ironing is higher than the opportunity cost for the person she hires.

Economists believe that socially good outcomes arise whenever:

self-interest is pursued and it aligns with social interest.

An increase in the general price level is:

inflation.

The opportunity cost of committing a crime and spending 5 years in jail:

is higher for people who are employed than for the unemployed.

When deciding whether or not to undertake an activity, economists compare:

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

Self-interest can be aligned with the social interest by:

the enactment of government policies that increase incentives to work and trade.

When the government decreases the supply of money, there is an increase in the general level of prices.

False

Which of the following is an example of self-interest that attempts to promote the public interest?

An entrepreneur risks his life savings to open up a grocery store in an underserved area.

A student spends 4 years in college. College tuition, fees, and room and board cost $10,000 per year. This student's opportunity cost of attending college is $10,000.

False

Inflation increases the value of money by increasing the purchasing power of money.

False

Markets align self-interest with the social interest as long as the government doesn't interfere.

False

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.

Trade-offs Are Everywhere.

For countries to be wealthy, they need lots of physical and human capital per worker, which, in turn, depends on a system of private property rights, political stability, a just legal system, honest government, and competitive and open markets.

True

In addition to monetary incentives, economists also believe people respond to incentives like fame, power, reputation, and love.

True

All booms and busts:

affect the rate of economic growth.

In the 1800s, the federal government paid railroad companies for each mile of track built. This payment scheme created incentives for railroad companies to lay track:

between points A and B using the most indirect route.

Economists have discovered that economic booms and busts:

can be moderated but not eliminated.

A high-school graduate deciding to go to college makes that decision by:

comparing the additional income earned per year after graduating from college with the additional cost of going to college.

Trade increases production partly by taking advantage of:

economies of scale.

Patterns of specialization and trade are explained by:

the principle of comparative advantage.