Chapter 1 - Big Ideas

Adam Smith said that when markets work well, those who pursue their own interest end up promoting the ________ interest, as if led to do so by an "invisible hand."

social

Which of the following is an example of self-interest not being aligned with social interest?

A firm does not have to pay for its pollution emissions. → If the firm does not bear the cost of the pollution, it may tend to over-pollute.

Jasmine is considering taking a job as a hostess at the Forty Thieves restaurant, for $8 an hour. She was also offered a hostess position at Ali Baba's restaurant, where she would be paid $7.25 an hour. Which of the following will decrease Jasmine's opportunity cost of taking the job at Forty Thieves? - Ali Baba's changes its offer to $7.00 an hour. - Forty Thieves changes its offer to $8.25 an hour. - Ali Baba's changes its offer to $7.50 an hour. - Forty Thieves changes its offer to $7.75 an hour.

Ali Baba's changes its offer to $7.00 an hour. → If Ali Baba's decreases its offer, the opportunity cost of not accepting it will decrease.

Which of the following describes an incentive that affects one's decision whether to obey the speed limit? - All of these are correct. - the benefits of getting to one's destination faster - the benefits of arriving safely at one's destination - the costs of a speeding ticket

All of these are correct. → Making decisions is complicated because there are so many incentives that affect behavior.

Roger's favorite microwave meal is sesame chicken. His second favorite is cheesy rice and beans. His third choice would be spaghetti and meatballs. What is Roger's opportunity cost for choosing to have sesame chicken for dinner if he has all three varieties of microwave dinners in his freezer? - There is no opportunity cost, since Roger gets dinner no matter which meal he chooses. - Spaghetti and meatballs - Cheesy rice and beans and spaghetti and meatballs - Cheesy rice and beans

Cheesy rice and beans → The spaghetti and meatballs don't matter, since if he didn't have sesame chicken, he would have had cheesy rice and beans.

Veronica has three friends, none of whom like the others. Consequently, she has to choose whom to spend time with. Sarah is her favorite. If Sarah is not available to hang out, Veronica prefers Abbey. Of her three friends, Veronica likes Vickie least (though she still enjoys spending time with her). If all of her friends are busy, Veronica will read a book. If Veronica finds herself hanging out with Abbey, what must have been the opportunity cost of this decision?

Spending an evening with Vickie → If Sarah is unavailable, Veronica will choose Abbey, giving up her next-best choice, which is Vickie.

Which of the following is true about Federal Reserve actions?

The Federal Reserve can cause price levels to rise by printing too much money. → This is the cause of inflation.

Which of the following is not a trade-off for making prescription drugs safer? - There are fewer drug-related illnesses and deaths once the drugs come out on the market. - Because of the immense amount of money and time spent on testing new drugs, fewer drugs are available in the market than would be if there were less stringent safety requirements. - People miss out on the benefits of drugs in the years it takes to test new drugs for safety. - Drug companies must spend a lot of money on testing new drugs. The drugs are therefore more expensive when they come on the market than they would have been had they not been as extensively tested.

There are fewer drug-related illnesses and deaths once the drugs come out on the market. → This is not a trade-off; this is the purpose of making drugs safer.

Rachel has just graduated from college in the United States. Although she has a job offer for $50,000 a year as an editor of a small technology magazine, she is considering taking a year to travel across India. Which of the following will increase Rachel's opportunity cost of traveling through India? - a decrease in the cost of food in India - a $3,500 increase in her job offer - an increase in the price of living in the United States - a decrease in the cost of international airplane tickets

a $3,500 increase in her job offer → If the salary offer increases, she will give up even more by not taking it.

When the British sea captains were paid for prisoners who _________, the survival rate among prisoners was __________.

boarded the ship; low → Under this incentive system, the sea captains benefited from the prisoners' deaths.

Economic booms and busts:

cannot be avoided. → Economic booms and busts cannot be avoided, but they can be moderated.

Adam Smith said that when markets work well, those who pursue their own interest end up promoting the social interest, as if led to do so by an "invisible ________."

hand

Incentives are the ________ that motivate behavior.

rewards and penalties → Incentives matter.

Which of the following is not an institution that supports good incentives for investing in physical capital, human capital, innovation, and efficient organization? strong banking regulations political stability open markets property rights

strong banking regulations → The rest of these choices are powerful institutions for providing strong incentives to invest in physical capital, human capital, innovation, and efficient organization.

If Individuals acting in their own interest produce outcomes that were not part of their intention or design, but which nevertheless have desirable properties, this is a demonstration of: - a trade-off. - the invisible hand. - the importance of incentives. - marginal thinking.

the invisible hand. → This striking metaphor was first used by Adam Smith.

If you wish to understand a person's behavior, look at:

the trade-offs that people face. → Those trade-offs usually involve a little more or a little less of something.

When two people voluntarily trade with one another:

they both benefit. → Voluntary exchanges tend to be mutually beneficial.

The length of time between when the Fed makes a decision and when the effects on the economy are known is:

typically many months. → In the meantime, economic conditions have changed, so you should think of the Fed as shooting at a moving target.

What ended malaria in the United States?

wealth → Wealth allowed the United States to afford to pay for the prevention of malaria.

Institutions align self-interest with the social interest: - only when the government provides the right incentives. - None of these is correct, because self-interest and the social interest cannot be aligned. - when markets work well. - only when the government does not attempt to regulate the market.

when markets work well. → When markets don't work well, self-interest and social interest may be at odds.