Chapter 1 - Practice Problems

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

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

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

A

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

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

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

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

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

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

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

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

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

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

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

C

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

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

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

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

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

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

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

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

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

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

D

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

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

In recent years, Zimbabwe has had hyperinflation, with prices tripling (or more!) every month. According to what you learned in this chapter, what do you think the government can do to end this hyperinflation?

It can stop printing so much money.

When bad weather in India destroys the crop harvest, does this sound like a fall in the total "supply" of crops or a fall in people's "demand" for crops?

It sounds like a fall in supply.

Nobel Prize winner Milton Friedman said that a bad central banker is like a "fool in the shower." In a shower, of course, when you turn the faucet, water won't show up in the showerhead for a few seconds. So if a "fool in the shower" is always making big changes in the temperature based on how the water feels right now, the water is likely to swing back and forth between too hot and too cold. How does this apply to central banking?

It takes a few months for the central banker's actions to affect the economy. So if he or she is always making today's decisions based on how the economy looks right now, he or she might make the economy swing back and forth between too "hot" and too "cold."

Let's connect Big Ideas Six and Nine: Do you think that people in poor countries are poor because they don't have enough money? In other words, could a country get richer by printing more pieces of paper called "money" and handing those out to its citizens?

No. If a country printed more money, prices would rise, but the country would not get richer.

How much did national output fall during the Great Depression? According to the chapter, which government agency might have helped to avoid much of the Great Depression had it acted more quickly and appropriately?

Output fell by about 30 percent and much of the blame belongs to the Federal Reserve for failing to act.

A headline in the New York Times read: "Study Finds Enrollment Is Up at Colleges Despite Recession." How would you rewrite this headline now that you understand the idea of of opportunity cost?

The easiest change is to switch "despite" to "because of" Ordinary people focus on the fact that when times are tough, people can't afford college. Economists, on the other hand, see that there is an opposing effect: when times are tough the price (or opportunity cost) of attending college is low.

According to the United Nations, there were roughly 300 million humans on the planet a thousand years ago. Essentially all of them were poor by modern standards: They lacked antibiotics, almost all lacked indoor plumbing, and none traveled faster than a horse or a river could carry them. Today, between 1 and 3 billion humans are poor out of about 7 billion total humans. So, over the last thousand years, what has happened to the fraction of humans who are poor: Did it rise, fall, or stay about the same? What happened to the total number of people living in deep poverty: rise, fall, or no change?

The fraction of poor people has fallen: almost 100 percent were poor in 1000 AD, while much less than 50 percent are poor now. The number of poor has risen: We went from about 300 million poor people to 1 to 3 billion today, depending on your definition of poverty. The number of poor people has increased, partly because fewer poor people starve to death today than in the past; in this sense today's poor are marginally better off than the poor of the past.

Who has a better incentive to work long hours in a laboratory researching new cures for diseases; a scientist who earns a percentage of the profits from any new medicine she might invent, or a scientist who will get a handshake and a thank you note from her boss if she invents a new medicine?

The scientist who gets a share of the profits will have a stronger incentive to invent more new drugs.

Some people worry that machines will take jobs away from people, making people permanently unemployed. Only 150 years ago in the United States, most people were farmers. Now, machines do almost all of the farm work and fewer than 2% of Americans are farmers, yet that 2% produces enough food to feed the entire country while still exporting food overseas. a. What happened to all of those people who used to work on farms? Do you think most adult males in the United States are unemployed nowadays, now that farm work is gone? b. Some people say that it's okay for machines to take jobs because we'll get jobs fixing the machines. Just from .looking around, do you think that most working Americans are earning a living by fixing farm equipment? If not, what do you think most working people are doing instead? (We'll give a full answer .later in this book.)

a. They are mostly employed in other industries. Farm states don't have tens of millions of people searching for jobs. b. Very few people fix farm equipment for a living. Instead, they work in offices, warehouses, and factories. The demand for more goods and services is almost limitless so when innovations make it possible to produce a good with fewer resources, other resources (including labor) are freed up to produce other goods.