ECON 130: CHAPTER 1 (10 PRINCIPLES OF ECONOMICS) (148 Q)

Trade between countries tends to

increase both competition and specialization.

Efficiency means that

society is getting the most it can from its scarce resources

A rational decisionmaker

takes an action only if the marginal benefit of that action exceeds the marginal cost of that action.

Which of the following do economists not generally regard as a legitimate reason for the government to intervene in a market?

To protect an industry from foreign competition

Prior to the collapse of communism, communist countries worked on the premise that economic well-being could be best attained by

the actions of government central planners.

In most societies, resources are allocated by

the combined actions of millions of households and firms

Suppose that in Peru total annual output is worth $750 million and people work 40 million hours. In Oman, total annual output is worth 650 million and people work 20 million hours. Productivity is higher

in Oman. Most variation in the standard of living across countries is due to differences in productivity.

Suppose the cost of flying a 200-seat plane for an airline is $100,000 and there are 10 empty seats on a flight. If the marginal cost of flying a passenger is $200 and a standby passenger is willing to pay $300, the airline should

sell the ticket because the marginal benefit exceeds the marginal cost.

Thousands of people develop lung cancer from second-hand exposure to cigarette smoke. This is an example of

a market failure caused by an externality.

Consider Miray's decision to go to college. If she goes to college, she will spend $24,000 on tuition, $12,000 on room and board, and $1,900 on books. If she does not go to college, she will earn $16,000 working in a store and spend $8,000 on room and board. Miray's cost of going to college is

$45,900.

Suppose that you have received $650 as a birthday gift. You can spend it today or you can put the money in a savings account for a year and earn 2 percent interest. The opportunity cost of spending the money today, in terms of what you could have after one year, is

$663.00.

For which of the following individuals would the opportunity cost of going to college be highest?

A famous, highly paid actor who wants to take time away from show business to finish college and earn a degree

Which of these activities will most likely impose an external cost?

A postal worker smokes a cigarette in a crowded break room.

Which of the following firms is likely to have the greatest market power?

A utility company

The famous observation that households and firms interacting in markets act as if they are guided by an "invisible hand" that leads them to desirable market outcomes comes from whose 1776 book?

Adam Smith

Which of these activities will most likely result in an external benefit?

An elderly woman plants a flower garden on the vacant lot next to her house.

Which of the following statements best represents the principle represented by the adage, "There ain't no such thing as a free lunch"?

Benjamin must decide between going to Florida or Brazil for summer vacation.

Which of the following is true?

Efficiency refers to the size of the economic pie; equality refers to how the pie is divided.

When the government implements programs such as progressive income tax rates, which of the following is likely to occur?

Equality is increased and efficiency is decreased.

In a market economy, who makes the decisions that guide most economic activity?

Firms and households

Fossil fuels are considered 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 does not apply to a market economy?

Government policies are the primary forces that guide the decisions of firms and households.

Savion is restoring a car and has already spent $4,000 on the restoration. He expects to be able to sell the car for $5800. Savion discovers that he needs to do an additional $2,400 of work to make the car worth $5,800 to potential buyers. He could also sell the car now, without completing the additional work, for $3,800. What should he do?

He should sell the car now for $3,800.

Which of the following observations was made famous by Adam Smith in his book The Wealth of Nations?

Households and firms interacting in markets are guided by an "invisible hand" that leads them to desirable market outcomes.

A hair stylist currently cuts and colors hair for 50 clients per week and earns a profit. He is considering expanding his operation in order to serve more clients. Should he expand?

It depends on the marginal cost of serving more clients and the marginal revenue he will earn from serving more clients.

A worker in Thailand can earn $12 per day making cotton cloth on a hand loom. A worker in the United States can earn $82 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.

A donut shop sells fresh-baked donuts from 6 a.m. until 5 p.m. every day. The shop does not sell day-old donuts, so all unsold donuts are thrown away at 5 p.m. each day. The cost of making and selling a dozen donuts is $1; there are no costs associated with throwing donuts away. If the manager has seven dozen donuts left at 4 p.m. on a particular day, which of the following alternatives is most attractive?

Lower the price of the remaining donuts, even if the price falls below $1 per dozen.

Which of the following is an example of an externality?

Malik's bird chirps loudly during the night, waking his neighbors.

The term market failure refers to

a situation in which the market on its own fails to allocate resources efficiently.

Suppose the state of Rhode Island passes a law that increases the tax on beer. As a result, beer consumers who live in Rhode Island start purchasing their beer in surrounding states. Which of the following principles does this best illustrate?

People respond to incentives.

Which of the following industries has a marginal cost that is close to zero?

Software

You go to the movieplex where movies ordinarily cost $8.00. You are intending to see a movie for which you have a $2.50-off coupon good for only that movie at that time. However, when you get there you see a friend who asks if you would rather see a new release. Both movies start and end at the same time. If you decide to see the new release with your friend, what is your opportunity cost?

The amount you value the first movie + $2.50

Which of the following statements exemplifies a principle of individual decision making?

The cost of something is what you give up to get it.

Suppose your college institutes a new policy requiring you to pay for a permit to park your car in a campus parking lot.

The cost of the parking permit is part of the opportunity cost of attending college if you would not have to pay for parking otherwise.

After much consideration, you have chosen Ireland over Spain for your Study Abroad program next year. However, the deadline for your final decision is still months away and you may reverse this decision. Which of the following events could prompt you to reverse this decision?

The marginal benefit of going to Spain increases

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.

Suppose the cost of flying a 350-seat plane for an airline is $350,000 and there are 10 empty seats on a flight. The marginal cost of flying a passenger is

This cannot be determined from the information given.

When society requires that firms reduce pollution, there is

a tradeoff because of reduced incomes to the firms' owners and workers

Which is the most accurate statement about trade?

Trade can make every nation better off.

Dee is an accomplished actress and a homeowner who pays a landscaper to maintain her lawn rather than do it herself. Dee has determined that she can earn more in the hour it would take her to work on her lawn than she must pay her landscaper. This scenario is an example of which principle of economics?

Trade can make everyone better off.

The cost of something is what you give up to get it.

Universities offer fewer online classes when they generate more revenue at the same cost than traditional classes.

Which of the following statements about trade is false?

With trade, one country must win and one country must lose.

The slow growth of U.S. incomes during the 1970s and 1980s can best be explained by

a decline in the rate of increase in U.S. productivity.

If the government were to intervene and set a wage for unskilled labor above the market wage, then we would expect, relative to the market outcome,

a decrease in the number of unskilled jobs available.

When the government prevents prices from adjusting naturally to supply and demand, it

adversely affects the allocation of resources.

Trade

allows specialization, which reduces costs.

Productivity is defined as the

amount of goods and services produced from each unit of labor input.

The willingness of citizens to pay for vaccinations does not include the benefit society receives from having vaccinated citizens who cannot transmit an illness to others. This extra benefit society gets from vaccinating its citizens is known as

an externality.

If the government were to intervene in a market economy and fix the price of visiting a health care provider below the market price, then we would expect, relative to the market outcome,

an increase in the number of visits people want to make and a decrease in the number of visits health care providers want to provide.

Suppose your finance professor has been offered a corporate job with a 25 percent pay increase. He has decided to take the job. For him, the marginal

benefit of leaving was greater than the marginal cost.

Dale is a guitar teacher and Terrence is a tile layer. If Dale teaches Terrence's daughter to play the guitar in exchange for Terrence tiling Dale's kitchen floor,

both Dale and Terrence are made better off by trade.

Large or persistent inflation is almost always caused by

excessive growth in the quantity of money

Communist countries worked under the premise that

central planners were in the best position to determine the allocation of scarce resources in the economy.

You are considering staying in college another semester so that you can complete a major in finance. In deciding whether or not to stay you should

compare the cost of staying one more semester to the benefits of staying one more semester.

Making rational decisions at the margin means that people

compare the marginal costs and marginal benefits of each decision.

Your professor loves her work, teaching math. She has been offered other positions in the corporate world that would increase her income by 15 percent, but she has decided to continue working as a professor. Her decision would not change unless the marginal

cost of teaching increased.

Laws that enforce chemical hazard control are examples of government intervention that is intended to reduce

externalities.

The property of society getting the most it can from its scarce resources is called

efficiency

A typical society strives to get the most it can from its scarce resources. At the same time, the society attempts to distribute the benefits of those resources to the members of the society in a fair manner. However, redistributing income from rich to poor reduces the reward for working hard. Therefore, society faces a tradeoff between

efficiency and equality.

When society gets the most it can from its scarce resources, then the outcome is called

efficient

The terms equality and efficiency are similar in that they both refer to benefits to society. However, they are different in that

equality refers to uniform distribution of those benefits and efficiency refers to maximizing benefits from scarce resources.

Bo buys and sells real estate. Two weeks ago, he paid $400,000 for a house on Cypress Street, intending to spend $50,000 on repairs and then sell the house for $500,000. Last week, the city government announced a plan to build a new landfill on Cypress Street just down the street from the house Bo purchased. As a result of the city's announced plan, Bo is weighing two alternatives: He can go ahead with the $50,000 in repairs and then sell the house for $390,000, or he can forgo the repairs and sell the house as it is for $350,000. He should

forgo the repairs and sell the house as it is for $350,000.

To improve living standards, policymakers should

formulate policies designed to increase productivity.

The "invisible hands" ability to coordinate the decisions of the firms and households in the economy can be hindered by

government actions that distort prices.

Central planning refers to

government guiding economic activity. Today many countries that had this system have abandoned it.

If an externality is present in a market, economic efficiency may be enhanced by

government intervention.

The basic principles of economics suggest that

government should become involved in markets when those markets fail to produce efficient or fair outcomes.

The "invisible hand" refers to

how the decisions of households and firms lead to desirable market outcomes.

In a particular country in 1998, the average worker needed to work 25 hours to produce 40 units of output. In that same country in 2008, the average worker needed to work 40 hours to produce 68 units of output. In that country, the productivity of the average worker

increased by 6.25 percent between 1998 and 2008.

An increase in the overall level of prices in an economy is referred to as

inflation

Prices direct economic activity in a market economy by

influencing the actions of buyers and sellers.

Suppose the government taxes the wealthy at a higher rate than it taxes the poor and then develops programs to redistribute the tax revenue from the wealthy to the poor. This redistribution of wealth

is more equal but less efficient for society.

The term used to describe a situation in which markets do not allocate resources efficiently is

market failure

Suppose the cost of operating a 75-room hotel for a night is $6,000 and there are five empty rooms for tonight. If the marginal cost of operating one room for one night is $40, the hotel manager should rent one of the empty rooms only if a customer is willing to pay

more than $40; because the marginal benefit will exceed the marginal cost.

Chloe's college raises the cost of room and board per semester. This increase raises Chloe's opportunity cost of attending college

only if the amount she would have to pay for room and board if she didn't attend college rose by less than the increase in the amount her college charges. An increase in opportunity cost reduces Chloe's incentive to attend college.

Candice is planning her activities for a hot summer day. She would like to go to the local swimming pool and see the latest blockbuster movie, but because she can only get tickets to the movie for the same time that the pool is open she can only choose one activity. This illustrates the basic principle that

people face tradeoffs

While pollution regulations yield the benefit of a cleaner environment and the improved health that comes with it, the regulations come at the cost of reducing the incomes of the regulated firms' owners, workers, and customers. This statement illustrates the principle that

people face tradeoffs

The adage, "There ain't no such thing as a free lunch," means

people face tradeoffs.

When the government redistributes income from the wealthy to the poor,

people work less and produce fewer goods and services.

Market power refers to the

power of a single person or small group to influence market prices.

The ability of an individual to own and exercise control over scarce resources is called

property rights.

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.

The phenomenon of scarcity stems from the fact that

resources are limited

The overriding reason why households and societies face many decisions is that

resources are rare

Resources are

scarce for households and scarce for economies

Fundamentally, economics deal with

scarcity

What term refers to the idea that society has limited resources and therefore cannot produce all the goods and services people wish to have?

scarcity

In a market economy, economic activity is guided by

self-interest and prices.

You have driven 850 miles on a vacation and then you notice that you are only 50 miles from an attraction you hadn't known about, but would really like to see. In computing the opportunity cost of visiting this attraction you had not planned to visit, you should include

the cost of driving the next 50 miles, but not the cost of driving the first 850 miles.

The primary determinant of a country's standard of living is

the country's ability to produce goods and services.

Alana decides to spend 2 hours working overtime rather than going shopping with her friends. She earns $11 per hour for overtime work. Her opportunity cost of working is

the enjoyment she would have received had she gone shopping.

People are willing to pay more for a diamond than for a bottle of water because

the marginal benefit of an extra diamond far exceeds the marginal benefit of an extra bottle of water.

When computing the opportunity cost of attending a professional football game as a spectator, you should include

the price you pay for the ticket and the value of your time.

The marginal benefit Joseph gets from purchasing a fourth pair of shoes is

the total benefit he gets from purchasing four pairs of shoes minus the total benefit he gets from purchasing three pairs of shoes.

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.

Savion's aunt gave him $25 for his birthday with the condition that Savion buys himself something. In deciding how to spend the money, Savion narrows his options down to four choices: Option 1, Option 2, Option 3, and Option 4. Each option costs $25. Finally, he decides on Option 2. The opportunity cost of this decision is

the value to Savion of the option he would have chosen had Option 2 not been available.

Aiden and Zaria charge people to park on their lawn while attending a nearby craft fair. At the current price of $10, six people park on their lawn. If they raise the price to $15, they know that only five people will want to park on their lawn. Whether they have six or five cars parked on their lawn does not affect their costs. From this information it follows that

they would do better charging $15 than $10.

Economics is the study of how society manages its

unlimited wants and limited resources

The opportunity cost of an item is

what you give up to get that item.