Ch. 1 Self-Test

Which of the following products would be least capable of producing an externality?

food

Productivity can be increased by

improving the education of workers.

You have spent $1,000 building a hot-dog stand based on estimates of sales of $2,000. The hot-dog stand is nearly completed, but now you estimate total sales to be only $800. You can complete the hot-dog stand for another $300. Should you complete the hot-dog stand? (Assume that the hot dogs cost you nothing.)

Yes

In the short run,

a decrease in inflation temporarily increases unemployment.

Workers in the United States enjoy a high standard of living because

workers in the United States are highly productive.

Which of the following activities is most likely to produce an externality?

A student has a party in her dorm room.

Adam Smith's "invisible hand" concept describes how corporate business reaches into the pockets of consumers like an "invisible hand."

False: Adam Smith's "invisible hand" concept describes how corporate business reaches into the pockets of consumers like an "invisible hand."

In the short run, a reduction in inflation tends to cause a reduction in unemployment.

False; a reduction in inflation tends to raise unemployment.

Which of the following statements is true about a market economy?

Market participants act as if guided by an "invisible hand" to produce outcomes that promote general economic well-being.

Which of the following situations describes the greatest market power?

Microsoft's impact on the price of desktop operating systems

Rational people act only when the marginal benefit of the action exceeds the marginal cost.

True

Foreign trade

allows a country to have a greater variety of products at a lower cost than if it tried to produce everything at home.

High and persistent inflation is caused by

governments increasing the quantity of money too much.

The United States will benefit economically if we eliminate trade with Asian countries because we will be forced to produce more of our own cars and clothes.

False: All countries gain from voluntary trade

When the government redistributes income with taxes and welfare, the economy becomes more efficient.

False: When the government redistributes income with taxes and welfare, the economy becomes more efficient.

An auto manufacturer should continue to produce additional autos as long as the firm is profitable, even if the cost of the additional units exceeds the price received.

False: a manufacturer should produce as long as the marginal benefit exceeds the marginal cost.

An individual farmer is likely to have market power in the market for wheat.

False: a single farmer is too small to influence the market.

Workers in the United States have a relatively high standard of living because the United States has a relatively high minimum wage.

False: workers in the United States have a high standard of living because they are productive.

A tax on liquor raises the price of liquor and provides an incentive for consumers to drink more.

False; higher prices reduce the quantity demanded

Which of the following is not part of the opportunity cost of going on vacation?

The money you spent on food

Economics is the study of how: a. to fully satisfy our unlimited wants. b. society manages its scarce resources. c. to reduce our wants until we are satisfied. d. to avoid having to make trade-offs. e. society manages its unlimited resources

b. society manages its scarce resources.

Raising taxes and increasing welfare payments a. proves that there is such a thing as a free lunch. b. reduces market power. c. improves efficiency at the expense of equality. d. improves equality at the expense of efficiency. e. does none of the above.

improves equality at the expense of efficiency.

An increase in the price of beef provides

information that tells producers to produce more beef.

You have spent $1,000 building a hot-dog stand based on estimates of sales of $2,000. The hot-dog stand is nearly completed, but now you estimate total sales to be only $800. You can complete the hot-dog stand for another $300. Should you complete the hot-dog stand? (Assume that the hot dogs cost you nothing.) Referring to question 17, your decision rule should be to complete the hot-dog stand as long as the cost to complete the stand is less than

$800

Suppose you find $20. If you choose to use the $20 to go to the football game, your opportunity cost of going to the game is

$20 (because you could have used the $20 to buy other things) plus the value of your time spent at the game

An unintended consequence of public support for higher education is that low tuition provides an incentive for many people to attend state universities even if they have no desire to learn anything.

True

High and persistent inflation is caused by excessive growth in the quantity of money in the economy.

True

Sue is better at cleaning, and Bob is better at cooking. It will take fewer hours to eat and clean if Bob specializes in cooking and Sue specializes in cleaning than if they share the household duties evenly.

True

To a student, the opportunity cost of going to a basketball game would include the price of the ticket and the value of the time that could have been spent studying.

True

When a jet flies overhead, the noise it generates is an externality.

True

When economists say, "There ain't no such thing as a free lunch," they mean that all economic decisions involve trade-offs.

True

Trade-offs are required because wants are unlimited and resources are a. efficient. b. economical. c. scarce. d. unlimited. e. marginal.

c. scarce

Which of the following involve a trade-off? a. Buying a new car b. going to college c. watching a football game on Saturday afternoon d. taking a nap e. All of the above involve trade-offs.

e. All of the above involve trade-offs.

Because people respond to incentives, we would expect that if the average salary of accountants increases by 50 percent while the average salary of teachers increases by 20 percent

students will shift majors from education to accounting.

A rational person does not act unless: a.the action makes money for the person. b. the action is ethical. c. the action produces marginal costs that exceed marginal benefits. d. the action produces marginal benefits that exceed marginal costs. e. None of the above is true.

the action produces marginal benefits that exceed marginal costs.