ECN M1 Major Question 1

The basic principles of economics suggest that

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

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

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

In the circular-flow diagram, which of the following is not a factor of production?

c. Money

Suppose the cost of operating a 75 room hotel for a night is $6,000 and there are 5 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

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

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

c. a market failure caused by an externality

A rational decisionmaker takes an action if and only if the marginal cost exceeds the marginal benefit.

False

Efficiency means everyone in the economy should receive an equal share of the goods and services produces

False

Equality means distributing society's resources in the most efficient manner.

False

Productivity is defined as

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

Which of the following statements best represents the principle represented by the adage, "There ain't no such thing as a free lunch"? a. Dani must decide between going to Florida or Brazil for spring break. b. Diego can attend the concert only if he takes his sister with him. c. Justin is hungry and homeless. d. Zehra must repair the tire on her bike before she can ride it to class.

a

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

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

The art in scientific thinking - whether in chemistry, economics, or biology - is

a. deciding which assumptions to make.

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

a. utility company

How are economists not like mathematicians, physicists, and biologists?

b. They cannot run lab experiments in the same way that other scientists can

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 a. work and leisure b. inflation and unemployment c. efficiency and equality d. guns and butter

c

Which of the following is an example of a capital input?

c. A computer

For a number of years country A had inflation of 3% but for the last five years has had inflation of 6%. Country B had inflation of 4% for many years, but very recently inflation unexpectedly rose to 9%. Other things the same, in which of the countries would the higher inflation rate be more likely to reduce unemployment?

d. Country B but not country A

Which of the following claims is consistent with the views of mainstream economists?

d. If we increase the rate of inflation from 3 to 6 percent, then the rate of unemployment will temporarily fall.

You go to the movieplex where movies ordinarily cost $9. You are intending to see a movie for which you have a $3 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?

d. The amount you value the first movie + $3

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

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

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

d. adversely affects the allocation of resources

Instead of conducting laboratory experiments to generate data to test their theories, economists often:

d. gather data from historical episodes of economic change

The use of theory and observation is more difficult in economics than in sciences such as physics due to the difficulty in

d. performing an experiment in an economic system

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

d. the actions of government central planners

A circular-flow diagram is a model that

explains how the economy is organized

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.

A marginal change is a small incremental adjustment to an existing plan of action

True

In the short-run, society faces a tradeoff between inflation and unemployment

True

Market power and externalities are two possible causes of market failure

True

One of the effects of gas prices rising from about $2 to about $4 per gallon was airlines ordering new, fuel-efficient aircraft.

True

The cost of an action is measured in terms of foregone opportunities.

True

The government can potentially improve market outcomes if market inequalities or market failure exists.

True

Trade allows each person to specialize in the activities he or she does best, thus increasing each individual's productivity.

True

Devin works as an attorney for a corporation and is paid a salary in exchange for the legal services he performs. If Devin's income is represented by a flow of dollars from Box D to Box B of this circular-flow diagram, then the revenue earned by a firm selling its product is represented by a flow of dollars

a. from Box C to Box A

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

a. people respond to incentives

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

a. the country's ability to produce goods and services

A worker in Vietnam can earn $6 per day making cotton cloth on a hand loom. A worker in the United States can earn $85 per day making cotton cloth with a mechanical loom. What is the likely explanation for the difference in wages?

b. Labor is more productive making cotton cloth with a mechanical loom than with a hand loom

Laws that restrict the smoking of cigarettes in public places are examples of government intervention that is intended to reduce

b. externalities

Suppose that in Brazil total annual output is worth $600 million and people work 30 million hours. In Peru total annual output is worth $800 million and people work 50 million hours. Productivity is higher

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

Market power refers to the

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

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

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

Consider Luis's decision to go to college. If he goes to college, he will spend $21,000 on tuition, $11,000 on room and board, and $1,800 on books. If he does not go to college, he will earn $16,000 working in a store and spend $7,200 on room and board. Luis's cost of going to college is a. $49,800 b. $57,000 c. $42,600 d. $33,800

c

To improve living standards, policymakers should

c. formulate policies designed to increase productivity

Trade between countries tends to

c. increase both competition. and specialization

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

c. increased by 6.25% between 1998 and 2008

In a market economy, economic activity is guided by

c. self-interest and prices

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 a. Rational people think at the margin. b. People respond to incentives. c. Improvements in efficiency sometimes come at the expense of equality. d. people face tradeoffs.

d

The property of society getting the most it can from its scarce resources is called a. Productivity b. Equality c. externality d. efficiency

d