study section 1

A person has a comparative advantage in activity X when that person's:

opportunity cost is lower than other trading partners.

The main incentive for business activity is:

profit.

Economists think that people are self-interested:

because they respond to incentives in predictable ways.

Adam Smith's metaphor of the "invisible hand" refers to the notion that:

behavior based on self-interest can lead to an overall benefit to society

The real power of trade lies in people's ability to:

specialize and increase production.

Adam Smith sought to explain the concept of aligning self-interest with the promotion of society's overall interest by

suggesting markets are led by an Invisible Hand

Economics

teaches us how to make the world a better place, increases our understanding of historical events, & can help you better manage your finances.

When deciding whether or not to undertake an activity, economists compare

the total cost of the activity against the total benefit received.

What is meant by the term marginal revolution?

the transformation in economic thought that occurred with the discovery of marginal thinking

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:

$48,900

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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

Trade-offs are everywhere

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.

I and III

Which of the following arise as benefits from trade? I. economies of scale II. cost reduction from mass production III. the division of knowledge

I, II, and III

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?

II

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?

Payment (to ship captains) was made dependent on the survival rate of prisoners.

Which of the following statements reflects Adam Smith's, Wealth of Nations, important insight into marketplace behavior?

Society benefits when people and firms pursue their own self interests

Why do you think researchers sometimes find a positive relationship between the unemployment rate and college enrollment rates?

The opportunity cost of attending college falls during recessions, leading to higher college enrollment rates

2. The opportunity cost of winning a free ticket to the Super Bowl worth $950 and attending the game is:

at least $950, the lost market value of selling the ticket and the time to go.

The basic postulate of economics indicates that changes in incentives influence the:

choices of individuals with regard to a wide range of activities, including those generally perceived as social or political

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:

d develop incentives such as tax breaks on savings in order to encourage more savings.

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:

incentives—the rewards and penalties that motivate behavior.

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:

marginal thinking.

Imposing the death penalty on rapists may increase the number of murders, because:

once a victim is raped there is no additional penalty imposed for also killing the victim.

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:

only choose to stay if the benefits gained from the extra study session exceed the cost of another 30 minutes in class.

What you give up to obtain an item is called your

opportunity cost

The opportunity cost of a choice is:

the value of the next best alternative

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?

trade-offs