Chapter 1 - ECON 2105 - 10 Principles of Economics

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 a. nothing, because you found the money. b. $20 (because you could have used the $20 to buy other things). c. $20 (because you could have used the $20 to buy other things) plus the value of your time spent at the game. d. $20 (because you could have used the $20 to buy other things) plus the value of your time spent at the game, plus the cost of the dinner you purchased at the game. e. none of the above.

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

Which of the following will happen in the short run if the money supply decreases? a.Decreasing the money supply will encourage firms to hire more workers. b.Decreasing the money supply will lead to a lower rate of inflation. c.Decreasing the money supply will lead to increased inflation. d.Decreasing the money supply will increase the demand for goods and services

.Decreasing the money supply will lead to a lower rate of inflation

Nick is a guitar teacher and Raul is an accountant. If Nick teaches Raul to play the guitar in exchange for Raul helping with Nick's bookkeeping: a.only Raul is made better off by the trade. b.neither Nick nor Raul are made better off by the trade. c.both Nick and Raul are made better off by the trade. d.only Nick is made better off by the trade.

.both Nick and Raul are made better off by the trade.

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 a. $100. b. $300. c. $500. d. $800. e. none of the above.

800

Which of the following are trade-offs faced by a family deciding whether to buy a new car?

A newer model offers better protection and functions but is more expensive than an older model. The vehicle is available in several colors. An increase in the family's car payment means the family will be unable to afford a vacation.

Which of the following activities is most likely to produce an externality? a. A student reads a novel for pleasure. b. A student eats a hamburger in the student union. c. A student sits at home and watches television. d. A student has a party in her dorm room.

A student has a party in her dorm room.

The idea that trade can make everyone better off applies to which of the following? a.Different countries only b.Different countries, states within the United States, and families c.Different countries and states within the United States only d.Families only

Different countries, states within the United States, and families

Incentives are not important in economics. True False

False

Inflation and unemployment both decrease as the money supply increases. True False

False

In the United States, inflation was much higher during the 1990s than it was during the 1970s. True False

False During the 1970s, the overall level of prices more than doubled in the United States due to high inflation. Inflation rates averaged between 2 and 3 percent during the 1990s.

Which of the following products would be least capable of producing an externality? a. Food b. Stereo equipment c. Education d. Inoculations against disease e. Cigarettes

Food

According to the FYI insert in your textbook, in The Wealth of Nations, Adam Smith made which of the following observations? a.People will buy more of an item when its price is low than at a higher price. b.Households and firms, acting in their own self-interest, seem guided by an "invisible hand" that leads them to desirable market outcomes. c.The more people make, the more they spend. d.There is no such thing as a free lunch.

Households and firms, acting in their own self-interest, seem guided by an "invisible hand" that leads them to desirable market outcomes.

Andrew is training for a triathlon, a timed race that combines swimming, biking, and running. Consider the following sentence: Because his pool sessions are helping him swim more quickly, Andrew plans to reduce by 1 hour per week the time he spends training on the bike and increase by 1 hour the time he spends in the swimming pool; however, his wife says that he should stop doing any biking and running and spend all 20 hours per week in the pool. Which basic principle of individual choice does Andrew's plan illustrate that his wife's advice does not?

Many decisions are made on the margin.

Which of the following statements is true about a market economy? a. The strength of a market system is that it tends to distribute resources evenly across consumers. b. With a large enough computer, central planners could guide production more efficiently than markets. c. Taxes help prices communicate costs and benefits to producers and consumers. d. Market participants act as if guided by an "invisible hand" to produce outcomes that promote general economic well-being.

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

Immediately after an ice storm brought down power lines throughout the region, hardware stores were sold out of batteries and flashlights. However, within a couple of days, special deliveries brought in extra batteries and flashlights, and everyone who wanted to buy a flashlight or batteries was able to do so. Which of the following principles of economic interaction best describes this scenario? All costs are opportunity costs. When markets do not achieve efficiency, government intervention can improve overall welfare. Markets allocate goods effectively. There are gains from trade.

Markets allocate goods effectively.

Which of the following situations describes the greatest market power? a. Microsoft's impact on the price of desktop operating systems b. a farmer's impact on the price of corn c. a student's impact on college tuition d. Volvo's impact on the price of autos

Microsoft's impact on the price of desktop operating systems

Which of the following are trade-offs faced by a member of Congress deciding how much to spend on national parks?

National parks are essential to protecting wildlife from extinction. Money spent on national parks benefits park visitors, but alternatively the money could be spent on highways to benefit drivers. Dog ownership will surge as a result of better national parks.

Which of the following factors explains most of the differences in standards of living among countries around the world? Productivity Labor unions Welfare and transfer payments Minimum wage laws

Productivity

Which of the following government activities is motivated by a concern about efficiency?

Regulating cable TV prices Instituting laws against driving while intoxicated Prohibiting smoking in public places Breaking up Standard Oil (which once owned 90% of all oil refineries) into several smaller companies

Which of the following are trade-offs faced by a company president deciding whether to open a new factory?

The firm can either open a new factory or upgrade existing equipment. The firm can either open a new factory or expand its current factory. The firm can either pay out more of its profit to shareholders or earn additional profit next year by increasing production.

Economics is the study of the choices people make in attempting to manage their scarce resources. True False

True

The government plays an important role in a market economy. True False

True

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.) a. No. b. There is not enough information to answer this question. c. Yes.

Yes

In the short run, a. an increase in inflation temporarily increases unemployment. b. a decrease in inflation temporarily increases unemployment. c. inflation and unemployment are unrelated. d. the business cycle has been eliminated. e. None of the above is true.

a decrease in inflation temporarily increases unemployment.

In economics, we measure the cost of something as a.always measured in units of time given up to get it. b.usually impossible to quantify. c.what you give up to get it. d.the dollar price you pay to buy it.

c.what you give up to get it.

Which of the following is a way in which the government helps enforce property rights? a.Providing the court system b.Providing public parks and recreation facilities c.Forcing people to own property d.Requiring property owners to pay property taxes

a.Providing the court system

Which of the following best summarizes a basic difference between market economies and centrally planned economies? a.Self-interest and prices serve to allocate resources in a market economy while a central planner typically attempts to allocate resources in a centrally planned economy. b.A market economy has a "more equal" distribution of resources than a centrally planned economy. c.The government plays a larger role in a market economy than in a centrally planned economy. d.Centrally planned economies rely more on self-interest and prices to allocate resources than market-based economies.

a.Self-interest and prices serve to allocate resources in a market economy while a central planner typically attempts to allocate resources in a centrally planned economy.

In the short run, an increase in the money supply will likely cause a.a decrease in the unemployment rate and an increase in inflation. b.an increase in the unemployment rate and an increase in inflation. c.an increase in the unemployment rate and a decrease in inflation. d.a decrease in the unemployment rate and a decrease in inflation.

a.a decrease in the unemployment rate and an increase in inflation.

A marginal change is best described as: a.a small, incremental change from the present situation. b.a change for the better. c.a change for the worse. d.a large, significant change from the present situation.

a.a small, incremental change from the present situation.

In the 1990s, inflation in the United States was a.about 3 percent per year. b.referred to as "public enemy number one". c.zero. d.extremely high.

a.about 3 percent per year.

Public policy such as changes in the amount of taxes and subsidies can alter people's behavior by:

a.changing the benefits and the costs of an activity. b.All of these answers are correct. c.changing the opportunity cost of an activity. d.offering an incentive or a disincentive to engage in an activity.

A main cause of large or persistent inflation is a.excessive growth in the money supply. b.increasing worker productivity. c.foreign competition. d.too much government spending.

a.excessive growth in the money supply.

Adam Smith's 'invisible hand' refers to: a.how households and firms, acting in their own self-interest, manage to make everyone better off. b.how governments allocate economic resources. c.the control that large firms have over the economy. d.how central planners made economic decisions.

a.how households and firms, acting in their own self-interest, manage to make everyone better off.

The concept of guns vs. butter represents the classic societal trade-off between spending on a.military goods vs. consumer goods. b.goods vs. services. c.health care vs. agriculture. d.imports vs. exports.

a.military goods vs. consumer goods

Every time we choose to do one thing, we give up doing something else. This best describes the economic principle of: a.opportunity cost. b.self-interest. c.monetary cost. d.marginal thinking.

a.opportunity cost.

The standard of living in a country is most closely tied to its a.productivity. b.public health care system. c.public education system. d.population growth rate.

a.productivity.

Foreign trade a. allows a country to have a greater variety of products at a lower cost than if it tried to produce everything at home. b. allows a country to avoid trade-offs. c. makes the members of a country more equal. d. increases the scarcity of resources. e. is none of the above.

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

Productivity is defined as the

amount of output produced from each unit of labor input.

In the short run, which of the following rates of growth in the money supply is likely to lead to the highest level of unemployment in the economy? a.4 percent per year b.2 percent per year c.3 percent per year d.5 percent per year

b.2 percent per year

A reason for government involvement in a market economy is: a.markets sometimes fail to produce an efficient allocation of resources. b.All of these answers are correct. c.property rights have to be enforced to promote innovation in an economy. d.markets sometimes fail to produce a fair distribution of economic resources.

b.All of these answers are correct.

US citizens have better nutrition, better healthcare, and a longer life expectancy than citizens of Nigeria. Which of the following conclusions can be drawn from this statement? a.US citizens have a higher standard of living than Nigerians. b.All of these conclusions are correct. c.Productivity in the US is higher than productivity in Nigeria. d.Average income in the US is higher than the average income Nigeria.

b.All of these conclusions are correct.

In the short run, if the money supply increases, which of the following is NOT likely to happen? a.Encourage firms to hire more workers. b.Lead to a lower rate of inflation. c.Lead to increased inflation. d.Increase the demand for goods and services.

b.Lead to a lower rate of inflation.

Which of the following is true about market economies? a.Market economies allow the government to allocate all resources. b.Market economies are more efficient than centrally planned economies. c.Market economies solve the problem of scarcity. d.Market economies provide an equal distribution of goods and services.

b.Market economies are more efficient than centrally planned economies.

Suppose the state of Ohio increases the tax on a pack of cigarettes and, in response to the policy change, Ohio smokers decide to buy cigarettes in neighboring states. Which principle of economics does this illustrate? a.The cost of something is what you give up to get it. b.People respond to incentives. c.Rational people think at the margin. d.People face trade-offs.

b.People respond to incentives. (Because rational people make decisions by comparing costs and benefits, they respond to incentives.)

Which of the following is not a policy typically used in the United States to exploit the relationship between inflation and unemployment? a.Increasing government spending b.Reducing immigration. c.Increasing the supply of money d.Reducing taxes

b.Reducing immigration.

It once took 90 percent of our population to grow our food but now it takes around 3 percent of the population. Which of the following statements is true? a.The government should provide subsidies to encourage more people to become farmers. b.This is good for our economy because those who would have been farmers years ago can now invent new things and produce other goods. c.This reduction in the number of farmers has decreased our productivity and standard of living. d.This loss of agricultural jobs has caused the unemployment rate to increase by 87 percentage points.

b.This is good for our economy because those who would have been farmers years ago can now invent new things and produce other goods.

Which of the following is an important cause of inflation? a.the influence of negative externalities b.growth in the quantity of money c.when individuals fail to respond appropriately to incentives d.increases in productivity

b.growth in the quantity of money

In economics, the phrase "no such thing as a free lunch" means a.there is an unlimited supply of resources. b.people face tradeoffs. c.everyone is always acting in his or her own self-interest. d.rational people think at the margin.

b.people face tradeoffs.

The main reason households and societies must make many decisions is because a.incomes fluctuate with business cycles. b.resources are scarce. c.goods and services are unlimited. d.people, by nature, tend to disagree.

b.resources are scarce.

A fundamental concept in economics is the idea of a.poverty. b.scarcity. c.money. d.banking.

b.scarcity.

Marginal thinking involves: a.comparing the total benefit and total cost of a decision. b.weighing the small incremental benefits against the small incremental cost of a decision. c.always acting in your own self-interest. d.accurately calculating the opportunity cost of a decision.

b.weighing the small incremental benefits against the small incremental cost of a decision. Marginal thinking means that rational people make decisions by comparing the incremental, or marginal, benefit and the incremental, or marginal, cost of a decision.

In the United States, real incomes have increased about 2 percent per year. At this growth rate, average income doubles every a.25 years. b.45 years. c.35 years. d.15 years

c.35 years.

Which of the following is something an economist might study? Roger reads a newspaper article about the decline of the unemployment rate in the United States over the past few years. b.Phil decides to work overtime to earn extra income for his upcoming family vacation. c.All of these answers are correct. d.Claire sells her physics textbook from last semester to her roommate for half the price she paid for it.

c.All of these answers are correct.

Which of the following is true? a.As long as our economic pie continues to grow, everyone will automatically get a bigger piece. b.Efficiency and equality occur only when our economic pie is cut into equal pieces. c.Efficiency refers to the size of the economic pie; equality refers to how the pie is divided. d.Government policies always improve upon both equality and efficiency.

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

A key feature of market economies is that market economies: a.have government planners to allocate all economic resources. b.are based solely on consumer spending. c.allocate resources by everyone acting in their own self-interest. d.always elect their government officials.

c.allocate resources by everyone acting in their own self-interest.

If the Federal Reserve announces that it will be increasing the money supply through its monetary policy tools, it tells us the Federal Reserve is a.not concerned about the unemployment rate. b.would like to slow down the pace of economic growth. c.hoping to stimulate demand for goods and services. d.concerned there is too much inflation.

c.hoping to stimulate demand for goods and services.

The increase in living standards of Americans over the past century is mainly due to a.minimum-wage laws. b.increasing foreign competition. c.improvements in productivity. d.the success of labor unions.

c.improvements in productivity.

A record company went out of business because too many of its customers downloaded its music illegally from the internet rather than purchasing the digital copy from the record company. This instance serves as an example of: a.inefficient trade. b.the invisible hand at work. c.inadequate enforcement of property rights. d.market power.

c.inadequate enforcement of property rights.

When the government intervenes in the economy to promote efficiency, it means that the government is trying to: a.change the way in which the economic pie is divided. b.create a more unequal distribution of income. c.increase the size of the economic pie. d.create a more fair distribution of income.

c.increase the size of the economic pie.

All societies face a trade-off between equality and efficiency. If the United States government lowers the income taxes on the wealthiest Americans, while decreasing welfare payments to the poorest Americans, the result will likely be an increase in efficiency and a decrease in equality in the United States.

correct

Before you started applying for college, a job recruiter offered you a full-time cashier position at a department store, earning an after-tax salary of $21,000 per year. However, you turn down this offer and attend your first year of college. The additional monetary cost of college to you, including tuition, supplies, and additional housing expenses, is $32,000. You decide to go to college, probably because you value a year of college at more than $53,000 .

correct

Suppose that, in an attempt to combat severe unemployment, the government decides to increase the amount of money in circulation in the economy. This monetary policy increases the economy's demand for goods and services, leading to higher product prices. In the short run, the change in prices induces firms to produce more goods and services. This, in turn, leads to a lower level of unemployment. Points: 1 / 1 In other words, the economy faces a trade-off between inflation and unemployment: Higher inflation leads to lower unemployment.

correct

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

d

Which of the following statements about trade is the most accurate? a.Trade makes some better off and others worse off. b.International trade helps rich nations while hurting poor nations. c.International trade can only make a country better off if the country cannot produce the good itself. d.International trade has the potential to make all countries better off.

d.International trade has the potential to make all countries better off.

Thousands of people develop asthma and breathing problems from exposure to air pollution. This is an example a: a.a market failure caused by market power. b.a perfectly functioning market. c.a market failure caused by equality. d.a market failure caused by an externality.

d.a market failure caused by an externality.

Fluctuations in economic activity are known as the a.broken window fallacy. b.ten principles of economics. c.'invisible hand.' d.business cycle.

d.business cycle.

If the Federal Reserve announces it will be decreasing the money supply through its monetary policy tools, it tells us the Federal Reserve is a.attempting to decrease the unemployment rate. b.concerned that the economy is not growing quickly enough. c.hoping to stimulate the demand for goods and services. d.concerned about inflation.

d.concerned about inflation.

When the government intervenes in the economy to promote equality, it means that the government is trying to: a.change the way we produce goods and services. b.create a more unequal distribution of income. c.increase the size of the economic pie. d.create a more fair distribution of income.

d.create a more fair distribution of income.

One of the reasons that people tend to eat more in an "all you can eat" buffet is because the a.marginal cost of an extra plate of food is greater than the marginal benefit. b.opportunity cost of the extra plate of food is negative. c.opportunity cost of the additional food is greater than the marginal benefit from the extra food. d.marginal benefit from an extra plate of food is greater than the marginal cost of the additional food.

d.marginal benefit from an extra plate of food is greater than the marginal cost of the additional food.

Adam has $200 to spend and wants to buy either a new amplifier for his guitar or a new cell phone. Both the amplifier and the cell phone cost $200, so he can only buy one. This illustrates the basic concept that: a.people respond to incentives. b.everyone is always acting in his or her own self-interest. c.everyone has an unlimited supply of resources. d.people face trade-offs.

d.people face trade-offs.

Monica has $500 to spend and wants to buy either a new snowboard or a new laptop. Both the snowboard and the laptop cost around $500, so she can only buy one. This illustrates the basic concept that: a.people respond to incentives. b.everyone is always acting in his or her own self-interest. c.everyone has an unlimited supply of resources. d.people face trade-offs.

d.people face trade-offs.

A direct or positive relationship exists between a country's a.government spending and its population. b.rate of population growth and its level of exports. c.total population and its average citizen's income. d.productivity and its standard of living.

d.productivity and its standard of living.

Suppose a publishing company is deciding whether or not to print 50,000 additional copies of an economic textbook. The company should print the textbooks if: a.the marginal cost of printing the extra books is greater than the marginal benefit (additional revenue) of selling the books. b.the cost of printing the additional textbooks is zero. c.they can get a good deal on the paper used to print the additional textbooks. d.the marginal benefit (additional revenue) from selling the extra books is greater than the marginal cost of printing the books.

d.the marginal benefit (additional revenue) from selling the extra books is greater than the marginal cost of printing the books.

To measure a business cycle we look at what is happening to a.average labor productivity. b.interest rates. c.the 'invisible hand.' d.the production of goods and services.

d.the production of goods and services.

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

When a society gets the most it can from its scarce resources

efficiency

When economic benefits are distributed uniformly across society

equality

A house party plays music at a very high volume, disturbing other residents in the neighborhood.

externality

Efficiency means our economic pie is divided into equal slices. True False

false

Productivity is not important in economics. True False

false

The last time the United States experienced high inflation was during the 1990s. True False

false

There is no need for a government in a market economy. True False

false

There is no relationship between a country's productivity and its standard of living. True False

false

When countries trade, one country wins and the other country loses. True False

false (Countries benefit from international trade. Trade allows countries to specialize in what they do best and to enjoy a greater variety of goods and services.)

Suppose that you have already spent 45 minutes grocery shopping, but upon arriving at the checkout line, you realize it's going to be another 15 minutes just to purchase your groceries. Marginal thinking tells you that the decision of whether or not to wait in line depends on the cost of an hour of your time. True False

false (When people think at the margin, they compare marginal benefits with marginal costs. In this case, you already spent 45 minutes grocery shopping, so this shouldn't factor into your decision of whether or not to wait in line. What matters is the additional cost of purchasing your groceries, which includes the 15 minutes of waiting in line plus the cost of the groceries.)

Normal cost of living expenses, such as room and board, are included in the opportunity cost of attending college. True False

false You would incur expenses such as room and board whether you attend college or not. Therefore, rent is not part of the opportunity cost of attending college. In other words, money for rent and food is not what you have to give up to go to college, since you must pay for rent and food even if you do not attend college.

The business cycle refers to the level of growth in the money supply. True False

false (The business cycle refers to fluctuations in economic activity such as employment and production.)

High and persistent inflation is caused by a. OPEC raising the price of oil too much. b. governments increasing the quantity of money too much. c. regulations raising the cost of production too much. d. unions increasing wages too much

governments increasing the quantity of money too much.

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.

Productivity can be increased by a. raising minimum wages. b. raising union wages. c. restricting trade with foreign countries. d. improving the education of workers.

improving the education of workers.

An increase in the price of beef provides a. no information because prices in a market system are managed by planning boards. b. information that tells consumers to buy less pork. c. information that tells consumers to buy more beef. d. information that tells producers to produce more beef.

information that tells producers to produce more beef.

A single grocery store is the only source of food in a small town, giving the store the ability to influence the price of food.

market power

Efficiency

means that society is getting the maximum benefits from its scarce resources

Reasons why we need government, even in a market economy, include

property rights need to be protected to serve as an incentive for innovation. c.the invisible hand is not perfect. d.the market may sometimes fail to allocate resources properly.

The term "productivity"

refers to the quantity of goods and services each unit of labor can produce.

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

society manages its scarce resources.

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, a. students will shift majors from education to accounting. b. students will shift majors from accounting to education. c. fewer students will attend college. d. None of the above is true.

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.

Which of the following is not part of the opportunity cost of going on vacation? a. the money you spent on airline tickets b. the money you could have made if you had stayed home and worked c. the money you spent on a Broadway show d. the money you spent on food

the money you spent on food

Kurt decides to spend 2 hours working rather than hanging out with his friends. He earns $10 per hour for work. His opportunity cost of working is a.the utility or enjoyment he would have gotten from hanging out with his friends. b.$20 minus the value of the time spent with friends. c.nothing as he has given nothing up to work the extra hours. d.the $20 he earned working the extra two hours.

the utility or enjoyment he would have gotten from hanging out with his friends.

An incentive is anything that is designed to change behavior. True False

true

Both the production of goods and services and the unemployment rate are used to measure the business cycle. True False

true

Former communist countries are an example of a centrally planned economy. True False

true

Germany's hyperinflation after World War I was primarily due to the rapid increase in the supply of money. True False

true

Historically, real income in the United States has risen about 2 percent per year. True False

true

Most countries on the planet use a market-based approach to organizing economic activity. True False

true

Nothing in life is free. In order to get something, you usually have to give up something else. For example, when you spend $3 on a coffee on your way to class, you not only give up something else you could've bought for $3, but you also give up the time it takes to walk to the coffee shop, wait in line, and then drink your coffee. Therefore, making decisions requires trading off one goal against another, in terms of both the benefits and the costs.

true

Suppose the large number of auto accidents in a small town results in new legislation that requires all citizens of the town to install new anti-lock brakes on their cars. These new brakes cut the time it takes a car to stop by 50%, allowing drivers to avoid collisions with other cars and pedestrians more easily. The new brakes decrease the probability that a vehicle will collide with another vehicle but also give drivers an incentive to drive more recklessly , which could potentially increase the number of car accidents in the town.

true

When countries trade, it is possible for both countries to benefit. True False

true

Workers in the United States enjoy a high standard of living because a. unions in the United States keep the wage high. b. we have protected our industry from foreign competition. c. the United States has a high minimum wage. d. workers in the United States are highly productive. e. None of the above is true.

workers in the United States are highly productive.