Chapter 1

A rational person does not act unless

the action produces marginal benefits that exceed marginal costs.

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

A student has a party in her room in the student hall of residence.

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 maximize social welfare.

Which of the following situations describes the greatest market power?

Microsoft's impact on the price of desktop operating systems

Trade-offs are required because wants are unlimited and resources are

Scarce

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.

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

fewer students will take degree courses in education and more will take accounting courses.

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

food

Economics is the study of

how society manages its scarce resources

Raising taxes and increasing welfare payments

improves equity at the expense of efficiency.

Suppose you find €20. If you choose to use the €20 to go to a football match, 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.