Chapter 1

A donut shop sells fresh baked donuts from 5 a.m. until 3 p.m. every day. The shop does not sell day-old donuts, so all unsold donuts are thrown away at 3 p.m. each day. The cost of making and selling a dozen donuts is $1.50; there are no costs associated with throwing donuts away. If the manager has 10 dozen donuts left at 2:30 p.m. on a particular day, which of the following alternatives is most attractive? a. Lower the price of the remaining donuts, even if the price falls below $1.50 per dozen. b. Lower the price of the remaining donuts, but under no circumstances should the price fall below $1.50 per dozen. c. Throw the donuts away and produce 10 fewer dozen donuts tomorrow. d. Starting tomorrow, lower the price on all donuts so they will all be sold earlier in the day.

a. Lower the price of the remaining donuts, even if the price falls below $1.50 per dozen.

When society requires that firms reduce pollution, there is a. a tradeoff because of reduced incomes to the firms' owners and workers. b. a tradeoff only if some firms are forced to close. c. no tradeoff, since the cost of reducing pollution falls only on the firms affected by the requirements. d. no tradeoff, since everyone benefits from reduced pollution.

a. a tradeoff because of reduced incomes to the firms' owners and workers.

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. In other words, the society faces a tradeoff between a. guns and butter. b. efficiency and equity. c. inflation and unemployment. d. work and leisure.

b. efficiency and equity.

The primary determinant of a country's standard of living is a. the country's ability to prevail over foreign competition. b. the country's ability to produce goods and services. c. the total supply of money in the economy. d. the average age of the country's labor force.

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

During the 1990s, the United Kingdom experienced low levels of inflation while Turkey experienced high levels of inflation. A likely explanation of these facts is that a. the United Kingdom is more industrialized than Turkey. b. the rate of growth of the quantity of money was slower in the United Kingdom than in Turkey. c. workers in the United Kingdom are less productive than workers in Turkey. d. there were more cases of market failure in Turkey than in the United Kingdom.

b. the rate of growth of the quantity of money was slower in the United Kingdom than in Turkey.

Making rational decisions "at the margin" means that people a. make those decisions that do not impose a marginal cost. b. evaluate how easily a decision can be reversed if problems arise. c. compare the marginal costs and marginal benefits of each decision. d. always calculate the marginal dollar costs for each decision.

c. compare the marginal costs and marginal benefits of each decision.

Evidence indicates that seat belt laws have led to a. fewer pedestrian deaths. b. fewer automobile accidents. c. fewer deaths per automobile accident. d. All of the above are correct.

c. fewer deaths per automobile accident.

An example of an externality is the impact of a. bad weather on the income of farmers. b. the personal income tax on a person's ability to purchase goods and services. c. pollution from a factory on the health of people in the vicinity of the factory. d. increases in health care costs on the health of individuals in society.

c. pollution from a factory on the health of people in the vicinity of the factory.

President Gerald Ford referred to inflation as a. a blight on our nation's economy. b. a necessary evil to combat high unemployment. c. public enemy number one. d. a fly in the ointment.

c. public enemy number one.

The term "productivity" a. means the same thing as "efficiency." b. is seldom used by economists, as its meaning is not precise. c. refers to the quantity of goods and services produced from each hour of a worker's time. d. refers to the variety of goods and services from which households can choose when they shop.

c. refers to the quantity of goods and services produced from each hour of a worker's time.

In economics, the cost of something is a. the dollar amount of obtaining it. b. always measured in units of time given up to get it. c. what you give up to get it. d. often impossible to quantify, even in principle.

c. what you give up to get it.

When the government redistributes income from the wealthy to the poor, a.efficiency is improved, but equity is not. b.both wealthy people and poor people benefit directly. c.people work less and produce fewer goods and services. d.wealthy people consume fewer goods, but poor people consume more goods, resulting in no real change.

c.people work less and produce fewer goods and services.

Policies to enhance living standards should be designed to ensure that workers a. have access to the best available methods of producing goods and services. b. have the appropriate equipment to produce goods and services. c. receive good educations. d. All of the above are correct.

d. All of the above are correct.

When the government attempts to improve equity in an economy the result is often a. an increase in overall output in the economy. b. additional government revenue since overall income will increase. c. a reduction in equity. d. a reduction in efficiency.

d. a reduction in efficiency.

Stan buys a 1966 Mustang for $2,000, planning to restore and sell the car. He goes on to spend $8,000 restoring the car. At this point he can sell the car for $9,000. As an alternative, he can spend an additional $3,000 replacing the engine. With a new engine the car would sell for $12,000. Stan should a. complete the repairs and sell the car for $12,000. b. sell the car now for $9, 000. c. never try such an expensive project again. d. be indifferent between (i) selling the car now and (ii) replacing the engine and then selling it.

d. be indifferent between (i) selling the car now and (ii) replacing the engine and then selling it.