Chapter 1 Quick Check and True/False Questions

Suppose that you spent $1,000 building an ice-cream stand based on estimates of sales of $2,000. The stand is nearly completed, but now you estimate total sales to be only $800. You can complete for another $300. Should you complete the stand, assuming the ice-cream costs you nothing? What should be the minimum cost for you to decide to complete the same?

Extra cost: $300 Extra benefit: $800 Since 800>300 (benefit exceeds cost) you should complete the stand. Abandon: revenue=0, Cost=$1000, profit= -$1,000 Continue: Revenue=$800, Cost=$1,300, profit=-$500. Lower loss this way

In the short run, a reduction in inflation tends to cause a reduction in unemployment

False (Demand for goods increases so then firms produce more so they need to hire more people and so then unemployment decreases)

Adam Smith's invisible hand concept describes how corporate business reaches into the pockets of consumers like an "invisible hand"

False (The "invisible hand" refers to how markets guide self-interested people to create desirable social outcomes)

Workers in the United States have a relatively high standard of living because the United States has a relatively high minimum wage

False (Workers in the United States have a high standard of living because they are productive)

An automanufacturer should continue to produce additional autos as long as the firm is profitable, even if the cost of the additional unit exceeds the price recieved

False (a manufacture should produce as long as the marginal benefit exceeds the marginal cost)

A tax on liquor raises the price of liquor and provides an incentive for consumers to drink more

False (the tax DISincentivizes people to drink more, higher prices reduce the quantity demanded)

The United States will benefit economically if we eliminate trade with Asian countries because we will be forced to produce more of our own cars and clothes

False (we benefit from trade, all countries gain from voluntary trade)

An unintended consequence of public support for higher education is that low tuition provides an incentive for many people to attend state universities even if they have no desire to learn anything.

True

High and persistent inflation is caused by excessive growth in the quantity of money in the economy.

True

Rational people act only when the marginal benefit of the action exceeds the marginal cost

True

Sue is better at cleaning, and Bob is better at cooking. It will take fewer hours to eat and clean if Bob specializes in cooking and Sue specializes in cleaning than if they share the household duties evenly.

True

To a student, the opportunity cost of going to a basketball game would include the price of the ticket and the value of the time that could have been spent studying.

True

When a jet flies overhead, the noise it generates is an externality.

True

When economists say, "there ain't no such thing as a free lunch," they mean that all economic decisions involve trade-offs a. true b. false

a. True

Economics is best defined as the study of: a. how society manages its scarce resources b. how to run a business most profitably c. how to predict inflation, unemployment, and stock prices d. how the government can stop the harm from unchecked self-interest

a. how society manages its scarce resources

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. At what price will the hotel manager rent one of the empty rooms? a. more than $40 b. $40 c. will not rent d. less than $40

a. more than $40, as the marginal benefit is more than the marginal cost

A marginal change is one that a. is not important for public policy b. incrementally alters an existing plan c. makes an outcome inefficient d. does not influence incentives

b. incrementally alters an existing plan

Adam Smith's "invisible hand" refers to: a. the subtle and often hidden methods that businesses use to profit at consumers' expense b. the ability of free markets to reach desirable outcomes, despite the self-interest of market participants c. the ability of government regulation to benefit consumers, even if the consumers are unaware of the regulations d. the way in which producers or consumers in unregulated markets impose costs on innocent bystanders

b. the ability of free markets to reach desirable outcomes, despite the self-interest of market participants

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

b. the money you spent on food

Cassia decides to spend 3 hours working overtime rather than watching a video with her friends. She earns $8 an hour. Her opportunity cost of working is: a. the $24 she earns working b. the $24 minus the enjoyment she would have received from watching the video c. the enjoyment she would have received had she watched the video d. nothing, since she would have received less than $24 of enjoyment from the video

c. the enjoyment she would have received has she watched the video

Governments may intervene in a market economy in order to a. protect property rights b. correct a market failure due to externalities c. achieve a more equal distribution of income d. all of the above

d. all of the above

Efficiency means that a. society is conserving resources in order to save them for the future. b. society's goods and services are distributed equally among society's members. c. society's goods and services are distributed fairly, though not necessarily equally, among society's members. d. society is getting the maximum benefits from its scarce resources.

d. society is getting the maximum benefits from its scarce resources

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

d. the action produces marginal benefits that exceed marginal costs