Unit 1 Prep Quiz 1
If the price of a dozen eggs were fixed above the current price, then we would expect
a decrease in the number of eggs people want to buy and an increase in the number of eggs farmers want to sell.
If the wage for unskilled labor were fixed above the current wage, then we would expect
a decrease in the number of unskilled jobs available.
A friend of yours asks you why market prices are better than government-determined prices. Because you understand economic principles, you say that market-determined prices are better because they generally reflect
both the value of a good to society and the cost of making it.
Senator Bright, who understands economic principles, is trying to convince workers in her district that trade with other countries is beneficial. Senator Bright should argue that trade can be beneficial
because it allows specialization, which increases total output.
Suppose your management professor has been offered a corporate job with a 30 percent pay increase. He has decided to take the job. For him, the marginal
benefit of leaving was greater than the marginal cost.
Brenda is an excellent baker and Floyd has a plentiful farm. If Floyd trades eggs and butter to Brenda for some of Brenda's bread and pastries,
both Floyd and Brenda are made better off by trade.
Penny is piano teacher and Dan is a tile layer. If Penny teaches Dan's daughter to play the piano in exchange for Dan tiling her kitchen floor,
both Penny and Dan are made better off by trade.
Causes of market failure include
externalities and market power.
Laws that restrict the smoking of cigarettes in public places are examples of government intervention that is intended to reduce
externalities.
According to Adam Smith, the success of decentralized market economies is primarily due to
individuals' pursuit of self-interest.
The principle that "people face tradeoffs" applies to
individuals. families. societies. - All of the above are correct.
Oil is considered to be a non-renewable energy source. Oil
is a scarce resource.
It costs a company $50,000 to produce 5000 beach towels. The company's cost will be $50,009 if it produces an additional beach towel. If the company produces 5,000 beach towels then
its average cost is greater than its marginal cost.
Which of the following could reduce economic efficiency?
laws that encourage lawsuits policies that redistribute income policies that impose significant restrictions on international trade - All of the above are correct
A tradeoff exists between a clean environment and a higher level of income in that
laws that reduce pollution raise costs of production and reduce incomes.
Benefits from trade would not include
less competition.
U.S. laws requiring that drivers wear seat belts have resulted in
little change in the number of driver deaths, but more accidents and more pedestrian deaths.
When a single person (or small group) has the ability to influence market prices, there is
market power.
Public policies
may be able to improve either economic efficiency or equality.
Maureen's college raises the cost of room and board per semester. This increase raises Maureen's opportunity cost of attending college
only if the amount she would have to pay for room and board if she didn't attend college rose by less than the increase in the amount her college charges. An increase in opportunity cost reduces Maureen's incentive to attend college.
Based on the available evidence, which of the following groups benefits most from mandatory seat belt laws?
owners of collision-repair shops
Mitch has $100 to spend and wants to buy either a new amplifier for his guitar or a new mp3 player to listen to music while working out. Both the amplifier and the mp3 player cost $100, so he can only buy one. This illustrates the basic concept that
people face trade-offs
Economics deals primarily with the concept of
scarcity.
When a society cannot produce all the goods and services people wish to have, it is said that the economy is experiencing
scarcity.
Efficiency means that
society is getting the maximum benefits from its scarce resources.
A rational decisionmaker takes an action if and only if
the marginal benefit of the action exceeds the marginal cost of the action.
According to a recent study of Chilean bus drivers, drivers who are paid by the number of passengers they transport have higher productivity than drivers who are paid by the hour. This result is an example of which principle of economics?
People respond to incentives.
Katie is planning to sell her house, and she is considering making two upgrades to the house before listing it for sale. Replacing the carpeting will cost her $2,500 and replacing the roof will cost her $9,000. Katie expects the new carpeting to increase the value of her house by $3,000 and the new roof to increase the value of her house by $7,000.
She should replace the carpeting but not replace the roof.
When calculating the cost of college, which of the following should you probably not include?
The cost of rent for your off-campus apartment.
Suppose your college institutes a new policy requiring you to pay for a permit to park your car in a campus parking lot.
The cost of the parking permit is part of the opportunity cost of attending college if you would not have to pay for parking otherwise.
Which of the following is correct?
Economists study the management of scarce resources.
Government policies resulting in reduced efficiency include (i) the welfare system (ii) unemployment insurance (iii) progressive income tax
(i), (ii), and (iii)
Following the implementation of laws requiring automobiles to have seat belts, which of the following occurred?
*An individual's probability of surviving an auto accident rose. *There was an increase in pedestrian deaths. *There was an increase in automobile accidents. - All of the above are correct.
Which of the following is an example of something economists study?
*Kate chooses to work overtime to earn extra income for her family. *Ryan sells his economics textbook from last semester to his roommate for half the price of a new textbook. *The unemployment rate in the United States is at its highest level in over fifty years. - All of the above are correct.
Government policies can change the costs and benefits that people face. Those policies have the potential to
*alter people's behavior. *alter people's decisions at the margin. *produce results that policymakers did not intend. - All of the above are correct.
Bridget drinks three sodas during a particular day. The marginal benefit she enjoys from drinking the third soda
*can be thought of as the total benefit Bridget enjoys by drinking three sodas minus the total benefit she would have enjoyed by drinking just two sodas. *determines Bridget's willingness to pay for the third soda. *is likely different from the marginal benefit provided to Bridget by the second soda. - All of the above are correct.
In considering how to allocate its scarce resources among its various members, a household considers
*each member's abilities. *each member's efforts. *each member's desires. - all of the above
When government policies are enacted,
*equality can usually be enhanced without an efficiency loss, but efficiency can never be enhanced without a reduction in equality. *efficiency can usually be enhanced without a reduction in equality, but equality can never be enhanced without an efficiency loss. *it is always the case that either efficiency and equality are both enhanced, or efficiency and equality are both diminished. - None of the above are correct.
Suppose that a country that has a high average wage level agrees to trade with a country that has a low average wage level. Which country can benefit?
*only the one with a low level of output per person. *only the one with a high level of output per person. - both
Suppose that a country that has a high level of output per person agrees to trade with a country that has a low level of output per person. Which country can benefit?
*only the one with a low level of output per person. *only the one with a high level of output per person. - both
In communism, central planners decide which of the following?
*what goods and services will be produced *how much will be produced *who produced and consumed the goods and services - All of the above are correct.
The collapse of communism in the Soviet Union and Eastern Europe took place mainly in the
1980s.
Which of these activities will most likely result in an external benefit?
An elderly woman plants a flower garden on the vacant lot next to her house.
Betty's Bakery bakes fresh bread every morning. Any bread not sold by the end of the day is thrown away. A loaf of bread costs Betty $2.00 to produce, and she prices loaves of bread at $3.50 per loaf. Suppose near the end of one day Betty still has 12 loaves of bread on hand. Which of the following is correct?
Betty should be willing to sell the remaining bread for any price above $0 per loaf since she will have to throw it away if she does not sell it for something.
Which of the following is true?
Efficiency refers to the size of the economic pie; equality refers to how the pie is divided.
A construction company has built 25 houses so far this year at a total cost to the company of $7.2 million. If the company builds a 26th house, its total cost will increase to $7.5 million. Which of the following statements is correct?
For the first 25 houses, the average cost per house was $288,000.
Which of the following statements does not apply to a market economy?
Government policies are the primary forces that guide the decisions of firms and households.
Mark is refinishing an antique china cabinet and has already spent $180 on the restoration. He expects to be able to sell the cabinet for $360. Mark discovers that he needs to do an additional $200 of work to make the cabinet worth $360 to potential buyers. He could also sell the cabinet now, without completing the additional work, for $100. What should he do?
He should complete the additional work and sell the cabinet for $360.
Bill is restoring a car and has already spent $4000 on the restoration. He expects to be able to sell the car for $5800. Bill discovers that he needs to do an additional $2400 of work to make the car worth $5800 to potential buyers. He could also sell the car now, without completing the additional work, for $3800. What should he do?
He should sell the car now for $3800.
A barber currently cuts hair for 50 clients per week and earns a profit. He is considering expanding his operation in order to serve more clients. Should he expand?
It depends on the marginal cost of serving more clients and the marginal revenue he will earn from serving more clients.
Which of the following statements best represents the principle represented by the adage, "There is no such thing as a free lunch"?
Kendra must decide between going to Colorado or Cancun for spring break.
Which of the following statements about markets is most accurate?
Markets are usually a good way to organize economic activity.
If the United States decides to trade with Mexico, we know that
Mexico and the United States can both benefit.
Suppose the state of Illinois passes a law that bans smoking in restaurants. As a result, residents of Wisconsin who do not like breathing second-hand smoke begin driving across the border to Illinois to eat at restaurants there. Which of the following principles does this best illustrate?
People respond to incentives
Suppose the state of Massachusetts passes a law that increases the tax on alcoholic beverages. As a result, residents in Massachusetts start purchasing their alcohol in surrounding states. Which of the following principles does this best illustrate?
People respond to incentives
After much consideration, you have chosen Cancun over Ft. Lauderdale as your Spring Break destination this year. However, Spring Break is still months away, and you may reverse this decision. Which of the following events would prompt you to reverse this decision?
The marginal cost of going to Ft. Lauderdale decreases.
Which of the following principles is not one of the four principles of individual decisionmaking?
Trade can make everyone better off.
When you calculate your true costs of going to college, what portion of your room-and-board expenses should be included?
You should include only the amount by which your room-and-board expenses exceed the expenses for rent and food if you were not in college.
Senator Brown wants to increase taxes on people with high incomes and use the money to help the poor. Senator Johnson argues that such a tax will discourage successful people from working and will therefore make society worse off. An economist would say that
a good decision requires that we recognize both viewpoints.
Thousands of people develop lung cancer from second-hand exposure to cigarette smoke. This is an example of
a market failure caused by an externality.
When a species of fish dies off due to pollution in a river where it once lived, this is an example of
a market failure caused by an externality.
The price of diamonds is high, in part because the majority of the world's diamonds are controlled by a single firm. This is an example of
a market failure caused by market power.
The willingness of citizens to pay for vaccinations does not include the benefit society receives from having vaccinated citizens who cannot transmit an illness to others. This extra benefit society gets from vaccinating its citizens is known as
an externality.
One advantage market economies have over centrally-planned economies is that market economies
are more efficient.
Caroline eats two bananas during a particular day. The marginal benefit she enjoys from eating the second banana
can be thought of as the total benefit Caroline enjoys by eating two bananas minus the total benefit she would have enjoyed by eating just the first banana.
If Germany chooses to engage in trade, it
can benefit by trading with any other country.
The economy of the former Soviet Union is best described as a
centrally-planned economy.
You are considering staying in college another semester so that you can complete a major in economics. In deciding whether or not to stay you should
compare the cost of staying one more semester to the benefits of staying one more semester.
The English word that comes from the Greek word for "one who manages a household" is
economy.
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
efficiency and equality.
If a paper factory does not bear the entire cost of the pollution it emits, it will
emit too much pollution.
To say that government intervenes in the economy to promote efficiency is to say that government is attempting to
enlarge the economic pie.
When the government implements programs such as progressive income tax rates, which of the following is likely to occur?
equality is increased and efficiency is decreased.
Catherine buys and sells real estate. Two weeks ago, she paid $300,000 for a house on Pine Street, intending to spend $50,000 on repairs and then sell the house for $400,000. Last week, the city government announced a plan to build a new landfill on Pine Street just down the street from the house Catherine purchased. As a result of the city's announced plan, Catherine is weighing two alternatives: She can go ahead with the $50,000 in repairs and then sell the house for $290,000, or she can forgo the repairs and sell the house as it is for $250,000. She should
forgo the repairs and sell the house as it is for $250,000.
Central planning refers to
government guiding economic activity. Today many countries that had this system have abandoned it.
If an externality is present in a market, economic efficiency may be enhanced by
government intervention.
The basic principles of economics suggest that
government should become involved in markets when those markets fail to produce efficient or fair outcomes.
In a market economy,
households decide which firms to work for and what to buy with their incomes. firms decide whom to hire and what to make. - both are correct
Which of the following is a decision that economists study?
how much people work what people buy how much money people save -All of the above are correct.
Economics is the study of
how society manages its scarce resources.
People are likely to respond to a policy change
if the policy changes either the costs or benefits of their behavior.
While pollution regulations yield the benefit of a cleaner environment and the improved health that comes with it, the regulations come at the cost of reducing the incomes of the regulated firms' owners, workers, and customers. This statement illustrates the principle that
people face tradeoffs.
When the government redistributes income from the wealthy to the poor,
people work less and produce fewer goods and services.
The invisible hand works to promote general well-being in the economy primarily through
people's pursuit of self-interest.
An example of an externality is the impact of
pollution from a factory on the health of people in the vicinity of the factory.
The "invisible hand" directs economic activity through
prices.
Efficiency
refers to how much a society can produce with its resources. Equality refers to how evenly the benefits from using resources are distributed among members of society.
The overriding reason why households and societies face many decisions is that
resources are scarce.
In most societies, resources are allocated by
the combined actions of millions of households and firms.
Olivia was accepted to Notre Dame and another college. She is trying to decide where to go. Which of the following should she include in making her decision?
the difference between living expenses at Notre Dame and her second choice, but not how much she spent applying to Notre Dame
Ed spends an hour studying instead of watching tv with his friends. The opportunity cost to him of studying is
the enjoyment he would have received if he had watched tv with his friends.
Kyle is planning to take a roadtrip. After he makes his plans, he has to make some unexpected auto repairs. Also, he sees the price of gas has gone up. Which of these two events should Kyle consider in deciding if it is still worthwhile to go on the trip?
the increase in the price of gas, but not the unexpected repairs
One reason we need government, even in a market economy, is that
the invisible hand is not perfect.
As a result of a successful attempt by government to cut the economic pie into more equal slices,
the pie gets smaller, and there will be less pie overall.
In an economy in which decisions are guided by prices and individual self-interest, there is
the potential to achieve efficiency in production.
The marginal benefit Colin gets from eating a fourth slice of pizza is
the total benefit Colin gets from eating four slices of pizza minus the total benefit Colin gets from eating three slices of pizza.
Shane receives $100 as a birthday gift. In deciding how to spend the money, he narrows his options down to four choices: Option A, Option B, Option C, and Option D. Each option costs $100. Finally he decides on Option B. The opportunity cost of this decision is
the value to Shane of the option he would have chosen had Option B not been available.
In economics, the cost of something is
what you give up to get it.
The opportunity cost of an item is
what you give up to get that item.
England can benefit from trade
with any nation.