# Chapter 1

When a society cannot produce all the goods and services people wish to have, it is said that the economy is experiencing,

a. scarcity
b. shortage
c. inefficiency
d. inequalities

a
Billie Jean has \$120 to spend and wants to buy either a new amplifier for her guitar or a new mp3 player to listen to music while working out. Both the amplifier and the mp3 player cost \$120, so she can only buy one. This illustrates the basic concept that

a. trade can make everyone better off.
c. rational people think at the margin.
d. decisions made at the margin are not particularly important.

b
Suppose the government taxes the wealthy at a higher rate than it taxes the poor and then develops programs to redistribute the tax revenue from the wealthy to the poor. This redistribution of wealth

a. is more efficient and more equal for society.
b. is more efficient but less equal for society
c. is more equal but less efficient for society.
d. is less equal and less efficient for society.

c
Consider Mandy’s decision to go to college. If she goes to college, she will spend \$20,000 on tuition, \$10,000 on room and board, and \$2,000 on books. If she does not go to college, she will earn \$18,000 working in a store and spend \$8,000 on room and board. Mandy’s cost of going to college is

a. 32,000
b. 42,000
c. 50,000
d. 58,000

b
Barb’s aunt gave her \$100 for her birthday with the condition that Barb buy herself something. In deciding how to spend the money, Barb narrows her options down to four choices: Option A, Option B, Option C, and Option D. Each option costs \$100. Finally she decides on Option B. The opportunity cost of this decision is

a. the value to Barb of the option she would have chosen had Option B not been available
b. the value to Barb of Options A, C and D combined.
c. the average of the values to Barb of Options A, C, and D.
d. \$100.

a
Bill is restoring a car and has already spent \$4000 on the restoration. He expects to be able to sell the car for \$6200. Bill discovers that he needs to do an additional \$2400 of work to make the car worth \$6200 to potential buyers. He could also sell the car now, without completing the additional work, for \$3800. What should he do?

a. He should sell the car now for \$3800.
b. He should keep the car since it wouldn’t be rational to spend \$6400 restoring a car and then sell it for only \$6200.
c. He should complete the additional work and sell the car for \$6200.
d. It does not matter if Bill sells the car now or completes the work and then sells it at the higher price because the outcome will be the same either way.

d
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Suppose the cost of flying a 100-seat plane for an airline is \$50,000 and there are 10 empty seats on a flight. Then the average cost per seat is \$500. There is one passenger on the standby list. You would be willing to take this passanger on the plane only if he is willing to pay more than

a. \$50.
b. \$500.
c. \$5,000.
d. This cannot be determined from the information given.

d
You have eaten two bowls of ice cream at Sundae School Ice Cream store. You consider eating a third. As a rational consumer you should make your choice by comparing

a. the benefits from eating all three bowls of ice cream to how much three bowls of ice cream costs.
b. the benefits from eating all three bowls of ice cream to how much one more bowl of ice cream costs.
c. the benefits from eating one more bowl of ice cream to how much three bowls of ice cream costs.
d. the benefits from eating one more bowl of ice cream to how much one more bowl of ice cream costs.

d
Suppose the state of Wyoming passes a law that increases the tax on cigarettes. As a result, smokers who live in Wyoming start purchasing their cigarettes in surrounding states. Which of the following principles does this best illustrate?

a. People respond to incentives.
b. Rational people think at the margin.
c. Trade can make everyone better off.
d. Markets are usually a good way to organize economic activity.

a

a. only with nations that can produce goods England cannot produce.
b. only with less developed nations.
c. only with nations outside of Europe.
d. with any nation.

d
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

a. the value of a good to society, but not the cost of making it.
b. the cost of making a good to society, but not its value.
c. both the value of a good to society and the cost of making it.
d. neither the value of a good to society nor the cost of making it.

c
According to Adam Smith, the success of decentralized market economies is primarily due to

a. the basic benevolence of society.
b. society’s legal system.
c. individuals’ pursuit of self-interest.
d. partnerships that are forged between business and government.

c
Water pollution from pulp and paper mills harms plants, animals, and humans. This is an example of

a. a market failure caused by an externality
b. a market failure caused by market power.
c. a market failure caused by equality.
d. There is no market failure in this case.

a
The phenomenon of scarcity stems from the fact that

a. most economies’ production methods are not very good.
b. in most economies, wealthy people consume disproportionate quantities of goods and services.
c. governments restrict production of too many goods and services.
d. resources are limited.

d
Guns and butter are used to represent the classic tradeoff between spending on
Select one:

a. durable and nondurable goods
b. imports and exports
c. national defense and consumer goods
d. law enforcement and agriculture

c
Consider Paul’s decision to go to college. If he goes to college, he will spend \$90,000 on tuition, \$15,000 on room and board, and \$7,000 on books. If he does not go to college, he will earn \$22,000 working at a construction job and he will spend \$11,000 on room and board. Paul’s cost of going to college is (ignore any other possible cost that is not mentioned here)

Select one:
a. \$96,000.
b. \$110,000.
c.\$114,000.
d.\$123,000

d
Ashley eats two bananas during a particular day. The marginal benefit she enjoys from eating the second banana

a. can be thought of as the total benefit Ashley enjoys by eating two bananas minus the total benefit she would have enjoyed by eating just the first banana.
b. determines Ashley’s marginal cost of the first and second bananas.
c. does not depend on how many bananas Ashley has already eaten.
d. cannot be determined unless we know how much she paid for the bananas.

a
A tax on gasoline encourages people to drive smaller, more fuel-efficient cars. Which principle of economics does this illustrate?
Select one:

b. The cost of something is what you give up to get it.
c. Rational people think at the margin.
d. People respond to incentives.

d
If the United States decides to trade with Yemen, we know that
Select one:

a.Yemen will benefit, but trade with a less developed country could not benefit the United States.
b.it will not benefit Yemen because workers in the United States are more productive.
c.Yemen and the United States can both benefit.
d.it will not benefit either country because their cultural differences are too vast.

c
A rationale for government involvement in a market economy is
Select one:

a.markets sometimes fail to produce a fair distribution of economic well-being.
b.markets sometimes fail to produce an efficient allocation of resources.
c.property rights have to be enforced.
d.All of the above are correct.

d
In a market economy, who makes the decisions that guide most economic activity?
Select one:

a.firms only
b.households only
c.firms and households
d.government

c
Economics is best defined as the study of

Select one:
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