Name: 
 

Chapter 1


True/False
Indicate whether the statement is true or false.
 

 1. 
When the government redistributes income with taxes and welfare, the economy becomes more efficient.
 

 2. 
When economists say, "There is no such thing as a free lunch," they mean that all economic decisions involve trade-offs.
 

 3. 
Adam Smith's “invisible hand” concept describes how corporate business reaches into the pockets of consumers like an “invisible hand.”
 

 4. 
Rational people act only when the marginal benefit of the action exceeds the marginal cost.
 

 5. 
The European Union will benefit economically if we eliminate trade with Asian countries because EU citizens will be forced to produce more of their own cars and clothes.
 

 6. 
When a jet flies overhead, the noise it generates is an externality.
 

 7. 
A tax on alcoholic drinks raises the price of alcoholic drinks and provides an incentive for consumers to drink more.
 

 8. 
An unintended consequence of public support for higher education is that low or free tuition costs to students provides an incentive for many people to attend state universities even if they have no desire to learn anything.
 

 9. 
Anneka is better at cleaning and Jurgen is better at cooking. It will take fewer hours to eat and clean if Jurgen specializes in cooking and Anneka specializes in cleaning than if they share the household duties evenly.
 

 10. 
High and persistent inflation is caused by excessive growth in the quantity of money in the economy.
 

 11. 
In the short run, a reduction in inflation tends to cause a reduction in unemployment.
 

 12. 
A car manufacturer should continue to produce additional cars as long as the firm is profitable, even if the cost of the additional units exceeds the price received.
 

 13. 
An individual farmer is likely to have market power in the market for wheat.
 

 14. 
To a student, the opportunity cost of going to a football match would include the price of the ticket and the value of the time that could have been spent studying.
 

 15. 
Workers in the countries of Western Europe have a relatively high standard of living because those countries have relatively high minimum wage rates.
 

Multiple Choice
Identify the choice that best completes the statement or answers the question.
 

 16. 
Which of the following involve a trade-off?
a.
Taking a nap
b.
All of these answers involve trade-offs.
c.
Watching a football game on Saturday afternoon
d.
Going to university
e.
Buying a new car
 

 17. 
Trade-offs are required because wants are unlimited and resources are
a.
economical.
b.
unlimited.
c.
efficient.
d.
marginal.
e.
scarce.
 

 18. 
Economics is the study of how
a.
society manages its unlimited resources.
b.
to reduce our wants until we are satisfied.
c.
society manages its scarce resources.
d.
to fully satisfy our unlimited wants.
e.
to avoid having to make trade-offs.
 

 19. 
A rational person does not act unless
a.
the action is ethical.
b.
the action produces marginal costs that exceed marginal benefits.
c.
the action produces marginal benefits that exceed marginal costs.
d.
the action makes money for the person.
e.
none of these answers.
 

 20. 
Raising taxes and increasing welfare payments
a.
reduces market power.
b.
proves that there is such a thing as a free lunch.
c.
improves efficiency at the expense of equity.
d.
none of these answers
e.
improves equity at the expense of efficiency.
 

 21. 
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
a.
nothing, because you found the money.
b.
€20 (because you could have used the €20 to buy other things) plus the value of your time spent at the game.
c.
€20 (because you could have used the €20 to buy other things) plus the value of your time spent at the game, plus the cost of the dinner you purchased at the game.
d.
€20 (because you could have used the €20 to buy other things).
e.
none of these answers
 

 22. 
Foreign trade:
a.
increases the scarcity of resources.
b.
makes a country more equitable.
c.
allows a country to have a greater variety of products at a lower cost than if it tried to produce everything at home.
d.
allows a country to avoid trade-offs.
 

 23. 
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
a.
fewer students will take degree courses in accounting and more will take education courses.
b.
fewer students will take degree courses in education and more will take accounting courses.
c.
fewer students will attend university.
d.
none of these answers.
 

 24. 
Which of the following activities is most likely to produce an externality?
A student:
a.
eats a hamburger in the student union.
b.
reads a novel for pleasure.
c.
sits at home and watches T.V.
d.
has a party in her room in the student hall of residence.
 

 25. 
Which of the following products would be least capable of producing an externality?
a.
inoculations against disease
b.
cigarettes
c.
food
d.
education
e.
hi-fi equipment
 

 26. 
Which of the following situations describes the greatest market power?
a.
Subaru’s impact on the price of cars
b.
a farmer's impact on the price of corn
c.
Microsoft's impact on the price of desktop operating systems
d.
a student's impact on college tuition
 

 27. 
Which of the following statements is true about a market economy?
a.
With a large enough computer, central planners could guide production more efficiently than markets.
b.
Market participants act as if guided by an invisible hand to produce outcomes that maximize social welfare.
c.
The strength of a market system is that it tends to distribute resources evenly across consumers.
d.
Taxes help prices communicate costs and benefits to producers and consumers.
 

 28. 
Workers in Western Europe enjoy a high standard of living because
a.
the countries of Western Europe have set high minimum wage rates.
b.
unions in Western Europe keep the wage high.
c.
none of these answers.
d.
the countries of Western Europe have protected their industries from foreign competition.
e.
workers in the United States are highly productive.
 

 29. 
High and persistent inflation is caused by
a.
unions increasing wages too much.
b.
OPEC raising the price of oil too much.
c.
governments increasing the quantity of money too much.
d.
regulations raising the cost of production too much.
 

 30. 
The Phillips curve shows that
a.
the business cycle has been eliminated.
b.
an increase in inflation temporarily increases unemployment.
c.
inflation and unemployment are unrelated in the short run.
d.
a decrease in inflation temporarily increases unemployment.
e.
none of these answers.
 

 31. 
An increase in the price of beef provides information which
a.
provides no information because prices in a market system are managed by planning boards.
b.
tells consumers to buy less pork.
c.
tells producers to produce more beef.
d.
tells consumers to buy more beef.
 

 32. 
You are planning to run a hot dog stand during a forthcoming fair. You originally estimated that you will generate sales revenue of €2000 and you have already spent €1000 building the hot dog stand. The hot dog stand is nearly completed but now you estimate total sales to be only €800 because the fair clashes with a major music festival in a nearby location. You can complete the hot dog stand for another €300. Should you complete the hot dog stand? (Assume that there are no other costs - the hot dogs are costless to you.)
a.
There is not enough information to answer this question.
b.
Yes.
c.
No.
 

 33. 
You are planning to run a hot dog stand during a forthcoming fair. You originally estimated that you will generate sales revenue of €2000 and you have already spent €1000 building the hot dog stand. The hot dog stand is nearly completed but now you estimate total sales to be only €800 because the fair clashes with a major music festival in a nearby location. You can complete the hot dog stand for another €300. Your decision rule should be to complete the hot dog stand as long as the cost to complete the stand is less than
a.
€300
b.
€100
c.
€500
d.
none of these answers.
e.
€800
 

 34. 
Which of the following is not part of the opportunity cost of going on holiday?
The money you:
a.
spent on a theatre show
b.
could have made if you had stayed at home and worked
c.
spent on airline tickets
d.
spent on another opportunity
 

 35. 
Productivity can be increased by
a.
improving the education of workers.
c.
raising minimum wages.
b.
raising union wages.
d.
restricting trade with foreign countries.
 



 
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