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Chapter 1 Ten Principles of Economics MULTIPLE CHOICE . The word economy comes from the Greek word for a. “environment.” b. “one who participates in a market.” c. “one who manages a household.” d. “conservation.” ANSWER: c. “one who manages a household.” TYPE: M KEY1: D OBJECTIVE: 1 RANDOM: Y . Economics deals primarily with the concept of a. poverty. b. scarcity. c. change. d. power. ANSWER: b. scarcity. TYPE: M KEY1: D OBJECTIVE: 1 RANDOM: Y . Which of the following is NOT included in the decisions that every society must make? a. what goods will be produced b. what determines consumer preferences c. who will produce goods d. who will consume the goods ANSWER: b. what determines consumer preferences TYPE: M KEY1: D OBJECTIVE: 1 RANDOM: Y . Scarcity exists when a. there is less than an infinite amount of a resource or good. b. there is less of a good or resource available than people wish to have. c. society can meet the wants of every individual. d. the price of a good rises. ANSWER: b. there is less of a good or resource available than people wish to have. TYPE: M KEY1: D OBJECTIVE: 1 RANDOM: Y . For society, a good is not scarce if a. all members of society can have all they want of it. b. at least one individual in society can obtain all he or she wants of the good. c. firms are producing at full capacity. d. those who have enough income can buy all they want of the good. ANSWER: a. if all members of society can have all they want of it. TYPE: M KEY1: D OBJECTIVE: 1 RANDOM: Y
Chapter Ten Principles of Economics MULTIPLE CHOICE The word economy comes from the Greek word for a “environment.” b “one who participates in a market.” c “one who manages a household.” d “conservation.” ANSWER: c “one who manages a household.” TYPE: M KEY1: D OBJECTIVE: RANDOM: Y Economics deals primarily with the concept of a poverty b scarcity c change d power ANSWER: b scarcity TYPE: M KEY1: D OBJECTIVE: RANDOM: Y Which of the following is NOT included in the decisions that every society must make? a what goods will be produced b what determines consumer preferences c who will produce goods d who will consume the goods ANSWER: b what determines consumer preferences TYPE: M KEY1: D OBJECTIVE: RANDOM: Y Scarcity exists when a there is less than an infinite amount of a resource or good b there is less of a good or resource available than people wish to have c society can meet the wants of every individual d the price of a good rises ANSWER: b there is less of a good or resource available than people wish to have TYPE: M KEY1: D OBJECTIVE: RANDOM: Y For society, a good is not scarce if a all members of society can have all they want of it b at least one individual in society can obtain all he or she wants of the good c firms are producing at full capacity d those who have enough income can buy all they want of the good ANSWER: a if all members of society can have all they want of it TYPE: M KEY1: D OBJECTIVE: RANDOM: Y Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Chapter 1/The Ten Principles of Economics Which of the following goods best meets the definition of scarcity? a air b wood in a forest c water in the ocean d water in a city ANSWER: d water in a city TYPE: M KEY1: D OBJECTIVE: RANDOM: Y Economics is defined as a the study of business b the study of how society manages its scarce resources c the study of central planning d the study of government regulation ANSWER: b the study of how society manages its scarce resources TYPE: M KEY1: D OBJECTIVE: RANDOM: Y Which of the following is NOT a major area of study for economists? a how people make decisions b how people interact with each other c how forces and trends affect the overall economy d how countries choose national leaders ANSWER: d how countries choose national leaders TYPE: M KEY1: D OBJECTIVE: RANDOM: Y The adage, “There is no such thing as a free lunch,” means: a To get something we like, we usually have to give up another thing we like b Even people on welfare have to pay for food these days c The cost of living is always increasing d All costs are measured in dollars ANSWER: a To get something we like, we usually have to give up another thing we like TYPE: M KEY1: D SECTION: OBJECTIVE: RANDOM: Y 10 Daniel decides to spend an hour playing basketball rather than working at $6 per hour His tradeoff is a nothing, because he enjoys playing basketball more than working b the increase in skill he obtains from playing basketball for that hour c the $6 he could have earned d nothing, because he spent $6 for admission into the sports complex to play basketball ANSWER: c the $6 he could have earned TYPE: M KEY1: C SECTION: OBJECTIVE: RANDOM: Y 11 When society requires that firms reduce pollution, a there is no tradeoff, since everyone benefits from reduced pollution b there is no tradeoff for society as a whole, since the cost of reducing pollution falls only on the firms affected by the requirements Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Chapter 1/The Ten Principles of Economics c there is a tradeoff only if some firms are forced to close d there is a tradeoff because of reduced incomes to the firms’ owners, workers, and customers ANSWER: d there is a tradeoff because of reduced incomes to the firms’ owners, workers, and customers TYPE: M KEY1: D SECTION: OBJECTIVE: RANDOM: Y 12 Efficiency means that a society is getting the most it can from its scarce resources b society is conserving resources in order to save them for the future c society’s goods and services are distributed fairly among society’s members d society has lessened its dependence on foreign energy sources ANSWER: a society is getting the most it can from its scarce resources TYPE: M KEY1: D SECTION: OBJECTIVE: RANDOM: Y 13 Equity means that a all members of society have the same income b society is getting the most it can from its scarce resources c society’s goods and services are distributed according to need d the benefits of society’s resources are distributed fairly among society’s members ANSWER: d the benefits of society’s resources are distributed fairly among society’s members TYPE: M KEY1: D SECTION: OBJECTIVE: RANDOM: Y 14 A good definition of equity would be a everyone receiving the same income b fairness c efficiency d eliminating extreme affluence ANSWER: b fairness TYPE: M KEY 1: D SECTION: OBJECTIVE: RANDOM: Y 15 When government policies are being designed, a equity and efficiency goals are usually independent of each other b there is usually a tradeoff between equity and efficiency c equity can usually be achieved without an efficiency loss d increasing efficiency usually results in more equity ANSWER: b there is usually a tradeoff between equity and efficiency TYPE: M KEY1: D SECTION: OBJECTIVE: RANDOM: Y 16 When the government redistributes income from the rich to the poor, a efficiency is improved b both rich people and poor people benefit directly c people work less and produce fewer goods and services d rich people consume fewer goods and poor people consume more goods, resulting in no real change ANSWER: c people work less and produce fewer goods and services TYPE: M KEY1: C SECTION: OBJECTIVE: RANDOM: Y Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Chapter 1/The Ten Principles of Economics 17 In economics, the cost of something is a the out-of-pocket expense of obtaining it b what you give up to get it c always measured in units of time d always higher than people think ANSWER: b what you give up to get it TYPE: M KEY1: D SECTION: OBJECTIVE: RANDOM: Y 18 The opportunity cost of going to college is a the total spent on food, clothing, books, transportation, tuition, lodging, and other expenses b zero for students who are fortunate enough to have all of their college expenses paid by someone else c the value of the best opportunity a student gives up to attend college d zero, since a college education will allow a student to earn a larger income after graduation ANSWER: c the value of the best opportunity a student gives up to attend college TYPE: M KEY1: C SECTION: OBJECTIVE: RANDOM: Y 19 For most students, the largest single cost of a college education is a transportation, parking, and entertainment b tuition, fees, and books c room and board d the wages given up to attend school ANSWER: d the wages given up to attend school TYPE: M KEY1: C SECTION: OBJECTIVE: RANDOM: Y 20 The opportunity cost of an item is a the number of hours needed to earn money to buy it b what you give up to get that item c always less than the dollar value of the item d always equal to the dollar value of the item ANSWER: b what you give up to get that item TYPE: M KEY1: D SECTION: OBJECTIVE: RANDOM: Y 21 Carolyn decides to spend an additional hour working overtime rather than watching a video with her friends She earns $8 for her hour’s work Her opportunity cost of working is a the $8 she earns b the enjoyment she would have received had she watched the video c the $8 minus the enjoyment she would have received from watching the video d nothing, since she would have received less than $8 of enjoyment from the video ANSWER: b the enjoyment she would have received had she watched the video TYPE: M KEY1: C SECTION: OBJECTIVE: RANDOM: Y 22 Ryan spends an hour studying instead of going for a bike ride The opportunity cost to him of studying is Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Chapter 1/The Ten Principles of Economics a the improvement in his grades from studying for the hour b the difference between the improvement in his grades from studying minus the enjoyment of a bike ride c the enjoyment and exercise he would have received had he gone for a bike ride d zero Since Ryan chose to study rather than to ride his bike, the value of studying must have been greater than the value of the bike ride ANSWER: c the enjoyment and exercise he would have received had he gone for a bike ride TYPE: M KEY1: C SECTION: OBJECTIVE: RANDOM: Y 23 College-age athletes who drop out of school to play professional sports a are making a bad economic decision, since they can’t play forever b are unaware of their opportunity cost of attending college c underestimate the value of a college education d are well aware that their opportunity cost of attending college is very high ANSWER: d are well aware that their opportunity cost of attending college is very high TYPE: M KEY1: C SECTION: OBJECTIVE: RANDOM: Y 24 The term which means whatever must be given up to obtain an item is a efficiency b externality c opportunity cost d market failure ANSWER: c opportunity cost TYPE: M KEY1: C SECTION: OBJECTIVE: RANDOM: Y 25 People make decisions at the margin by a following tradition b comparing costs and benefits c experience d calculating dollar costs ANSWER: b comparing costs and benefits TYPE: M KEY1: C SECTION: OBJECTIVE: RANDOM: Y 26 A marginal change is a a long-term trend b a large, significant adjustment c a change for the worse d a small incremental adjustment ANSWER: d a small incremental adjustment TYPE: M KEY1: D SECTION: OBJECTIVE: RANDOM: Y Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Chapter 1/The Ten Principles of Economics 27 Which of the following is the best example of a marginal change? a Mark graduates from college and takes a job His income increases from $10,000 per year to $50,000 per year b The price of housing rises in Seattle by 25% in one year c Kim works at the college bookstore She gets a raise from $5.15 per hour to $5.20 per hour d A drought hits the upper Midwest and the price of wheat increases from $4.00 per bushel to $8.00 per bushel ANSWER: c Kim works at the college bookstore She gets a raise from $5.15 per hour to $5.20 per hour TYPE: M KEY1: D SECTION: OBJECTIVE: RANDOM: Y 28 A rational decisionmaker takes an action only if a the marginal benefit is greater than the marginal cost b the marginal benefit is less than the marginal cost c the average benefit is greater than the average cost d the marginal benefit is greater than both the average cost and the marginal cost ANSWER: a the marginal benefit is greater than the marginal cost TYPE: M KEY1: D SECTION: OBJECTIVE: RANDOM: Y 29 You have spent $500 purchasing and repairing an old car which you expect to sell for $800 once the repairs are complete You discover that you need an additional part, which will cost $400, including labor, in order to complete the repairs You can sell the car as it is now for $300 What should you do? a You should complete the repairs and sell the car b You should cut your losses and take the $300 c You should never sell something for less than it costs d It doesn’t matter which action you take; the outcome is the same either way ANSWER: a You should complete the repairs and sell the car TYPE: M KEY1: E SECTION: OBJECTIVE: RANDOM: Y 30 Economists understand that people respond to a the wishes of policymakers b incentives c threats more than rewards d tax breaks, but not tax hikes ANSWER: b incentives TYPE: M KEY1: D SECTION: OBJECTIVE: RANDOM: Y 31 Which of the following is important for policy makers to consider when designing public policy? a the possibility that policies might change behavior b the direct effect of policies c the indirect effect of policies d all of the above ANSWER: d all of the above TYPE: M KEY1: C SECTION: OBJECTIVE: RANDOM: Y 32 U.S laws requiring that drivers wear seat belts have resulted in Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Chapter 1/The Ten Principles of Economics a a reduction in both driver deaths and pedestrian deaths b fewer accidents and fewer deaths per accident c little change in the number of driver deaths, but more accidents and more pedestrian deaths d fewer driver deaths, fewer accidents and fewer pedestrian deaths ANSWER: c little change in the number of driver deaths, but more accidents and more pedestrian deaths TYPE: M KEY1: C SECTION: OBJECTIVE: RANDOM: Y 33 One effect of a government imposed seat belt law has been a fewer pedestrian deaths b safer driving c an increase in the number of accidents d that everyone now wears seat belts ANSWER: c an increase in the number of accidents TYPE: M KEY1: C SECTION: OBJECTIVE: RANDOM: Y 34 In the former Soviet Union, producers were paid for meeting output targets, not for selling products Under those circumstances, what were the economic incentives for producers? a to produce good quality products so that society benefits from the resources used b to conserve on costs, so as to maintain efficiency in the economy c to produce those products that society desires most d to produce enough to meet the output target, without regard for quality or cost ANSWER: d to produce enough to meet the output target, without regard for quality or cost TYPE: M KEY1: C SECTION: OBJECTIVE: RANDOM: Y 35 Trade can benefit a family a by allowing the family to buy a greater variety of goods and services at a lower cost b by allowing each person to specialize in the activities he or she does best c a and b d only if the family is not in economic competition with other families ANSWER: c a and b TYPE: M KEY1: D SECTION: OBJECTIVE: RANDOM: Y 36 Which is the most accurate statement about trade? a Trade makes some nations better off and others worse off b Trade can make every nation better off c Trading for a good can make a nation better off only if the nation cannot produce that good d Trade helps rich nations and hurts poor nations ANSWER: b Trade can make every nation better off TYPE: M KEY1: D SECTION: OBJECTIVE: RANDOM: Y 37 Trade between the United States and Mexico a is a losing proposition for Mexico because U.S workers are more productive b is a losing proposition for the U.S because Mexico has cheaper labor c is like a sports contest: one side wins and the other side loses d benefits both the United States and Mexico ANSWER: d benefits both the United States and Mexico TYPE: M KEY1: C SECTION: OBJECTIVE: RANDOM: Y 38 The United States can benefit from trade Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Chapter 1/The Ten Principles of Economics a with any nation b only with nations which can produce goods the U.S cannot produce c with any nation not in economic competition with the U.S d only with less-developed nations ANSWER: a with any nation TYPE: M KEY1: C SECTION: OBJECTIVE: RANDOM: Y 39 If Canada is better than the U.S at producing hockey sticks, but the U.S is better than Canada at producing roller blades, a the U.S should impose a tariff on Canadian hockey sticks in order to protect jobs in the U.S roller blade industry b the U.S should sell roller blades to Canada, and should buy Canadian hockey sticks c the U.S should subsidize its hockey stick industry so that it can compete with Canadian hockey sticks d the U.S should put a quota on the amount of Canadian hockey sticks imported ANSWER: b the U.S should sell roller blades to Canada, and should buy Canadian hockey sticks TYPE: M KEY1: C SECTION: OBJECTIVE: RANDOM: Y 40 Which of the following is the best statement about markets? a Markets are usually a good way to organize economic activity b Markets are usually inferior to central planning as a way to organize economic activity c Markets are flawed and are therefore not an acceptable way to organize economic activity d Markets are a good way to organize economic activity in developed nations, but not in lessdeveloped nations ANSWER: a Markets are usually a good way to organize economic activity TYPE: M KEY1: D SECTION: OBJECTIVE: RANDOM: Y 41 In a market economy, a firms decide whom to hire and what to produce b profit and self-interest guide the decisions of firms and households c households decide which firms to work for and what to buy with their incomes d all of the above ANSWER: d all of the above TYPE: M KEY1: D SECTION: OBJECTIVE: RANDOM: Y 42 In a market economy, economic activity is guided by a the government b prices c central planners d corporations ANSWER: b prices TYPE: M KEY1: D SECTION: OBJECTIVE: RANDOM: Y Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Chapter 1/The Ten Principles of Economics 43 One advantage market economies have over central planning is that market economies a are more efficient b solve the problem of scarcity c establish government economic control d provide an equal distribution of goods and services to consumers ANSWER: a are more efficient TYPE: M KEY1: D SECTION: OBJECTIVE: RANDOM: Y 44 Which of the following observations was made famous by Adam Smith in his book The Wealth of Nations? a There is no such thing as a free lunch b People buy more when prices are low than when prices are high c No matter how much people earn, they tend to spend more than they earn d Households and firms interacting in markets are guided by an “invisible hand” that leads them to desirable market outcomes ANSWER: d Households and firms interacting in markets are guided by an “invisible hand” that leads them to desirable market outcomes TYPE: M KEY1: D SECTION: OBJECTIVE: RANDOM: Y 45 The “invisible hand” directs economic activity through a prices b mass media c subliminal messages d government regulations ANSWER: a prices TYPE: M KEY1: D SECTION: OBJECTIVE: RANDOM: Y 46 Adam Smith's book The Wealth of Nations was published in a 1692 b 1776 c 1816 d 1936 ANSWER: b 1776 TYPE: M KEY1: D SECTION: OBJECTIVE: RANDOM: Y 47 The invisible hand works to promote general well-being in the economy primarily through a government intervention b the political process c self interest d altruism ANSWER: c self interest TYPE: M KEY1: D SECTION: OBJECTIVE: RANDOM: Y Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc 10 Chapter 1/The Ten Principles of Economics 48 Taxes adversely affect the allocation of resources in society because a they not always fall more heavily on the rich b the taxes collected are not enough to finance government c they distort prices and thus the decisions of households and firms d not everyone pays taxes ANSWER: c they distort prices and thus the decisions of households and firms TYPE: M KEY1: D SECTION: OBJECTIVE: RANDOM: Y 49 When the government prevents prices from adjusting naturally to supply and demand, a it stabilizes the economy b it adversely affects the allocation of resources c the improvement in equity justifies the reduction in efficiency d the reduced uncertainty associated with fixed prices is worth more than the cost in lower efficiency ANSWER: b it adversely affects the allocation of resources TYPE: M KEY1: C SECTION: OBJECTIVE: RANDOM: Y 50 The term market failure refers to a a firm which is forced out of business because of losses b an unsuccessful advertising campaign c a situation in which competition among firms becomes ruthless d a situation in which the market on its own fails to allocate resources efficiently ANSWER: d a situation in which the market on its own fails to allocate resources efficiently TYPE: M KEY1: D SECTION: OBJECTIVE: RANDOM: Y 51 The two best reasons for a government to intervene in a market are a to raise revenues and to promote stability b to promote equity and to raise revenues c to promote efficiency and to raise revenues d to promote equity and to promote efficiency ANSWER: d to promote equity and to promote efficiency TYPE: M KEY1: C SECTION: OBJECTIVE: RANDOM: Y 52 Causes of market failure include a externalities and foreign competition b market power and incorrect forecasts of consumer demand c externalities and market power d incorrect forecasts of consumer demand and foreign competition ANSWER: c externalities and market power TYPE: M KEY1: D SECTION: OBJECTIVE: RANDOM: Y 53 An externality is a the impact of society’s decisions on the well-being of society b the impact of a person’s actions on that person’s well-being c the impact of society’s decisions on the well-being of one person d the impact of one person’s actions on the well-being of a bystander ANSWER: d the impact of one person’s actions on the well-being of a bystander TYPE: M KEY1: D SECTION: OBJECTIVE: RANDOM: Y Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc