Chapter 1

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Chapter 1

Multiple Choice

Identify the letter of the choice that best completes the statement or answers the question.

For society, a good is not scarce if

a.	at least one individual in society can obtain all he or she wants of the good.
b.	firms are producing at full capacity.
c.	all members of society can have all they want of it.
d.	those who have enough income can buy all they want of the good.

Economics is defined as the study of

a.	business.
b.	how society manages its scarce resources.
c.	central planning.
d.	government regulation.

Which of the following is NOT a major area of study for economists?

a.	how people make decisions
b.	how countries choose national leaders
c.	how people interact with each other
d.	how forces and trends affect the overall economy

The adage, "There is no such thing as a free lunch," means

a.	even people on welfare have to pay for food.
b.	the cost of living is always increasing.
c.	to get something we like, we usually have to give up another thing we like.
d.	all costs are included in the price of a product.

When the government implements programs such as progressive income tax rates, which of the following is likely to occur?

a.	Equity is increased and efficiency is increased.
b.	Equity is increased and efficiency is decreased.
c.	Equity is decreased and efficiency is increased.
d.	Equity is decreased and efficiency is decreased.

Russell spends an hour studying instead of playing tennis. The opportunity cost to him of studying is

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 playing tennis.
c.	the enjoyment and exercise he would have received had he played tennis.
d.	zero. Since Russell chose to study rather than to play tennis, the value of studying must have been greater than the value of playing tennis.

A marginal change is illustrated by which of the following?

a.	Nancy retires and takes a part-time job. She was working 40 hours per week and now works 10 hours per week.
b.	State University has announced that due to state budget deficits, tuition must rise by 25% next year.
c.	Ryan moved to a new apartment and now pays 40% more rent than before.
d.	Arizona, which usually receives 10 inches of rain per year, received 11 inches last year.

Canada can benefit from trade

a.	only with nations which can produce goods Canada cannot produce.
b.	with any nation.
c.	with any nation not in economic competition with Canada.
d.	only with less developed nations.

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 fail 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 less developed nations.

10.

Which would NOT be true in a market economy?

a.	Firms decide whom to hire and what to produce.
b.	Government policies do not affect the decisions of firms and households.
c.	Households decide which firms to work for and what to buy with their incomes.
d.	Profit and self-interest guide the decisions of firms and households.

11.

Adam Smith's book The Wealth of Nations was published in

a.	1692.
b.	1776.
c.	1816.
d.	1936.

12.

One necessary role of government in a market economy is to

a.	tax goods and services which are most desired by consumers.
b.	maintain welfare programs for the poor.
c.	provide services such as mail delivery.
d.	enforce property rights.

13.

Market failure can be caused by

a.	low consumer demand.
b.	government intervention and price controls.
c.	externalities and market power.
d.	high prices and foreign competition.

14.

If a copper refinery does NOT bear the entire cost of the smoke it emits, it will

a.	not emit any smoke so as to avoid the entire cost of the smoke.
b.	emit lower levels of smoke.
c.	emit an acceptable level of smoke.
d.	emit too much smoke.

15.

A market economy rewards people according to

a.	their need for goods and services.
b.	how willing they are to work.
c.	their ability to produce things that other people are willing to pay for.
d.	their ability to produce things of cultural importance.

16.

If a sawmill creates too much air pollution,

a.	interference by the government will surely make the matter worse.
b.	a sense of social responsibility will cause the owners of the mill to reduce pollution.
c.	the government can raise economic well-being by providing health care to those affected by the pollution.
d.	the government can raise economic well-being through environmental regulation.

17.

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

a.	the basic benevolence of society.
b.	society's justice (legal) system.
c.	individuals' self-interest.
d.	basic human survival instincts.

18.

Almost all variation in living standards is attributable to differences in countries'

a.	population growth rates.
b.	endowments of natural resources.
c.	national government budgets.
d.	productivity.

19.

Large or persistent inflation is almost always caused by

a.	an increase in demand for domestic production.
b.	growth in the quantity of money.
c.	foreign competition.
d.	higher worker productivity.

20.

The business cycle is the

a.	relationship between unemployment and inflation.
b.	irregular fluctuations in economic activity.
c.	positive relationship between the quantity of money in an economy and inflation.
d.	predictable changes in economic activity due to changes in government spending and taxes.

True/False

Indicate whether the sentence or statement is true or false.

21.

Market failure refers to a situation in which the market does not allocate resources efficiently.

22.

Inflation increases the value of money.

Short Answer

23.

One tradeoff society faces is between efficiency and equity. Define each term. If the U.S. government redistributes income from the rich to the poor, explain how this action affects equity as well as efficiency in the economy.

24.

With the understanding that people respond to incentives, outline the possible outcome for teachers if the K-12 school year is extended to 11 months per year instead of the existing 9 months per year.

25.

Explain how an attempt by the government to lower inflation could cause unemployment to increase in the short-run.