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Unformatted text preview: Chapter 1 Ten Principles of Economics TRUE/FALSE 1. ANS: NAT: TOP: 2. ANS: NAT: TOP: 3. ANS: NAT: TOP: 4. ANS: NAT: TOP: 5. ANS: NAT: TOP: 6. ANS: NAT: MSC: 7. ANS: NAT: MSC: 8. ANS: NAT: MSC: 9. ANS: NAT: TOP: 10. ANS: NAT: TOP: 11. ANS: NAT: TOP: 12. ANS: NAT: TOP: 13. ANS: NAT: MSC: 14. ANS: NAT: MSC: Scarcity means that there is less of a good or resource available than people wish to have. T Analytic Scarcity DIF: LOC: MSC: 1 REF: 1-0 Scarcity, tradeoffs, and opportunity cost Definitional Economics is the study of how evenly goods and services are distributed within society. F Analytic Economics DIF: LOC: MSC: 1 REF: 1-0 The Study of economics, and definitions in economics Definitional Economics is the study of how society allocates its unlimited resources. F Analytic Economics DIF: LOC: MSC: 1 REF: 1-0 The Study of economics, and definitions in economics Definitional With careful planning, we can usually get something that we like without having to give up something else that we like. F Analytic Tradeoffs DIF: LOC: MSC: 2 REF: 1-1 Scarcity, tradeoffs, and opportunity cost Interpretive Choosing not to attend a concert so that you can study for your exam is an example of a tradeoff. T Analytic Tradeoffs DIF: LOC: MSC: 2 REF: 1-1 Scarcity, tradeoffs, and opportunity cost Applicative Efficiency means everyone in the economy should receive an equal share of the goods and services produced. F Analytic Definitional DIF: LOC: 2 REF: Efficiency and Equity 1-1 TOP: Equality Equality refers to how the pie is divided, and efficiency refers to the size of the economic pie. T Analytic Definitional DIF: LOC: 2 REF: Efficiency and Equity 1-1 TOP: Equality | Efficiency Government policies that improve equality usually increase efficiency at the same time. F Analytic Interpretive DIF: LOC: 1 REF: Efficiency and Equity 1-1 TOP: Efficiency | Equality An individual deciding how to allocate her limited time is dealing with both scarcity and trade-offs. T Analytic Opportunity cost DIF: LOC: 1 REF: 1-1 Scarcity, tradeoffs, and opportunity cost MSC: Interpretative The cost of an action is measured in terms of foregone opportunities. T Analytic Opportunity cost DIF: LOC: 1 REF: 1-1 Scarcity, tradeoffs, and opportunity cost MSC: Interpretive Tuition is the single-largest cost of attending college for most students. F Analytic Opportunity cost DIF: LOC: 1 REF: 1-1 Scarcity, tradeoffs, and opportunity cost MSC: Interpretive If wages for accountants rose, then accountants’ leisure time would have a lower opportunity cost. F Analytic Opportunity cost DIF: LOC: 1 REF: 1-1 Scarcity, tradeoffs, and opportunity cost MSC: Applicative A marginal change is a small incremental adjustment to an existing plan of action. T Analytic Definitional DIF: LOC: 1 REF: Marginal costs & benefits 1-1 TOP: Marginal changes An increase in the marginal cost of an activity necessarily means that people will no longer engage in any of that activity. F Analytic Applicative DIF: LOC: 2 REF: Marginal costs & benefits 1-1 TOP: Marginal changes 1 15. ANS: NAT: MSC: 16. ANS: NAT: MSC: 17. ANS: NAT: MSC: 18. ANS: NAT: MSC: 19. ANS: NAT: MSC: 20. ANS: NAT: TOP: 21. ANS: NAT: TOP: 22. ANS: NAT: TOP: 23. ANS: NAT: TOP: 24. ANS: NAT: TOP: 25. ANS: NAT: TOP: 26. ANS: NAT: TOP: 27. ANS: NAT: TOP: If the average cost of transporting a passenger on the train from Chicago to St. Louis is $75, it would be irrational for the railroad to allow any passenger to ride for less than $75. F Analytic Applicative DIF: LOC: 2 REF: Marginal costs & benefits 1-1 TOP: Marginal changes The fact that people are willing to pay much more for a diamond, which is not needed for survival, than they are willing to pay for a cup of water, which is needed for survival, is an example of irrational behavior. F Analytic Interpretive DIF: LOC: 2 REF: Marginal costs & benefits 1-1 TOP: Marginal changes A rational decisionmaker takes an action if and only if the marginal cost exceeds the marginal benefit. F Analytic Interpretive DIF: LOC: 2 REF: Marginal costs & benefits 1-1 TOP: Marginal changes Suppose one county in Missouri decides it wants to reduce alcohol consumption, so the county passes a law that raises the price of a bottle of beer by $1. As a result, people drive to other counties to drink alcohol, which results in an increase in drunk driving. This illustrates the principle that people respond to incentives. T Analytic Applicative DIF: LOC: 2 REF: The role of incentives 1-1 TOP: Incentives A tax on gasoline is an incentive that encourages people to drive smaller more fuel-efficient cars. T Analytic Applicative DIF: LOC: 1 REF: The role of incentives 1-1 TOP: Incentives Trade allows each person to specialize in the activities he or she does best, thus increasing each individual's productivity. T DIF: Analytic LOC: Trade | Productivity 2 REF: 1-2 Gains from trade, specialization and trade MSC: Interpretive Trade with any nation can be mutually beneficial. T Analytic Trade DIF: LOC: MSC: 2 REF: 1-2 Gains from trade, specialization and trade Interpretive Trade can make everyone better off except in the case where one person is better at doing everything. F Analytic Trade DIF: LOC: MSC: 1 REF: 1-2 Gains from trade, specialization and trade Interpretive The invisible hand ensures that economic prosperity is distributed equally. F DIF: Analytic LOC: The invisible hand 2 REF: 1-2 Markets, market failure, and externalities MSC: Definitional A market economy cannot produce a socially desirable outcome because individuals are motivated by their own selfish interests. F Analytic Market economy DIF: LOC: 2 REF: 1-2 Markets, market failure, and externalities MSC: Interpretive The government can potentially improve market outcomes if market inequalities or market failure exists. T DIF: 2 REF: 1-2 Analytic LOC: Markets, market failure, and externalities | The role of government Government | Market economy MSC: Interpretive One way that governments can improve market outcomes is to ensure that individuals are able to own and exercise control over their scarce resources. T Analytic Property rights DIF: LOC: 2 REF: 1-2 Markets, market failure, and externalities | The role of government MSC: Interpretive Market failure refers to a situation in which the market does not allocate resources efficiently. T Analytic Market failure DIF: LOC: 1 REF: 1-2 Markets, market failure, and externalities MSC: Definitional 28. ANS: NAT: TOP: 29. ANS: NAT: MSC: 30. ANS: NAT: TOP: 31. ANS: NAT: MSC: 32. ANS: NAT: MSC: 33. ANS: NAT: MSC: 34. ANS: NAT: MSC: Market power and externalities are two possible causes of market failure. T Analytic Market failure DIF: LOC: 1 REF: 1-2 Markets, market failure, and externalities MSC: Definitional Productivity is defined as the quantity of goods and services produced from each unit of labor input. T Analytic Definitional DIF: LOC: 1 REF: Productivity and growth 1-3 TOP: Productivity Inflation is the primary determinant of a country's living standards. F DIF: 2 REF: Analytic LOC: Productivity and growth Productivity | Standard of living MSC: 1-3 Interpretive Inflation increases the value of money. F Analytic Interpretive DIF: LOC: 2 REF: 1-3 Unemployment and Inflation TOP: Inflation Inflation measures the increase in the quantity of goods and services produced from each hour of a worker’s time. F Analytic Definitional DIF: LOC: 1 REF: 1-3 Unemployment and Inflation TOP: Inflation | Productivity In the long run the primary effect of increasing the quantity of money is higher prices. T Analytic Interpretative DIF: LOC: 2 REF: 1-3 Unemployment and Inflation TOP: Inflation The business cycle refers to fluctuations in economic activity such as employment and production. T Analytic Definitional DIF: LOC: 1 REF: 1-3 Unemployment and Inflation TOP: The business cycle SHORT ANSWER 1. How does the study of economics depend upon the phenomenon of scarcity? ANS: Because economics is the study of how society allocates its scarce resources, if there were no scarcity, there would be no need for economics. Everyone could have all the goods and services they wanted. No one would have to make decisions based on tradeoffs, because there would be no opportunity cost associated with the decision. (It is difficult to conceive of a situation where time is not scarce, however). DIF: LOC: MSC: 2. 2 REF: 1-1 Scarcity, tradeoffs, and opportunity cost Applicative NAT: Analytic TOP: Economics | Scarcity One tradeoff society faces is between efficiency and equality. Define each term. If the U.S. government redistributes income from the rich to the poor, explain how this action affects equality as well as efficiency in the economy. ANS: Efficiency is the property of society getting the most it can from its scarce resources. Equality is defined as the property of distributing economic prosperity fairly among the members of society. Often, these two goals conflict. When the government redistributes income from the rich to the poor, it reduces the reward for working hard. Fewer goods and services are produced and the economic pie gets smaller. When the government tries to cut the economic pie into more equal slices, the pie gets smaller. Policies aimed at achieving a more equal distribution of economic wellbeing, such as the welfare system, try to help those members of society who are most in need. The individual income tax asks the financially successful to contribute more than others to support the government. DIF: LOC: TOP: 3. 2 REF: 1-1 NAT: Analytic Scarcity, tradeoffs, and opportunity cost | Efficiency and Equity Tradeoffs | Efficiency | Equality MSC: Interpretive Define opportunity cost. What is the opportunity cost to you of attending college? What was your opportunity cost of coming to class today? ANS: Whatever must be given up to obtain some item it its opportunity cost. Basically, this would be a person's second choice. The opportunity cost of a person attending college is the value of the best alternative use of that person's time, as well as the additional costs the person incurs by making the choice to attend college. For most students this would be the income the student gives up by not working plus the cost of tuition and books, and any other costs they incur by attending college that they would not incur if they chose not to attend college. A student's opportunity cost of coming to class was the value of the best opportunity the student gave up. (For most students, that seems to be sleep.) DIF: LOC: MSC: 2 REF: 1-1 Scarcity, tradeoffs, and opportunity cost Interpretive NAT: Analytic TOP: Opportunity cost 4. 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. ANS: The concept of working longer per year would be perceived by many teachers as a definite increase in the cost of teaching. Even with additional compensation, many teachers look at summers off as a major benefit of the education profession. If this benefit were eliminated or diminished, some teachers may perceive that the marginal cost of teaching would now be greater than the marginal benefit and would choose to leave teaching. DIF: LOC: 5. 3 REF: The role of incentives 1-1 NAT: TOP: Analytic Incentives MSC: Analytical Under what conditions might government intervention in a market economy improve the economy’s performance? ANS: If there is a market failure, such as an externality or monopoly, government regulation might improve the well-being of society by promoting efficiency. If the distribution of income or wealth is considered to be unfair by society, government intervention might achieve a more equal distribution of economic well-being. DIF: LOC: TOP: 6. 2 REF: 1-2 NAT: Analytic Markets, market failure, and externalities | The role of government Market economy | Government MSC: Applicative Explain how an attempt by the government to lower inflation could cause unemployment to increase in the short-run. ANS: To lower inflation, the government may choose to reduce the money supply in the economy. When the money supply is reduced, prices don't adjust immediately. Lower spending, combined with prices that are too high, reduces sales and causes workers to be laid off. Hence, the lower price level is associated with higher unemployment. DIF: LOC: TOP: 2 REF: 1-3 NAT: Unemployment and Inflation | Efficiency and Equity Inflation | Unemployment | Tradeoffs Analytic MSC: Applicative Multiple Choice-Sec00 MULTIPLE CHOICE 1. ANS: NAT: TOP: 2. ANS: NAT: TOP: 3. ANS: NAT: TOP: 4. ANS: NAT: TOP: The word that comes from the Greek word for "one who manages a household" is a. market. b. consumer. c. producer. d. economy. D Analytic Economy DIF: LOC: MSC: 1 REF: 1-0 The Study of economics, and definitions in economics Definitional The word “economy” comes from the Greek word oikonomos, which means a. “environment.” b. “production.” c. “one who manages a household.” d. “one who makes decisions.” C Analytic Economy DIF: LOC: MSC: 1 REF: 1-0 The Study of economics, and definitions in economics Definitional Resources are a. scarce for households but plentiful for economies. b. plentiful for households but scarce for economies. c. scarce for households and scarce for economies. d. plentiful for households and plentiful for economies. C DIF: Analytic LOC: Resources | Scarcity 1 REF: 1-0 Scarcity, tradeoffs, and opportunity cost MSC: Interpretive In considering how to allocate its scarce resources among its various members, a household considers a. each member’s abilities. b. each member’s efforts. c. each member’s desires. d. all of the above D Analytic Scarcity DIF: LOC: MSC: 1 REF: 1-0 Scarcity, tradeoffs, and opportunity cost Interpretive 5. ANS: NAT: TOP: 6. ANS: NAT: TOP: 7. ANS: NAT: TOP: 8. ANS: NAT: TOP: 9. ANS: NAT: TOP: 10. ANS: NAT: TOP: 11. ANS: NAT: TOP: Economics deals primarily with the concept of a. scarcity. b. money. c. poverty. d. banking. A Analytic Scarcity DIF: LOC: MSC: 1 REF: 1-0 The Study of economics, and definitions in economics Definitional Which of the following is correct? a. The word economy comes from the Greek word for “rational thinker.” b. Economists study the management of scarce resources. c. Because economists believe that people pursue their best interests, they are not interested in how people interact. d. All of the above are correct. B Analytic Economics DIF: LOC: MSC: 1 REF: 1-0 The Study of economics, and definitions in economics Definitional The overriding reason as to why households and societies face many decisions is that a. resources are scarce. b. goods and services are not scarce. c. incomes fluctuate with business cycles. d. people, by nature, tend to disagree. A Analytic Scarcity DIF: LOC: MSC: 2 REF: 1-0 Scarcity, tradeoffs, and opportunity cost Interpretive 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 Analytic Scarcity DIF: LOC: MSC: 2 REF: 1-0 Scarcity, tradeoffs, and opportunity cost Interpretive Approximately what percentage of the world's economies experience scarcity? a. 25% b. 50% c. 75% d. 100% D Analytic Scarcity DIF: LOC: MSC: 1 REF: 1-0 Scarcity, tradeoffs, and opportunity cost Interpretive 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. surpluses. c. inefficiencies. d. inequalities. A Analytic Scarcity DIF: LOC: MSC: 2 REF: 1-0 Scarcity, tradeoffs, and opportunity cost Interpretive Which of the following products would be considered scarce? a. golf clubs b. Picasso paintings c. apples d. All of the above are correct. D Analytic Scarcity DIF: LOC: MSC: 2 REF: 1-0 Scarcity, tradeoffs, and opportunity cost Interpretive 12. ANS: NAT: TOP: 13. ANS: NAT: TOP: Economics is the study of a. production methods. b. how society manages its scarce resources. c. how households decide who performs which tasks. d. the interaction of business and government. B DIF: Analytic LOC: Economies | Scarcity 1 REF: 1-0 The Study of economics, and definitions in economics MSC: Definitional In most societies, resources are allocated by a. a single central planner. b. a small number of central planners. c. those firms that use resources to provide goods and services. d. the combined actions of millions of households and firms. D DIF: Analytic LOC: Resource allocation 1 REF: 1-0 The Study of economics, and definitions in economics MSC: Interpretive Multiple Choice-Sec01-How People Make Decisions MULTIPLE CHOICE 1. ANS: NAT: TOP: 2. ANS: NAT: TOP: 3. ANS: NAT: TOP: 4. ANS: NAT: TOP: 5. 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. people face tradeoffs. d. all costs are included in the price of a product. C Analytic Tradeoffs DIF: LOC: MSC: 1 REF: 1-1 Scarcity, tradeoffs, and opportunity cost Definitional The adage, "There is no such thing as a free lunch," is used to illustrate the principle that a. goods are scarce. b. people face tradeoffs. c. income must be earned. d. households face many decisions. B Analytic Tradeoffs DIF: LOC: MSC: 2 REF: 1-1 Scarcity, tradeoffs, and opportunity cost Interpretive Which of the following statements best represents the principle represented by the adage, "There is no such thing as a free lunch"? a. Melissa can attend the concert only if she takes her sister with her. b. Greg is hungry and homeless. c. Brian must repair the tire on his bike before he can ride it to class. d. Kendra must decide between going to Colorado or Cancun for spring break. D Analytic Tradeoffs DIF: LOC: MSC: 3 REF: 1-1 Scarcity, tradeoffs, and opportunity cost Applicative The principle that "people face tradeoffs" applies to a. individuals. b. families. c. societies. d. All of the above are correct. D Analytic Tradeoffs DIF: LOC: MSC: 1 REF: 1-1 Scarcity, tradeoffs, and opportunity cost Applicative Sophia is planning her activities for a hot summer day. She would like to go to the local swimming pool and see the latest blockbuster movie, but because she can only get tickets to the movie for the same time that the pool is open she can only choose one activity. This illustrates the basic principle that a. people respond to incentives. b. rational people think at the margin. c. people face tradeoffs. d. improvements in efficiency sometimes come at the expense of equality. ANS: NAT: TOP: 6. ANS: NAT: TOP: 7. ANS: NAT: TOP: 8. ANS: NAT: TOP: 9. ANS: NAT: TOP: 10. ANS: NAT: MSC: 11. ANS: NAT: MSC: 12. C Analytic Tradeoffs DIF: LOC: MSC: 1 REF: 1-1 Scarcity, tradeoffs, and opportunity cost Interpretive 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 a. trade can make everyone better off. b. people face trade-offs c. rational people think at the margin. d. people respond to incentives. B Analytic Tradeoffs DIF: LOC: MSC: 1 REF: 1-1 Scarcity, tradeoffs, and opportunity cost Interpretive Guns and butter are used to represent the classic societal tradeoff between spending on a. durable and nondurable goods. b. imports and exports. c. national defense and consumer goods. d. law enforcement and agriculture. C Analytic Tradeoffs DIF: LOC: MSC: 1 REF: 1-1 Scarcity, tradeoffs, and opportunity cost Interpretive A tradeoff exists between a clean environment and a higher level of income in that a. studies show that individuals with higher levels of income pollute less than low-income individuals. b. efforts to reduce pollution typically are not completely succ...
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