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Review Questions – Chapter 1

1) The three fundamental questions that any economy must address are: 1) _______
A) How much will be saved; what will be produced; and how can these goods and services be fairly distributed?
B) What goods and services to produce; how will these goods and services be produced; and who receives them?
C) What will be the prices of goods and services; how will these goods and services be produced; and who will receive
them?
D) Who gets jobs; what wages do workers earn; and who owns what property?
2) Economics does not study correct or incorrect behaviors but rather it assumes that economic agents behave ________,
meaning they make the best decisions given their knowledge of the costs and benefits.
2) _______
A) rationally

B) selfishly

C) equitably

D) emotionally

3) Suppose the U.S. government encouraged new medical school graduates to take over existing practices from doctors
wishing to retire by paying both the new and retiring doctors $100,000. These doctors would be exemplifying the
economic idea that
3) _______
A) people respond to economic incentives.
B) people are rational.
C) equity is more important than efficiency.
D) optimal decisions are made at the margin.
4) The term ________ in economics refers to a group of buyers and sellers of a product and the arrangement by which they
come together to trade. 4) _______
A) market

B) trade-off

C) cooperative D) collective

5) Which of the following statements is false?
5) _______
A) A direct relationship has a positive slope value.
B) A straight line has a slope of zero.
C) An inverse relationship has a negative slope value.
D) A curved line has slope values that change at every point.
6) By definition, economics is the study of
6) _______
A) how to make money in a market economy.
B) how to make money in the stock market.
C) the choices people make to attain their goals, given their scarce resources.
D) supply and demand.
7) Which of the following is not an example of an economic trade-off that a firm has to make?
A) whether it is to outsource the production of a good or service
B) whether or not consumers will buy its products
C) whether it should produce more of its product
D) whether it is cheaper to produce with more machines or with more workers
8) Economists assume that rational people do all of the following except 8) _______
A) use all available information as they act to achieve their goals.
B) weigh the benefits and costs of all possible alternative actions.
C) undertake activities that benefit others and hurt themselves.
D) respond to economic incentives.

7) _______

C) All economic resources are man-made. B) equity is more important than efficiency. D) marginal cost. and c are positive statements and d is a normative statement. B) behave in unpredictable ways. D) a and b are positive statements. b and d are normative statements. 9) _______ 10) Suppose that some teachers have decided that economic and financial uncertainty have made the prospect of retiring more risky. 15) The decision about what goods and services will be produced made in a market economy is made by 15) ______ A) lawmakers in the government voting on what will be produced. C) people respond to economic incentives. By using all available information as they act to achieve their goals. it would be impossible for low-skilled workers to live in the city without minimum wage laws. The minimum wage law causes unemployment. 14) Which of the following statements about economic resources is true? 14) ______ A) Economic resources are used only by businesses. D) opinions. C) will never take actions to help others. Which of the consequences above are positive statements and which are normative statements? 12) ______ A) Only a is a positive statement. D) Economic resources include financial capital and money. C) assumptions. c and d are normative statement. b. In some cities such as San Francisco and New York. B) Economic resources are also called factors of production. The gains to winners of a minimum wage law should be valued more highly than the losses to losers because the latter primarily comprises businesses. d. b. B) data. D) prefer to live in a society that values fairness above all else. D) workers deciding to produce only what the boss says must be produced. 11) All of the following are part of an economic model except A) hypotheses. C) a. these teachers are exemplifying the economic idea that 10) ______ A) optimal decisions are made at the margin. E) producers deciding what society wants most. C) economic equity. and therefore carry a higher cost than not retiring. 11) ______ 12) The economic analysis of minimum wage involves both normative and positive analysis.9) The highest valued alternative that must be given up to engage in an activity is the definition of A) marginal benefit. B) opportunity cost. 13) Economists assume that individuals 13) ______ A) are rational and respond to incentives. c and d are normative statements. . Consider the following consequences of a minimum wage: a. B) consumers and firms choosing which goods and services to buy or produce. C) consumers dictating to firms what they need most. D) people are rational. A minimum wage law benefits some groups and hurts others. b. B) a and c are positive statements. c.

the government b. and he charges $75 for this service. DeShawn will also detail the car's engine. C) make economic ideas explicit and concrete for use by decision makers. C) These decisions are made by the country's elders who have had much experience in answering these questions. 20) ______ 21) ______ 22) How are the fundamental economic decisions determined in North Korea? 22) ______ A) The United Nations decides because North Korea is a developing economy. a service that adds an additional $20 to the total cost of the package. consumers and producers 17) DeShawn's Detailing is a service that details cars at the customers' homes or places of work. D) foregone cost. B) opportunity cost. in a centrally planned economy. consumers c. B) The government decides because North Korea is a centrally planned economy. C) because individuals act rationally all the time in all circumstances. 19) Which of the following is a normative economic statement? 19) ______ A) The state of Texas is considering increasing funds for light-rail development to promote the use of public transportation. What is the marginal cost of adding the engine detailing to the basic detailing package? 17) ______ A) $20 B) $30 C) $60 D) $60 plus the value of his time 18) Economic models do all of the following except 18) ______ A) answer economic questions. 20) Economists assume that rational behavior is useful in explaining choices people make A) even though people may not behave rationally all the time. the number of unsold homes has increased. B) Rising global demand for coal has led to increases in the price of coal. For a total price of $90. producers Who. 21) The extra cost associated with undertaking an activity is called A) net loss. DeShawn's cost for a basic detailing package is $40. D) portray reality in all its minute details. D) Individuals. and the government interact in a market to make these economic decisions. if ever. D) even though people rarely. . B) simplify some aspect of economic life.16) Consider the following economic agents: a. behave in a rational manner. firms. decides what goods and services will be produced with the scarce resources available in that economy? 16) ______ A) producers B) consumers C) consumers and producers D) the government E) the government. C) Pharmaceutical manufacturers should not be allowed to patent their products so prescription drugs would be more affordable. C) marginal cost. B) because irrational people do not make economic choices. D) With rising mortgage rates and rising unemployment rates.

"Although the last 3. B) only if its marginal costs are greater than its marginal benefits.000 cell phones we produced and sold increased our revenue by $6.700.30." 24) Refer to Scenario 1-1. Scenario 1-1 .000 per week so I think we're on the right track. C) until its marginal costs start declining. A manager at the plant observes. Which of the following is a term used by economists to describe the money received from the sale of an additional bag of potatoes? 23) ______ A) pure profit B) marginal costs C) gross earnings D) net benefit E) marginal revenue Scenario 1-1 Suppose a cell phone manufacturer currently sells 20. what is another economic term for the incremental revenue received from the sale of the last 3. We are producing the optimal number of cell phones. Using marginal analysis terminology. C) efficiency.23) A grocery store sells a bag of potatoes at a fixed price of $2.000 and our costs by $6.000 cell phones per week and makes a profit of $5. D) until its marginal benefits equal marginal costs. we are still making an overall profit of $5. B) equity. 27) ______ A) no units B) only profitable units C) the total number of units D) an additional unit 28) Which of the following questions or statements regarding medical school is normative? 28) ______ A) Medical students who enter specialized fields make a larger contribution to society than do student who enter primary care. 26) Which of the following is a microeconomics question? 26) ______ A) What will the level of economic growth be in the entire economy? B) What factors determine the price of carrots? C) How much will be saved and how much will be produced in the entire economy? D) What determines the average price level and inflation? 27) The revenue received from the sale of ________ of a product is a marginal benefit to the firm. D) trade-off.000 cell phones? 24) ______ A) gross profit B) gross earnings C) sales revenue D) marginal revenue 25) The idea that because of scarcity.000 per week. producing more of one good or service means producing less of another good or service refers to the economic concept of 25) ______ A) optimization. B) What role does tuition play in a student's decision about whether to attend medical school? C) Have tuition increases had a large effect or a small effect on the number of applications to medical school? D) How do changes in expected future incomes affect the decisions of medical students about which specialty to choose? 29) Marginal analysis involves undertaking an activity 29) ______ A) only when its marginal benefits are positive.

000 per week so I think we're on the right track. We are producing the optimal number of cell phones. This implies that 32) ______ A) there is a direct relationship between laptop prices and quantities purchased by college students. you rightly conclude that 35) ______ A) Soo Jin figures that the benefit of having her own place (as opposed to sharing) is at least $950. 34) Which of the following statements is true about scarcity? 34) ______ A) Scarcity refers to the situation in which unlimited wants exceed limited resources. D) Its profit will be $6. C) making borderline decisions.000 lower. B) Its profit will be $700 lower. Soo Jin is as rational as any other person. "Although the last 3. Had the firm not produced and sold the last 3. college students buy more laptops.000 and our costs by $6.000 cell phones per week and makes a profit of $5. 36) Consider the following statements: a.Suppose a cell phone manufacturer currently sells 20. . 35) Soo Jin shares a one-bedroom apartment with her classmate.000 per week. B) when deciding what goods and services will be produced. D) making consistently irrational decisions.700 higher. Banks do not take steps to increase security since they believe it is less costly to allow some bank robberies than to install expensive security monitoring equipment. C) there is a one-to-one relationship between laptop prices and quantities purchased by college students. c. D) Soo Jin figures that the additional benefit of having her own place (as opposed to sharing) is at least $250." 30) Refer to Scenario 1-1.700. D) Scarcity arises when there is a wide disparity in income distribution.000 cell phones we produced and sold increased our revenue by $6. B) Soo Jin did not have a choice. B) weighing the costs and benefits of a decision before deciding if it should be pursued. A manager at the plant observes. we are still making an overall profit of $5. B) Scarcity is only a problem when a country has too large a population. D) there is a negative relationship between laptop prices and quantities purchased by college students. C) Scarcity is not a problem for the wealthy. She is considering moving to a studio apartment which she will not have to share with anyone. Car owners purchase more gasoline from a gas station that sells gasoline at a lower price than other rival gas stations in the area. b. The studio apartment rents for $950 per month. you ran into Soo Jin on campus and she tells you that she has moved into the studio apartment. her roommate was a slob. and if so by how much? 30) ______ A) Its profit will be $6. 33) Making optimal decisions "at the margin" requires 33) ______ A) making decisions according to one's whims and fancies. C) when deciding how goods and services will be produced. As an economics major. Recently. would its profit be higher or lower. 31) Society faces a trade-off in all of the following situations except A) when some previously unemployed workers find jobs. C) The cost of having one's own space outweighs the benefits.000 cell phones. Her share of the rent is $700 per month. D) when deciding who will receive the goods and services produced. C) Its profit will be $700 higher. Firms produce more of a particular DVD when its selling price rises. 31) ______ 32) Suppose when the price of laptops fall. B) there is a positive relationship between laptop prices and quantities purchased by college students.

D) The government should revamp the health care system. a larger quantity of iPhones will be purchased. b. 39) ______ A) variable B) market C) trade-off D) model 40) Which of the following is a positive economic statement? 40) ______ A) The standard of living in the United States should be higher. B) how firms make choices. Table 1-1 Hours Open 1 2 3 4 5 6 Total Revenue (dollars) $50 75 95 110 120 125 Lydia runs a small nail salon in the town of New Hope. C) how households make choices. B) If the price of iPhones falls.S. 37) Macroeconomics is the study of 37) ______ A) the economy as a whole. She is debating whether she should extend her hours of operation. government should not have bailed out U. B) marginal benefit equals the marginal cost. D) how households and firms make choices. 38) ______ 39) An economic ________ is a simplified version of some aspect of economic life used to analyze an economic issue. auto manufacturers. 41) Refer to Table 1-1. C) c only.Which of the above statements demonstrates that economic agents respond to incentives? A) a only. D) marginal benefit is zero. 36) ______ E) a. Lydia figures that her sales revenue will depend on the number of hours the nail salon is open as shown in the table above. D) a and b. 38) Economists reason that the optimal decision is to continue any activity up to the point where the A) marginal benefit is greater than the marginal cost.S. She would have to hire a worker for those hours at a wage rate of $10 per hour. C) marginal cost is zero. and c. B) b only. and economic growth. C) The U. B) how households and firms make choices. What is Lydia's marginal benefit if she decides to stay open for two hours instead of one hour? 41) ______ A) $25 B) $50 C) $75 D) $125 42) Microeconomics is the study of 42) ______ A) topics such as unemployment. . inflation. D) the economy as a whole. C) the global economy.

such as a stock clearance sale. C) scarcity. B) unlimited resources. luxury sedans. D) greed. D) Every individual. A) efficient central planning B) allocative efficiency C) equity D) productive efficiency 43) ______ 44) In economics. A) inflation B) efficiency C) scarcity D) recession 47) ______ 48) Arlene quits her $125. D) as long as the marginal benefit she receives is just equal to or greater than $200. is faced with making trade-offs. ________ occurs. the term ________ means "additional" or "extra.000 D) zero. What fundamental economic question are they addressing by making this range of products? 46) ______ A) Who to produce automobiles for? B) What to produce? C) How to produce goods that consumers want? D) Why produce a variety of automobiles? 47) The basic economic problem of ________ has always existed and will continue to exist." A) allocative B) equity C) marginal D) optimal 44) ______ 45) If the marginal cost of keeping a doctor's office open one additional hour per day is $200. B) Economics is a social science that studies the trade-offs we are forced to make because resources are unlimited. 50) ______ . B) only if the marginal benefit she receives is greater than $200 plus an acceptable profit margin. pickup trucks and compact cars.000-a-year job to take care of her ailing parents. 50) In economics. What is the opportunity cost of her decision? 48) ______ A) It depends on the "going rate" for home-care providers.43) When production reflects consumer preferences. 46) Automobile manufacturers produce a range of automobiles such as sports utility vehicles. choices must be made because we live in a world of A) unemployment. since she will no longer be earning a salary 49) Which of the following statements is true? 49) ______ A) Trade-offs do not apply when the consumers purchase a product for which there is excess supply. no matter how rich or poor. C) as long as the marginal cost does not rise. then the doctor should keep the office open for one extra hour 45) ______ A) until the marginal benefit she receives reaches zero. C) Anytime you have to decide which action to take you are experiencing economic equity. B) the value she attributes to the satisfaction she receives from taking care of her parents C) at least $125.