Chapter 1
Ten Principles of Economics
1.
Choices must be made in the use of resources
a. because they are in finite supply.
b. because they are in finite demand.
c. only if the resources are nonrenewable.
d. because they are in infinite supply.
ANSWER: a because they are in finite supply.
SECTION: 1
OBJECTIVE: 1
2.
The cost to an airline of letting its employees fly at no charge
a. is zero.
b. will depend on the value employees place upon travel.
c. is greater during the Christmas holidays than at most other times.
d. depends on the alternatives open to the employees.
ANSWER: c is greater during the Christmas holidays than at most other times.
SECTION: 1
OBJECTIVE: 2
3.
Social security programs are aimed at making the distribution of resources in an economy more
a. efficient.
b. inefficient.
c. equitable.
d. inequitable.
ANSWER: c equitable.
SECTION: 1
OBJECTIVE: 2
4.
The opportunity cost of building an additional parking lot at your school is
a. the cost of concrete, labor, etc. used to build the lot.
b. the value of the property and resources used at their next-best alternative use.
c. the value of the property and resources used at all of their alternative uses.
d. infinite; we cannot estimate it.
ANSWER: b the value of the property and resources used at their next-best alternative use.
SECTION: 1
OBJECTIVE: 3
5.
Suppose you are considering going to the movies, and you place a $12 value on your anticipated
enjoyment of the movie. The ticket price is $6 and you would be giving up two hours of work,
where you earn $5 per hour. You would go to
a. work; the opportunity cost of the movies exceeds the expected benefit.
b. the movies; your incentive is the $6 excess expected benefit.
c. the movies; your enjoyment will exceed the lost wages by $2.
d. the movies; the benefit of $18 exceeds the lost wages.
ANSWER: a work; the opportunity cost of the movies exceeds the expected benefit.
SECTION: 1
OBJECTIVE: 3
1
2  Chapter 1/Ten Principles of Economics
6.
Metro North Railway is trying to decide whether or not to run an additional train into New York
City from New Haven, Connecticut at 8:15 a.m. The total cost of running trains between 8:00 a.m.
and 9:00 a.m. is $45,000 and the expected revenues on any given day are $100,000 during this time
period. The cost of running the additional train is $4,000 and it is expected that revenues will rise to
$103,500. Metro North should
a. run the train because the total revenues are greater than the total costs.
b. run the train because the firm’s revenues will rise.
c. not run the train because the total costs are already too high.
d. not run the train because the marginal cost of $4000 is greater than the marginal revenue of
$3,500.
ANSWER: d not run the train because the marginal cost of $4000 is greater than the marginal revenue of
$3,500.
SECTION: 1
OBJECTIVE: 4
7.
A proposed regulation to require infants traveling in airplanes to sit in approved safety seats has
never been adopted. If we think about how people respond to incentives, the most likely reason is
that
a. people would switch from flying to driving, so the death rate would rise.
b. the airline industry is a powerful lobby in Washington.
c. it would require every seat in airplanes to be made wider so the infant seats would fit.
d. the airlines threatened to bring a lawsuit against the government.
ANSWER: a people would switch from flying to driving, so the death rate would rise.
SECTION: 2
OBJECTIVE: 5
8.
A nation’s standard of living can be increased by
a. improvements in technology and international trade.
b. improvements in technology but not international trade.
c. international trade but not improvements in technology.
d. neither international trade nor improvements in technology.
ANSWER: a improvements in technology and international trade.
SECTION: 2
OBJECTIVE: 6
9.
In a market economy, the economic well being of society is the responsibility of
a. central planners.
b. central bankers.
c. government policymakers.
d. no one; self-interested individuals bring about the well-being of society.
ANSWER: d no one; self-interested individuals bring about the well-being of society.
SECTION: 2
OBJECTIVE: 7
10.
An important element of the market process is that
a. although people trade voluntarily, one party “wins” and the other party “loses.”
b. the government determines the extent of market activity in order for all parties to benefit.
c. people are better off if they are self-sufficient than if they trade with others in the market.
d. people trade voluntarily and all parties expect to benefit.
ANSWER: d people trade voluntarily and all parties expect to benefit.
SECTION: 2
OBJECTIVE: 7
Chapter 1/Ten Principles of Economics  3
11.
Adam Smith argues in the Wealth of Nations that an economy will produce more goods and
services if
a. people act in the public interest than if they act selfishly.
b. people act selfishly, than if the government directs economic activity.
c. the government controls the use of the nation’s scarce resources.
d. people ignore their own interests and contribute to national wealth as a whole.
ANSWER: b people act selfishly, than if the government directs economic activity.
SECTION: 2
OBJECTIVE: 7
12.
If there is a way to change a situation so that at least some people gain while no one in the economy
loses, the situation is
a. economically inefficient.
b. economically efficient.
c. providing an inequitable distribution of resources to the community.
d. neither equitable nor efficient.
ANSWER: a is economically inefficient.
SECTION: 2
OBJECTIVE: 7
13.
Assume that there are spillover benefits associated with keeping cars in good mechanical
conditions. Without government intervention (i.e., with a free market), we would expect people to
a. give their cars too much maintenance.
b. stop driving and start walking.
c. subsidize each other’s car maintenance bills.
d. not maintain their cars as much as they should.
ANSWER: d not maintain their cars as much as they should.
SECTION: 2
OBJECTIVE: 7
14.
Suppose that Rebecca throws her soda bottle out the car window and it smashes on the road. Jim
drives over the broken glass and gets a flat tire. Rebecca’s soda consumption has resulted in
a. the production of a public good.
b. an externality.
c. monopoly power for Rebecca.
d. greater efficiency in consumption.
ANSWER: b an externality.
SECTION: 2
OBJECTIVE: 7
15.
The market power that your school’s bookstore has is now limited by
a. new federal antitrust laws.
b. public goods provided by the government.
c. university policies against monopoly power.
d. increased access to other booksellers provided by the internet.
ANSWER: d increased access to other booksellers provided by the internet.
SECTION: 2
OBJECTIVE: 7
16.
The Department of Justice recently brought a suit against Microsoft for
a. generating external costs.
b. generating external benefits.
c. creating excess market power for itself.
d. providing public goods to the marketplace.
ANSWER: c creating excess market power for itself.
SECTION: 2
OBJECTIVE: 7
4  Chapter 1/Ten Principles of Economics
17.
The poor in the United States are disproportionately people who
a. have less than a high school education.
b. have incomes that are essentially nonwage incomes.
c. have families with over five children.
d. live in cities.
ANSWER: a have less than a high school education.
SECTION: 3
OBJECTIVE: 7
18.
According to economists who emphasize the connection between productive contribution and
economic reward, a more equal income distribution
a. is fundamental to economic growth.
b. always helps the poor in the long run.
c. creates inefficiency.
d. generates greater productivity.
ANSWER: d generates greater productivity.
SECTION: 3
OBJECTIVE: 7
19.
Inflation reduces
a. the price level.
b. employment.
c. the money supply.
d. the purchasing power of money.
ANSWER: d the purchasing power of money.
SECTION: 3
OBJECTIVE: 8
20.
The inflation rate is the
a. price level.
b. average price of goods and services in an economy.
c. growth rate of the price level.
d. purchasing power of money.
ANSWER: c growth rate of the price level.
SECTION: 3
OBJECTIVE: 8
21.
What caused the collapse of the German economy after World War I?
a. hyperinflation due to large amounts of currency printed
b. too many returning soldiers taking jobs away from other people
c. low interest rates causing too much investment
d. high business profits and racketeering
ANSWER: a Hyperinflation due to large amounts of currency printed
SECTION: 3
OBJECTIVE: 8
22.
The long-run relationship between inflation and the growth rate of the money supply
a. is unique to the United States.
b. is a recent phenomenon.
c. is quite different for industrialized countries than for LDCs.
d. exists in a wide variety of countries throughout the world.
ANSWER d exists in a wide variety of countries throughout the world.
SECTION: 3
OBJECTIVE: 8
Chapter 1/Ten Principles of Economics  5
23.
Which of the following diagrams represents a Phillips Curve:
a.
ANSWER: d
SECTION: 3
b.
c.
d.
OBJECTIVE: 8
24.
When we say that prices are “sticky” in the short run, we mean that
a. prices will not change without government intervention.
b. prices change slowly in response to changes in the economy.
c. prices will never change unless resource costs fall.
d. labor unions will not make concessions in the short run.
ANSWER: b prices change slowly in response to changes in the economy.
SECTION: 3
OBJECTIVE: 8
25.
Policymakers can make effective short-term policy actions because
a. prices will immediately respond to changes in the macroeconomy.
b. central banks always accommodate changes in the economy by increasing or decreasing the
money supply.
c. prices are sticky so that changes in the economy occur relatively slowly.
d. the Phillips curve is downward sloping.
ANSWER: c prices are sticky so that changes in the economy occur relatively slowly.
SECTION: 3
OBJECTIVE: 8