Question 1

Both The Wealth of Nations and the Declaration of Independence share the point of view that

Accepted Answer

A) every person is entitled to life, liberty, and the pursuit of happiness. 
B) individuals are best left to their own devices without the government guiding their actions. 
C) the government plays a central role in organizing a market economy. 
D) because of human nature a strong legal system is necessary for a market system to survive. 
A) every person is entitled to life, liberty, and the pursuit of happiness. 
B) individuals are best left to their own devices without the government guiding their actions. 
C) the government plays a central role in organizing a market economy. 
D) because of human nature a strong legal system is necessary for a market system to survive.

Question 2

When a society cannot produce all the goods and services people wish to have, it is said that the economy is experiencing

Accepted Answer

A) scarcity. 
B) surpluses. 
C) inefficiencies. 
D) inequalities. 
A) scarcity. 
B) surpluses. 
C) inefficiencies. 
D) inequalities.

Question 3

Economists use the word equality to describe a situation in which

Accepted Answer

A) each member of society has the same income. 
B) each member of society has access to abundant quantities of goods and services, regardless of his or her income. 
C) society is getting the maximum benefits from its scarce resources. 
D) society's resources are used efficiently. 
A) each member of society has the same income. 
B) each member of society has access to abundant quantities of goods and services, regardless of his or her income. 
C) society is getting the maximum benefits from its scarce resources. 
D) society's resources are used efficiently.

Question 4

Bill is restoring a car and has already spent $4000 on the restoration. He expects to be able to sell the car for $5800. Bill discovers that he needs to do an additional $2400 of work to make the car worth $5800 to potential buyers. He could also sell the car now, without completing the additional work, for $3800. What should he do?

Accepted Answer

A) He should sell the car now for $3800. 
B) He should keep the car since it wouldn't be rational to spend $6400 restoring a car and then sell it for only $5800. 
C) He should complete the additional work and sell the car for $5800. 
D) It does not matter which action he takes since the outcome will be the same either way. 
A) He should sell the car now for $3800. 
B) He should keep the car since it wouldn't be rational to spend $6400 restoring a car and then sell it for only $5800. 
C) He should complete the additional work and sell the car for $5800. 
D) It does not matter which action he takes since the outcome will be the same either way.

Question 5

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.

Accepted Answer

A) True 
 B)False

Question 6

Communist countries worked under the premise that

Accepted Answer

A) markets were the best way to organize economic activity. 
B) central planners were in the best position to determine the allocation of scarce resources in the economy. 
C) households and firms, guided by an "invisible hand," could achieve the most efficient allocation of scarce resources. 
D) allowing the market forces of supply and demand to operate with no government intervention would achieve the most efficient allocation of scarce resources. 
A) markets were the best way to organize economic activity. 
B) central planners were in the best position to determine the allocation of scarce resources in the economy. 
C) households and firms, guided by an "invisible hand," could achieve the most efficient allocation of scarce resources. 
D) allowing the market forces of supply and demand to operate with no government intervention would achieve the most efficient allocation of scarce resources.

Question 7

A construction company has built 30 houses so far this year at a total cost to the company of $7.5 million. If the company builds a 31st house, its total cost will increase to $7.76 million. Which of the following statements is correct?

Accepted Answer

A) For the first 30 houses, the average cost per house was $250,000. 
B) The marginal cost of the 31st house, if it is built, will be $260,000. 
C) If the company can experience a marginal benefit of $275,000 by building the 31st house, then the company should build it. 
D) All of the above are correct. 
A) For the first 30 houses, the average cost per house was $250,000. 
B) The marginal cost of the 31st house, if it is built, will be $260,000. 
C) If the company can experience a marginal benefit of $275,000 by building the 31st house, then the company should build it. 
D) All of the above are correct.

Question 8

Government policies can change the costs and benefits that people face. Those policies have the potential to

Accepted Answer

A) alter people's behavior. 
B) alter people's decisions at the margin. 
C) produce results that policymakers did not intend. 
D) All of the above are correct. 
A) alter people's behavior. 
B) alter people's decisions at the margin. 
C) produce results that policymakers did not intend. 
D) All of the above are correct.

Question 9

Equality refers to how the pie is divided, and efficiency refers to the size of the economic pie.

Accepted Answer

A) True 
 B)False

Question 10

Rational people make decisions at the margin by

Accepted Answer

A) following marginal traditions. 
B) behaving in a random fashion. 
C) thinking in black-and-white terms. 
D) comparing marginal costs and marginal benefits. 
A) following marginal traditions. 
B) behaving in a random fashion. 
C) thinking in black-and-white terms. 
D) comparing marginal costs and marginal benefits.

Question 11

The invisible hand ensures that economic prosperity is distributed equally.

Accepted Answer

A) True 
 B)False

Question 12

The term "market failure"

Accepted Answer

A) means the same thing as "market power." 
B) refers to the dissolution of a market when firms decide to quit producing a certain product. 
C) refers to the failure of a market to produce an efficient allocation of resources. 
D) refers to government's failure to enforce the property rights of households or firms that participate in a certain market. 
A) means the same thing as "market power." 
B) refers to the dissolution of a market when firms decide to quit producing a certain product. 
C) refers to the failure of a market to produce an efficient allocation of resources. 
D) refers to government's failure to enforce the property rights of households or firms that participate in a certain market.

Question 13

People are willing to pay more for a diamond than for a bottle of water because

Accepted Answer

A) the marginal cost of producing an extra diamond far exceeds the marginal cost of producing an extra bottle of water. 
B) the marginal benefit of an extra diamond far exceeds the marginal benefit of an extra bottle of water. 
C) producers of diamonds have a much greater ability to manipulate diamond prices than producers of water have to manipulate water prices. 
D) water prices are held artificially low by governments, since water is necessary for life. 
A) the marginal cost of producing an extra diamond far exceeds the marginal cost of producing an extra bottle of water. 
B) the marginal benefit of an extra diamond far exceeds the marginal benefit of an extra bottle of water. 
C) producers of diamonds have a much greater ability to manipulate diamond prices than producers of water have to manipulate water prices. 
D) water prices are held artificially low by governments, since water is necessary for life.

Question 14

A rationale for government involvement in a market economy is

Accepted Answer

A) markets sometimes fail to produce a fair distribution of economic well-being. 
B) markets sometimes fail to produce an efficient allocation of resources. 
C) property rights have to be enforced. 
D) All of the above are correct. 
A) markets sometimes fail to produce a fair distribution of economic well-being. 
B) markets sometimes fail to produce an efficient allocation of resources. 
C) property rights have to be enforced. 
D) All of the above are correct.

Question 15

Suppose the cost of operating a 100 room hotel for a night is $10,000 and there are 5 empty rooms for tonight. If the marginal cost of operating one room for one night is $30 and a customer is willing to pay $60 for the night, the hotel manager should

Accepted Answer

A) rent the room because the marginal benefit exceeds the marginal cost. 
B) rent the room because the marginal benefit exceeds the average cost. 
C) not rent the room because the marginal benefit is less than the marginal cost. 
D) not rent the room because the marginal benefit is less than the average cost. 
A) rent the room because the marginal benefit exceeds the marginal cost. 
B) rent the room because the marginal benefit exceeds the average cost. 
C) not rent the room because the marginal benefit is less than the marginal cost. 
D) not rent the room because the marginal benefit is less than the average cost.

Question 16

Irregular fluctuations in economic activity are known as the

Accepted Answer

A) business cycle. 
B) broken window fallacy. 
C) tradeoff between inflation and unemployment. 
D) ten principles of economics. 
A) business cycle. 
B) broken window fallacy. 
C) tradeoff between inflation and unemployment. 
D) ten principles of economics.

Question 17

Market economies are distinguished from other types of economies largely on the basis of

Accepted Answer

A) the political affiliations of government officials. 
B) the process by which government officials are elected or appointed. 
C) the ways in which scarce resources are allocated. 
D) the number of retail outlets available to consumers. 
A) the political affiliations of government officials. 
B) the process by which government officials are elected or appointed. 
C) the ways in which scarce resources are allocated. 
D) the number of retail outlets available to consumers.

Question 18

The government enforces property rights by

Accepted Answer

A) requiring property owners to pay property taxes. 
B) providing police and courts. 
C) forcing people to own property. 
D) providing public parks and recreation facilities. 
A) requiring property owners to pay property taxes. 
B) providing police and courts. 
C) forcing people to own property. 
D) providing public parks and recreation facilities.

Question 19

Which of the following statements does not apply to a market economy?

Accepted Answer

A) Firms decide whom to hire and what to produce. 
B) The "invisible hand" usually maximizes the well-being of society as a whole. 
C) Households decide which firms to work for and what to buy with their incomes. 
D) Government policies are the primary forces that guide the decisions of firms and households. 
A) Firms decide whom to hire and what to produce. 
B) The "invisible hand" usually maximizes the well-being of society as a whole. 
C) Households decide which firms to work for and what to buy with their incomes. 
D) Government policies are the primary forces that guide the decisions of firms and households.

Question 20

When calculating the cost of college, which of the following should you probably include?

Accepted Answer

A) The cost of your meal plan for the cafeteria. 
B) The cost of books required for college classes 
C) The income you earn at your part-time job. 
D) The cost of living in the dormitory. 
A) The cost of your meal plan for the cafeteria. 
B) The cost of books required for college classes 
C) The income you earn at your part-time job. 
D) The cost of living in the dormitory.

Exam 1: Ten Principles of Economics

Both The Wealth of Nations and the Declaration of Independence share the point of view that

When a society cannot produce all the goods and services people wish to have, it is said that the economy is experiencing

Economists use the word equality to describe a situation in which

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.

Communist countries worked under the premise that

A construction company has built 30 houses so far this year at a total cost to the company of $7.5 million. If the company builds a 31st house, its total cost will increase to $7.76 million. Which of the following statements is correct?

Government policies can change the costs and benefits that people face. Those policies have the potential to

Equality refers to how the pie is divided, and efficiency refers to the size of the economic pie.

Rational people make decisions at the margin by

The invisible hand ensures that economic prosperity is distributed equally.

The term "market failure"

People are willing to pay more for a diamond than for a bottle of water because

A rationale for government involvement in a market economy is

Suppose the cost of operating a 100 room hotel for a night is $10,000 and there are 5 empty rooms for tonight. If the marginal cost of operating one room for one night is $30 and a customer is willing to pay $60 for the night, the hotel manager should

Irregular fluctuations in economic activity are known as the

Market economies are distinguished from other types of economies largely on the basis of

The government enforces property rights by

Which of the following statements does not apply to a market economy?

When calculating the cost of college, which of the following should you probably include?

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Elasticity and Its Application

Supply, Demand, and Government Policies

Consumers, Producers, and the Efficiency of Markets

Application: The Costs of Taxation

Application: International Trade

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, Investment, and the Financial System

The Basic Tools of Finance

Unemployment

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomic Models

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Trade-Off Between Inflation and Unemployment

Six Debates Over Macroeconomic Policy

Filters

A construction company has built 30 houses so far this year at a total cost to the company of $7.5 million. If the company builds a 31^st house, its total cost will increase to $7.76 million. Which of the following statements is correct?