Question 1

The term ceteris paribus means that

Accepted Answer

A)  everything is changing. 
B)  all variables except those specified are constant. 
C)  no one knows which variables will change and which will remain constant. 
D)  the basic postulate of economics does not apply for the case being considered.

Question 2

Which of the following statements best describes the scientific method?

Accepted Answer

A)  The use of modern electronic testing equipment to understand the world. 
B)  The unbiased development and testing of theories about how the world works. 
C)  The use of controlled laboratory experiments to understand the way the world works. 
D)  Finding evidence to support preconceived theories about how the world works.

Question 3

A student noted that the football team won by a larger margin when the third-string played more minutes. Therefore, he recommended that the third-stringers become the first team. His conclusion was probably erroneous because he

Accepted Answer

A)  confused positive and normative analysis. 
B)  committed the fallacy of composition. 
C)  failed to recognize that association is not causation. 
D)  confused macroeconomics with microeconomics.

Question 4

In economics the term utility refers to

Accepted Answer

A)  the subjective benefit or satisfaction a person expects to receive from a choice or course of action. 
B)  the number of possible uses for a resource. 
C)  the fact that human desire for goods is unlimited while the resources available to meet those desires is limited. 
D)  the highest valued alternative that must be sacrificed when a choice is made.

Question 5

The fallacy of composition is the incorrect view that

Accepted Answer

A)  decisions are always made at the margin. 
B)  incentives matter only to those who behave selfishly. 
C)  if something is true for an individual, then it must also be true for the group. 
D)  the value of a good can be objectively measured by its cost of production.

Question 6

When the Hometown football team is winning by a lot of points after halftime, they often play their second and third team players. One of the coaches notices that when the third team plays that Hometown wins by a bigger margin than when just the first team plays. He recommends that the third team see more playing time as a result. What is wrong with his way of thinking?

Accepted Answer

A)  association is not causation 
B)  it is a violation of ceteris paribus 
C)  the fallacy of composition 
D)  good intentions do not guarantee desirable outcomes

Question 7

Economic analysis is based on the premise that

Accepted Answer

A)  people act only out of selfish motives. 
B)  people are always fully informed when making choices. 
C)  changes in the personal benefits or costs of an action influence behavior in a predictable way. 
D)  most human behavior is unpredictable.

Question 8

When economists use the term ceteris paribus, they are indicating that

Accepted Answer

A)  the relationship between two economic variables cannot be determined. 
B)  the analysis is true for the individual but not for the economy as a whole. 
C)  all other variables except the ones specified are assumed to be constant. 
D)  their conclusions are based on normative economics rather than positive economic analysis.

Question 9

In economics, the term marginal refers to

Accepted Answer

A)  the change or difference between two alternatives. 
B)  man-made resources as opposed to natural resources. 
C)  the satisfaction a consumer receives from a good. 
D)  holding everything else constant in the analysis.

Question 10

Homeowners can deduct interest payments on their mortgages from their federal income tax. If this deduction were removed, how would the housing market be affected?

Accepted Answer

The answer of Homeowners can deduct interest payments on their...

Question 11

The consequences of an economic change that are not immediately identifiable but are felt only with the passage of time are known in economics as

Accepted Answer

A)  opportunity costs. 
B)  utility curves. 
C)  secondary effects. 
D)  comparative advantages.

Question 12

Which of the following is a normative economic statement?

Accepted Answer

A)  Congress should increase the legal minimum wage. 
B)  An increase in the legal minimum wage would cause unemployment to increase. 
C)  An increase in the legal minimum wage would cause unemployment to decrease. 
D)  An increase in the legal minimum wage would lead to more equality in the distribution of income.

Question 13

Economic analysis assumes that

Accepted Answer

A)  people act only out of selfish motives. 
B)  people are motivated by a variety of forces; however, changes in personal benefits and costs affect behavior only when individuals are motivated by selfishness. 
C)  people are basically unselfish, and their actions are, therefore, difficult to predict. 
D)  changes in the personal benefits and costs associated with an activity will exert a predictable influence on the behavior of both those who are selfish and those who are unselfish.

Question 14

Which of the following is an example of a normative economic statement?

Accepted Answer

A)  The inflation rate in the United States decreased from 4 percent last year to 3 percent this year as a result of lower energy prices. 
B)  The economy grew at an annual rate of 5 percent during the first quarter of this year. 
C)  If two automobile companies merge, it is likely that the price of automobiles will rise. 
D)  An increase in international trade benefits some workers but hurts others. 
E)  The minimum wage should be increased so that low income workers can afford to keep up with the cost of living.

Question 15

Which of the following is a positive economic statement?

Accepted Answer

A)  Too much government spending is the biggest problem facing the U.S. economy. 
B)  Creating jobs is the most serious problem facing the U.S. economy. 
C)  Raising taxes provides additional revenue that should be used to finance health care. 
D)  If taxes are over 50 percent of national income, job creation falls.

Question 16

The economic way of thinking stresses that

Accepted Answer

A)  greed is the primary motivation for human action. 
B)  as the benefits of an option increase, people will be more likely to choose that option. 
C)  an objective value can be attached to physical goods. 
D)  as the cost of an option decreases, people will be less likely to choose that option.

Question 17

A firm producing cans buys three tons of aluminum per day at $200 per ton. If it buys four tons per day, it receives a quantity discount on all units and pays only $175 per ton. The marginal cost of the fourth ton per day is

Accepted Answer

A)  $100. 
B)  $175. 
C)  $700. 
D)  $225.

Question 18

"The resources now going into the War on Terrorism and into improved airport security would save more lives if they were invested in medical research." This statement most clearly reflects which of the following?

Accepted Answer

A)  The best test of an economic theory is its ability to predict. 
B)  There is no such thing as a free lunch--the use of scarce resources always has an opportunity cost. 
C)  selfishness; if people were not selfish, we could have more of everything. 
D)  The value of goods can be determined objectively.

Question 19

Jim enjoys the feeling of wind in his hair enough to ride his motorcycle without a helmet, even though he fully realizes the potential for injury it creates by not wearing one in the unlikely event he is in an accident. To an economist, Jim is

Accepted Answer

A)  making an irrational choice. 
B)  making a rational choice. 
C)  not fully considering the personal costs and benefits of his decision. 
D)  not responding to the incentives he faces.

Question 20

A restaurant offers an "all you can eat" meal for $9. Tyrone has eaten three servings and is trying to decide whether or not to go back for a fourth. The economic way of thinking suggests that Tyrone should go back for the fourth serving if and only if

Accepted Answer

A)  his marginal benefit of the additional serving is greater than zero. 
B)  his marginal benefit of the additional serving is at least $3. 
C)  his marginal benefit of the additional serving is $9 or more. 
D)  his total value from the meal exceeds $9.

Exam 1: The Economic Approach