Chap 01

Chapter 1
Ten Principles of Economics

MULTIPLE CHOICE

1
. The word economy comes from the Greek word for
a.environment.
b.one who participates in a market.
c.one who manages a household.
d.conservation.
ANSWER: c. one who manages a household.
TYPE: M KEY1: D OBJECTIVE: 1 RANDOM: Y

2
. Economics deals primarily with the concept of
a.poverty.
b.scarcity.
c.change.
d.power.
ANSWER: b. scarcity.

3
. Which of the following is NOT included in the decisions that every society must make?
a.what goods will be produced
b.what determines consumer preferences
c.who will produce goods
d.who will consume the goods
ANSWER: b. what determines consumer preferences

4
. Scarcity exists when
a.there is less than an infnite amount of a resource or good.
b.there is less of a good or resource available than people wish to have.
c.society can meet the wants of every individual.
d.the price of a good rises.
ANSWER: b. there is less of a good or resource available than people wish to have.

5
. For society, a good is not scarce if
a.all members of society can have all they want of it.
b.at least one individual in society can obtain all he or she wants of the good.
c.frms are producing at full capacity.
d.those who have enough income can buy all they want of the good.
ANSWER: a. if all members of society can have all they want of it.
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2 Chapter 1/The Ten Principles of Economics

6
. Which of the following goods best meets the defnition of scarcity?
a.air
b.wood in a forest
c.water in the ocean
d.water in a city
ANSWER: d. water in a city

7
. Economics is defned as
a.the study of business.
b.the study of how society manages its scarce resources.
c.the study of central planning.
d.the study of government regulation.
ANSWER: b. the study of how society manages its scarce resources.

8
. Which of the following is NOT a major area of study for economists?
a.how people make decisions
b.how people interact with each other
c.how forces and trends afect the overall economy
d.how countries choose national leaders
ANSWER: d. how countries choose national leaders

9
. The adage, There is no such thing as a free lunch, means:
a.To get something we like, we usually have to give up another thing we like.
b.Even people on welfare have to pay for food these days.
c.The cost of living is always increasing.
d.All costs are measured in dollars.
ANSWER: a. To get something we like, we usually have to give up another thing we like.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

10
. Daniel decides to spend an hour playing basketball rather than working at $6 per hour. His tradeof
is
a.nothing, because he enjoys playing basketball more than working.
b.the increase in skill he obtains from playing basketball for that hour.
c.the $6 he could have earned.
d.nothing, because he spent $6 for admission into the sports complex to play basketball.
ANSWER: c. the $6 he could have earned.
TYPE: M KEY1: C SECTION: 1 OBJECTIVE: 2 RANDOM: Y

11
. When society requires that frms reduce pollution,
a.there is no tradeof, since everyone benefts from reduced pollution.
b.there is no tradeof for society as a whole, since the cost of reducing pollution falls only on the
frms afected by the requirements.
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Chapter 1/The Ten Principles of Economics 3
c.there is a tradeof only if some frms are forced to close.
d.there is a tradeof because of reduced incomes to the frms owners, workers, and customers.
ANSWER: d. there is a tradeof because of reduced incomes to the frms owners, workers, and
customers.

12
. Efciency means that
a.society is getting the most it can from its scarce resources.
b.society is conserving resources in order to save them for the future.
c.societys goods and services are distributed fairly among societys members.
d.society has lessened its dependence on foreign energy sources.
ANSWER: a. society is getting the most it can from its scarce resources.

13
. Equity means that
a.all members of society have the same income.
b.society is getting the most it can from its scarce resources.
c.societys goods and services are distributed according to need.
d.the benefts of societys resources are distributed fairly among societys members.
ANSWER: d. the benefts of societys resources are distributed fairly among societys members.

14
. A good defnition of equity would be
a.everyone receiving the same income.
b.fairness.
c.efciency.
d.eliminating extreme afuence.
ANSWER: b. fairness.
TYPE: M KEY 1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

15
. When government policies are being designed,
a.equity and efciency goals are usually independent of each other.
b.there is usually a tradeof between equity and efciency.
c.equity can usually be achieved without an efciency loss.
d.increasing efciency usually results in more equity.
ANSWER: b. there is usually a tradeof between equity and efciency.

16
. When the government redistributes income from the rich to the poor,
a.efciency is improved.
b.both rich people and poor people beneft directly.
c.people work less and produce fewer goods and services.
d.rich people consume fewer goods and poor people consume more goods, resulting in no real
change.
ANSWER: c. people work less and produce fewer goods and services.

17
. In economics, the cost of something is
a.the out-of-pocket expense of obtaining it.
b.what you give up to get it.
c.always measured in units of time.
d.always higher than people think.
ANSWER: b. what you give up to get it.

18
. The opportunity cost of going to college is
a.the total spent on food, clothing, books, transportation, tuition, lodging, and other expenses.
b.zero for students who are fortunate enough to have all of their college expenses paid by someone
else.
c.the value of the best opportunity a student gives up to attend college.
d.zero, since a college education will allow a student to earn a larger income after graduation.
ANSWER: c. the value of the best opportunity a student gives up to attend college.

19
. For most students, the largest single cost of a college education is
a.transportation, parking, and entertainment.
b.tuition, fees, and books.
c.room and board.
d.the wages given up to attend school.
ANSWER: d. the wages given up to attend school.

20
. The opportunity cost of an item is
a.the number of hours needed to earn money to buy it.
b.what you give up to get that item.
c.always less than the dollar value of the item.
d.always equal to the dollar value of the item.
ANSWER: b. what you give up to get that item.

21
. Carolyn decides to spend an additional hour working overtime rather than watching a video with
her friends. She earns $8 for her hours work. Her opportunity cost of working is
a.the $8 she earns.
b.the enjoyment she would have received had she watched the video.
c.the $8 minus the enjoyment she would have received from watching the video.
d.nothing, since she would have received less than $8 of enjoyment from the video.
ANSWER: b. the enjoyment she would have received had she watched the video.

22
. Ryan spends an hour studying instead of going for a bike ride. The opportunity cost to him of
studying is
a.the improvement in his grades from studying for the hour.
b.the diference between the improvement in his grades from studying minus the enjoyment of a
bike ride.
c.the enjoyment and exercise he would have received had he gone for a bike ride.
d.zero. Since Ryan chose to study rather than to ride his bike, the value of studying must have been
greater than the value of the bike ride.
ANSWER: c. the enjoyment and exercise he would have received had he gone for a bike ride.

23
. College-age athletes who drop out of school to play professional sports
a.are making a bad economic decision, since they cant play forever.
b.are unaware of their opportunity cost of attending college.
c.underestimate the value of a college education.
d.are well aware that their opportunity cost of attending college is very high.
ANSWER: d. are well aware that their opportunity cost of attending college is very high.

24
. The term which means whatever must be given up to obtain an item is
a.efciency.
b.externality.
c.opportunity cost.
d.market failure.
ANSWER: c. opportunity cost.

25
. People make decisions at the margin by
a.following tradition.
b.comparing costs and benefts.
c.experience.
d.calculating dollar costs.
ANSWER: b. comparing costs and benefts.

26
. A marginal change is
a.a long-term trend.
b.a large, signifcant adjustment.
c.a change for the worse.
d.a small incremental adjustment.
ANSWER: d. a small incremental adjustment.

27
. Which of the following is the best example of a marginal change?
a.Mark graduates from college and takes a job. His income increases from $10,000 per year to
$50,000 per year.
b.The price of housing rises in Seattle by 25% in one year.
c.Kim works at the college bookstore. She gets a raise from $5.15 per hour to $5.20 per hour.
d.A drought hits the upper Midwest and the price of wheat increases from $4.00 per bushel to $8.00
per bushel.
ANSWER: c. Kim works at the college bookstore. She gets a raise from $5.15 per hour to $5.20 per hour.

28
. A rational decisionmaker takes an action only if
a.the marginal beneft is greater than the marginal cost.
b.the marginal beneft is less than the marginal cost.
c.the average beneft is greater than the average cost.
d.the marginal beneft is greater than both the average cost and the marginal cost.
ANSWER: a. the marginal beneft is greater than the marginal cost.

29
. You have spent $500 purchasing and repairing an old car which you expect to sell for $800 once the
repairs are complete. You discover that you need an additional part, which will cost $400, including
labor, in order to complete the repairs. You can sell the car as it is now for $300. What should
you do?
a.You should complete the repairs and sell the car.
b.You should cut your losses and take the $300.
c.You should never sell something for less than it costs.
d.It doesnt matter which action you take; the outcome is the same either way.
ANSWER: a. You should complete the repairs and sell the car.
TYPE: M KEY1: E SECTION: 1 OBJECTIVE: 4 RANDOM: Y

30
. Economists understand that people respond to
a.the wishes of policymakers.
b.incentives.
c.threats more than rewards.
d.tax breaks, but not tax hikes.
ANSWER: b. incentives.

31
. Which of the following is important for policy makers to consider when designing public policy?
a.the possibility that policies might change behavior
b.the direct efect of policies
c.the indirect efect of policies
d.all of the above
ANSWER: d. all of the above

32
. U.S. laws requiring that drivers wear seat belts have resulted in
a.a reduction in both driver deaths and pedestrian deaths.
b.fewer accidents and fewer deaths per accident.
c.little change in the number of driver deaths, but more accidents and more pedestrian deaths.
d.fewer driver deaths, fewer accidents and fewer pedestrian deaths.
ANSWER: c. little change in the number of driver deaths, but more accidents and more pedestrian
deaths.

33
. One efect of a government imposed seat belt law has been
a.fewer pedestrian deaths.
b.safer driving.
c.an increase in the number of accidents.
d.that everyone now wears seat belts.
ANSWER: c. an increase in the number of accidents.

34
. In the former Soviet Union, producers were paid for meeting output targets, not for selling
products. Under those circumstances, what were the economic incentives for producers?
a.to produce good quality products so that society benefts from the resources used
b.to conserve on costs, so as to maintain efciency in the economy
c.to produce those products that society desires most
d.to produce enough to meet the output target, without regard for quality or cost
ANSWER: d. to produce enough to meet the output target, without regard for quality or cost

35
. Trade can beneft a family
a.by allowing the family to buy a greater variety of goods and services at a lower cost.
b.by allowing each person to specialize in the activities he or she does best.
c.a and b
d.only if the family is not in economic competition with other families.
ANSWER: c. a and b

36
. Which is the most accurate statement about trade?
a.Trade makes some nations better of and others worse of.
b.Trade can make every nation better of.
c.Trading for a good can make a nation better of only if the nation cannot produce that good.
d.Trade helps rich nations and hurts poor nations.
ANSWER: b. Trade can make every nation better of.

37
. Trade between the United States and Mexico
a.is a losing proposition for Mexico because U.S. workers are more productive.
b.is a losing proposition for the U.S. because Mexico has cheaper labor.
c.is like a sports contest: one side wins and the other side loses.
d.benefts both the United States and Mexico.
ANSWER: d. benefts both the United States and Mexico.

38
. The United States can beneft from trade
a.with any nation.
b.only with nations which can produce goods the U.S. cannot produce.
c.with any nation not in economic competition with the U.S.
d.only with less-developed nations.
ANSWER: a. with any nation.

39
. If Canada is better than the U.S. at producing hockey sticks, but the U.S. is better than Canada at
producing roller blades,
a.the U.S. should impose a tarif on Canadian hockey sticks in order to protect jobs in the U.S. roller
blade industry.
b.the U.S. should sell roller blades to Canada, and should buy Canadian hockey sticks.
c.the U.S. should subsidize its hockey stick industry so that it can compete with Canadian hockey
sticks.
d.the U.S. should put a quota on the amount of Canadian hockey sticks imported.
ANSWER: b. the U.S. should sell roller blades to Canada, and should buy Canadian hockey sticks.

40
. Which of the following is the best statement about markets?
a.Markets are usually a good way to organize economic activity.
b.Markets are usually inferior to central planning as a way to organize economic activity.
c.Markets are fawed and are therefore not an acceptable way to organize economic activity.
d.Markets are a good way to organize economic activity in developed nations, but not in less-
developed nations.
ANSWER: a. Markets are usually a good way to organize economic activity.

41
. In a market economy,
a.frms decide whom to hire and what to produce.
b.proft and self-interest guide the decisions of frms and households.
c.households decide which frms to work for and what to buy with their incomes.
d.all of the above

42
. In a market economy, economic activity is guided by
a.the government.
b.prices.
c.central planners.
d.corporations.
ANSWER: b. prices.

43
. One advantage market economies have over central planning is that market economies
a.are more efcient.
b.solve the problem of scarcity.
c.establish government economic control.
d.provide an equal distribution of goods and services to consumers.
ANSWER: a. are more efcient.

44
. Which of the following observations was made famous by Adam Smith in his book The Wealth of
Nations?
a.There is no such thing as a free lunch.
b.People buy more when prices are low than when prices are high.
c.No matter how much people earn, they tend to spend more than they earn.
d.Households and frms interacting in markets are guided by an invisible hand that leads them to
desirable market outcomes.
ANSWER: d. Households and frms interacting in markets are guided by an invisible hand that leads
them to desirable market outcomes.

45
. The invisible hand directs economic activity through
a.prices.
b.mass media.
c.subliminal messages.
d.government regulations.
ANSWER: a. prices.

46
. Adam Smith's book The Wealth of Nations was published in
a.1692.
b.1776.
c.1816.
d.1936.
ANSWER: b. 1776.

47
. The invisible hand works to promote general well-being in the economy primarily through
a.government intervention.
b.the political process.
c.self interest.
d.altruism.
ANSWER: c. self interest.

48
. Taxes adversely afect the allocation of resources in society because
a.they do not always fall more heavily on the rich.
b.the taxes collected are not enough to fnance government.
c.they distort prices and thus the decisions of households and frms.
d.not everyone pays taxes.
ANSWER: c. they distort prices and thus the decisions of households and frms.

49
. When the government prevents prices from adjusting naturally to supply and demand,
a.it stabilizes the economy.
b.it adversely afects the allocation of resources.
c.the improvement in equity justifes the reduction in efciency.
d.the reduced uncertainty associated with fxed prices is worth more than the cost in lower
efciency.
ANSWER: b. it adversely afects the allocation of resources.

50
. The term market failure refers to
a.a frm which is forced out of business because of losses.
b.an unsuccessful advertising campaign.
c.a situation in which competition among frms becomes ruthless.
d.a situation in which the market on its own fails to allocate resources efciently.
ANSWER: d. a situation in which the market on its own fails to allocate resources efciently.

51
. The two best reasons for a government to intervene in a market are
a.to raise revenues and to promote stability.
b.to promote equity and to raise revenues.
c.to promote efciency and to raise revenues.
d.to promote equity and to promote efciency.
ANSWER: d. to promote equity and to promote efciency.

52
. Causes of market failure include
a.externalities and foreign competition.
b.market power and incorrect forecasts of consumer demand.
c.externalities and market power.
d.incorrect forecasts of consumer demand and foreign competition.
ANSWER: c. externalities and market power.

53
. An externality is
a.the impact of societys decisions on the well-being of society.
b.the impact of a persons actions on that persons well-being.
c.the impact of societys decisions on the well-being of one person.
d.the impact of one persons actions on the well-being of a bystander.
ANSWER: d. the impact of one persons actions on the well-being of a bystander.

54
. An example of an externality is
a.the impact of bad weather on the income of farmers.
b.the impact of the personal income tax on a persons ability to purchase goods and services.
c.the impact of pollution from a factory on the health of people in the vicinity of the factory.
d.the impact of increases in health care costs on the health of individuals in society.
ANSWER: c. the impact of pollution from a factory on the health of people in the vicinity of the
factory.

55
. If a copper refnery does NOT bear the entire cost of the smoke it emits,
a.it will eliminate all smoke so as to avoid the entire cost of the smoke.
b.it will emit lower levels of smoke.
c.it will emit an acceptable level of smoke.
d.it will emit too much smoke.
ANSWER: d. it will emit too much smoke.

56
. A situation in which a market left on its own fails to allocate resources efciently is known as
a.scarcity.
b.opportunity cost.
c.market failure.
d.market power.
ANSWER: c. market failure.

57
. A market economy rewards people according to
a.their need for goods and services.
b.how willing they are to work.
c.their ability to produce things of cultural importance.
d.their ability to produce things that other people are willing to pay for.
ANSWER: d. their ability to produce things that other people are willing to pay for.

58
. Which of these consumption activities is most likely to cause an external cost?
a.An executive plays a vigorous game of golf.
b.A construction worker eats a sandwich during the lunch break.
c.A young mother exercises to an aerobics video.
d.A student in a dorm plays her CDs at 120 decibels late at night.
ANSWER: d. A student in a dorm plays her CDs at 120 decibels late at night.

59
. If education produces external benefts for society, which of the following might be an appropriate
policy for society to establish regarding education?
a.public subsidies of education
b.mandatory minimum levels of education
c.tax incentives for schooling
d.all of the above

60
. If a sawmill creates too much air pollution,
a.interference by the government will surely make the matter worse.
b.a sense of social responsibility will cause the owners of the mill to reduce pollution.
c.the government can raise economic well-being by providing health care to those afected by the
pollution.
d.the government can raise economic well-being through environmental regulation.
ANSWER: d. the government can raise economic well-being through environmental regulation.

61
. Market power refers to
a.the relative importance of a market to the overall economy.
b.the ability of a person or group of people to successfully market new products.
c.the power of the government to regulate a market.
d.the power of a single person (or small group of people) to unduly infuence market prices.
ANSWER: d. the power of a single person (or small group of people) to unduly infuence market
prices.

62
. An example of a monopoly would be
a.a sole provider of electrical power in a city.
b.a gasoline service station in Los Angeles.
c.a grocery store in Chicago.
d.a hospital in Missouri.
ANSWER: a. a sole provider of electrical power in a city.

63
. Which is the most correct statement about the invisible hand?
a.The invisible hand always ensures both equity and efciency.
b.The invisible hand never ensures either equity or efciency.
c.The invisible hand is more efective at ensuring equity than it is at ensuring efciency.
d.The invisible hand is more efective at ensuring efciency than it is at ensuring equity.
ANSWER: d. The invisible hand is more efective at ensuring efciency than it is at ensuring equity.

64
. In the United States, higher income tax rates on rich people could be justifed on the basis of
a.efciency.
b.equity.
c.lack of other sources of government revenue.
d.government bias against the wealthy.
ANSWER: b. equity.

65
. Taxing high incomes at a higher rate than low incomes is most likely to do which of the following?
a.promote equity and promote efciency
b.promote equity and hinder efciency
c.hinder equity and promote efciency
d.hinder equity and hinder efciency
ANSWER: b. promote equity and hinder efciency

66
. Upon what does a countrys standard of living depend?
a.its ability to produce goods and services
b.the amount of gold and silver the country has
c.the average amount of money individuals in the country have
d.its ability to protect its workers from foreign competition
ANSWER: a. its ability to produce goods and services

67
. In 1997 the average American had an income of about
a.$35,000.
b.$29,000.
c.$20,000.
d.$15,000.
ANSWER: b. $29,000.

68
. In the United States, incomes have historically grown about 2% per year. At this rate incomes will
double every
a.10 years.
b.25 years.
c.35 years.
d.50 years.
ANSWER: c. 35 years.

69
. The income of a typical worker in a country is most closely linked to which of the following?
a.population
b.labor unions
c.productivity
d.government policies
ANSWER: c. productivity

70
. If the average income of an American is higher than the average income of an Italian, it is most likely
because
a.labor unions are more aggressive in the United States than in Italy.
b.the United States has a more industrial economy than Italy.
c.there is more competition in the United States than in Italy.
d.productivity is higher in the United States than in Italy.
ANSWER: d. productivity is higher in the United States than in Italy.

71
. A worker in Bangladesh can earn $1 per day making cotton cloth on a hand loom. A worker in the
United States can earn $100 per day making cotton cloth with a mechanical loom. What accounts for
the diference in wages?
a.U.S. textile workers belong to a union.
b.Labor is more productive when making cotton cloth with a mechanical loom than with a hand
loom.
c.There is little demand for cotton cloth in Bangladesh and great demand in the U.S.
d.Bangladesh has a low-wage policy to make its textile industry more competitive in world markets.
ANSWER: b. Labor is more productive when making cotton cloth with a mechanical loom than with a
hand loom.

72
. In the United States, incomes have historically grown
a.about 10 percent per year.
b.about 5 percent per year.
c.about 2 percent per year.
d.about 0.5 percent per year.
ANSWER: c. about 2 percent per year.

73
. Almost all variation in living standards is attributable to
a.diferences in countries population growth rates.
b.diferences in countries endowments of natural resources.
c.diferences in countries productivity.
d.diferences in countries defense budgets.
ANSWER: c. diferences in countries productivity.

74
. Productivity is defned as
a.the actual amount of efort workers put into an hour of working time.
b.the number of workers required to produce a given amount of goods and services.
c.the amount of labor which can be saved by replacing workers with machines.
d.the amount of goods and services produced from each hour of a workers time.
ANSWER: d. the amount of goods and services produced from each hour of a workers time.

75
. The primary determinant of a countrys standard of living is
a.the government.
b.labor unions.
c.productivity.
d.minimum wage laws.
ANSWER: c. productivity.

76
. The historical rise in living standards of American workers is primarily a result of
a.the infuence of labor unions.
b.the rise in labor productivity.
c.minimum-wage laws.
d.tarif protection.
ANSWER: b. the rise in labor productivity.

77
. To increase living standards, public policy should
a.move workers into jobs directly from high school.
b.make unemployment benefts more liberal.
c.ensure that workers are well educated and have the necessary tools and technology.
d.ensure that workers have access to union membership and benefts.
ANSWER: c. ensure that workers are well educated and have the necessary tools and technology.

78
. Concern among economists about the U.S.governments budget defcit is based largely on
a.the likelihood that the defcit will cause the country to go bankrupt.
b.the defcits adverse impact on productivity.
c.the fact that part of the defcit is covered by borrowing from foreigners.
d.the fact that the defcit is covered by printing money.
ANSWER: b. the defcits adverse impact on productivity.

79
. Which of the following tends to decrease productivity?
a.budget defcits
b.education
c.competition
d.investment
ANSWER: a. budget defcits

80
. In the United States, government defcits are fnanced by
a.printing money, which creates infation.
b.borrowing, which reduces funds available for investment in human and physical capital.
c.taxes, which lowers the incentive for people to work.
d.confscating property of criminals.
ANSWER: b. borrowing, which reduces funds available for investment in human and physical capital.

81
. Infation is defned as
a.a period of rising productivity in the economy.
b.an increase in the overall level of output in the economy.
c.a period of rising income in the economy.
d.an increase in the overall level of prices in the economy.
ANSWER: d. an increase in the overall level of prices in the economy.

82
. One of the worst episodes of infation occurred
a.in the United States in the 1960s.
b.in Germany in the 1920s.
c.in Russia in the 1930s.
d.in Japan in the 1950s.
ANSWER: b. in Germany in the 1920s.

83
. Large or persistent infation is almost always caused by
a.inefciency.
b.low productivity.
c.foreign competition.
d.growth in the quantity of money.
ANSWER: d. growth in the quantity of money.

84
. The person who referred to infation as public enemy number one was
a.Richard Nixon.
b.Alan Greenspan.
c.Gerald Ford.
d.John F. Kennedy.
ANSWER: c. Gerald Ford.

85
. In the 1990s, infation in the United States
a.was almost zero.
b.was about 3% per year.
c.approached double digits.
d.was caused by too much consumer spending.
ANSWER: b. was about 3% per year.

86
. Infation causes
a.the value of money to fall.
b.productivity to increase.
c.the government to lower taxes.
d.the value of money to rise.
ANSWER: a. the value of money to fall.

87
. Which of the following is the most correct statement about the relationship between infation and
unemployment?
a.In the short run, reducing infation is associated with rising unemployment.
b.In the short run, reducing infation is associated with falling unemployment.
c.In the long run, reducing infation is associated with falling unemployment.
d.In the long run, reducing infation is associated with rising unemployment.
ANSWER: a. In the short run, reducing infation is associated with rising unemployment.

88
. The tradeof between infation and unemployment is called
a.the Lafer curve.
b.the Lorenz curve.
c.the Demand curve.
d.the Phillips curve.
ANSWER: d. the Phillips curve.

89
. One explanation of the tradeof between infation and unemployment is that
a.prices are fexible.
b.prices are sticky.
c.prices always tend to rise.
d.unemployment increases demand.
ANSWER: b. prices are sticky.

90
. In the early 1980s, U.S. economic policy was directed toward reducing infation. What would you
assume about infation and unemployment during this period?
a.Infation fell and unemployment increased.
b.Infation and unemployment were both unafected.
c.Infation fell and unemployment fell.
d.Infation fell and unemployment was unchanged.
ANSWER: a. Infation fell and unemployment increased.

91
. Between 1929 and 1933, the U.S. economy went from a situation of full employment to one of 25%
unemployment. What do you assume happened to prices?
a.Prices were unafected.
b.Prices fell and the economy experienced defation.
c.Prices rose and the economy experienced infation.
d.It is impossible to guess what happened to prices from the information given.
ANSWER: b. Prices fell and the economy experienced defation.
TRUE/FALSE

92
. The word economy comes from the Greek word for conservation.
ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

93
. Scarcity means that society has less to ofer than people wish to have.
ANSWER: T

94
. Economics is the study of how fairly goods and services are distributed within society.
ANSWER: F

95
. Economists study how individuals make decisions, how they interact with each other, and the
factors which afect the economy as a whole.
ANSWER: T

96
. With careful planning, we can usually get something that we like without having to give up
something else that we like.
ANSWER: F

97
. Individuals face tradeofs, but societies do not.
ANSWER: F

98
. Equity means everyone in the economy should receive an equal share of the goods and services
produced.
ANSWER: F

99
. People are likely to make good decisions only if they understand the options that they have
available.
ANSWER: T
100
. Pollution regulations make society better of by raising incomes.
ANSWER: F

101
. Equity refers to the size of the economic pie, and efciency refers to how the pie is divided.
ANSWER: F

102
. In economic policymaking, there is often a confict between the goal of efciency and the goal of
equity.
ANSWER: T

103
. When the government redistributes income from the rich to the poor, society benefts since there are
more poor than rich.
ANSWER: F
TYPE: T KEY: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

104
. For most students, tuition is the single largest cost of attending college.
ANSWER: F

105
. The opportunity cost of something is what you give up to get it.
ANSWER: T

106
. If an All-American basketball player decides to stay in school for his senior year rather than sign an
NBA contract, the opportunity cost to him of his fnal year of college could be well over $1 million.
ANSWER: T
TYPE: T KEY1: C SECTION: 1 OBJECTIVE: 3 RANDOM: Y

107
. A marginal change is a small incremental adjustment to an existing plan of action.
ANSWER: T

108
. If the average cost of transporting a passenger on a night train from Kansas City to St. Louis is $50, it
would be irrational for the railroad to allow any passenger to ever ride for less than $50.
ANSWER: F

109
. A rational decisionmaker takes an action if and only if the marginal cost exceeds the marginal
beneft.
ANSWER: F

110
. Public policies often alter the costs and benefts of private actions.
ANSWER: T

111
. Economist Sam Peltzman found that seat belt laws caused more accidents and more pedestrian
deaths.
ANSWER: T

112
. Policy makers cannot directly afect public behavior; they can only afect public behavior indirectly.
ANSWER: F

113
. In international trade, if one party gains, the other party loses.
ANSWER: F

114
. Trade allows each person to specialize in the activities he or she does best, thus increasing each
individuals productivity.
ANSWER: T

115
. Trade makes rich nations richer and poor nations poorer.
ANSWER: F

116
. In his book The Wealth of Nations, Adam Smith observed that households and frms interacting in
markets are led by an invisible hand to make decisions that produce desirable outcomes for
society.
ANSWER: T

117
. When the government prevents prices from adjusting naturally to supply and demand, efciency is
improved in the economy.
ANSWER: F

118
. A market economy cannot possibly produce a socially desirable outcome because individuals are
motivated by their own selfsh interests.
ANSWER: F

119
. While the invisible hand cannot guarantee efciency, it is better at guaranteeing equity.
ANSWER: F

120
. The two broad reasons for a government to intervene in the economy are to promote efciency and
to promote equity.
ANSWER: T

121
. Market failure refers to a situation in which the market does not allocate resources efciently.
ANSWER: T

122
. Since taxes afect only the price paid by the buyer, they cannot have an adverse impact on the
allocation of societys resources.
ANSWER: F

123
. A monopolist has market power.
ANSWER: T

124
. A market economy rewards people according to their ability to produce things that other people are
willing to pay for.
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 7 RANDOM: Y PAGE: 10

125
. Monopoly power and income inequality are examples of market failure.
ANSWER: F

126
. Productivity is defned as the quantity of goods and services produced from each hour of a workers
time.
ANSWER: T

127
. Better tools and technology can increase productivity and therefore living standards in countries.
ANSWER: T

128
. Almost all variation in living standards is a result of diferences in countries productivity.
ANSWER: T

129
. Protecting domestic jobs from foreign competition is the best way to raise labor productivity.
ANSWER: F

130
. During the 1970s, the United States experienced stable prices and robust economic growth.
ANSWER: F

131
. Infation increases the value of money.
ANSWER: F

132
. If the government prints too much money, it will cause infation.
ANSWER: T

133
. The Phillips Curve shows the short-run tradeof between infation and economic growth.
ANSWER: F

134
. Economists agree that monetary and fscal policy, although not very powerful, are necessary
instruments for controlling the economy.
ANSWER: F

135
. The major cause of infation in an economy is too much government debt.
ANSWER: F
SHORT ANSWER
APPLICATION/SCENARIO

136
. Give three examples each of household and societal decisions regarding the allocation of resources.
ANSWER: For households, examples would include such things as who feeds the cat, who takes out the
garbage, who fxes meals, who runs errands, etc. For society, examples would include such things as
who will produce food, who will produce computers, how land will be allocated to produce food,
locate housing, and factories, use for recreation, etc.
TYPE: S KEY1: D OBJECTIVE: 1 RANDOM: Y

137
. Households face many of the same decisions that societies face. Explain why this is true.
ANSWER: Like households, societies must decide which members do which tasks and what each
member gets in return for doing those tasks. Like societies, households must allocate their scarce
resources among their members given each member's abilities, eforts and desires.

138
. What would happen to the study of economics if scarcity disappeared?
ANSWER: Since economics is the study of how society allocates its scarce resources, if there was 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 tradeofs, because there would be no
opportunity cost. (It is difcult to conceive of a situation where time is not scarce, however.)
TYPE: S KEY1: C OBJECTIVE: 1 RANDOM: Y

139
. What does the phrase, There is no such thing as a free lunch, illustrate?
ANSWER: This phrase illustrates the concept of tradeofs. It means that to get one thing that we like, we
usually have to give up another thing that we like.
TYPE: S KEY1: C SECTION: 1 OBJECTIVE: 1 RANDOM: Y

140
. The U.S. government redistributes income from the rich to the poor. Explain how this action afects
equity as well as efciency in the economy.
ANSWER: Policies aimed at achieving a more equal distribution of economic well-being, such as the
welfare system, try to help those members of society who are most in need. The individual income
tax asks the fnancially successful to contribute more than others to support the government. 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. As a result, equity
increases and efciency decreases.

141
. One tradeof that society faces is between efciency and equity. Defne each term and explain this
tradeof.
ANSWER: Efciency is the property of society getting the most it can from its scarce resources.
Equity is defned as the property of distributing economic prosperity fairly among the members of
society. Often, these two goals confict. 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.

142
. Defne opportunity cost. What is the opportunity cost to you of attending college?
ANSWER: The value of the best alternative use of your time. For most students this would be the income
the student gives up by not working.

143
. Suppose Regan enjoys hiking, skiing, and solitude. She graduates from college and needs to decide
whether to take a job in a large coastal city at a salary of $55,000 per year, or a job in a small Rocky
Mountain community at $40,000 per year. Would it be rational for her to take the lower-paying job?
Explain.
ANSWER: To Regan, there is non-monetary value to living in an area which can aford her the hiking,
skiing, and solitude she enjoys. The decision to take the lower-paying job is rational if the additional
hiking, skiing, and solitude opportunities are worth at least $15,000 per year to Regan.

144
. Stan buys a 1966 Mustang with the intention of repairing, restoring and selling it. He anticipates
that it will cost him $10,000 to purchase, repair and restore the car, and that he can sell the fnished
car for $13,000. When he has spent a total of $10,000 on the project, he discovers that he needs to
replace the engine. It will cost Stan $4,000 to replace the engine. He can sell the car without the new
engine for $9,000.What should he do?
ANSWER: Stan should be indiferent between fnishing the project and selling the car now. The marginal
cost of fnishing the project is $4,000 and the marginal beneft of fnishing the project is $13,000, for a
net marginal beneft of $9,000. The marginal cost of stopping the project now is zero, and the
marginal beneft is the $9,000 he can obtain from selling the car as is. Hence, the net marginal
beneft from stopping the project now is also $9,000.
TYPE: S KEY1: E SECTION: 1 OBJECTIVE: 3 RANDOM: Y

145
. What is the general rule for rational decisionmaking?
ANSWER: An action is taken only if the marginal beneft of the action exceeds the marginal cost.
TYPE: S KEY1: D SECTION: 1 OBJECTIVE: 4 RANDOM: Y

146
. A cookie shop in a mall is open from 9am to 7pm Monday through Friday. The cost of making and
selling cookies averages $.50 per cookie. At 6:30 pm Friday evening, the owner still has several
dozen unsold cookies. The cookies will not be saleable on Monday. What is the best price strategy
for the cookie shop to take? Justify your answer.
ANSWER: The owner should continually reduce the price of the cookies so that all the cookies are sold
by closing time, even if the price falls below $.50.

147
. You must decide whether or not to attend graduate school next semester. How might you use
marginal analysis to make your decision?
ANSWER: A rational decisionmaker takes an action if and only if the marginal beneft of the action
exceeds the marginal cost. You will need to know the additional benefts that more education would
ofer and the additional costs that you would incur. By comparing these marginal benefts and
marginal costs, you can determine whether the additional education is worthwhile.

148
. 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.
ANSWER: The concept of working longer per year would be perceived by many teachers as a defnite
increase in the cost of teaching. Even with additional compensation, many teachers look at summers
of as a major beneft of the education profession. If this beneft were eliminated or even diminished,
some teachers may perceive that the marginal cost of teaching would now be greater than the
marginal beneft and choose to leave teaching.

149
. Public policies often alter the costs and benefts of private actions. Why is it important for policy
makers to consider both the direct and indirect efects of public policies?
ANSWER: If policy makers don't consider how behavior might change both directly and indirectly, their
policies can have efects that they did not intend. The example used in the text is the seat belt law.

150
. In the old days of the Soviet Union, ideology dictated that the prices of consumer goods should
decline over time. Hence, the Soviet planners consistently set the prices of goods like bread and
meat much below the cost of the materials used to produce them. They did not, however, subsidize
the prices of the goods and materials used by producers. Soviet fur breeders were supposed to
purchase animal products at high prices to feed their mink and sable, and bread and meat at low
prices to feed their families. If these producers responded to incentives, how do you think they
adjusted their purchases of grain, animal products, bread, and meat?
ANSWER: The fur breeders would have incentive to feed their mink and sable meat intended for humans
instead of animal products. They would continue to buy bread and meat for their families. (In fact,
this is what actually happened in many instances in the old Soviet Union.)

151
. Why is it that two individuals or nations can both gain from trade when they trade things of equal
value?
ANSWER: Trade allows individuals and societies to specialize in what they do best. By trading with
others, they can obtain a variety of goods and services at a lower cost than if they produced the
goods and services themselves.

152
. What benefts can a family realize by choosing to trade instead of being self-sufcient?
ANSWER: Trade allows each person to specialize in the activities he or she does best. By trading with
others, people can buy a greater variety of goods and services at lower cost.

153
. Why does the United States continue to trade with a country like Japan, which places tarifs and
other barriers on U.S. goods?
ANSWER: Trade between the U.S. and Japan allows both countries to specialize in what they do best, and
to purchase goods at lower costs than they can produce the goods themselves. Although the tarifs
and other barriers reduce the gains from trade, as long as trade between the U.S. and Japan takes
place, both nations must be beneftting from trade. Japan must be able to produce some goods
cheaper than the U.S. can.

154
. Under what conditions might a government intervention in an economy improve the market
outcome?
ANSWER: If there is a market failure, such as an externality or monopoly, government regulation might
improve the well-being of society by promoting efciency. If the distribution of income or wealth is
considered to be unfair by society, government intervention might achieve a more equitable
distribution of economic well-being.

155
. Adam Smith used the term invisible hand in his 1776 book The Wealth of Nations. Prices are the
instrument with which the invisible hand directs economic activity in a market economy. Explain.
ANSWER: Because households and frms look at prices when deciding what to buy and sell, they
unknowingly take into account the social benefts and costs of their actions. As a result, prices guide
these individual decisionmakers to reach outcomes that maximize the welfare of society as a whole.

156
. Suppose that the government enforces a law which prohibits the creation of any pollution. What
efect do you think the enforcement of this law will have on the well-being of society?
ANSWER: While pollution creates an external cost to society, there is also a cost to society of eliminating
the pollution. A law which prohibits pollution considers the marginal beneft to society of
eliminating pollution, but not the marginal cost. Hence, the enforcement of the law could actually
harm society, if the cost of eliminating the pollution were greater than the beneft. In fact, such a law
would eliminate all people, because people emit CO2, a greenhouse gas.

157
. Most analysts believe that the failure of communism can be blamed on the failure of central
planning to allocate resources efciently. Why is it difcult for central planners to allocate resources
efciently?
ANSWER: Efcient allocation of resources depends on information which refects the true marginal
beneft to society of consuming products and the true marginal cost to society of producing
products. Market prices contain this information. These prices are determined automatically in a
market economy through the interactions of the decisions of millions of households and frms. Since
the central planners do not have access to all of the information the market uses in determining
prices, it is impossible for the planners to set prices which refect marginal beneft and marginal
cost. Therefore, it is impossible for the central planners to allocate resources efciently.

158
. Why is productivity so important in an economy and what steps can the government take to
increase productivity?
ANSWER: Productivity is the primary determinant of the standard of living of a nation, and productivity
growth is the primary determinant of the growth of average income in a nation. The government
can increase productivity by ensuring that workers are well educated, have the tools needed to
produce goods and services, and have access to the best available technology.

159
. Explain how an attempt by the government to lower infation could cause unemployment to
increase in the short-run.
ANSWER: To lower infation, the government may choose to reduce the money supply in the economy.
When the money supply is reduced, prices dont adjust immediately. Lower spending combined
with prices which are too high reduces sales and causes workers to be laid of. Hence, the lower
price level is associated with higher unemployment.

160
. Russell learned in his economics class that income depends primarily on productivity. He took a
summer job in construction, and worked very hard as a manual laborer for one month at $8 per
hour. His hard work and reliability led the foreman to give Russell a new responsibility--operating a
steel roller at $15 per hour. The new job required much less efort than the old job, and left Russell
wondering why his income had increased when his efort had gone down. How can you explain this
situation to Russell?
ANSWER: Income is based on productivity, not efort. Russell was able to be more productive working
with a machine than working with a shovel.

1
ANSWER:
c. one who manages a household.
2
ANSWER:
b. scarcity.
3
ANSWER:
b. what determines consumer preferences
4
ANSWER:
b. there is less of a good or resource available than people wish to have.
5
ANSWER:
a. if all members of society can have all they want of it.
6
ANSWER:
d. water in a city
7
ANSWER:
b. the study of how society manages its scarce resources.
8
ANSWER:
d. how countries choose national leaders
9
ANSWER:
a. To get something we like, we usually have to give up another thing we like.
10
ANSWER:
c. the $6 he could have earned.
11
ANSWER:
d. there is a tradeof because of reduced incomes to the frms owners, workers, and customers.
12
ANSWER:
a. society is getting the most it can from its scarce resources.
13
ANSWER:
d. the benefts of societys resources are distributed fairly among societys members.
14
ANSWER:
b. fairness.
TYPE: M KEY 1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y
15
ANSWER:
b. there is usually a tradeof between equity and efciency.
16
ANSWER:
c. people work less and produce fewer goods and services.
17
ANSWER:
b. what you give up to get it.
18
ANSWER:
c. the value of the best opportunity a student gives up to attend college.
19
ANSWER:
d. the wages given up to attend school.
20
ANSWER:
b. what you give up to get that item.
21
ANSWER:
b. the enjoyment she would have received had she watched the video.
22
ANSWER:
c. the enjoyment and exercise he would have received had he gone for a bike ride.
23
ANSWER:
d. are well aware that their opportunity cost of attending college is very high.
24
ANSWER:
c. opportunity cost.
25
ANSWER:
b. comparing costs and benefts.
26
ANSWER:
d. a small incremental adjustment.
27
ANSWER:
c. Kim works at the college bookstore. She gets a raise from $5.15 per hour to $5.20 per hour.
28
ANSWER:
a. the marginal beneft is greater than the marginal cost.
29
ANSWER:
a. You should complete the repairs and sell the car.
TYPE: M KEY1: E SECTION: 1 OBJECTIVE: 4 RANDOM: Y
30
ANSWER:
b. incentives.
31
ANSWER:
d. all of the above
32
ANSWER:
c. little change in the number of driver deaths, but more accidents and more pedestrian deaths.
33
ANSWER:
c. an increase in the number of accidents.
34
ANSWER:
d. To produce enough to meet the output target, without regard for quality or cost.
35
ANSWER:
c. a and b
36
ANSWER:
b. Trade can make every nation better of.
37
ANSWER:
d. benefts both the United States and Mexico.
38
ANSWER:
a. with any nation.
39
ANSWER:
b. the U.S.should sell roller blades to Canada, and should buy Canadian hockey sticks.
40
ANSWER:
a. Markets are usually a good way to organize economic activity.
41
ANSWER:
d. all of the above
42
ANSWER:
b. prices.
43
ANSWER:
a. are more efcient.
44
ANSWER:
d. Households and frms interacting in markets are guided by an invisible hand that leads them
to desirable market outcomes.
45
ANSWER:
a. prices.
46
ANSWER:
b. 1776.
47
ANSWER:
c. self interest.
48
ANSWER:
c. they distort prices and thus the decisions of households and frms.
49
ANSWER:
b. it adversely afects the allocation of resources.
50
ANSWER:
d. a situation in which the market on its own fails to allocate resources efciently.
51
ANSWER:
d. to promote equity and to promote efciency.
52
ANSWER:
c. externalities and market power.
53
ANSWER:
d. the impact of one persons actions on the well-being of a bystander.
54
ANSWER:
c. the impact of pollution from a factory on the health of people in the vicinity of the factory.
55
ANSWER:
d. it will emit too much smoke.
56
ANSWER:
c. market failure.
57
ANSWER:
d. their ability to produce things that other people are willing to pay for.
58
ANSWER:
d. A student in a dorm plays her CDs at 120 decibels late at night.
59
ANSWER:
d. all of the above
60
ANSWER:
d. the government can raise economic well-being through environmental regulation.
61
ANSWER:
d. the power of a single person (or small group of people) to unduly infuence market prices.
62
ANSWER:
a. a sole provider of electrical power in a city.
63
ANSWER:
d. The invisible hand is more efective at ensuring efciency than it is at ensuring equity.
64
ANSWER:
b. equity.
65
ANSWER:
b. promote equity and hinder efciency
66
ANSWER:
a. its ability to produce goods and services
67
ANSWER:
b. $29,000.
68
ANSWER:
c. 35 years.
69
ANSWER:
c. productivity
70
ANSWER:
d. productivity is higher in the United States than in Italy.
71
ANSWER:
b. Labor is more productive when making cotton cloth with a mechanical loom than with a hand
loom.
72
ANSWER:
c. about 2 percent per year.
73
ANSWER:
c. diferences in countries productivity.
74
ANSWER:
d. the amount of goods and services produced from each hour of a workers time.
75
ANSWER:
c. productivity.
76
ANSWER:
b. the rise in labor productivity.
77
ANSWER:
c. ensure that workers are well educated and have the necessary tools and technology.
78
ANSWER:
b. the defcits adverse impact on productivity.
79
ANSWER:
a. budget defcits
80
ANSWER:
b. borrowing, which reduces funds available for investment in human and physical capital.
81
ANSWER:
d. an increase in the overall level of prices in the economy.
82
ANSWER:
b. in Germany in the 1920s.
83
ANSWER:
d. growth in the quantity of money.
84
ANSWER:
c. Gerald Ford.
85
ANSWER:
b. was about 3% per year.
86
ANSWER:
a. the value of money to fall.
87
ANSWER:
a. In the short run, reducing infation is associated with rising unemployment.
88
ANSWER:
d. the Phillips curve.
89
ANSWER:
b. prices are sticky.
90
ANSWER:
a. Infation fell and unemployment increased.
91
ANSWER:
b. Prices fell and the economy experienced defation.
92
ANSWER:
F
93
ANSWER:
T
94
ANSWER:
F
95
ANSWER:
T
96
ANSWER:
F
97
ANSWER:
F
98
ANSWER:
F
99
ANSWER:
T
100
ANSWER:
F
101
ANSWER:
F
102
ANSWER:
T
103
ANSWER:
F
TYPE: T KEY: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y
104
ANSWER:
F
105
ANSWER:
T
106
ANSWER:
T
107
ANSWER:
T
108
ANSWER:
F
109
ANSWER:
F
110
ANSWER:
T
111
ANSWER:
T
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ANSWER:
F
113
ANSWER:
F
114
ANSWER:
T
115
ANSWER:
F
116
ANSWER:
T
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ANSWER:
F
118
ANSWER:
F
119
ANSWER:
F
120
ANSWER:
T
121
ANSWER:
T
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ANSWER:
F
123
ANSWER:
T
124
ANSWER:
T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 7 RANDOM: Y PAGE: 10
125
ANSWER:
F
126
ANSWER:
T
127
ANSWER:
T
128
ANSWER:
T
129
ANSWER:
F
130
ANSWER:
F
131
ANSWER:
F
132
ANSWER:
T
133
ANSWER:
F
134
ANSWER:
F
135
ANSWER:
F
136
ANSWER:
For households, examples would include such things as who feeds the cat, who takes out the garbage, who fxes
meals, who runs errands, etc. For society, examples would include such things as who will produce food, who
will produce computers, how land will be allocated to produce food, locate housing, and factories, use for
recreation, etc.
137
ANSWER:
Like households, societies must decide which members do which tasks and what each member gets in return for
doing those tasks. Like societies, households must allocate their scarce resources among their members given
each member's abilities, eforts and desires.
138
ANSWER:
Since economics is the study of how society allocates its scarce resources, if there was 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 tradeofs, because there would be no opportunity cost. (It is difcult to conceive of a
situation where time is not scarce, however).
TYPE: S KEY1: C OBJECTIVE: 1 RANDOM: Y
139
ANSWER:
This phrase illustrates the concept of tradeofs. It means that to get one thing that we like, we usually have to
give up another thing that we like.
140
ANSWER:
Policies aimed at achieving a more equal distribution of economic well-being, such as the welfare system, try to
help those members of society who are most in need. The individual income tax asks the fnancially successful to
contribute more than others to support the government. 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. As a result, equity increases and efciency decreases.
141
ANSWER:
Efciency is the property of society getting the most it can from its scarce resources.
Equity is defned as the property of distributing economic prosperity fairly among the members of society.
Often, these two goals confict. 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.
142
ANSWER:
The value of the best alternative use of your time. For most students this would be the income the student gives
up by not working.
143
ANSWER:
To Regan, there is non-monetary value to living in an area which can aford her the hiking, skiing, and solitude
she enjoys. The decision to take the lower-paying job is rational if the additional hiking, skiing, and solitude
opportunities are worth at least $15,000 per year to Regan.
144
ANSWER:
Stan should be indiferent between fnishing the project and selling the car now. The marginal cost of fnishing
the project is $4,000 and the marginal beneft of fnishing the project is $13,000, for a net marginal beneft of
$9,000. The marginal cost of stopping the project now is zero, and the marginal beneft is the $9,000 he can obtain
from selling the car as is. Hence, the net marginal beneft from stopping the project now is also $9,000.
TYPE: S KEY1: E SECTION: 1 OBJECTIVE: 3 RANDOM: Y
145
ANSWER:
An action is taken only if the marginal beneft of the action exceeds the marginal cost.
146
ANSWER:
The owner should continually reduce the price of the cookies so that all the cookies are sold by closing time,
even if the price falls below $.50.
147
ANSWER:
A rational decisionmaker takes an action if and only if the marginal beneft of the action exceeds the marginal
cost. You will need to know the additional benefts that more education would ofer and the additional costs that
you would incur. By comparing these marginal benefts and marginal costs, you can determine whether the
additional education is worthwhile.
148
ANSWER:
The concept of working longer per year would be perceived by many teachers as a defnite increase in the cost of
teaching. Even with additional compensation, many teachers look at summers of as a major beneft of the
education profession. If this beneft were eliminated or even diminished, some teachers may perceive that the
marginal cost of teaching would now be greater than the marginal beneft and choose to leave teaching.
149
ANSWER:
If policy makers don't consider how behavior might change both directly and indirectly, their policies can have
efects that they did not intend. The example used in the text is the seat belt law.
150
ANSWER:
The fur breeders would have incentive to feed their mink and sable meat intended for humans instead of animal
products. They would continue to buy bread and meat for their families. (In fact, this is what actually happened
in many instances in the old Soviet Union.)
151
ANSWER:
Trade allows individuals and societies to specialize in what they do best. By trading with others, they can obtain
a variety of goods and services at a lower cost than if they produced the goods and services themselves.
152
ANSWER:
Trade allow each person to specialize in the activities he or she does best. By trading with others, people can buy
a greater variety of goods and services at lower cost.
153
ANSWER:
Trade between the U.S. and Japan allows both countries to specialize in what they do best, and to purchase
goods at lower costs than they can produce the goods themselves. Although the tarifs and other barriers reduce
the gains from trade, as long as trade between the U.S. and Japan takes place, both nations must be beneftting
from trade. Japan must be able to produce some goods cheaper than the U.S. can.
154
ANSWER:
If there is a market failure, such as an externality or monopoly, government regulation might improve the well-
being of society by promoting efciency. If the distribution of income or wealth is considered to be unfair by
society, government intervention might achieve a more equitable distribution of economic well-being.
155
ANSWER:
Because households and frms look at prices when deciding what to buy and sell, they unknowingly take into
account the social benefts and costs of their actions. As a result, prices guide these individual decisionmakers to
reach outcomes that maximize the welfare of society as a whole.
156
ANSWER:
While pollution creates an external cost to society, there is also a cost to society of eliminating the pollution. A
law which prohibits pollution considers the marginal beneft to society of eliminating pollution, but not the
marginal cost. Hence, the enforcement of the law could actually harm society, if the cost of eliminating the
pollution were greater than the beneft. In fact, such a law would eliminate all people, because people emit CO2,
a greenhouse gas.
157
ANSWER:
Efcient allocation of resources depends on information which refects the true marginal beneft to society of
consuming products and the true marginal cost to society of producing products. Market prices contain this
information. These prices are determined automatically in a market economy through the interactions of the
decisions of millions of households and frms. Since the central planners do not have access to all of the
information the market uses in determining prices, it is impossible for the planners to set prices which refect
marginal beneft and marginal cost. Therefore, it is impossible for the central planners to allocate resources
efciently.
158
ANSWER:
Productivity is the primary determinant of the standard of living of a nation, and productivity growth is the
primary determinant of the growth of average income in a nation. The government can increase productivity by
ensuring that workers are well educated, have the tools needed to produce goods and services, and have access
to the best available technology.
159
ANSWER:
To lower infation, the government may choose to reduce the money supply in the economy. When the money
supply is reduced, prices dont adjust immediately. Lower spending combined with prices which are too high
reduces sales and causes workers to be laid of. Hence, the lower price level is associated with higher
unemployment.
160
ANSWER:
Income is based on productivity, not efort. Russell was able to be more productive working with a machine than
working with a shovel.

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