A.

Completion

1. _______economics____________ is the study of how individuals use their

_________scarce__________ resources to satisfy their
___________unlimited________ wants.
2. The ultimate raw material associated with labor is
____Time_______________.
3. There are two kinds of capital, ____Human_______________ capital and
__________Physical_________ capital.
4. ____________Entrepreneur_ability______ includes management and
organizational skills, combined with a willingness to take risks.
5. The entrepreneur is the _____residual______________ claimant.
6. An automobile is a ____goods_____________; an airplane ride is a
__________service________.
7. Exchange is carried out in _____markets______________.
8. A key behavioural assumption concerning human economic behaviour is
that of ___rational self interest________________.
9. Economic choice usually involves a comparison of
______marginal_____________ benefits and costs.
10. A _________model__________ is a simplification of economic reality that
tries to capture the most important elements of the relation under
consideration.
11. A __________________ is a quantity that can take on different possible
values.
12. ___________________ are conditional statements of the if-then variety.
13. A ___________________ economic statement represents an opinion.
14. Unintended consequences that develop slowly over time as people respond
to circumstances are called ___________________ effects.
15. The relation between income and consumption is ___________________
because increases in income lead to increases in consumption.

B. True/False

1. ___T__ The economic problem results from the fact that resources are
scarce but human wants tend to be limitless.
2. ___T__ A student's knowledge of computer programming is an example of
human capital.
3. ___F__ Profit goes to the owners of capital.
4. ____F_ All goods are scarce but not all services are scarce.
5. __F___ Product markets refer to specific geographic locations.
6. ___F__ Microeconomics is the study of the economy as a whole.
7. __F___ People who give to charity cannot be motivated by rational self-
interest.
8. ___T__ A decision to go to one college instead of another is an example of a
marginal decision.
 9. __T___ Time is a scarce resource.
10. ___F__ Rational self-interest directs people to make any choice for which
the total benefits exceed the total costs.
11. ___F__ Good theories contain as many details as possible.
12. ___T__ Assumptions are used to simplify theories by eliminating areas that
are not expected to have important effects on the analysis.
13. ___F__ A theory is not good if it cannot predict accurately all the time.
14. ___T__ A positive statement is one that can be verified by reference to
facts.
15. __F___ If one event follows another, then the first event necessarily caused
the second event.
16. __F ___Policymakers generally pay close attention to both the primary
and the secondary effects of policies.
17. *__T___Two variables are independent if increases in one leave the second
unchanged.
18. *__F___The slope of a vertical line is zero.

C. Multiple Choice

1. Which of the following is an example of a scarce resource?

a. coal
b. water
c. unskilled labor
d. time
e. all of the above
2. Crude oil is considered which kind of resource?
a. land
b. labor
c. physical capital
d. human capital
e. none of the above
3. Since goods are scarce,
a. we always have to pay money for the goods we get.
b. we never can get what we want.
c. everybody wants some of each good that exists.
d. we must choose among them.
e. a and d
4. Services differ from goods in that services
a. do not always use scarce resources.
b. do not always satisfy wants.
c. often do not have a price.
d. are intangible.
e. are provided by the government.
5. Markets include
a. shopping malls.
 b. arrangements by which buyers and sellers communicate their
intentions.
c. union hiring halls.
d. all of the above
e. a and b only.
6. Which of the following decisions is not consistent with rational self-
interest?
a. giving money to charity
b. choosing to work for the Peace Corps instead of for a large
corporation
c. buying a car without knowing everything about it
d. becoming a bullfighter
e. All are consistent with rational self-interest.
7. Economic choices are made by comparing
a. total benefits and total costs.
b. marginal benefits and marginal costs.
c. average benefits and average costs.
d. the behavior of rational people with that of irrational people.
e. any of the above except d.
8. People are rational if they
a. have perfect information about the future.
b. know and understand philosophy.
c. are selfish.
d. make the best choices they can given their circumstances.
e. none of the above
9. If consumers must collect information to make rational decisions, then they
should collect additional information as long as
a. it helps them make good decisions.
b. they learn something from the additional information.
c. the marginal cost of the information is less than the expected
marginal benefit from the information.
d. there is anything they do not know about the good.
e. all of the above
10. A good theory is one that
a. best replicates reality.
b. uses the fewest assumptions.
c. predicts more accurately than other theories.
d. cannot be proven wrong.
e. all of the above
11. The validity of a theory is determined by
a. testing the reasonableness of its assumptions.
b. testing its predictions with evidence.
c. making sure its variables are well defined.
d. none of the above.
 e. all of the above.
12. Ceteris paribus means
a. economic man.
b. other things constant.
c. the fallacy of composition.
d. secondary effects.
e. positive economics.
13. A positive statement is one that
a. can be supported or rejected with reference to the facts.
b. states how things ought to be.
c. is true.
d. cannot be refuted.
e. all economists agree on.
14. Which of the following is an example of a normative statement?
a. The rate of inflation is lower today than it was ten years ago.
b. High interest rates cause lower economic growth.
c. Since price controls cause shortages, the government should not use
price controls to combat inflation.
d. Per capita income is higher in the Soviet Union than in the United
States.
e. Tariffs result in higher prices to consumers.
15. Suppose that some individual decision makers in Los Angeles decide that
removing the pollution control equipment on their cars will not have a
noticeable effect on pollution in the area. Several months later pollution
levels are higher than ever. The decision makers have fallen into
a. ignoring the secondary effects.
b. the fallacy that association is causation.
c. the fallacy of composition.
d. irrational self-interest.
e. none of the above.
16. It has been found that minimum wage laws increase unemployment among
teenagers. This is an example of
a. ignoring the secondary effects.
b. the fallacy that association is causation.
c. the fallacy of composition.
d. irrational self-interest.
e. none of the above.
17. *In Exhibit 3, the relationship between price and quantity depicted by line
ab is
a. positive, with slope 0.4.
b. positive, with slope -0.4.
c. inverse, with slope -2.5.
d. inverse, with slope -0.4.
e. positive, with slope 2.5.
18. *The value of a dependent variable is determined by
a. the value of the independent variable.
b. the values of other dependent variables.
c. the assumptions of the model.
d. the reliability of the theory.
e. b and d.
19. *A straight line is tangent to a curve at point A. If the slope of the straight
line is +3, the slope of the curve at A
a. is between 0 and +3.
b. is equal to +3.
c. is equal to -3.
d. is more than +3.
e. The slope cannot be determined without more information.
20. *If consumption is on the vertical axis and income is on the horizontal axis,
a 45-degree line represents
a. the expected relation between income and consumption.
b. the marginal benefit from another dollar of income.
c. the marginal cost of another dollar of income.
d. the best combination of income and consumption for a rational
consumer.
e. the combination of points where consumption equals income.
D. Discussion Questions

1. Explain how scarcity and choice are related.

2. How are human capital and entrepreneurial ability different from labor?
3. The text says that a study of economic aggregates must begin with an
understanding of individual choice. Why is this so?
4. Explain the concept of rational decision making. Can decisions a student
makes about what to take to college be said to involve rational decision
making? Explain.
5. "People don't really act rationally. If they did, there would never be any
mistakes." Evaluate this statement.
6. The number of people volunteering to serve in the Peace Corps increased
greatly during the late 1960s. Can you offer an explanation for this?
7. Sales of automobiles increased in December 1986 and fell in January 1987.
The deductibility of sales taxes ended on December 31, 1986. Did the
change in the tax laws affect sales of autos in December and January?
Explain.
8. The text says that a company's decision to build a plant in Taiwan can be an
example of a marginal decision. Explain how such a large investment can be
described as marginal.
9. People usually spend more time deciding which car to buy than they do
choosing a brand of toothpaste. Can you offer an explanation for this
observation?
10. Economic theory says that a rise in the price of a good will cause people to
buy less of it. If the price of meat increases and John Doe buys more meat,
has the theory been refuted? Explain.
11. How are economic theory and positive statements related?
12. Discuss the four steps of the scientific method.
13. How do predictions and forecasts differ?
14. If association is not the same as causation, then how can we determine when
one variable affects another?
15. *Use the following information to answer the question below:

x = 0 2 4 6 8 10 12 14 16 18 20
y = 0 1 2 3 4 5 6 7 8 9 10
 16.
a. Graph the relation between x and y on Exhibit 4.
b. Is this a positive or a negative relation? How do you know?
c. What is the slope of the line?
17. *You are given the following information regarding the price of eggs and
the quantity purchased.

Price: $1.00 0.90 0.80 0.70 0.60 0.50 0.40

Quantity (dozens): 1 2 3 4 5 6 7

18.
a. Graph the relation between price and quantity purchased on Exhibit 5.
b. What is the slope of the line?
 19. *In Exhibit 6, what is the slope of the curve at point a? point b? point c?
point d?

20. *
a. Draw a curve whose slope increases with distance from the origin.
b. Draw a curve illustrating a direct relation whose slope decreases as
the distance from the origin increases.
c. Draw a curve illustrating an inverse relation whose slope increases as
the distance from the origin increases.
d. Draw a curve illustrating an inverse relation whose slope decreases as
the distance from the origin increases.

*Throughout this study guide, asterisks next to question numbers indicate that the
material is discussed in an appendix.