Microeconomics, 4e (Hubbard/O’Brien)
Chapter 1 Economics: Foundations and Models
1.1 Three Key Economic Ideas
1) Recent changes occurring within the U.S. health care system, including lower insurance
reimbursement rates, have resulted in
A) a growing number of doctor’s choosing to open private practices.
B) more medical practices being owned by hospitals than by individual doctors.
C) a majority of hospitals closing routine medical practices in order to focus only on emergency
care facilities.
D) a majority of doctors working directly for insurance companies.
2) In economics, choices must be made because we live in a world of
A) unemployment.
B) scarcity.
C) greed.
D) unlimited resources.
3) Which of the following statements is true about scarcity?
A) Scarcity refers to the situation in which unlimited wants exceed limited resources.
B) Scarcity is not a problem for the wealthy.
C) Scarcity is only a problem when a country has too large a population.
D) Scarcity arises when there is a wide disparity in income distribution.
4) The basic economic problem of ________ has always existed and will continue to exist.
A) scarcity
B) efficiency
C) inflation
D) recession
5) By definition, economics is the study of
A) how to make money in the stock market.
B) how to make money in a market economy.
C) the choices people make to attain their goals, given their scarce resources.
D) supply and demand.
6) An economic ________ is a simplified version of some aspect of economic life used to
analyze an economic issue.
A) market
B) trade-off
C) variable
D) model
7) Where do economic agents such as individuals, firms and nations, interact with each other?
A) in public locations monitored by the government
B) in any arena that brings together buyers and sellers
C) in any physical location people where people can physically get together for selling goods,
such as shopping malls
D) in any location where transactions can be monitored by consumer groups and taxed by the
government
8) The term ________ in economics refers to a group of buyers and sellers of a product and the
arrangement by which they come together to trade.
A) collective
B) cooperative
C) market
D) trade-off
9) Economists assume that individuals
A) behave in unpredictable ways.
B) will never take actions to help others.
C) prefer to live in a society that values fairness above all else.
D) are rational and respond to incentives.
10) Economists assume that rational behavior is useful in explaining choices people make
A) because irrational people do not make economic choices.
B) even though people may not behave rationally all the time.
C) because individuals act rationally all the time in all circumstances.
D) even though people rarely, if ever, behave in a rational manner.
11) Economists assume that rational people do all of the following except
A) use all available information as they act to achieve their goals.
B) undertake activities that benefit others and hurt themselves.
C) weigh the benefits and costs of all possible alternative actions.
D) respond to economic incentives.
12) Economics does not study correct or incorrect behaviors but rather it assumes that economic
agents behave ________, meaning they make the best decisions given their knowledge of the
costs and benefits.
A) equitably
B) rationally
C) emotionally
D) selfishly
13) Consider the following statements:
a. Car owners purchase more gasoline from a gas station that sells gasoline at a lower price than
other rival gas stations in the area.
b. Banks do not take steps to increase security since they believe it is less costly to allow some
bank robberies than to install expensive security monitoring equipment.
c. Firms produce more of a particular DVD when its selling price rises.
Which of the above statements demonstrates that economic agents respond to incentives?
A) a only.
B) b only.
C) c only.
D) a and b.
E) a, b, and c.
14) Suppose that some teachers have decided that economic and financial uncertainty have made
the prospect of retiring more risky, and therefore carry a higher cost than not retiring. By using
all available information as they act to achieve their goals, these teachers are exemplifying the
economic idea that
A) people are rational.
B) people respond to economic incentives.
C) optimal decisions are made at the margin.
D) equity is more important than efficiency.
15) Suppose the U.S. government encouraged new medical school graduates to take over
existing practices from doctors wishing to retire by paying both the new and retiring doctors
$100,000. These doctors would be exemplifying the economic idea that
A) people are rational.
B) people respond to economic incentives.
C) optimal decisions are made at the margin.
D) equity is more important than efficiency.
16) Holding all other personal characteristics-such as age, gender, and income-constant,
economists would expect that
A) people with health insurance will be less likely to be overweight than people without health
insurance.
B) people with health insurance will be more likely to be overweight than people without health
insurance.
C) people with health insurance will be equally likely to be overweight as people without health
insurance.
D) there is no correlation between having health insurance and being overweight.
17) Since 1994, obesity rates in the United States
A) have been on a slow and steady decline.
B) have increased in all 50 states.
C) have primarily increased in the Southeast and remained constant or slightly decreased in the
remainder of the country.
D) have remained fairly constant throughout the country.
18) In economics, the term ________ means “additional” or “extra.”
A) allocative
B) marginal
C) equity
D) optimal
19) A grocery store sells a bag of potatoes at a fixed price of $2.30. Which of the following is a
term used by economists to describe the money received from the sale of an additional bag of
potatoes?
A) marginal revenue
B) gross earnings
C) pure profit
D) marginal costs
E) net benefit
20) Economists reason that the optimal decision is to continue any activity up to the point where
the
A) marginal benefit is zero.
B) marginal benefit is greater than the marginal cost.
C) marginal cost is zero.
D) marginal benefit equals the marginal cost.
21) Marginal analysis involves undertaking an activity
A) until its marginal costs start declining.
B) only when its marginal benefits are positive.
C) until its marginal benefits equal marginal costs.
D) only if its marginal costs are greater than its marginal benefits.
22) The revenue received from the sale of ________ of a product is a marginal benefit to the
firm.
A) an additional unit
B) the total number of units
C) no units
D) only profitable units
23) Making optimal decisions “at the margin” requires
A) making decisions according to one’s whims and fancies.
B) making consistently irrational decisions.
C) weighing the costs and benefits of a decision before deciding if it should be pursued.
D) making borderline decisions.
24) Making “how much” decisions involve
A) calculating the total benefits of the activity and determining if you are satisfied with that
amount.
B) calculating the total costs of the activity and determining if you can afford to incur that
expenditure.
C) calculating the average benefit and the average cost of an activity to determine if it is
worthwhile undertaking that activity.
D) determining the additional benefits and the additional costs of that activity.
25) The extra cost associated with undertaking an activity is called
A) net loss.
B) marginal cost.
C) opportunity cost.
D) foregone cost.
26) DeShawn’s Detailing is a service that details cars at the customers’ homes or places of work.
DeShawn’s cost for a basic detailing package is $40, and he charges $75 for this service. For a
total price of $90, DeShawn will also detail the car’s engine, a service that adds an additional $20
to the total cost of the package. What is DeShawn’s marginal benefit if he sells a basic detailing
package?
A) $35
B) $75
C) He makes a marginal loss of $15, not a marginal benefit.
D) The marginal benefit cannot be determined.
27) DeShawn’s Detailing is a service that details cars at the customers’ homes or places of work.
DeShawn’s cost for a basic detailing package is $40, and he charges $75 for this service. For a
total price of $90, DeShawn will also detail the car’s engine, a service that adds an additional $20
to the total cost of the package. What is the marginal cost of adding the engine detailing to the
basic detailing package?
A) $20
B) $30
C) $60
D) $60 plus the value of his time
28) DeShawn’s Detailing is a service that details cars at the customers’ homes or places of work.
DeShawn’s cost for a basic detailing package is $40, and he charges $75 for this service. For a
total price of $90, DeShawn will also detail the car’s engine, a service that adds an additional $20
to the total cost of the package. Should DeShawn continue to offer the engine detailing service?
A) yes, he still makes a profit by selling the engine detailing service with the basic detailing
package
B) yes, but only if he raises the price of the basic detailing package
C) no, his marginal benefit is less than his marginal cost
D) More information is needed for DeShawn to make this decision.
29) Refer to Scenario 1-1. Using marginal analysis terminology, what is another economic term
for the incremental revenue received from the sale of the last 3,000 cell phones?
A) gross earnings
B) marginal revenue
C) sales revenue
D) gross profit
30) Refer to Scenario 1-1. Using marginal analysis terminology, what is another economic term
for the incremental cost of producing the last 3,000 cell phones?
A) marginal cost
B) operating cost
C) explicit cost
D) Any of the above terms are correct.
31) Refer to Scenario 1-1. Had the firm not produced and sold the last 3,000 cell phones, would
its profit be higher or lower, and if so by how much?
A) Its profit will be $6,700 higher.
B) Its profit will be $700 higher.
C) Its profit will be $700 lower.
D) Its profit will be $6,000 lower.
Table 1-1
Hours
Open
Total
Revenue
(dollars)
1
$50
2
75
3
95
4
110
5
120
6
125
Lydia runs a small nail salon in the town of New Hope. She is debating whether she should
extend her hours of operation. Lydia figures that her sales revenue will depend on the number of
hours the nail salon is open as shown in the table above. She would have to hire a worker for
those hours at a wage rate of $10 per hour.
32) Refer to Table 1-1. Using marginal analysis, determine how many hours should Lydia
extend her nail salon’s hours of operations?
A) 2 hours
B) 3 hours
C) 4 hours
D) 5 hours
E) 6 hours
33) Refer to Table 1-1. What is Lydia’s marginal benefit if she decides to stay open for two
hours instead of one hour?
A) $25
B) $50
C) $75
D) $125
34) Refer to Table 1-1. What is Lydia’s marginal cost if she decides to stay open for two hours
instead of one hour?
A) $10
B) $20
C) $25
D) $40
35) Soo Jin shares a one-bedroom apartment with her classmate. Her share of the rent is $700 per
month. She is considering moving to a studio apartment which she will not have to share with
anyone. The studio apartment rents for $950 per month. Recently, you ran into Soo Jin on
campus and she tells you that she has moved into the studio apartment. Soo Jin is as rational as
any other person. As an economics major, you rightly conclude that
A) Soo Jin did not have a choice; her roommate was a slob.
B) Soo Jin figures that the additional benefit of having her own place (as opposed to sharing) is
at least $250.
C) Soo Jin figures that the benefit of having her own place (as opposed to sharing) is at least
$950.
D) the cost of having one’s own space outweighs the benefits.
36) If the marginal cost of keeping a doctor’s office open one additional hour per day is $200,
then the doctor should keep the office open for one extra hour
A) only if the marginal benefit she receives is greater than $200 plus an acceptable profit margin.
B) as long as the marginal benefit she receives is just equal to or greater than $200.
C) as long as the marginal cost does not rise.
D) until the marginal benefit she receives reaches zero.
37) Scarcity refers to a situation in which unlimited wants exceed the limited resources available
to fulfill those wants.
38) Scarcity is a problem that will eventually disappear as technology advances.
39) An economic model is a simplified version of reality used to analyze real-world economic
situations.
40) The sales revenue a seller receives from the sale of an additional unit of goods is called the
marginal benefit.
41) Optimal decisions are made at the point where marginal cost equals zero.
42) If it costs Sinclair $300 to produce 3 suede jackets and $420 to produce 4 suede jackets, then
the difference of $120 is the marginal cost of producing the 4th suede jacket.
43) Suppose the extra cost for a doctor to keep his office open for one extra hour is $200. Then,
the doctor should stay open for the extra hour even if he can generate additional revenue of $200
for that hour.
44) Explain the economic assumption that “people are rational.”
45) Explain the economic idea that “people respond to incentives.”
46) What is meant by the statement that “optimal decisions are made at the margin”?
47) Assume that a doctor can earn an additional $20,000 of revenue each year from keeping his
office open for one additional hour per week. What must the additional cost of keeping the
office open this additional hour per week be to make staying open for the extra hour
economically rational?
1.2 The Economic Problem That Every Society Must Solve
1) The three fundamental questions that any economy must address are:
A) What will be the prices of goods and services; how will these goods and services be
produced; and who will receive them?
B) What goods and services to produce; how will these goods and services be produced; and who
receives them?
C) Who gets jobs; what wages do workers earn; and who owns what property?
D) How much will be saved; what will be produced; and how can these goods and services be
fairly distributed?
2) The idea that because of scarcity, producing more of one good or service means producing
less of another good or service refers to the economic concept of
A) optimization.
B) efficiency.
C) trade-off.
D) equity.
3) Society faces a trade-off in all of the following situations except
A) when deciding who will receive the goods and services produced.
B) when deciding what goods and services will be produced.
C) when deciding how goods and services will be produced.
D) when some previously unemployed workers find jobs.
4) Which of the following statements is true?
A) Anytime you have to decide which action to take you are experiencing economic equity.
B) Trade-offs do not apply when the consumers purchase a product for which there is excess
supply, such as a stock clearance sale.
C) Every individual, no matter how rich or poor, is faced with making trade-offs.
D) Economics is a social science that studies the trade-offs we are forced to make because
resources are unlimited.
5) Which of the following is not an example of an economic trade-off that a firm has to make?
A) whether it is cheaper to produce with more machines or with more workers
B) whether it is to outsource the production of a good or service
C) whether or not consumers will buy its products
D) whether it should produce more of its product
6) The highest valued alternative that must be given up to engage in an activity is the definition
of
A) economic equity.
B) marginal benefit.
C) opportunity cost.
D) marginal cost.
7) The Coffee Nook, a small cafe near campus, sells cappuccinos for $2.50 and Russian tea
cakes for $1.00 each. What is the opportunity cost of buying a cappuccino?
A) 2 1/2 Russian tea cakes
B) 2/5 of a Russian tea cake
C) $2.50
D) $1.00
8) Arlene quits her $125,000-a-year job to take care of her ailing parents. What is the opportunity
cost of her decision?
A) zero, since she will no longer be earning a salary
B) It depends on the “going rate” for home-care providers.
C) at least $125,000
D) the value she attributes to the satisfaction she receives from taking care of her parents
9) The distribution of income primarily determines which of the fundamental economic
questions?
A) What goods and services are to be produced?
B) How the goods and services are to be produced?
C) Who will receive the goods and services produced?
D) How to plan the economy?
10) Automobile manufacturers produce a range of automobiles such as sports utility vehicles,
luxury sedans, pickup trucks and compact cars. What fundamental economic question are they
addressing by making this range of products?
A) How to produce goods that consumers want?
B) Why produce a variety of automobiles?
C) What to produce?
D) Who to produce automobiles for?