c.
They lose, because the gain of the passengers must necessarily come at the expense of the
airline.
d.
They benefit as long as the additional revenue from the passengers exceeds the marginal
cost.
89. If an airline company has several empty seats on a flight and the full price of an air ticket is $500 and
the marginal cost per passenger is $100, then it will be profitable for the airline to
a.
charge a stand-by passenger no less than the full fare of $500.
b.
charge a stand-by passenger less than $100.
c.
charge a stand-by passenger more than $500.
d.
charge a stand-by passenger more than $100.
e.
fill the seats at the last minute for any price.
90. To say that people make marginal decisions means that
a.
they usually wait until the last minute before making a decision to buy
b.
they weigh the additional costs and additional benefits of various activities before they
make a decision
c.
most people just barely get by on the incomes they earn and live from day to day on the
very edge of subsistence
d.
they consider the total cost and benefit of various activities before they make a purchase
91. Andre, a wheat farmer, is deciding whether or not to add fertilizer to his crops. If he adds 1 pound of
fertilizer per acre, the value of the resulting crops rises from $80 to $100 per acre. According to
marginal analysis, Andre should add fertilizer if it costs less than
a.
$12.50 per pound.
b.
$20 per pound.
c.
$80 per pound.
d.
$100 per pound.
92. According to marginal analysis, you should spend more time studying economics if the extra benefit
from an additional hour of study
a.
is positive.
b.
outweighs the extra cost.
c.
exceeds the benefits of the previous hour of study.
d.
will raise your exam score.
93. While waiting in line to buy two tacos at 80 cents each and a medium drink for 90 cents, Kayla notices
that the restaurant has a value meal containing three tacos and a medium drink all for $3. For Kayla,
the marginal cost of the third taco would be
a.
zero.
b.
50 cents.
c.
80 cents.
d.
$1.
94. While waiting in line to buy one cheeseburger for $1.50 and a medium drink for $1.00, Sally notices
that she could get a value meal that contains both the cheeseburger and medium drink and also a
medium order of fries for $2.75. She thinks to herself, “Is it worth the extra 25 cents to get the medium
fries?” To an economist, Sally’s decision is an example of
a.
marginal decision making.
b.
basing decisions on total, rather than marginal, value.
c.
an unintended consequence.
d.
the fallacy of composition.
95. Isabella wishes to buy gasoline and have her car washed. She finds that if she buys 9 gallons of
gasoline at $1.50 per gallon, the car wash costs $1, but if she buys 10 gallons of gasoline, the car wash
is free. For Isabella, the marginal cost of the tenth gallon of gasoline is
a.
zero.
b.
50 cents.
c.
$1.
d.
$1.50.
96. Santiago wants to buy some milk and a box of cereal. If he buys 2 quarts of milk at $1 per quart, the
box of cereal costs 75 cents. If he buys 3 quarts of milk at $1 per quart, the box of cereal is free. For
Santiago, the marginal cost of the third quart of milk is
a.
zero.
b.
25 cents.
c.
75 cents.
d.
$1.
97. 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
a.
$100.
b.
$175.
c.
$700.
d.
$225.
98. A local restaurant offers an “all you can eat” buffet for $15. Mia eats four servings but leaves half of a
fifth helping uneaten. Why?
a.
Her marginal value of a serving of brunch has fallen below $15.
b.
Her marginal value of a serving has fallen below $3 ($15 divided by 5 servings).
c.
Her marginal value of food has fallen to zero.
d.
The total value she places on the buffet exactly equals $15.
99. 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
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.
100. Because information is costly to acquire,
a.
people will rationally choose not to become fully informed when making decisions.
b.
people will generally choose to become as fully informed as possible when making
decisions.
c.
people will generally choose to acquire no information that would be relevant to their
decisions.
d.
none of the above are true.
101. People are more likely to purchase a consumer ratings magazine that reviews new automobiles before
buying a new car than they are to purchase a consumer ratings magazine that reviews pens and pencils
before buying a new pen or pencil. Which of the following best explains this behavior?
a.
Because the consumer ratings magazine must have a higher price for the issue reviewing
pens and pencils.
b.
Because the value of the information, in terms of avoiding a mistake on the purchase, is
much higher for an automobile than for a pen or pencil, it is more worthwhile to gather
this information.
c.
Because people generally do not know which products are reviewed by these consumer
magazines.
d.
None of the above explain this behavior.
102. Which of the following is consistent with the implications of the economic guidepost that information
is costly to acquire?
a.
Most people do not know the names of their legislators in the U.S. Congress, but those
same individuals are likely to know the names of all the cast members on a popular TV
show.
b.
In considering purchases, people are more likely to purchase a consumer ratings magazine
that reviews new automobiles before buying a car, but are unlikely to purchase a consumer
ratings magazine that reviews pens and pencils before buying a pen or pencil.
c.
When shopping for something like a new calculator, people will generally not spend the
time to do price comparisons at all of the stores in town that sell calculators.
d.
All of the above are consistent with the economic way of thinking.
103. Economic analysis is based on the premise that
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.
104. In economics, secondary effects refer to the
a.
best alternative that must be forgone as the result of a choice.
b.
unintended consequences of a change that are not immediately identifiable but are felt
only with time.
c.
immediate and visible intended consequences of a change.
d.
impact of the scarcity of resources on the scarcity of the goods that are produced with
those resources.
105. The unintended consequences of an economic change that are not immediately identifiable but are felt
only with time are known in economics as
a.
opportunity costs.
b.
marginal effects.
c.
secondary effects.
d.
scarcity constraints.
106. Which of the following could be considered to be a secondary effect caused by making drugs such as
cocaine illegal?
a.
The higher prices that result from making them illegal results in more property theft by
users to afford the drugs.
b.
The usage of police and law enforcement resources to enforce drug laws leads to lower
enforcement (and thus a higher amount) of other crimes.
c.
Without the ability to use the legal system to enforce contracts, violence often results
when one party to a drug deal does not live up to their end of the bargain, thus the amount
of violence increases by making drugs illegal.
d.
All of the above would be considered secondary effects of making drugs illegal.
107. Economists are generally opposed to tariffs or other restrictions on imported goods because of the
negative secondary effects they create that more than offset the benefits to employment in the domestic
industry. Which of the following could be considered a secondary effect of these trade restrictions?
a.
The price to consumers of the good in question will be higher as a result of the restriction,
meaning consumers will be worse off.
b.
As consumers must spend more money to purchase the good, there will be employment
losses in other domestic industries as consumers cut back on their spending on other
things.
c.
Because there is a link between a country’s imports and its exports, less imports from other
countries will result in lower domestic employment in export industries.
d.
All of the above.
108. “Mediocre economists often consider only the immediate apparent effects of a change, whereas a good
economist will also consider effects that may only become observable over time.” This statement most
clearly emphasizes
a.
the fallacy of composition.
b.
economizing behavior.
c.
the importance of secondary effects.
d.
the fact that association is not causation.
109. The value of a good
a.
depends on many factors, including who uses it and under what circumstances.
b.
is determined by the cost of producing it.
c.
depends on the labor necessary to supply the good.
d.
can be measured objectively by a survey of manufacturers of the good.
110. All but one of the following are elements of the economic way of thinking. Which one is not part of
the economic way of thinking?
a.
Incentives matter.
b.
The value of goods can be determined objectively.
c.
Economic thinking is marginal thinking.
d.
Information is scarce.
111. What is the best test of an economic theory?
a.
the accuracy of the assumptions behind the theory
b.
the ability of the theory to predict real-world events
c.
the implications of the theory for current public policy
d.
how much mathematical detail is behind the theory
112. What is the best test of an economic theory?
a.
its eloquence
b.
the plausibility of its assumptions
c.
its ability to predict real-world events, patterns, and changes
d.
whether it produces implications that are favored by the researcher
113. The difference between a positive economic statement and a normative statement is that
a.
a positive statement must be true; a normative statement is often not true
b.
a normative statement must be true; a positive statement is often not true
c.
a positive statement can be proved; a normative statement cannot
d.
a normative statement can be proved; a positive statement cannot
e.
a positive economic statement is a moral judgment; a normative economic statement is not
a moral judgment
114. The difference between positive economic statements and normative economic statements is that
a.
positive statements are based on opinion while normative statements are based on fact
b.
positive statements are true and normative statements are often false
c.
positive statements are often false and normative statements are true
d.
positive statements are based on fact while normative statements are based on opinion
e.
both b and d.
115. Which of the following is a positive economic statement?
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.
116. Which of the following is a positive economic statement?
a.
Government control of rent is a fair way to help poor people afford housing.
b.
Government control of rent keeps landlords from charging too much rent.
c.
Government control of rent decreases the number of new apartments constructed.
d.
Government control of rent is an injustice.
117. The Secretary of Labor states that wage rates in the country have risen by 2 percent this past year. The
head of a local labor union states that wage gains should have been higher. The Secretary’s statement is
a(n) ____ economic statement, and the labor head’s statement is a(n) ____ economic statement.
a.
normative; normative
b.
normative; positive
c.
positive; normative
d.
positive; positive
e.
proper; improper
118. Which of the following is an example of a normative economic statement?
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.
119. Which of the following most clearly distinguishes between positive and normative economics?
a.
Positive economics is the study of what ought to be; normative economics is concerned
with the facts.
b.
Positive economics is the study of the facts; normative economics is concerned with what
ought to be.
c.
Positive economics is the study of supply and demand in narrowly defined markets such as
the market for shoes; normative economics focuses on highly aggregated markets such as
the market for all consumer products.
d.
Positive economics is the study of goods that are scarce; normative economics is
concerned with goods that are not scarce.
120. Positive economics
a.
postulates relationships among economic variables that are potentially refutable by
real-world events.
b.
is strictly quantitative and is, therefore, of little value to policy makers.
c.
will usually indicate which economic policy is best.
d.
is the same as normative economics.
121. Which of the following is true?
a.
Positive economics deals with how people react to changes in benefits, and normative
economics deals with how people react to changes in costs.
b.
Positive economic statements are testable, but normative statements are not.
c.
Positive economic statements involve value judgments while normative economics
focuses on whether a policy will achieve its intended objectives.
d.
Positive economic statements focus on policy issues while normative economics focuses
on economic theory.
122. Which of the following is a positive economic statement?
a.
Raising the federal minimum wage to $6.50 per hour will cause the rate of unemployment
to increase.
b.
The United States spends too much on welfare.
c.
Philosophy is not as interesting as economics.
d.
Cold weather is much more enjoyable than warm weather.
123. Which of the following is a normative economic statement?
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.
124. Which of the following is a normative economic statement?
a.
If we doubled the size of welfare payments, we would reduce the number of homeless
persons.
b.
Companies should be concerned with more than just their profits.
c.
An increase in spending on airport security will reduce the number of hijackings.
d.
If social security were to be privatized, workers would earn a higher rate of return on their
retirement contributions.
125. “The standard of living is too low for many individuals in the United States. The government should
implement policies designed to achieve a more equal distribution of income.” The preceding
statements are
a.
positive economic statements based on cause and effect.
b.
normative economic statements based on value judgments.
c.
based on the fallacy of composition argument.
d.
an empirically validated economic principle.
126. The statement, “John buys more of good X as his income increases, ceteris paribus,” means
a.
John’s income is being held constant.
b.
John’s purchases of good X are being held constant.
c.
John’s income and purchases of this good are being held constant.
d.
John’s income is the only influence that is being allowed to change.
e.
the price of this good is being allowed to change.
127. When economists use the term ceteris paribus, they are indicating that
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.
128. The term ceteris paribus means that
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.
129. Economists use the term ceteris paribus to indicate that
a.
supply and demand are in balance.
b.
other things are assumed to be constant.
c.
the analysis is true for the individual but not for the economy as a whole.
d.
their conclusions are based on normative economics rather than positive economic
analysis.
130. Which one of the following statements is correct?
a.
Policymakers have good intentions and therefore their proposals will create good
outcomes.
b.
Potential secondary effects do not need to be considered when deciding whether to
implement a new government program.
c.
A good outcome is guaranteed from a government program if it is created with good
intentions.
d.
Government programs can be implemented with good intentions but can lead to
undesirable outcomes because of unintended consequences.
131. Senator DuMonde favors a government program that he believes will help save endangered species.
Economic analysis indicates that
a.
because Senator DuMonde has good intentions, his new program will have the desired
results.
b.
Senator DuMonde’s new program could have unintended consequences that might result in
an outcome different from what was intended.
c.
regardless of any secondary effects, costs should not be considered when designing
environmental legislation.
d.
because Senator DuMonde’s proposal is a government program, it will not have an
opportunity cost.
132. Legislation to protect red-cockaded woodpeckers created incentives that resulted in premature
harvesting of trees the woodpeckers like to nest in. This is an example of which of the following?
a.
Association is not causation.
b.
the fallacy of composition
c.
the use of ceteris paribus conditions in economic analysis
d.
Good intentions do not always lead to desirable outcomes.
133. Your friend notices that U.S. auto production and U.S. population growth have moved together over
several decades. He reasons that one way to slow population growth is for the government to order the
auto makers to cut back on production. You gently point out to him that he
a.
is correct only when the economy is in a recession
b.
has mistakenly inferred causation from observed correlation
c.
has ignored secondary effects
d.
has committed the fallacy of composition
e.
is correct only when the United States enjoys economic growth
134. 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
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.
135. “After every fall election, the weather starts to turn cold, therefore elections cause cold weather.” This
statement
a.
confuses positive and normative analysis.
b.
commits the fallacy of composition.
c.
fails to recognize that association is not causation.
d.
confuses macroeconomics with microeconomics.
136. Someone notices that sunspot activity is high just prior to recessions and concludes that sunspots cause
recessions. This person has
a.
confused association and causation.
b.
misunderstood the ceteris paribus assumption.
c.
used normative economics to answer a positive question.
d.
built an untestable model.
137. The fallacy of composition is the fallacious view that
a.
economic activity will benefit everyone.
b.
what is true for the individual will also be true for the group.
c.
it is possible for the whole to be greater than the sum of the individual parts.
d.
association does not necessarily indicate causation.
138. The fallacy of composition is the incorrect view that
a.
everything else is always held constant when a change occurs.
b.
a small change in an economic variable will have unrecognizable but significant
consequences on the economy.
c.
when two events are associated, the one observed first must have caused the second.
d.
if something is true for an individual, then it must also be true for the group.
139. Which of the following best illustrates the fallacy of composition?
a.
If Jamal had more money, he could afford to buy more goods.
b.
If Aisha stood up at a basketball game, she could get a better view of the game; if
everyone stood up at a basketball game, everyone could have a better view of the game.
c.
If the price of bread rose, consumers would buy less; if consumers bought less bread, the
price of bread would rise.
d.
High housing prices cause people to buy less housing, but an increase in income might
cause them to buy more housing.
140. “If Tom had twice as much money, he could consume twice as much. If everyone had twice as much
money, they could consume twice as much.” This quote illustrates
a.
the difference between positive and normative economics.
b.
the fallacy of composition.
c.
that association is not causation.
d.
the law of unintended consequences.
141. Economics is primarily the study of
a.
how to make money in the stock market.
b.
how to find lower cost methods of production.
c.
the choices we must make among alternatives because of scarcity.
d.
the proper form of industrial structure for the United States.
142. Which of the following are NOT scarce?
a.
time for leisure activities
b.
computers
c.
compact discs
d.
the air we breathe
143. The expression “There’s no such thing as a free lunch” means
a.
in an exchange, if one person gains, someone else must lose.
b.
each person must pay for exactly what he or she receives.
c.
the use of resources to meet one need means that those resources can no longer be used to
meet another need.
d.
in an exchange, if one person gains, someone else must lose and equal amount.
144. The highest valued alternative option that must be given up in order to choose an action is called its
a.
utility.
b.
opportunity cost.
c.
capital.
d.
ceteris paribus
145. Positive economics
a.
postulates a relationship that is potentially refutable and then seeks to determine whether
the stated relationship is correct.
b.
uses value judgments to determine which policy alternatives should be chosen.
c.
is of no use to policy makers because it reflects the value judgments of the researcher.
d.
is the scientific study of “what ought to be” among economic relationships.
146. The fallacy of composition is the incorrect view that
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.
147. The basic difference between macroeconomics and microeconomics is that
a.
microeconomics is concerned with aggregate markets and the entire economy, while
macroeconomics is concerned with specific individual markets.
b.
macroeconomics is concerned with policy decisions, while microeconomics applies only
to theory.
c.
microeconomics is concerned with individual markets and the behavior of people and
firms, while macroeconomics is concerned with aggregate markets and the entire
economy.
d.
macroeconomics is concerned with positive economics, while microeconomics is
concerned with normative economics.
148. 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
Oklahoma 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?
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
149. The economic way of thinking stresses that
a.
changes in personal costs and benefits generally do not influence human behavior.
b.
incentives matter—when an option becomes less costly, people will be more likely to
choose it.
c.
if one individual gains from an economic activity, then someone else must lose.
d.
goods provided by government do not consume valuable scarce resources since
government activity is not part of the market economy.
150. Which of the following is a positive economic statement?
a.
reducing unemployment should be the highest priority of the federal government.
b.
a reduction in the payroll tax will reduce the unemployment rate.
c.
corporations should be prohibited from laying off workers during a recession.
d.
the current unemployment rate is too high.
151. The Latin phrase “ceteris paribus” means
a.
that one event causes another.
b.
that one event is associated with, but not caused by, another.
c.
that other potential causes are assumed to remain constant.
d.
the way things should be.
152. Which of the following was a key belief of Adam Smith?
a.
he felt that human goodness would provide adequate goods and services to everyone.
b.
he stressed that limited exchange and command economies would prevent the exploitation
of the poor.
c.
he believed that individuals pursuing their own interests would direct economic activity in
the most advantageous way.
d.
he lectured about the importance of gold and silver in providing a stable monetary system.
153. If you win the lottery this would be great for you, but if everyone simultaneously won the lottery this
wouldn’t be nearly as good, why?
a.
association is not causation
b.
it is a violation of ceteris paribus
c.
the fallacy of composition
d.
what appear to be positive outcomes in society are actually normative.
154. 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
a.
opportunity costs.
b.
utility curves.
c.
secondary effects.
d.
comparative advantages.
155. Liam wants to buy some milk and a box of cereal. If Liam buys 4 gallons of milk at $3.00 per gallon,
the box of cereal costs $2.00. If he buys 5 gallons of milk, the box of cereal is free. For Liam, the
marginal cost of buying a fifth gallon of milk is
a.
zero.
b.
$1.00.
c.
$2.00.
d.
$3.00.
ESSAY
156. If economics is correct in its assumption that people are rational, why then would anyone choose to
smoke cigarettes?
157. A radio station gives “free money” to those listeners whose names are drawn and announced over the
airwaves from postcards the listeners sent into the radio station. Is the money really free for the
listener?
158. Why would a radio station give money to listeners? Does this violate the economic way of thinking?
159. William observes that a car in 1925 sold for an average of $500 versus $20,000 for a 2005 model. He
concludes that 2005 cars must be 40 times better than 1925 cars. What’s wrong with this way of
thinking?
160. Evaluate this statement: “People engaged in economizing behavior will always buy the lowest priced
item they can find.”
161. 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?
162. If people are self-interested, why does anyone give money to public radio?
163. When Mother Theresa won the Nobel Peace Prize, the monetary award was well in excess of
$100,000. Did she accept the money? If so, what did she do with it?
164. Who is more likely to drive carelessly, Camila in her 1980 Ford with bad brakes or Samantha, who has
a 2005 BMW with all the most recent safety options?
165. A popular video program, used to teach primary school children about economics, defines scarcity as
“when you don’t have enough of something.” Evaluate this definition based on your understanding of
the scarcity concept.