File: Chapter 01 Economics and Economic Reasoning
True/False
[Question]
1. The answers to an economy’s three central economic problems are determined by the interaction of three forces:
economic forces, political forces, and social forces.
2. Scarcity exists because economies cannot produce enough to meet the perceived desires of all individuals.
3. Only marginal costs, not sunk costs, affect economic decisions if individuals are rational.
4. The economic decision rule is to undertake an action only when the marginal benefits of that action are greater
than its total costs.
5. The opportunity cost of undertaking an activity includes any sunk cost.
6. The “invisible hand” is the price mechanism that guides people’s actions in the market.
7. Social and political forces affect the way in which the invisible hand works.
8. Macroeconomics is the study of how individual choices are affected by economic forces.
9. Deciding what the distribution of income should be is an example of normative economics.
10. Say a pill existed that made people selfless. After taking it they were only interested in others, not themselves.
Under the coordination definition of economics:
A. no economic problem would exist.
B. there still would be an economic problem.
C. there would be a political problem but not an economic problem.
D. there would be a social problem but not an economic problem.
11. According to the text, economics is the study of how:
A. governments allocate resources in the face of constraints.
B. government policies can be used to meet individuals’ wants and desires.
C. human beings coordinate their wants and desires.
D. scarce resources are allocated between capitalists and workers.
12. Dorm rooms usually are not allocated by markets. Allocating dorm rooms is:
A. not an economic problem.
B. an economic problem.
C. not affected by economic forces.
D. determined by prices.
13. If allocating dorm rooms changes from allocation by lottery to allocation by the market:
A. it becomes an economic problem.
B. it becomes a political problem but not an economic problem.
C. it becomes a social problem but not an economic problem.
D. the allocation problem is still an economic problem.
14. Which of the following is not one of the three central coordination problems of the economy given in the book?
A.What
B. Whether
C. For whom
D. How
15. The quantity of goods and services available to society:
A. is fixed.
B. depends on human action.
C. is not of economic importance.
D. will always grow to meet individuals’ wants and desires.
16. Economic systems:
A. can eliminate scarcity.
B. address the questions what is produced, how it is produced, and for whom it is produced.
C. provide all the goods people want and desire.
D. provide equal distribution of well-being among its participants.
17. Scarcity exists because:
A. individuals cannot solve the three central coordination problems.
B. governments cannot solve the three central coordination problems.
C. the supply of goods is always less than the demand.
D. new wants continue to develop and willingness to meet them is limited.
18. People can reasonably expect that an economic system will decide all of the following except:
A. what goods to produce
B. how to produce the goods
C. how to assign initial property rights
D. for whom to produce the goods
19. To engage in economic reasoning, one must compare:
A. total cost and total benefit.
B. marginal cost, sunk cost, and total benefit.
C. sunk cost and marginal cost.
D. marginal cost and marginal benefit.
20. Alexandra has determined that studying an hour for her economics quiz will improve her grade on the quiz from
75 to 100. She also determines that this improvement is worth $20. To study for an hour for her economics quiz,
however, she will have to work one fewer hour at her part-time job. Alexandra should:
A. study for the quiz as long as her hourly wage rate is less than $20.
B. study for the quiz as long as her hourly wage rate is more than $20.
C. study for the quiz only if her hourly wage rate is exactly $20.
D. not study for the quiz because earning a higher grade cannot have a dollar value.
21. Microsoft filed a lawsuit against people who sent spam (junk e-mail) and a website owner who hosted spam
services. A spokesman for Microsoft said that Microsoft was “trying to change the economics of spam” by
increasing the cost of being a spammer. An economist most likely would agree with which statement about
Microsoft’s actions?
A. A more effective approach would be to educate spammers about the costs they impose on others.
B. A more effective approach would be to appeal to the morals of the spammers and tell them to follow the Golden
Rule.
C. Microsoft’s approach of trying to change the costs of spamming is the most efficient way to change behavior.
D. Microsoft should not be involved because spamming is just part of the invisible hand at work and should be left
alone.
22. The marginal benefit from consuming another unit of a good:
A. must equal the marginal cost or the unit will not be consumed.
B. must be less than the marginal cost or the unit will not be consumed.
C. equals the increase in total benefits from consuming the unit.
D. equals the total benefit obtained from the consumption of all prior units.
23. The marginal cost of consuming another unit of a good:
A. must equal the marginal benefit or the unit will not be consumed.
B. must exceed the marginal benefit or the unit will not be consumed.
C. equals the increase in total cost when another unit is consumed.
D. equals the total cost of consuming all prior units.
24. Mary buys cell-phone services from a company that charges $30 per month. For that $30 she is allowed 600
minutes of free calls and then pays 25 cents per minute for any calls above 600 minutes. Mary has used 300 minutes
this month so far. What is her marginal cost per minute of making two more calls lasting 10 minutes each?
A. $2.50
B. 25 cents
C. 4 cents
D. $0
25. Mary buys cell-phone services from a company that charges $30 per month. For that $30 she is allowed 600
minutes of free calls and then pays 10 cents per minute for any calls above 600 minutes. Mary has used 600 minutes
this month so far. What is her marginal cost per minute of making additional calls?
A. 25 cents
B. 10 cents
C. 5 cents
D. $0
26. Sunk costs:
A. are essential parts of economic decisions.
B. are irrelevant to economic decisions.
C. should be considered, but only when marginal cost is less than marginal benefit.
D. should be considered only when there is no information about marginal cost and marginal benefit.
27. Suppose the marginal cost of dating Perry is $30 and the marginal benefit is worth $40 to you. Following
economic reasoning, you should:
A. date Perry.
B. not date Perry.
C. determine what your sunk costs are.
D. determine what your total benefits and total costs are.
28. The table below shows how the marginal benefit of videotape rentals varies for Carol with the number rented
per month.
The price of each tape rental is reduced from $2.99 to $1.99. Assuming that the price of a rental accurately reflects
the marginal cost to Carol and that she is rational, she will increase the number of tapes rented per month from:
A. one to two.
B. two to three.
C. three to four.
D. four to five.
29. The table below shows how the marginal benefit of pizza dinners varies for Luigi with the number consumed
per month.
Suppose the price per dinner is $4.99 and accurately reflects the marginal cost of the dinners to Luigi. Assuming that
Luigi is rational, he will:
A. not consume any pizza dinners this month.
B. consume one pizza dinner this month.
C. consume two pizza dinners this month.
D. consume three pizza dinners this month.
30. The price of a new model of iPod tends to fall significantly a year after it is introduced. Suppose Jane bought an
iPod as soon as it was introduced (a year ago) and paid a premium price for it. Now she wants to buy an iPod cover.
Which of the following should she consider before buying the new accessory?
A. the price she paid for her iPod, the price of the iPod cover, and the benefit she’ll receive from using the iPod
cover
B. The price of replacing her iPod, the price of the iPod cover, and the benefit she’ll receive from using the iPod
cover
C. the price of the iPod cover and the benefit she’ll receive from using the iPod cover
D. The price of the iPod cover had she bought it with the iPod, the current price of the iPod cover, and the benefit
she’ll receive from using the iPod cover
31. You bought one share of McDonald’s stock for $10, one share of Coca-Cola for $15, and one share of Pepto–
Bismol for $20. Currently, each stock is priced at $15. Assuming that there are no tax issues and that you cannot
predict the future price of any of the stocks, if you needed $15, which stock would you sell?
A. McDonalds
B. Coca-Cola
C. Pepto-Bismol
D. Any one of them
32. Which of the following best defines rational behavior?
A. Analyzing the total gains from a decision
B. Improving net gain by pursuing decisions as long as the marginal benefits exceed the marginal costs
C. Seeking to gain by choosing to undertake actions as long as the marginal costs exceed the associated marginal
benefits
D. Seeking to maximize total gain regardless of cost
33. Alan is sitting in a bar drinking beers that cost $1 each. According to the economic decision rule, Alan will quit
drinking when the marginal:
A. benefit to him of an additional beer is less than $1.
B. cost to him of an additional beer is less than the marginal benefit.
C. cost remains at $1.
D. benefit to him of an additional beer is greater than $1.
34. Chuck offers $140,000 for a house. The seller turns down the offer but says she will sell the house for $144,000.
However, Chuck refuses to pay the higher price. If Chuck is following the economic decision rule, the marginal
benefit of the house to:
A. Chuck must be less than $144,000.
B. Chuck must be greater than $144,000.
C. the seller must be less than $144,000.
D. the seller must be less than $140,000.
35. The marginal benefit of another T-shirt this month to Mary is $15. If the $10 price of a T-shirt reflects its
marginal cost to Mary and Mary uses economic reasoning, she:
A. will sell the T-shirts she has to others who are willing to pay $10.
B. cannot gain by buying another T-shirt.
C. will buy another T-shirt this month.
D. will not buy a T-shirt this month.
36. The marginal benefit of going to a movie during the week is currently $6 for you. Assume that the $4 price of
going to the movies measures its marginal cost. Following the economic decision rule, you will:
A. continue going to movies until the marginal benefit of doing so falls to zero.
B. choose not to go to any movies during the week.
C. continue going to movies until the marginal benefit of doing so falls below $4.
D. not be able to enjoy a net gain from going to the movies during the week.
37. Marginal analysis suggests that you will engage in more of an activity if the:
A. total benefit of the activity is less than the total cost.
B. additional benefit from the activity exceeds the additional cost.
C. total benefit from the activity exceeds the total cost.
D. additional cost of the activity exceeds the additional benefit.
38. You’ve purchased a car for $20,000 and now are deciding whether to have a moonroof installed for $800 and a
security system installed for $200. The marginal cost of adding both the moonroof and the security system is:
A. $21,200.
B. $20,000.
C. $800.
D. $1,000.
39. You’re deciding whether to install an $800 moonroof and a $400 security system in your car. Suppose the
marginal benefit from the moonroof is $700 and the marginal benefit from the security system is $600. The
economic decision rule dictates that you should:
A. purchase only the moonroof because that will provide you with the greatest marginal benefit.
B. purchase only the security system because its marginal benefit exceeds its marginal cost.
C. purchase both options because the combined cost of both is less than the combined benefit.
D. not purchase either because the benefits of each do not exceed the costs.
40. Your opportunity cost of taking this course is:
A. the tuition you paid for the course.
B. the net benefit of the activity you would have chosen if you had not taken the course.
C. the net benefit of taking this course.
D. the cost of the activity you would have chosen if you had not taken the course.
41. Economic reasoning would argue that there is an opportunity cost to:
A. all choices.
B. more choices.
C. only choices that involve money.
D. only choices that do not involve money.
42. Suppose you paid $300 to take this economics course, which meets 30 times for one hour a class during the
course of the semester. Instead of attending class you could have either flipped hamburgers for $8 an hour or waited
tables for $5 an hour. Given this information, the opportunity cost of attending each class session is:
A. $30.
B. $8.
C. $5.
D. $13.
43. Opportunity cost:
A. includes only monetary outlays.
B. is the net benefit forgone by not undertaking the next best alternative.
C. is nonexistent for some choices.
D. is the same as sunk cost.
44. Based on scientific nutritional studies, in most countries an income of $1 a day does not provide sufficient food,
shelter, and clothing to live. Under these conditions the medical risk of death is high. This statement is:
A. a normative statement.
B. a subjective statement.
C. an art-of-economics statement.
D. a positive statement.
45. The opportunity cost of attending college for one year is best measured by the:
A. benefit received by the student.
B. tuition paid for the year.
C. value of the next-best activity forgone by attending college.
D. total money expenses associated with attending college.
46. Brooke and Sandy both attend the same college and have the same expenses for tuition, books, and supplies.
However, Brooke is a famous actress who could earn $2 million per year if she were not attending college whereas
Sandy could earn $10,000 a year serving hamburgers if he were not attending college. It follows that the opportunity
cost of attending college:
A. is the same for both Brooke and Sandy.
B. is greater for Brooke than for Sandy.
C. is greater for Sandy than for Brooke.
D. for Brooke and Sandy cannot be compared.
47. When your wages rise, the:
A. opportunity cost of an hour of work decreases.
B. opportunity cost of an hour of leisure stays the same.
C. cost of working increases.
D. opportunity cost of an hour of leisure increases.
48. If it takes you an hour to make a rational decision and the opportunity cost of that hour is $100, you will:
A. always make rational decisions.
B. make rational decisions only if the benefit from doing so exceeds $100.
C. make rational decisions only if the benefit from doing so is less than $100.
D. never make rational decisions.
49. Applying the concept of opportunity cost to the pollution of a lake, an economist probably would conclude that:
A. all pollution in the lake should be eliminated regardless of cost.
B. no pollution in the lake should be eliminated regardless of benefit.
C. pollution should be eliminated as long as the benefit from a cleanup exceeds the opportunity cost.
D. pollution should be eliminated as long as the opportunity cost of a cleanup exceeds the cost of the resources
required for the cleanup.
50. For a given benefit, a rational person chooses the option that has:
A. the lowest opportunity cost.
B. the highest opportunity cost.
C. the average opportunity cost.
D. no opportunity cost.
51. More than 10,000 visitors waited up to two hours in line to see the rare flower titan arum at the Cambridge
Botanical Gardens. What does this situation illustrate to an economist about rationing?
A. Goods don’t have to be rationed by lottery or first-come, first-served. Goods can be rationed by price.
B. When goods are not fully rationed by monetary price, other rationing mechanisms such as waiting arise.
C. When goods are not rationed by monetary price, other rationing mechanisms such as lottery must be introduced.
D. There is no need for rationing if anyone who waits long enough can see the flower.
52. Cockfighting is against the law in New Jersey, resulting in high-priced events held illegally in that state. What
idea from Chapter 1 of the text does this story best illustrate?
A. There ain‘t no such thing as a free lunch.
B. The invisible hand is always invisible.
C. Social and political forces sometimes rein in market forces.
D. Maintaining objectivity is easiest in positive economics.
53. Prostitution is legal in Churchill County, Nevada, but a referendum threatened to close two brothels (prostitution
businesses) in that county. What idea from Chapter 1 of the text does this story best illustrate?
A. Sunk costs do not matter in making decisions.
B. Marginal revenue should equal marginal cost
C. Social and political forces sometimes rein in market forces.
D. Microeconomics and macroeconomics are very much interrelated.
54. Nepalese villagers sell their kidneys as a way to earn much-needed money. Unfortunately, although the demand
for such kidneys in developed economies is high and the medical facilities are available to conduct kidney
transplants, the selling and buying of organs is illegal. What idea from Chapter 1 of the text does this situation best
illustrate?
A. Sunk costs do not matter in making decisions.
B. Marginal revenue should equal marginal cost.
C. Social and political forces sometimes rein in market forces.
D. Microeconomics and macroeconomics are very much interrelated.
55. Countries such as Brazil, India, and Moldova—well-known sources of donors—have banned buying and selling
organs. This legal action comes at the risk of driving the trade underground. What idea from Chapter 1 of the text
does this story best illustrate?
A. Legal and social forces can eliminate economic forces.
B. Marginal revenue should equal marginal cost.
C. Economic forces always operate despite legal forces.
D. The invisible hand is not always invisible.
56. Economic forces:
A. are a reaction to scarcity.
B. give rise to scarcity.
C. are not related to scarcity.
D. are not related to rationing.
57. An economic force given relatively free rein by society to work through the market is:
A. a market force.
B. a social force.
C. a price mechanism.
D. a political force.
58. The price mechanism that guides people’s actions is called the:
A. invisible market force.
B. invisible hand.
C. invisible handshake.
D. invisible foot.
59. Antitrust laws are an example of:
A. social forces.
B. political forces.
C. economic forces.
D. the invisible hand.
60. Microsoft has just taken some senators out to dinner in Paris in a private jet. This is probably an example of an
attempt to influence:
A. economic forces.
B. political forces.
C. social forces.
D. the price mechanism.