93. The allocation of limited resources within an environment of almost unlimited wants is the focus
of
a. capitalism. d. scarcity.
b. fiscal policy. e. altruism.
c. economics.
94. An economist is most capable of determining
a. how worker productivity affects the output of an economy.
b. psychological factors that contribute to worker productivity.
c. interior paint colors that boost business revenue.
d. which individuals are allowed to make decisions.
e. why some consumers prefer emeralds over diamonds.
95. Without scarcity, the study of ________ would be unnecessary.
a. positive incentives d. economics
b. negative incentives e. productivity
c. resource allocation
96. Low prices for water in the developed world may lead individuals to believe it is NOT a ________
resource.
a. desired d. controlled
b. scarce e. economic
c. plentiful
97. A recession has crippled the national economy, producing a high rate of unemployment. Which of
the following would be a microeconomic decision?
a. Congress decides to institute a tax cut and encourage consumer spending.
b. The United States negotiates a new trade agreement with Japan, hoping to bolster exports.
c. The federal government extends the duration of unemployment benefits.
d. A Congresswoman decides to delay the purchase of a new car.
e. The Federal Reserve lowers interest rates in an effort to stimulate business activity.
98. Which is NOT one of the five foundations of economics?
a. innovation d. opportunity cost
b. incentives e. marginal thinking
c. trade-offs
99. Macroeconomics would be concerned with
a. a family’s decision to finance the purchase of a home.
b. the consequence of a massive layoff by a major corporation.
c. a local government issuing bonds to build a new sporting arena.
d. a single national government choosing to implement trade tariffs.
e. the opening of an auto plant in a county with high unemployment.
100. Decisions by individuals and firms are the domain of
a. microeconomics. d. median economics.
b. macroeconomics. e. choice economics.
c. consumption economics.
101. Why do incentives matter to economists?
a. People make poor decisions when they’re given money they didn’t earn.
b. Governments are the source of all incentives and there is value in studying the actions of
government.
c. Incentives are often the guiding principle behind greed and exploitation.
d. Incentives explain how people make decisions, and are the key to understanding economics.
e. Without incentives, the distinction between microeconomics and macroeconomics would be
unclear.
102. When an individual chooses to act, he or she is said to be motivated by
a. scarcity. d. indifference.
b. incentives. e. ambivalence.
c. disincentives.
103. A mother takes her daughter on an outing and promises her ice cream if she behaves. In addition,
she warns her that if she misbehaves, she won’t be allowed to play with her toys at home. The
latter is an example of a(n) ________ incentive and reinforces the efficacy of the ice cream, a(n)
________ incentive.
a. direct; indirect d. positive; negative
b. indirect; direct e. negative; direct
c. negative; positive
104. Hassan enjoys lifting weights in his spare time, but his gain in strength has come to a plateau. He is
considering giving up weight lifting altogether, unless he experiences significant gains in the near
future. Hassan is seeking a ________ incentive.
a. power d. positive
b. reasonable e. neutral
c. negative
105. Clarice must choose between reading the next chapter in her economics textbook or streaming the
next episode of her favorite show. In her experience, she does well on exams, but even better when
she reads the textbook. If she chooses to watch the show, what can be said of incentives?
a. Adding a negative incentive (e.g., her parents block access to streaming services) would more
likely result in Clarice choosing to read the textbook.
b. Positive incentives are always more effective than negative incentives.
c. Negative incentives are always more effective than positive incentives.
d. Only marginal incentives play a role in this example.
e. Clarice is motivated by the stronger of two negative incentives.
106. A new tax on gasoline causes a reduction in the purchase of new vehicles with poor fuel economy.
This is an example of what type of incentive?
a. negative direct
b. positive direct
c. negative indirect
d. positive indirect
e. The tax does not provide an incentive.
107. Which of the following is an example of an unintended consequence?
a. Competition between two businesses causes each to lower prices.
b. A tax rebate on electric cars results in increased household electricity consumption.
c. A tax cut leads to a spike in consumer spending.
d. Low interest rates encourage businesses to borrow money from banks.
e. A welfare program causes individuals to purchase necessities and seek employment.
108. The ________ system encourages innovation by creating a powerful financial reward for
creativity.
a. direct incentive d. trade-off
b. indirect incentive e. tax credit
c. patent
109. Corporate leadership sometimes waits until after presidential elections in order to make major
business decisions. An economist would maintain that this is in anticipation of future
a. forecasting. d. incentives.
b. fear. e. taxes.
c. scarcity.
110. The proliferation of BitTorrent and other file sharing media have threatened the copyright system.
Based on an understanding of incentives and opportunity cost, how are the decisions of musicians
likely impacted?
a. They will spend more time in court, reducing the amount of music they produce.
b. They will illegally download the music of other artists to balance the impact across the
industry.
c. Since music theft cannot be stopped, musicians will stop trying to sell their music.
d. Most musicians will be forced to take a second job in order to support themselves.
e. If more money can be made in alternative professions, individuals will choose not to pursue
music.
111. The concept of ________ explains that making one choice means an individual will not have the
time, resources, or energy to do something else.
a. scarcity d. opportunity cost
b. negative incentives e. marginal benefit
c. trade-offs
112. Trade-offs occur in all of the following scenarios EXCEPT
a. a student has two exams on the following day and must divide study time between the classes.
b. a couple chooses between two equally appealing vacation destinations for the following
weekend.
c. a shopper wants to buy two equally appealing shirts totaling $50, and has $35 to spend on
each.
d. a caterer selects from two potential jobs, both paying $2,500 on a Saturday night.
e. consumers are often forced to make a compromise between quality and price.
113. During a job search, individuals will sometimes accept the lower of two competing salary offers.
What would best explain this decision?
a. Individuals never accept a salary that exceeds their personal values.
b. A person may accept a lower starting salary in order to receive greater future pay increases.
c. The total benefits of the higher paying job are greater than the total benefits of the lower
paying job.
d. The total benefits of the lower paying job are greater than the total benefits of the higher
paying job.
e. The lower salary is still better than the salary earned at the previous job.
114. The presence of scarcity means that no choices come without
a. shortages. d. incentives.
b. trade-offs. e. consumption.
c. regret.
115. Laura leaves her job as an accountant, where she earns $80,000 per year, to start her own business.
After the first year, her business earns a profit of $60,000. How would an economist describe the
profitability of Laura’s career change?
a. Laura had a profit of $140,000. d. Laura had a profit of $60,000.
b. Laura had a loss of $20,000. e. Laura had a loss of $80,000.
c. Laura had a profit of $20,000.
116. Dexter decides to buy a new smartphone and offset the cost by selling his old phone to one of his
friends. His friend has no money and wants to barter for the old phone. Dexter’s preference for the
items offered is in this order: laser printer, television, headphones, and bicycle. If Dexter accepts
the laser printer as payment, what is his opportunity cost of this exchange?
a. the total value of the television, headphones, and bicycle
b. the difference between the value of the old phone and that of the new smartphone
c. There is no opportunity cost in a consensual trade.
d. the value of the laser printer
e. the value of the television
117. Isaac has four potential jobs to consider, each with different salary offers. From highest to lowest,
the salaries are: $47,500, $46,000, $45,000, and $42,000. Based on the information provided, if
Isaac accepts the highest-paying position, what is his opportunity cost of this position?
a. $46,000 d. $133,000
b. $42,000 e. $1,500
c. $47,500
118. Which statement represents a rational application of opportunity cost?
a. The value of the choice must be greater than or equal to the cost of the next-best alternative.
b. The value of the next-best alternative must be greater than or equal to the cost of the choice.
c. Opportunity cost is useful for evaluating a decision after the fact, but not during the
decision-making process.
d. The value of the choice must be greater than the sum of all available alternatives.
e. The value of the next-best alternative is irrelevant since the alternative was not selected.
119. What is NOT a possible opportunity cost of attending a four-year college following high school
graduation?
a. the experience of traveling throughout Europe and staying in hostels
b. the income earned at a full-time job
c. the cost of tuition at a four-year college
d. job training learned at a vocational school
e. the cost savings from attending a community college
120. What is the opportunity cost of purchasing a college textbook?
a. the price paid at the university bookstore
b. the cost savings from not purchasing a book
c. the prospect of failing homework assignments and quizzes
d. the trade-in value at the end of the semester
e. the cost of the course minus the cost of the textbook
121. An economist would argue that the true cost of a college education exceeds the cost of tuition,
housing, and books because of
a. opportunity cost. d. tax credits.
b. invisible costs. e. scholarships.
c. inflation.
122. Marginal decisions are said to be made on the ________ unit(s) under consideration.
a. total d. sum of
b. additional e. previous
c. average of
123. ________ is the process of breaking down decisions into smaller parts.
a. Economics d. Segmentation
b. Marginal analysis e. Reduction
c. Divisional analysis
124. According to marginal thinking, an individual will continue to consume until after the benefit of
additional consumption ________ its cost.
a. is equal to d. is less than
b. totals e. marginalizes
c. is greater than
125. ________ is value added by making additional effort.
a. Income d. Optimization
b. Money e. Opportunity benefit
c. Marginal benefit
126. Shoppers at supermarkets often abandon their empty shopping carts at various locations in the
parking lot, despite the risk of damage to vehicles or the additional labor cost of retrieving those
carts. How might an economist explain this behavior?
a. People go to the supermarket when they have the energy to shop only, without considering the
cost of returning their carts.
b. The perceived potential benefit of going to a cart return location is less than the time and
energy cost to the shopper.
c. People are generally lazy and gravitate toward any decision with the lowest cost.
d. Once a shopper leaves the parking lot, the abandoned cart becomes someone else’s problem.
e. Because food prices are always subsidized by the government, shoppers are ignorant of
additional costs.
127. Rodrigo operates a dry-cleaning service and charges customers $5 per article of clothing. Based on
his knowledge of operations, the 1,000 th piece of clothing costs him $4.95 to dry-clean. If he takes
additional business, however, the 1,001st piece will cost $5 for the service. Does he take the
additional business?
a. No, he has hidden costs that far exceed his estimate of $5, so he loses money.
b. No, taking on additional business doesn’t earn him any money.
c. Yes, if he turns away business, his service will be forced to close.
d. Maybe. If a competitor is accepting that many customers, he must at least equal that amount.
e. Yes. At a $5 cost, he breaks even and is indifferent. He necessarily turns away business when
the cost of the additional unit exceeds the income.
128. People often clean cabinet doors, but do not regularly clean inside the cabinet. The insides of
cabinets aren’t visible and require the removal of contents in order to clean. This is an example of
________ thinking.
a. conscientious d. incentive
b. deferential e. marginal
c. dismal
129. At any quantity, when the marginal benefit equals the marginal cost, that quantity is said to be
a. excessive. d. equivalent.
b. inadequate. e. allocated.
c. optimal.
130. It is crucial to recognize that ________ and ________ are separate evaluations made at the margin.
a. costs; benefits d. economics; accounting
b. buying; selling e. trade-offs; opportunity costs
c. incentives; trade-offs
131. The U.S. federal government imposes a tariff on cheaper steel arriving from other countries. When
producers make the decision to purchase domestic steel, what must first occur?
a. Producers always purchase domestic steel because the quality is superior to foreign products.
b. The price of domestic steel must be at least equal to or greater than that of foreign steel.
c. Producers never purchase domestic steel because it can’t be produced as efficiently as foreign
products.
d. The government must subsidize the manufacturing costs of domestic steel.
e. The price of foreign steel must be at least equal to or greater than that of domestic steel.
132. Decision makers engage in marginal thinking by
a. comparing the average cost and benefit of all units produced.
b. comparing the sum of the cost and benefit of all units produced.
c. ignoring benefits, which are a subjective determination.
d. comparing the benefit of one additional unit with its cost to produce.
e. focusing on mass production, which often keeps costs down.
133. ________ show(s) how resources and final goods and services flow through the economy.
a. Money d. Trade-offs
b. Government e. Circular flow
c. Allocation
134. A double coincidence of wants means that
a. each party in an exchange transaction has what the other party desires.
b. one party in an exchange transaction wants twice what the other party is offering.
c. both parties desire the same good or service, making exchange impossible.
d. desires in the marketplace are always unpredictable, so it takes at least two exchanges for
every market participant to be satisfied.
e. both parties in an exchange have a desire, but no means by which to pay for it.
135. ________ avoids the double coincidence of wants.
a. Bartering d. Money
b. Mandated trade e. Demand
c. Government ownership
136. ________ involves individuals trading goods they already have or providing services in exchange
for something they want.
a. Circular flow model d. Barter
b. Circular flow model with money e. Cash exchange
c. Optimization
137. Which is NOT a benefit of trade?
a. reaping the rewards of specialization
b. creation of value for all parties involved
c. equivalent gains for all parties involved
d. improved allocation of resources
e. More wants are satisfied.
138. If specialization and outsourcing can harm domestic workers, why do countries still engage in
trade?
a. Most workers have little influence on politicians and are ignored.
b. The gains from trade far outweigh the costs, and the economy benefits overall.
c. Domestic workers can move to a country with a greater need for their skills.
d. Welfare programs can support unemployed workers.
e. Shipping companies have a powerful lobby in Congress.
139. Disparities in opportunity cost among competitors are the cause of
a. optimization. d. command economies.
b. comparative advantage. e. marginal benefits.
c. trade-offs.
140. A possible opportunity cost of NOT engaging in free trade is
a. a loss of domestic jobs.
b. a smaller variety of goods and services.
c. higher prices.
d. economic growth.
e. import tariffs.
141. A nation will engage in voluntary trade if
a. the terms are mutually beneficial for both parties.
b. the trade is approved by the World Trade Center.
c. there are no domestic costs associated with trade.
d. it allows a trade partner to specialize.
e. it lacks a comparative advantage in the production of every good.
142. Coastal regions have stronger commercial fishing economies because they have a ________ in the
production of seafood.
a. comparative advantage d. higher opportunity cost
b. proximity advantage e. government subsidy
c. rational advantage
143. William can create 30 meals in one hour, or wash 90 dishes in the same time. Jeremy can create 25
meals in one hour, or wash 50 dishes in one hour. Using opportunity cost, who should specialize in
what task?
a. William is more productive and therefore should make meals and wash dishes.
b. Since creating meals is harder, William should create meals and wash dishes.
c. Since washing dishes is easier, Jeremy should wash dishes and create meals.
d. Jeremy can wash twice as many dishes per meal, so Jeremy should wash dishes.
e. Jeremy gives up fewer dish washings per meal creation, so Jeremy should create meals.
144. If the United States creates a trade agreement with Vietnam, we know that
a. Vietnam will benefit, but trade with a less developed, Third World country will not help the
United States.
b. Vietnam can get no benefit, since its workers are not as productive as the United States’.
c. Vietnam can get no benefit, since its businesses have less capital than the United States’.
d. Vietnam and the United States can both benefit.
e. physical and cultural differences between the two countries are too great to benefit from trade.
145. Bea bakes pastries well, and Lucian raises great herbs. If Lucian trades parsley with Bea in
exchange for cupcakes, then
a. both Bea and Lucian are made better off by trade.
b. neither Bea nor Lucian are made better off by trade.
c. only Bea is made better off by trade.
d. only Lucian is made better off by trade.
e. either Bea or Lucian is made better off by trade, but not both.
146. Trade makes costs of goods and services
a. lower and raises the variety of goods and services in markets.
b. lower but reduces the variety of goods and services in markets.
c. higher but reduces the variety of goods and services in markets.
d. higher but raises the variety of goods and services in markets.
e. Neither lower nor higher, since so many other variables need to be considered.
147. Choosing to trade ________ specialization, ________ opportunity costs.
a. reduces; reducing d. increases; increasing
b. reduces; increasing e. increases; but doesn’t change
c. increases; decreasing
148. Wages are higher in Country X than in Country Y. If the countries decide to trade, then who will
benefit?
a. Neither country can benefit unless one knows the product that is traded.
b. Both countries can benefit regardless of the products traded.
c. Only the country that can produce the product more efficiently will benefit.
d. Only the country that can produce the product at a lower opportunity cost will benefit.
e. Both countries will benefit, but only if a trade agreement for specific products is made by their
respective governments.
149. Benefits from trade would NOT include
a. lower prices.
b. less competition.
c. more variety of goods and services in the market.
d. the ability of producers to specialize.
e. more employment for the country.
150. The two highest paid midcareer jobs with only a bachelor’s degree are
a. business management and accounting.
b. criminal justice and psychology.
c. civil engineering and math.
d. economics and computer engineering.
e. economics and business management.
SHORT ANSWER
1. List and briefly explain each of the five foundations of economic thought.
2. Using any of the five foundations of economic thought, explain why farms are not located in major
metropolitan areas.
3. Health insurance companies have the goal of reducing payments to doctors and hospitals. One way
they have done this is by requiring individuals to pay a deductible. For example, a $1,000
deductible means that individuals are responsible for the first $1,000 in health care expenses over
the course of a year. In terms of incentives, explain how the presence of a deductible reduces
expenses for the health insurance company.
4. Economic growth in developed countries has been altered by the increased popularity of the
Internet. How has the Internet, in terms of both negative and positive incentives, promoted but also
discouraged economic growth?
5. The discipline of economics is largely based on encouraging individuals to engage in certain
activities and discouraging them from engaging in others. Why is encouraging or discouraging
individuals through incentives so important?
6. A dangerous habit among those who own cell phones is driving while talking or texting. Although
a great deal has been done to inform drivers of the risks of doing multiple tasks while driving, this
informational campaign has been ineffective in the face of increased ownership of cell phones. If
you were a policymaker, what types of negative incentives would you suggest to discourage
individuals from driving, talking, and texting at the same time?
7. Due to the fact that firms concern themselves primarily with earning profits, a common complaint
is that they often damage the environment in the process. More recently, markets have been set up
so that firms can actually reduce their costs and profit more by damaging the environment less and
selling their “right to pollute” to other companies. Discuss how this serves as a positive incentive
for a firm to act in an environmentally responsible manner. What would be a way to discourage
firms from polluting through the use of negative incentives?
8. What are opportunity costs, and why do economists spend so much time talking about them?
9. One of the first major decisions that one faces after graduation is getting an apartment. Describe
how someone might employ the concepts of trade-offs, opportunity costs, and making decisions at
the margin in deciding which apartment to rent.
10. What is meant when one says that decisions are made at the margin? Provide an example of
making a decision at the margin.
11. Explain why economics is not such a “dismal science.”
12. Explain how abundant resources such as water can be considered “scarce.”
13. Economics is divided into two subfields: microeconomics and macroeconomics. Why is this
separation necessary?
14. If opportunity cost is the value of the best alternative not chosen, why is a rejected option
important?
15. Explain how a market might develop naturally without planning by government.
16. When the Federal Reserve, the entity that manages money and banking in the United States,
announces changes in the supply of money it makes available to banks, it often causes a significant
response in financial markets. Based on an understanding of incentives, why is this not surprising?
17. Many car insurance companies offer discounts for safe drivers. The promise is lower premiums or
a reduction in deductibles for customers that remain accident-free for a specified period of time.
The discounts are not without a cost, however. Policyholders must pay an additional premium
(periodic fee paid for insurance coverage) in order to participate in the program. Understanding
opportunity cost, explain how safe-driver programs might be beneficial for some customers but not
others.
18. It can be said that voluntary trade will not occur unless all parties involved believe that they will be
better off after trading than they were before. Considering that the supply of goods and services
does not change in trade and only changes hands, how is it possible that each party improves?
Shouldn’t one party benefit at the expense of another?
19. Alejandro and Roger are working on a group project for class that requires writing a paper and
designing charts to explain the information contained in the paper. Alejandro can write three pages
of the paper in the same time it takes him to create two charts. Roger can write two pages of the
paper in the same time he can produce a single chart. What is the opportunity cost for each to
produce a single page of the essay? Based on the opportunity cost, who has the comparative
advantage in writing the essay?
20. Explain why every decision requires some sort of trade-off.
21. Some parents discourage their college student children from taking economics, saying it is not a
useful discipline. Why are they incorrect?
22. A teacher asks a student to research the details of a question that the teacher couldn’t answer
completely. The student responds, “What will you give me if I do it?” Use economic reasoning to
analyze the response.
23. If school teachers are offered more pay to teach year-round school instead of nine-month school,
then will they respond to the incentive?
24. Distinguish between a direct incentive and an indirect incentive.
25. Some environmentalists want to eliminate all pollution. Use economics to respond to this
statement.