Subjective Short Answer
1. Economics is the study of ______ .
2. The term ______ refers to the size of the economic pie, and the term ______ refers to how the pie is divided.
efficiency; equality
3. Explain how government policies that redistribute income from the rich to the poor might reduce efficiency.
They reduce the reward for working hard. As a result, people work less and produce fewer
Scenario 1-1
You have the afternoon free. You have a choice between going to the movies with a friend or studying economics for
three hours. If you go to the movies, you will spend $8.00 on a ticket and $4.50 on popcorn. If you choose to study
economics for three hours, you will raise your exam grade by 10 points.
4. Refer to Scenario 1-1. What is your opportunity cost of going to the movies?
$12.50 and 10 points on your exam grade
5. Refer to Scenario 1-1. What is your opportunity cost of studying economics?
The enjoyment you would have received from going to the movies with your friend.
6. Refer to Scenario 1-2. What is your opportunity cost of going to the movies?
$32
7. Refer to Scenario 1-2. What is your opportunity cost of working?
8. Debbie quits her job, which pays $30,000 a year, to finish her college degree. Her annual college expenses are $10,000
for tuition, $2,000 for books, and $700 for food. What is her opportunity cost of attending college for the year?
9. Zack quits his job at a consulting firm, which pays $40,000 a year, to enroll in a two-year graduate program. His annual
school expenses are $30,000 for tuition, $2,000 for books, and $600 for food. What is his opportunity cost of attending the
two-year graduate program?
10. Give an example of a trade-off faced by society.
(national defense and consumer goods)
Scenario 1-3
It costs a company $35,000 to produce 700 graphing calculators. The company’s cost will be $35,070 if it produces an
additional graphing calculator. The company is currently producing 700 graphing calculators.
11. Refer to Scenario 1-3. What is the company’s average cost?
12. Refer to Scenario 1-3. What is the company’s marginal cost?
13. Refer to Scenario 1-3. A customer is willing to pay $60 for the 701th calculator. Should the company produce and
sell it? Explain.
14. Refer to Scenario 1-3. What is the minimum price the company will charge for the 701th calculator?
Scenario 1-4 You have the afternoon free. You have a choice between going to the movies with a friend or studying
economics for three hours. If you go to the movies, you will spend $12.00 on a ticket and $4.75 on popcorn. If you choose
to study economics for three hours, you will raise your exam grade by 15 points.
15. Refer to Scenario 1-4. What is your opportunity cost of going to the movies?
16. Refer to Scenario 1-4. What is your opportunity cost of studying economics?
17. What is another word for “marginal”?
18. The term ______ refers to a small incremental adjustment to an existing plan of action.
Suppose that you have a choice between going to the movies with a friend for three hours or working at your job. If you
19. Refer to Scenario 1-5. What is your opportunity cost of going to the movies?
20. Refer to Scenario 1-5. What is your opportunity cost of working?
The enjoyment you would have received from going to the movies with your friend.
Scenario 1-6
It costs a company $30,000 to produce 600 heart rate monitors. The company’s cost will be $30,070 if it produces an
additional heart rate monitor. The company is currently producing 600 heart rate monitors.
21. Refer to Scenario 1-6. What is the company’s average cost?
22. Refer to Scenario 1-6. What is the company’s marginal cost?
23. Refer to Scenario 1-6. A customer is willing to pay $60 for the 601st heart rate monitor. Should the company produce
and sell it? Explain.
No, because the marginal cost ($70) exceeds the marginal benefit ($60).
24. Refer to Scenario 1-6. What is the minimum price that would induce this company to produce the 601st heart rate
monitor?
25. Tracy quits her job, which pays $25,000 a year, to finish her college degree. Her annual college expenses are $12,000
for tuition and fees and $1,000 for books. What is her opportunity cost of attending college for the year?
26. Melinda quits her job at a bank, which pays $30,000 a year, to enroll in a two-year graduate program. Her annual
school expenses are $22,000 for tuition and fees and $2,000 for books. What is her opportunity cost of attending the two-
year graduate program?
27. What does the term “marginal change” mean?
28. Rational people make decisions “at the margin” by comparing ______.
29. In a centrally-planned economy, economic activity is guided by ______.
30. Explain how trade with other countries is beneficial.
31. What are the two basic types of economies?
32. What is the main difference between a centrally planned economy and a market economy?
33. Invisible hand is a term used by the economist ______ to describe how the decisions of households and firms lead to
desirable market outcomes.
34. Economists use the term ______ to refer to a situation in which the market on its own fails to produce an efficient
allocation of resources.
35. What are the two possible causes of market failure?
36. Explain the concept of externality and give an example.
37. What are the two reasons for the government to intervene in a market?
38. What does the “invisible hand” refers to?
39. Invisible hand is a term used by the economist ______ in his 1776 book An Inquiry into the Nature and Causes of the
Wealth of Nations.
40. What do prices reflect in a market economy?
41. Explain the concept of market failure.
42. Economists use the term ______ to refer to the ability of a single person (or a small group) to have a substantial
influence on market prices.
43. Give an example of government intervention that is intended to reduce an externality.
44. Give an example of government intervention that is intended to improve equality.
45. Economists use the term ______ to refer to an increase in the overall level of prices in the economy.
46. In the short run, an increase in the money supply is likely to lead to ______ inflation and ______ unemployment.
47. Economists use the term ______ to refer to fluctuations in economic activity, such as employment and production.
48. Consider two countries, Muria and Zenya. In Muria total annual output is worth $800 million and people work 40
million hours. In Zenya total annual output is worth $900 million and people work 50 million hours. In which country is
productivity higher?
49. Suppose that in Germany total annual output is worth $600 million and people work 40 million hours. In France total
annual output is worth $700 million and people work 50 million hours. In which country do people enjoy a higher
standard of living?
50. What are the two short-run effects of increasing the quantity of nation’s money?
51. How does the study of economics depend upon the phenomenon of scarcity?
52. One tradeoff society faces is between efficiency and equality. Define each term. If the U.S. government redistributes
income from the rich to the poor, explain how this action affects equality as well as efficiency in the economy.
53. Define opportunity cost. What is the opportunity cost to you of attending college? What was your opportunity cost of
coming to class today?
54. With the understanding that people respond to incentives, outline the possible outcome for teachers if the K-12 school
year is extended to 11 months per year instead of the existing 9 months per year.
55. Under what conditions might government intervention in a market economy improve the economy’s performance?
56. Explain how an attempt by the government to lower inflation could cause unemployment to increase in the short-run.