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33) A politician says that the government should tax behavior they want less of and subsidize
behavior they want more of. This is an example of
A) cynical behavior in modern democracies.
B) failing to consider the alternatives available to the government.
C) a concern that people are not rational when they make decisions.
D) using incentives to alter behavior.
34) Which of the following ways to recruit soldiers utilizes incentives?
A) a draft
B) universal service
C) higher salaries
D) waging a war on another country
35) Self-interest
A) implies that a person must try to increase wealth at all times.
B) implies that people will not give away wealth.
C) is consistent with many goals that people pursue, including betterment of others.
D) applies only to people in market settings.
36) Self-interest
A) relates strictly to material well-being, such as a person’s stock of wealth at a point in time.
B) is measured entirely based on an individual’s income, whether earned from labor or inherited.
C) is inconsistent with economic analysis, which suggests that self-interest is irrational.
D) can involve any action that makes a person feel better off, such as charitable contributions.
37) Jaime’s father gives her a car for her graduation from college, but Jaime wants a smartphone.
This implies that
A) Jaime’s father is not acting out of self-interest because he knows that she really wants a
smartphone.
B) Jaime’s father is acting out of self-interest because he wants to give her something more
expensive.
C) Jaime is not acting out of her self-interest by wanting something different from what her
father gives her.
D) Jaime is not rational by asking for a smartphone instead of a car.
38) Charitable donations to the Red Cross
A) can be explained by the rational ignorance theory.
B) can be explained by the rational self-interest theory.
C) cannot be explained by the rational self-interest theory.
D) prove that there is no scarcity in the United States.
39) A five-cent deposit on beer bottles
A) provides a positive incentive because it rewards people for recycling.
B) provides a negative incentive because it punishes people who do not recycle.
C) is an irrational policy, because it adds to the prices of beer.
D) is an irrational policy, because it fails to take into account self-interest.
40) If a teacher tells a student that those who attend the study session typically score higher on
the final exam
A) the student has a positive incentive to attend the study session because she may get a higher
grade.
B) the student has a negative incentive to attend the study session because she will be punished if
she does not go.
C) the student has no greater incentive to attend because there is no guarantee she will get a
higher grade on the exam.
D) a “C” student will be making an irrational decision if she decides to skip the study session
since she has plenty of time to go.
41) Consider the case of a teacher who tells students that those who miss more than three classes
for any reason will automatically receive a lower grade.
A) This is an example of a positive incentive for students to attend class.
B) This is an example of a negative incentive for students to attend class.
C) The teacher is assuming that students are irrational, and she must force them to attend class.
D) Students who miss more than three classes are irrational.
42) If the government offers to reduce your property taxes by 10 percent if you install solar
heating for your home, this would be an example of
A) a violation of the rational assumption.
B) incentives.
C) disincentives.
D) ceteris paribus.
43) Economists assume that people are motivated by
A) a desire to please others.
B) the interests of the community at large.
C) self-interest.
D) morally correct behavior.
44) When we say that an individual behaves according to “rational self-interest,” we mean that
this individual
A) is motivated by greed.
B) will always buy the most fashionable items available.
C) never considers the well being of any other individual.
D) is making choices that he or she believes will leave him or her better off.
45) Rational behavior for an economist means that individuals
A) are motivated by self-interest.
B) never change their minds.
C) always value societal needs more than their own needs.
D) are self-sacrificing.
46) According to economists, when two people make exactly the opposite decision
A) one of them is acting irrationally.
B) each person evaluates the situation according to his/her individual self-interest.
C) one of them is acting out of spite.
D) one of them should compromise.
47) It is assumed in economics that people make decisions based upon
A) altruism.
B) rational self-interest.
C) tradition.
D) perfect information about every aspect of the world.
48) An incentive is a
A) need.
B) want.
C) reward for desired behavior.
D) concept that does not actually affect people’s behavior.
49) The assumption that individuals do NOT intentionally make decisions that would leave them
worse off is referred to as
A) the premium assumption.
B) the law of comparative advantage.
C) the rationality assumption.
D) a ceteris paribus assumption.
50) The author of the book An Inquiry into the Nature and Causes of the Wealth of Nations is
A) Thorstein Veblen.
B) Adam Smith.
C) Donald Trump.
D) Janet Yellen.
51) Rational self-interest means
A) always increasing your wealth.
B) pursuing what makes you better off.
C) pursuing activities that maximize income.
D) always pursuing activities that are consistent with your faith.
52) The rationality assumption states that
A) all actions taken by consumers are based on what is good for society.
B) people make decisions regardless of how the outcome will affect them.
C) people make decisions to buy only those goods that they need rather than goods that they
want.
D) people do not intentionally make decisions that would leave them worse off.
53) Economic theory predicts that people make choices in a manner that
A) makes them well liked by others.
B) makes them better off.
C) reflects the fact that resources are unlimited.
D) shows that they do not respond to monetary incentives.
54) How could Adam Smith’s comment about the butcher, the brewer, and the baker be
accurately rephrased in modern terms?
A) The butcher, the brewer, and the baker give us our dinner because they want to be well liked
in the community.
B) The butcher, the brewer, and the baker give us our dinner because they will be sued if they
don’t do so.
C) The butcher, the brewer, and the baker give us our dinner because they each earn a living by
doing so.
D) The butcher, the brewer, and the baker give us our dinner because they view doing so as a
public service.
55) According to economic theory, how do people make decisions?
A) They make decisions in the same manner as their parents did.
B) They make decisions by looking at what others have done in the same situation and then
doing the opposite.
C) They make decisions by looking at what others have done in the same situation and then
doing the same.
D) They make decisions based on their own self-interest.
56) The assumption underlying economic theory is that
A) people respond only to negative incentives, not to positive ones.
B) choices are affected by incentives.
C) value judgments do not play a role in the economic decisions people make.
D) money is the only incentive that matters.
57) High gasoline prices give people all of the following incentives EXCEPT
A) to drive less.
B) to car pool.
C) to buy a hybrid car.
D) to take vacations that require driving more miles.
58) The idea that people will not consciously make decisions that make them worse off is known
as
A) rationality assumption.
B) the decision duality.
C) Adam Smith’s doctrine.
D) incentive assumption.
59) Explain what economists mean when they apply the rationality assumption.
60) “Economists assume people are selfish.” Do you agree with this statement or not? Explain.
61) “Rational, self-interested people would never end up worse off by any decision they make.
Obviously, people often make mistakes or have regrets. Therefore, people do not act rationally or
out of self-interest.” Do you agree with these statements? Why or why not?
62) What assumption about human motivation is made in economics? Explain.
63) What is meant by the term “incentives,” and why are they important?
64) During the Middle Ages, heretics were often burned at the stake. Were the heretics violating
the assumption of rational self-interest? Explain.
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1.4 Economics as a Science
1) Another term for “economic models” is
A) economic systems.
B) economic theories.
C) economic science.
D) economic institutions.
2) A simplified representation of the real world that is used to explain economic phenomena is
a(n)
A) viewpoint.
B) model.
C) assumption.
D) implication.
3) Economics is an empirical science, which means that economists
A) must use laboratory experiments to test their theories.
B) evaluate a model or theory by whether its assumptions are consistent with the real world.
C) try to prove their models are true by referring to logic.
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4) Both the social sciences and the natural sciences employ ________ to help them understand
the world around them.
A) models
B) experiments
C) traditional thinking
D) implications
5) Which is NOT true about the use of economic models?
A) Economic models are simplified representations of the real world.
B) Economists always use experiments in science laboratories to test their theories.
C) Economists use what has already happened in the real world to test their theories.
D) Economists are employed to explain economic phenomena but are never used to predict what
might happen next.
6) Which of the following statements is FALSE?
A) Economists empirically test their models.
B) Economic models are not used to make predictions.
C) An economic model should capture only the key relationships that are sufficient to analyze
the particular problem being studied.
D) Economic models relate to behavior rather than to individual thought processes.
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7) Economists develop models to
A) capture every detail of the real world.
B) make their arguments more realistic.
C) justify the assumptions they make about people’s behavior.
D) help us understand economic phenomena in the real world.
8) Which of the following statements concerning economic models is FALSE?
A) Economic models must provide usable predictions.
B) Economic models are based on data alone and no assumptions.
C) Economic models are tested empirically.
D) Economic models relate to how people behave.
9) Which of the following statements about economic models is TRUE?
A) Economic models are not empirically testable.
B) The predictive power of models is not as important as they serve the preferences of
economists.
C) Economic models are designed so that every detail of the real world can be analyzed.
D) Every economic model is based on a set of assumptions.
10) Economic models
A) are used to explain how people think.
B) are used to explain how people behave.
C) are essential representations of the real world.
D) are used to explore the thought processes of individuals or groups.
11) One reason why economists often use models in their analysis is that
A) a model helps us to understand, explain, and predict economic phenomena in the real world.
B) a model accurately pictures every detail of the real world economy.
C) a model relates to individual thought processes rather than behavior.
D) it is relatively easy to perfectly specify a model.
12) An economic model should capture
A) the essential relationships that help to analyze the problem.
B) all possible variables that apply to the problem.
C) only social value related variables.
D) all of the above.
13) One problem with constructing a perfectly complete realistic economic model is that
A) it would be too simplistic to have any value.
B) it would be far too complicated to analyze.
C) it would not serve the needs of economists who builds that model.
D) None of the above is true.
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14) Which of the following statements is TRUE?
A) No economic model captures every detail that affects a problem.
B) Economic models always make accurate predictions about behaviors.
C) Economic models must fully reflect reality.
D) Economic models use economists’ opinions with no use of data.
15) A map is an example of a model because a map
A) realistically describes an area.
B) is always as complex as space will permit.
C) is two-dimensional.
D) is a simplified representation of reality.
16) Holding all variables constant but one and assessing the impact of the one variable that has
changed is an example of using
A) the ceteris paribus assumption.
B) an economic model based on unrealistic assumptions.
C) a flawed economic model.
D) an untestable proposition.
17) The term ceteris paribus means
A) the greatest good for all.
B) the study of scarcity and choice.
C) all other things remaining constant or equal.
D) value-free and testable.
18) In order to study how changing price affects consumer decisions, we must assume all other
factors, such as income and the prices of other goods are constant. This assumption is best know
as
A) rationality.
B) ceteris paribus.
C) normative economics.
D) behavioral economics.
19) Which of the following is an example of an application of the ceteris paribus assumption?
A) an analysis of how price changes affect how much of a good people will purchase when all
other factors are held constant
B) an analysis of how people purchase more goods when prices decline and income increases
C) After reading an article on the dangers of high-fat diets, an individual buys less red meat
when prices increase.
D) an analysis of how worker productivity increases when a firm invests in new machines and
training programs
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20) Ceteris paribus means
A) making all the necessary changes.
B) other things constant.
C) the assumption of rational behavior
D) as realistic as it can be
21) The ceteris paribus assumption is important in economics because
A) all empirical data are equal.
B) it would be impossible to relate the changes in one variable to another variable without
holding other variables constant.
C) economic data move very slowly over time and so they can always be considered constant.
D) models are always complex and require as many variables as possible.
22) The assumption that “other things are constant” is also known as the
A) ceteris paribus assumption.
B) rational self-interest assumption.
C) distinguishing characteristic of economics as a science.
D) relationships assumption.
23) Mary says she plans to return to college next semester assuming her car keeps running,
tuition fees don’t go up, and she will still have a student loan. An economist would say that Mary
plans to return to college next semester
A) caveat emptor.
B) ceteris paribus.
C) laissez faire.
D) post hoc ergo propter hoc
24) Professor’s economics students are constructing models for how gasoline prices change.
Maria’s model has very realistic assumptions and is quite complex. Anna’s model is less
complicated and less realistic. Maria’s model correctly predicts gas price increases 5% of the
time. Anna’s model predicts correctly 15% of the time. On the basis of usefulness or “goodness,”
Professor will give which student’s model the higher grade and why?
A) Maria’s model gets the higher grade because it is more complex.
B) Anna’s model gets the higher grade because it is simpler.
C) Maria’s model gets the higher grade because it is more realistic.
D) Anna’s model gets the higher grade because it predicts accurately more often.
25) Why is economics called an empirical science?
A) because economics has been used to both create and destroy empires
B) because economics uses math to evaluate the usefulness of its models
C) because economics relies on real-world data to determine the usefulness of a model
D) because economics utilizes only assumptions to evaluate how accurate a model is
26) An appropriate test of the effectiveness of an economic model is
A) the number of variables contained within the model.
B) the model’s ability to predict future economic activity.
C) the number of economists who have worked on the model.
D) the number of assumptions which the economist has made.
27) A useful economic model
A) utilizes only the two most important factors to analyze the problem under consideration.
B) generates statements that are incapable of refutation.
C) represents every detail of the real world.
D) yields usable predictions and implications for the real world.
28) The usefulness of a model is determined by
A) whether it helps to explain or predict real world phenomena.
B) whether it possesses realistic assumptions.
C) how well it uses the ceteris paribus assumption.
D) how many of the possible relationships that exist are included in the model.
29) The use of data in economic models is important because
A) the model’s predictive value rests on supportive evidence from real-world data.
B) the models are always complex in nature.
C) models must analyze every possible angle of the problem.
D) social problems analyzed by economists require long streams of data.
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30) If two competing models are offered to explain a certain economic phenomenon, the better
model is the one
A) that is the newest since newer models are better than old models.
B) with the fewest unrealistic assumptions.
C) that more often predicts with most accuracy.
D) that is not subject to empirical verification.
31) To be useful, a model must
A) predict accurately all of the time.
B) predict more accurately than other models that have been developed.
C) have assumptions that have been verified by empirical testing.
D) predict the behavior of every individual.
32) Economics is called an empirical science because
A) economists study real-world evidence to test their models.
B) economists use assumptions to test their models.
C) economic models have no predictive power.
D) economic analysis is only useful in a pure market economy.