Chapter 1 Ten Principles of Economics
MULTIPLE CHOICE
1. The English word that comes from the Greek word for “one who manages a household” is
a.
market.
b.
consumer.
c.
producer.
d.
economy.
2. The word “economy” comes from the Greek word oikonomos, which means
a.
“environment.”
b.
“production.”
c.
“one who manages a household.”
d.
“one who makes decisions.”
3. Resources are
a.
scarce for households but plentiful for economies.
b.
plentiful for households but scarce for economies.
c.
scarce for households and scarce for economies.
d.
plentiful for households and plentiful for economies.
4. In considering how to allocate its scarce resources among its various members, a household considers
a.
each member’s abilities.
b.
each member’s efforts.
c.
each member’s desires.
d.
all of the above
5. Economics deals primarily with the concept of
a.
scarcity.
b.
money.
c.
poverty.
d.
banking.
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6. Which of the following is correct?
a.
The word economy comes from the Greek word for “rational thinker.”
b.
Economists study the management of scarce resources.
c.
Because economists believe that people pursue their best interests, they are not interested in how
people interact.
d.
All of the above are correct.
7. The overriding reason why households and societies face many decisions is that
a.
resources are scarce.
b.
goods and services are not scarce.
c.
incomes fluctuate with business cycles.
d.
people, by nature, tend to disagree.
8. The phenomenon of scarcity stems from the fact that
a.
most economies’ production methods are not very good.
b.
in most economies, wealthy people consume disproportionate quantities of goods and services.
c.
governments restrict production of too many goods and services.
d.
resources are limited.
9. Approximately what percentage of the world’s economies experience scarcity?
a.
10%
b.
40%
c.
85%
d.
100%
10. When a society cannot produce all the goods and services people wish to have, it is said that the economy is expe-
riencing
a.
scarcity.
b.
surpluses.
c.
inefficiencies.
d.
inequalities.
11. Which of the following products would be considered scarce?
a.
automobiles
b.
baseballs autographed by Babe Ruth
c.
pickles
d.
All of the above are correct.
Chapter 1/Ten Principles of Economics ❖ 3
12. Economics is the study of
a.
production methods.
b.
how society manages its scarce resources.
c.
how households decide who performs which tasks.
d.
the interaction of business and government.
13. In most societies, resources are allocated by
a.
a single central planner.
b.
a small number of central planners.
c.
those firms that use resources to provide goods and services.
d.
the combined actions of millions of households and firms.
14. Oil is considered to be a non-renewable energy source. Oil
a.
is an unlimited resource.
b.
is a scarce resource.
c.
is not a productive resource.
d.
has no opportunity cost.
15. Which of the following is not an example of scarcity?
a.
Only some people can afford to buy a Ferrari.
b.
Every individual in society cannot attain the highest standard of living to which he or she might
aspire.
c.
Doug has an unlimited supply of apples in his orchard.
d.
Each member of a household cannot get everything he or she wants.
16. Which of the following is a decision that economists study?
a.
how much people work
b.
what people buy
c.
how much money people save
d.
All of the above are correct.
17. Which of the following is an example of something economists study?
a.
Kate chooses to work overtime to earn extra income for her family.
b.
Ryan sells his economics textbook from last semester to his roommate for half the price of a new
textbook.
c.
The unemployment rate in the United States is at its highest level in over fifty years.
d.
All of the above are correct.
4 ❖ Chapter 1/Ten Principles Of Economics
HOW PEOPLE MAKE DECISIONS
1. The adage, “There is no such thing as a free lunch,” means
a.
even people on welfare have to pay for food.
b.
the cost of living is always increasing.
c.
people face tradeoffs.
d.
all costs are included in the price of a product.
2. The adage, “There is no such thing as a free lunch,” is used to illustrate the principle that
a.
goods are scarce.
b.
people face tradeoffs.
c.
income must be earned.
d.
households face many decisions.
3. The phrase “no such thing as a free lunch” means
a.
people must face tradeoffs.
b.
rational people think at the margin.
c.
people respond to incentives.
d.
trade can make everyone better off.
4. Which of the following statements best represents the principle represented by the adage, “There is no such thing
as a free lunch“?
a.
Melissa can attend the concert only if she takes her sister with her.
b.
Greg is hungry and homeless.
c.
Brian must repair the tire on his bike before he can ride it to class.
d.
Kendra must decide between going to Colorado or Cancun for spring break.
5. Which of the following examples does not illustrate the principle represented by the adage, “There is no such thing
as a free lunch“?
a.
Joe needs to pay his rent and his electric bill.
b.
Pete must choose between buying a new flat screen television and buying his textbooks for this
semester.
c.
Kevin must decide between studying for his economics exam and working at his part-time job.
d.
Lisa can spend her money on a new sweater or a pair of jeans.
Chapter 1/Ten Principles of Economics ❖ 5
6. The principle that “people face tradeoffs” applies to
a.
individuals.
b.
families.
c.
societies.
d.
All of the above are correct.
7. Sophia is planning her activities for a hot summer day. She would like to go to the local swimming pool and see
the latest blockbuster movie, but because she can only get tickets to the movie for the same time that the pool is
open she can only choose one activity. This illustrates the basic principle that
a.
people respond to incentives.
b.
rational people think at the margin.
c.
people face tradeoffs.
d.
improvements in efficiency sometimes come at the expense of equality.
8. Mitch has $100 to spend and wants to buy either a new amplifier for his guitar or a new mp3 player to listen to
music while working out. Both the amplifier and the mp3 player cost $100, so he can only buy one. This illus-
trates the basic concept that
a.
trade can make everyone better off.
b.
people face trade-offs
c.
rational people think at the margin.
d.
people respond to incentives.
9. Guns and butter are used to represent the classic societal tradeoff between spending on
a.
durable and nondurable goods.
b.
imports and exports.
c.
national defense and consumer goods.
d.
law enforcement and agriculture.
10. A tradeoff exists between a clean environment and a higher level of income in that
a.
studies show that individuals with higher levels of income pollute less than low-income individuals.
b.
efforts to reduce pollution typically are not completely successful.
c.
laws that reduce pollution raise costs of production and reduce incomes.
d.
employing individuals to clean up pollution causes increases in employment and income.
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11. While pollution regulations yield the benefit of a cleaner environment and the improved health that comes with it,
the regulations come at the cost of reducing the incomes of the regulated firms’ owners, workers, and customers.
This statement illustrates the principle that
a.
trade can make everyone better off.
b.
rational people think at the margin.
c.
people face tradeoffs.
d.
people respond to incentives.
12. When society requires that firms reduce pollution, there is
a.
a tradeoff because of reduced incomes to the firms’ owners and workers.
b.
a tradeoff only if some firms are forced to close.
c.
no tradeoff, since the cost of reducing pollution falls only on the firms affected by the requirements.
d.
no tradeoff, since everyone benefits from reduced pollution.
13. Economists use the word equality to describe a situation in which
a.
each member of society has the same income.
b.
each member of society has access to abundant quantities of goods and services, regardless of his or
her income.
c.
society is getting the maximum benefits from its scarce resources.
d.
society’s resources are used efficiently.
14. Efficiency means that
a.
society is conserving resources in order to save them for the future.
b.
society’s goods and services are distributed equally among society’s members.
c.
society’s goods and services are distributed fairly, though not necessarily equally, among society’s
members.
d.
society is getting the maximum benefits from its scarce resources.
15. Efficiency
a.
and equality both refer to how much a society can produce with its resources.
b.
and equality both refer to how fairly the benefits from using resources are distributed between
members of a society.
c.
refers to how much a society can produce with its resources. Equality refers to how evenly the
benefits from using resources are distributed among members of society.
d.
refers to how evenly the benefits from using resources are distributed between members of society.
Equality refers to how much a society can produce with its resources
Chapter 1/Ten Principles of Economics ❖ 7
16. The terms equality and efficiency are similar in that they both refer to benefits to society. However they are differ-
ent in that
a.
equality refers to uniform distribution of those benefits and efficiency refers to maximizing benefits
from scarce resources.
b.
equality refers to maximizing benefits from scarce resources and efficiency refers to uniform
distribution of those benefits.
c.
equality refers to everyone facing identical tradeoffs and efficiency refers to the opportunity cost of
the benefits.
d.
equality refers to the opportunity cost of the benefits and efficiency refers to everyone facing
identical tradeoffs.
17. Which of the following phrases best captures the notion of efficiency?
a.
absolute fairness
b.
equal distribution
c.
minimum waste
d.
equitable outcome
18. Which of the following words and phrases best captures the notion of equality?
a.
minimum waste
b.
maximum benefit
c.
sameness
d.
efficiency
19. The property of society getting the most it can from its scarce resources is called
a.
equity.
b.
efficiency.
c.
equality.
d.
efficacy.
20. A typical society strives to get the most it can from its scarce resources. At the same time, the society attempts to
distribute the benefits of those resources to the members of the society in a fair manner. In other words, the society
faces a tradeoff between
a.
guns and butter.
b.
efficiency and equality.
c.
inflation and unemployment.
d.
work and leisure.
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21. Which of the following is true?
a.
Efficiency refers to the size of the economic pie; equality refers to how the pie is divided.
b.
Government policies usually improve upon both equality and efficiency.
c.
As long as the economic pie continually gets larger, no one will have to go hungry.
d.
Efficiency and equality can both be achieved if the economic pie is cut into equal pieces.
22. As a result of a successful attempt by government to cut the economic pie into more equal slices,
a.
the pie gets larger, and there will be more pie overall.
b.
the pie gets smaller, and there will be less pie overall.
c.
it increases the reward for working hard, resulting in people producing more goods and services.
d.
those who earn more income pay less in taxes.
23. When the government redistributes income from the wealthy to the poor,
a.
efficiency is improved, but equality is not.
b.
both wealthy people and poor people benefit directly.
c.
people work less and produce fewer goods and services.
d.
the government collects more revenue in total.
24. When the government attempts to improve equality in an economy the result is often
a.
an increase in overall output in the economy.
b.
additional government revenue since overall income will increase.
c.
a reduction in equality.
d.
a reduction in efficiency.
25. When the government implements programs such as progressive income tax rates, which of the following is likely
to occur?
a.
equality is increased and efficiency is increased.
b.
equality is increased and efficiency is decreased.
c.
equality is decreased and efficiency is increased.
d.
equality is decreased and efficiency is decreased.
26. A likely effect of government policies that redistribute income and wealth from the wealthy to the poor is that
those policies
a.
enhance equality.
b.
reduce efficiency.
c.
reduce the reward for working hard.
d.
All of the above are correct.
Chapter 1/Ten Principles of Economics ❖ 9
27. Government policies designed to equalize the distribution of economic well-being include
(i)
the welfare system
(ii)
unemployment insurance
(iii)
progressive income tax
a.
(i) only
b.
(ii) only
c.
(i) and (ii) only
d.
(i), (ii), and (iii)
28. Government policies resulting in reduced efficiency include
(i)
the welfare system
(ii)
unemployment insurance
(iii)
progressive income tax
a.
(i) only
b.
(ii) only
c.
(i) and (ii) only
d.
(i), (ii), and (iii)
29. When government policies are enacted,
a.
equality can usually be enhanced without an efficiency loss, but efficiency can never be enhanced
without a reduction in equality.
b.
efficiency can usually be enhanced without a reduction in equality, but equality can never be
enhanced without an efficiency loss.
c.
it is always the case that either efficiency and equality are both enhanced, or efficiency and equality
are both diminished.
d.
None of the above are correct.
30. Senator Brown wants to increase taxes on people with high incomes and use the money to help the poor. Senator
Johnson argues that such a tax will discourage successful people from working and will therefore make society
worse off. An economist would say that
a.
we should agree with Senator Brown.
b.
we should agree with Senator Johnson.
c.
a good decision requires that we recognize both viewpoints.
d.
there are no tradeoffs between equity and efficiency.
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31. Senator Green argues that replacing the income tax with a national sales tax would increase the level of output.
Senator Brown objects that this policy would benefit the rich at the expense of the poor.
a.
Both Senators’ arguments are primarily about equality.
b.
Both Senators’ arguments are primarily about efficiency.
c.
Senator Green’s argument is primarily about equality, while Senator Brown’s argument is primarily
about efficiency.
d.
Senator Green’s argument is primarily about efficiency, while Senator Brown’s argument is
primarily about equality.
32. Suppose the government taxes the wealthy at a higher rate than it taxes the poor and then develops programs to
redistribute the tax revenue from the wealthy to the poor. This redistribution of wealth
a.
is more efficient and more equal for society.
b.
is more efficient but less equal for society.
c.
is more equal but less efficient for society.
d.
is less equal and less efficient for society.
33. The government has just passed a law requiring that all residents earn the same annual income regardless of work
effort. This law is likely to
a.
increase efficiency and increase equality.
b.
increase efficiency but decrease equality.
c.
decrease efficiency but increase equality.
d.
decrease efficiency and decrease equality.
34. The opportunity cost of an item is
a.
the number of hours needed to earn money to buy the item.
b.
what you give up to get that item.
c.
usually less than the dollar value of the item.
d.
the dollar value of the item.
35. In economics, the cost of something is
a.
the dollar amount of obtaining it.
b.
always measured in units of time given up to get it.
c.
what you give up to get it.
d.
often impossible to quantify, even in principle.
Chapter 1/Ten Principles of Economics ❖ 11
36. What you give up to obtain an item is called your
a.
opportunity cost.
b.
explicit cost.
c.
monetary cost.
d.
direct cost.
37. Which of the following is correct concerning opportunity cost?
a.
Except to the extent that you pay more for them, opportunity costs should not include the cost of
things you would have purchased anyway.
b.
To compute opportunity costs, you should subtract benefits from costs.
c.
Opportunity costs and the idea of trade-offs are not closely related.
d.
Rational people should compare various options without considering opportunity costs.
38. High-school athletes who skip college to become professional athletes
a.
obviously do not understand the value of a college education.
b.
usually do so because they cannot get into college.
c.
understand that the opportunity cost of attending college is very high.
d.
are not making a rational decision since the marginal benefits of college outweigh the marginal
costs of college for high-school athletes.
39. When computing the opportunity cost of attending a concert you should include
a.
the price you pay for the ticket and the value of your time.
b.
the price you pay for the ticket, but not the value of your time.
c.
the value of your time, but not the price you pay for the ticket.
d.
neither the price of the ticket nor the value of your time.
40. Denise decides to spend three hours working overtime rather than watching a video with her friends. She earns $10
an hour. Her opportunity cost of working is
a.
the $30 she earns working.
b.
the $30 minus the enjoyment she would have received from watching the video.
c.
the enjoyment she would have received had she watched the video.
d.
nothing, since she would have received less than $30 of enjoyment from the video.
41. Ellie decides to spend two hours taking a nap rather than attending her classes. Her opportunity cost of napping is
a.
the value of the knowledge she would have received had she attended class.
b.
the $24 she could have earned if she had worked at her job for those two hours.
c.
the value of her nap less the value of attending class.
d.
nothing, since she valued sleep more than attendance at class.
12 ❖ Chapter 1/Ten Principles Of Economics
42. Ed spends an hour studying instead of watching tv with his friends. The opportunity cost to him of studying is
a.
the improvement in his grades from studying for the hour.
b.
the improvement in his grades from studying minus the enjoyment of watching tv.
c.
the enjoyment he would have received if he had watched tv with his friends.
d.
zero. Since Ed chose to study rather than to watch tv, the value of studying must have been greater
than the value of watching tv.
43. For most students, the largest single cost of a college education is
a.
the wages given up to attend school.
b.
tuition, fees, and books.
c.
room and board.
d.
transportation, parking, and entertainment.
44. The opportunity cost of going to college is
a.
the total spent on food, clothing, books, transportation, tuition, lodging, and other expenses.
b.
the value of the best opportunity a student gives up to attend college.
c.
zero for students who are fortunate enough to have all of their college expenses paid by someone
else.
d.
zero, since a college education will allow a student to earn a larger income after graduation.
45. Which of the following is not an example of the opportunity cost of going to school?
a.
The money a student could have earned by working if he had not gone to college.
b.
The nap a student could have enjoyed if he had not attended class.
c.
The party a student could have enjoyed if he had not stayed in to study for his exam.
d.
The money a student spends on rent for his apartment while attending school.
46. For a college student who wishes to calculate the true costs of going to college, the costs of room and board
a.
should be counted in full, regardless of the costs of eating and sleeping elsewhere.
b.
should be counted only to the extent that they are more expensive at college than elsewhere.
c.
usually exceed the opportunity cost of going to college.
d.
plus the cost of tuition, equals the opportunity cost of going to college.
Chapter 1/Ten Principles of Economics ❖ 13
47. When you calculate your true costs of going to college, what portion of your room-and-board expenses should be
included?
a.
Your full room-and-board expenses should always be included.
b.
None of your room-and-board expenses should ever be included.
c.
You should include only the amount by which your room-and-board expenses exceed the income
you earn while attending college.
d.
You should include only the amount by which your room-and-board expenses exceed the expenses
for rent and food if you were not in college.
48. Suppose after graduating from college you get a job working at a bank earning $30,000 per year. After two years
of working at the bank earning the same salary, you have an opportunity to enroll in a one-year graduate program
that would require you to quit your job at the bank. Which of the following should not be included in a calculation
of your opportunity cost?
a.
the cost of tuition and books to attend the graduate program
b.
the $30,000 salary that you could have earned if you retained your job at the bank
c.
the $45,000 salary that you will be able to earn after having completed your graduate program
d.
the value of insurance coverage and other employee benefits you would have received if you
retained your job at the bank
49. For which of the following individuals would the opportunity cost of going to college be highest?
a.
a promising young mathematician who will command a high salary once she earns her college
degree
b.
a student with average grades who has never held a job
c.
a famous, highly-paid actor who wants to take time away from show business to finish college and
earn a degree
d.
a student who is the best player on his college basketball team, but who lacks the skills necessary to
play professional basketball
50. Maureen’s college raises the cost of room and board per semester. This increase raises Maureen’s opportunity cost
of attending college
a.
even if the amount she would have to pay for room and board if she didn’t attend college rose by
the same amount. An increase in opportunity cost reduces Maureen’s incentive to attend college.
b.
even if the amount she would have to pay for room and board if she didn’t attend college rose by
the same amount. An increase in opportunity cost increases Maureen’s incentive to attend college.
c.
only if the amount she would have to pay for room and board if she didn’t attend college rose by
less than the increase in the amount her college charges. An increase in opportunity cost reduces
Maureen’s incentive to attend college.
d.
only if the amount she would have to pay for room and board if she didn’t attend college rose by
less than the increase in the amount her college charges. An increase in opportunity cost increases
Maureen’s incentive to attend college.
14 ❖ Chapter 1/Ten Principles Of Economics
51. When calculating the cost of college, which of the following should you probably not include?
a.
The cost of tuition
b.
The cost of books required for college classes
c.
The income you would have earned had you not gone to college
d.
The cost of rent for your off-campus apartment.
52. When calculating the cost of college, which of the following should you probably include?
a.
The cost of your meal plan for the cafeteria.
b.
The cost of books required for college classes
c.
The income you earn at your part-time job.
d.
The cost of living in the dormitory.
53. Suppose your college institutes a new policy requiring you to pay for a permit to park your car in a campus parking
lot.
a.
The cost of the parking permit is not part of the opportunity cost of attending college if you would
not have to pay for parking otherwise.
b.
The cost of the parking permit is part of the opportunity cost of attending college if you would not
have to pay for parking otherwise.
c.
Only half of the cost of the parking permit is part of the opportunity cost of attending college.
d.
The cost of the parking permit is not part of the opportunity cost of attending college under any
circumstances.
54. You have driven 500 miles on a vacation and then you notice that you are only 25 miles from an attraction you
hadn’t known about, but would really like to see. In computing the opportunity cost of visiting this attraction you
had not planned to visit, you should include
a.
both the cost of driving the first 500 and the next 25 miles.
b.
the cost of driving the first 500 miles, but not the cost of driving the next 25.
c.
the cost of driving the next 25 miles, but not the cost of driving the first 500.
d.
neither the cost of driving the first 500 miles nor the cost of driving the next 25 miles.
55. Shane receives $100 as a birthday gift. In deciding how to spend the money, he narrows his options down to four
choices: Option A, Option B, Option C, and Option D. Each option costs $100. Finally he decides on Option B.
The opportunity cost of this decision is
a.
the value to Shane of the option he would have chosen had Option B not been available.
b.
the value to Shane of Options A, C and D combined.
c.
$50.
d.
$100.
Chapter 1/Ten Principles of Economics ❖ 15
56. College-age athletes who drop out of college to play professional sports
a.
are not rational decision makers.
b.
are well aware that their opportunity cost of attending college is very high.
c.
are concerned more about present circumstances than their future.
d.
underestimate the value of a college education.
57. A rational decisionmaker
a.
ignores marginal changes and focuses instead on “the big picture.”
b.
ignores the likely effects of government policies when he or she makes choices.
c.
takes an action only if the marginal benefit of that action exceeds the marginal cost of that action.
d.
takes an action only if the combined benefits of that action and previous actions exceed the
combined costs of that action and previous actions.
58. A rational decision maker takes an action only if the
a.
marginal benefit is less than the marginal cost.
b.
marginal benefit is greater than the marginal cost.
c.
average benefit is greater than the average cost.
d.
marginal benefit is greater than both the average cost and the marginal cost.
59. A rational decisionmaker takes an action if and only if
a.
the marginal benefit of the action exceeds the marginal cost of the action.
b.
the marginal cost of the action exceeds the marginal benefit of the action.
c.
the marginal cost of the action is zero.
d.
the opportunity cost of the action is zero.
60. Rational people make decisions at the margin by
a.
following marginal traditions.
b.
behaving in a random fashion.
c.
thinking in black-and-white terms.
d.
comparing marginal costs and marginal benefits.
61. Making rational decisions “at the margin” means that people
a.
make those decisions that do not impose a marginal cost.
b.
evaluate how easily a decision can be reversed if problems arise.
c.
compare the marginal costs and marginal benefits of each decision.
d.
always calculate the dollar costs for each decision.
16 ❖ Chapter 1/Ten Principles Of Economics
62. A marginal change is a
a.
change that involves little, if anything, that is important.
b.
large, significant adjustment.
c.
change for the worse, and so it is usually a short-term change.
d.
small, incremental adjustment.
63. People are willing to pay more for a diamond than for a bottle of water because
a.
the marginal cost of producing an extra diamond far exceeds the marginal cost of producing an
extra bottle of water.
b.
the marginal benefit of an extra diamond far exceeds the marginal benefit of an extra bottle of
water.
c.
producers of diamonds have a much greater ability to manipulate diamond prices than producers of
water have to manipulate water prices.
d.
water prices are held artificially low by governments, since water is necessary for life.
64. It costs a company $50,000 to produce 5000 beach towels. The company’s cost will be $50,009 if it produces an
additional beach towel. If the company produces 5,000 beach towels then
a.
its average cost is greater than its marginal cost.
b.
its average cost and its marginal cost are equal.
c.
its average cost is less than its marginal cost.
d.
there is insufficient information to compute average and marginal costs.
65. The marginal benefit Colin gets from eating a fourth slice of pizza is
a.
the total benefit Colin gets from eating four slices of pizza minus the total benefit Colin gets from
eating three slices of pizza.
b.
the same as the total benefit of eating four slices of pizza.
c.
less than the marginal cost of eating the fourth slice of pizza since he chose to eat the fourth slice.
d.
the total benefit Colin gets from eating five slices of pizza minus the total benefit Colin gets from
eating four slices of pizza.
66. The marginal benefit Claire gets from purchasing a third pair of flip-flops is
a.
the same as the total benefit of purchasing three pairs of flip-flops.
b.
more than the marginal cost of purchasing the third pair of flip-flops.
c.
the total benefit Claire gets from purchasing three pairs of flip-flops minus the total benefit she gets
from purchasing two pairs of flip-flops.
d.
the total benefit Claire gets from purchasing four pairs of flip-flops minus the total benefit she gets
from purchasing three pairs of flip-flops.
Chapter 1/Ten Principles of Economics ❖ 17
67. Caroline eats two bananas during a particular day. The marginal benefit she enjoys from eating the second banana
a.
can be thought of as the total benefit Caroline enjoys by eating two bananas minus the total benefit
she would have enjoyed by eating just the first banana.
b.
determines Caroline’s marginal cost of the first and second bananas.
c.
does not depend on how many bananas Caroline has already eaten.
d.
All of the above are correct.
68. After much consideration, you have chosen Cancun over Ft. Lauderdale as your Spring Break destination this year.
However, Spring Break is still months away, and you may reverse this decision. Which of the following events
would prompt you to reverse this decision?
a.
The marginal benefit of going to Cancun increases.
b.
The marginal cost of going to Cancun decreases.
c.
The marginal benefit of going to Ft. Lauderdale decreases.
d.
The marginal cost of going to Ft. Lauderdale decreases.
69. After much consideration, you have chosen Ireland over Spain for your Study Abroad program next year. Howev-
er, the deadline for your final decision is still months away and you may reverse this decision. Which of the fol-
lowing events would prompt you to reverse this decision?
a.
The marginal benefit of going to Spain increases.
b.
The marginal cost of going to Spain increases.
c.
The marginal benefit of going to Ireland increases.
d.
The marginal cost of going to Ireland decreases.
70. A barber currently cuts hair for 50 clients per week and earns a profit. He is considering expanding his operation in
order to serve more clients. Should he expand?
a.
Yes, because cutting hair is profitable.
b.
No, because he may not be able to sell more services.
c.
It depends on the marginal cost of serving more clients and the marginal revenue he will earn from
serving more clients.
d.
It depends on the average cost of serving more clients and the average revenue he will earn from
serving more clients.
71. The average cost per seat on the 75-passenger Get-There-Safe Bus company’s trip from Milwaukee to Minneapolis,
on which no refreshments are served, is $37. In advance of a particular trip, three seats remain unsold. The bus
company could increase its profit only if it
a.
charged any ticket price above $0 for the three remaining seats.
b.
charged at least $18.50 for each of the three remaining seats.
c.
charged at least $37 for each of the three remaining seats.
d.
paid three people to occupy the three remaining seats.
18 ❖ Chapter 1/Ten Principles Of Economics
72. Bill is restoring a car and has already spent $4000 on the restoration. He expects to be able to sell the car for
$5800. Bill discovers that he needs to do an additional $2400 of work to make the car worth $5800 to potential
buyers. He could also sell the car now, without completing the additional work, for $3800. What should he do?
a.
He should sell the car now for $3800.
b.
He should keep the car since it wouldn’t be rational to spend $6400 restoring a car and then sell it
for only $5800.
c.
He should complete the additional work and sell the car for $5800.
d.
It does not matter which action he takes since the outcome will be the same either way.
73. Bill is restoring a car and has already spent $4000 on the restoration. He expects to be able to sell the car for
$6200. Bill discovers that he needs to do an additional $2400 of work to make the car worth $6200 to potential
buyers. He could also sell the car now, without completing the additional work, for $3800. What should he do?
a.
He should sell the car now for $3800.
b.
He should keep the car since it wouldn’t be rational to spend $6400 restoring a car and then sell it
for only $6200.
c.
He should complete the additional work and sell the car for $6200.
d.
It does not matter if Bill sells the car now or completes the work and then sells it at the higher price
because the outcome will be the same either way.
74. Mark is refinishing an antique china cabinet and has already spent $180 on the restoration. He expects to be able
to sell the cabinet for $360. Mark discovers that he needs to do an additional $200 of work to make the cabinet
worth $360 to potential buyers. He could also sell the cabinet now, without completing the additional work, for
$100. What should he do?
a.
He should sell the cabinet now for $100.
b.
He should keep the cabinet since it wouldn’t be rational to spend $380 restoring a cabinet and then
sell it for only $360.
c.
He should complete the additional work and sell the cabinet for $360.
d.
It does not matter which action he takes since the outcome will be the same either way.
75. Katie is planning to sell her house, and she is considering making two upgrades to the house before listing it for
sale. Replacing the carpeting will cost her $2,500 and replacing the roof will cost her $9,000. Katie expects the
new carpeting to increase the value of her house by $3,000 and the new roof to increase the value of her house by
$7,000.
a.
She should make both improvements to her house.
b.
She should replace the carpeting but not replace the roof.
c.
She should replace the roof but not replace the carpeting.
d.
She should not make either improvement to her house.
Chapter 1/Ten Principles of Economics ❖ 19
76. Bridget drinks three sodas during a particular day. The marginal benefit she enjoys from drinking the third soda
a.
can be thought of as the total benefit Bridget enjoys by drinking three sodas minus the total benefit
she would have enjoyed by drinking just two sodas.
b.
determines Bridget’s willingness to pay for the third soda.
c.
is likely different from the marginal benefit provided to Bridget by the second soda.
d.
All of the above are correct.
77. A construction company has built 30 houses so far this year at a total cost to the company of $7.5 million. If the
company builds a 31st house, its total cost will increase to $7.76 million. Which of the following statements is cor-
rect?
a.
For the first 30 houses, the average cost per house was $250,000.
b.
The marginal cost of the 31st house, if it is built, will be $260,000.
c.
If the company can experience a marginal benefit of $275,000 by building the 31st house, then the
company should build it.
d.
All of the above are correct.
78. A construction company has built 25 houses so far this year at a total cost to the company of $7.2 million. If the
company builds a 26th house, its total cost will increase to $7.5 million. Which of the following statements is cor-
rect?
a.
For the first 25 houses, the average cost per house was $288,000.
b.
The marginal cost of the 26th house, if it is built, will be equal to the average cost per house.
c.
If the company can experience a marginal benefit of $288,000 by building the 26th house, then the
company should build it.
d.
All of the above are correct.
79. Suppose the cost of operating a 100 room hotel for a night is $10,000 and there are 5 empty rooms for tonight. If
the marginal cost of operating one room for one night is $30 and a customer is willing to pay $60 for the night, the
hotel manager should
a.
rent the room because the marginal benefit exceeds the marginal cost.
b.
rent the room because the marginal benefit exceeds the average cost.
c.
not rent the room because the marginal benefit is less than the marginal cost.
d.
not rent the room because the marginal benefit is less than the average cost.
80. Suppose the cost of operating a 75 room hotel for a night is $6,000 and there are 5 empty rooms for tonight. The
marginal cost per room per night
a.
is $40.
b.
is $80.
c.
is $120.
d.
cannot be determined from the information given.
20 ❖ Chapter 1/Ten Principles Of Economics
81. Suppose the cost of operating a 75 room hotel for a night is $6,000 and there are 5 empty rooms for tonight. If the
marginal cost of operating one room for one night is $40, the hotel manager should rent one of the empty rooms
only if a customer is willing to pay
a.
more than $40, as the average benefit will exceed the marginal cost.
b.
more than $40, as the marginal benefit will exceed the marginal cost.
c.
more than $80, as the average benefit will exceed the marginal cost.
d.
more than $80, as the marginal benefit will exceed the marginal cost.
82. George has spent $600 purchasing and repairing an old fishing boat, which he expects to sell for $900 once the
repairs are complete. George discovers that, in addition to the $600 he has already spent, he needs to make an addi-
tional repair, which will cost another $400, in order to make the boat worth $900 to potential buyers. He can sell
the boat as it is now for $400. What should he do?
a.
He should sell the boat as it is now for $400.
b.
He should keep the boat since it would not be rational to spend $1,000 on repairs and then sell the
boat for $900.
c.
He should complete the repairs and sell the boat for $900.
d.
It does not matter which action he takes; the outcome is the same either way.
83. Betty’s Bakery bakes fresh bread every morning. Any bread not sold by the end of the day is thrown away. A loaf
of bread costs Betty $2.00 to produce, and she prices loaves of bread at $3.50 per loaf. Suppose near the end of
one day Betty still has 12 loaves of bread on hand. Which of the following is correct?
a.
Betty should only sell the remaining bread for $3.50 per loaf since that is the regular price.
b.
Betty should only sell the remaining bread for $2.00 per loaf or more since that is what the bread
costs to make.
c.
Betty should be willing to sell the remaining bread for any price above $0 per loaf since she will
have to throw it away if she does not sell it for something.
d.
Betty should just throw the bread away and change the price of her bread starting tomorrow to
make sure she sells all of her bread each day.
84. A bagel shop sells fresh baked bagels from 5 a.m. until 7 p.m. every day. The shop does not sell day-old bagels, so
all unsold bagels are thrown away at 7 p.m. each day. The cost of making and selling a dozen bagels is $1.00; there
are no costs associated with throwing bagels away. If the manager has 8 dozen bagels left at 6:30 p.m. on a particu-
lar day, which of the following alternatives is most attractive?
a.
Lower the price of the remaining bagels, even if the price falls below $1.00 per dozen.
b.
Lower the price of the remaining bagels, but under no circumstances should the price fall below
$1.00 per dozen.
c.
Throw the bagels away and produce 8 fewer dozen bagels tomorrow.
d.
Starting tomorrow, lower the price on all bagels so they will all be sold earlier in the day.