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.
b.
c.
d.
4. Which of the following statements best represents the principle represented by the adage, “There is no such thing as a
free lunch”?
a.
Michelle can attend the concert only if she takes her sister with her.
b.
Michael is hungry and homeless.
c.
Andrea must repair the tire on her bike before she can ride it to class.
d.
Dani must decide between going to Florida or Brazil 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.
Melissa needs to pay her rent and her electric bill.
b.
Kevin must choose between buying a new flat screen television and buying his textbooks for this semester.
c.
Robert must decide between studying for his psychology exam and working at his part-time job.
d.
Lisa can spend her money on a new smart phone or on a weekend trip.
6. The principle that “people face tradeoffs” applies to
a.
individuals.
b.
families.
c.
societies.
d.
All of the above are correct.
7. Candice 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. Billie Jean has $120 to spend and wants to buy either a new amplifier for her guitar or a new mp3 player to listen to
music while working out. Both the amplifier and the mp3 player cost $120, so she can only buy one. This illustrates the
basic concept that
a.
trade can make everyone better off.
b.
people face trade-offs.
c.
rational people think at the margin.
d.
decisions made at the margin are not particularly important.
9. John is an athlete. He has $120 to spend and wants to buy either a heart rate monitor or new running shoes. Both the
heart rate monitor and running shoes cost $120, so he can only buy one. This illustrates the principle that
a.
b.
c.
d.
10. Lawrence is a photographer. He has $230 to spend and wants to buy either a flash for his camera or a new tripod. Both
the flash and tripod cost $230, so he can only buy one. This illustrates the principle that
a.
b.
c.
d.
11. 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.
12. 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.
13. 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.
b.
c.
d.
14. 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.
15. 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.
16. 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.
17. The property of society getting the most it can from its scarce resources is called
a.
efficiency.
b.
equality.
c.
externality.
d.
productivity.
18. 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
19. The terms equality and efficiency are similar in that they both refer to benefits to society. However they are different 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.
20. Which of the following phrases best captures the notion of efficiency?
a.
absolute fairness
b.
equal distribution
c.
minimum waste
d.
equitable outcome
21. Which of the following words and phrases best captures the notion of equality?
a.
minimum waste
b.
maximum benefit
c.
sameness
d.
efficiency
22. When society gets the most it can from its scarce resources, then the outcome is called
a.
equitable.
b.
efficient.
c.
normal.
d.
efficacious.
23. 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.
24. When the government redistributes income from the wealthy to the poor,
a.
efficiency is improved, but equality is not.
b.
equality is improved, but efficiency is not.
c.
both efficiency and equality are improved.
d.
neither efficiency nor equality are improved.
25. 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.
26. 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.
27. 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.
28. 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.
29. 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.
30. 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.
31. 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.
enhance efficiency.
c.
increase the reward for working hard.
d.
All of the above are correct.
32. 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)
33. 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)
34. 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.
35. 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.
36. A certain state legislature is considering an increase in the state gasoline tax. Representative Campbell argues that an
increase in the gasoline tax would harm low-income drivers disproportionately. Representative Richards responds by
saying that low-income drivers own smaller cars that use less gasoline, and that low-income drivers therefore would not
be harmed disproportionately.
a.
Representative Campbell’s argument is based primarily on efficiency, while Representative Richards’
argument is based primarily on equality.
b.
Representative Campbell’s argument is based primarily on equality, while Representative Richards’ argument
is based primarily on efficiency.
c.
Both representatives’ arguments are based primarily on efficiency.
d.
Both representatives’ arguments are based primarily on equality.
37. Senator Jackson argues that replacing the federal income tax with a national sales tax would increase the level of
output. Senator Feldman 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 Jackson’s argument is primarily about equality, while Senator Feldman’s argument is primarily about
efficiency.
d.
Senator Jackson’s argument is primarily about efficiency, while Senator Feldman’s argument is primarily
about equality.
38. 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.
39. 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.
40. 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.
41. 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.
42. What you give up to obtain an item is called your
a.
opportunity cost.
b.
explicit cost.
c.
monetary cost.
d.
direct cost.
43. 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.
44. 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.
45. Suppose that you have received $300 as a birthday gift. You can spend it today or you can put the money in a bank
account for a year and earn 5 percent interest. The opportunity cost of spending the money today, in terms of what you
could have after one year, is
a.
$0.
b.
$15.
c.
$305.
d.
$315.
46. When computing the opportunity cost of attending a basketball game 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.
47. Melody decides to spend three hours working overtime rather than going to the park with her friends. She earns $20
per hour for overtime work. Her opportunity cost of working is
a.
the $60 she earns working.
b.
the $60 minus the enjoyment she would have received from going to the park.
c.
the enjoyment she would have received had she gone to the park.
d.
nothing, since she would have received less than $60 worth of enjoyment from going to the park.
48. Ramona 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 minus the value of attending class.
d.
nothing, since she valued sleep more than attendance at class.
49. Hamid 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 Hamid chose to study rather than to watch TV, the value of studying must have been greater to him
than the value of watching TV.
50. 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.
51. For most students, the earnings they give up to attend college are
a.
a minor cost when compared to the costs of tuition, room and board, and the like.
b.
the single largest cost of their education.
c.
about equal to the costs of room and board at college.
d.
not considered true costs by an economist.
52. 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.
53. 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.
54. 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.
55. 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.
56. Consider Frank’s decision to go to college. If he goes to college, he will spend $21,000 on tuition, $11,000 on room
and board, and $1,800 on books. If he does not go to college, he will earn $16,000 working in a store and spend $7,200 on
room and board. Frank’s cost of going to college is
a.
$33,800.
b.
$42,600.
c.
$49,800.
d.
$57,000.
57. 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
58. 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
59. Consider Mandy’s decision to go to college. If she goes to college, she will spend $20,000 on tuition, $10,000 on
room and board, and $2,000 on books. If she does not go to college, she will earn $18,000 working in a store and spend
$8,000 on room and board. Mandy’s cost of going to college is
a.
$32,000.
b.
$42,000.
c.
$50,000.
d.
$58,000.
60. Consider Noah’s decision to go to college. If he goes to college, he will spend $80,000 on tuition, $15,000 on room
and board, and $4,000 on books. If he does not go to college, he will earn $22,000 working in a store and he will spend
$13,000 on room and board. Noah’s cost of going to college is
a.
$99,000.
b.
$103,000.
c.
$108,000.
d.
$121,000.
61. Consider Paul’s decision to go to college. If he goes to college, he will spend $90,000 on tuition, $15,000 on room and
board, and $7,000 on books. If he does not go to college, he will earn $22,000 working at a construction job and he will
spend $11,000 on room and board. Paul’s cost of going to college is
a.
$96,000.
b.
$110,000.
c.
$114,000.
d.
$123,000.
62. If Faith attends college, it will take her four years, during which time she will earn no income. She will pay $50,000
for tuition, $12,000 for room and board, and $5,000 for books. If she spends the four years working rather than attending
college, she will pay $18,000 for room and board, pay no intuition, and buy no books. Based on this information, Faith’s
economic cost of attending college would be $67,000 if, over the four years, she could earn
a.
$12,000 instead of attending college.
b.
$14,000 instead of attending college.
c.
$16,000 instead of attending college.
d.
$18,000 instead of attending college.
63. 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.
64. 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.