Chapter 1/Ten Principles of Economics ❖ 21
85. Rick buys a 1966 Mustang for $3,000, planning to restore and sell the car. He goes on to spend $9,000 restoring
the car. At this point he can sell the car for $10,000. As an alternative, he can spend an additional $3,000 replacing
the engine. With a new engine the car would sell for $13,000. Rick should
a.
complete the repairs and sell the car for $13,000.
b.
sell the car now for $10,000.
c.
never try such an expensive project again.
d.
be indifferent between (i) selling the car now and (ii) replacing the engine and then selling it.
86. Catherine buys and sells real estate. Two weeks ago, she paid $300,000 for a house on Pine Street, intending to
spend $50,000 on repairs and then sell the house for $400,000. Last week, the city government announced a plan to
build a new landfill on Pine Street just down the street from the house Catherine purchased. As a result of the city’s
announced plan, Catherine is weighing two alternatives: She can go ahead with the $50,000 in repairs and then sell
the house for $290,000, or she can forgo the repairs and sell the house as it is for $250,000. She should
a.
keep the house and live in it.
b.
go ahead with the $50,000 in repairs and sell the house for $290,000.
c.
forgo the repairs and sell the house as it is for $250,000.
d.
move the house from Pine Street to a more desirable location, regardless of the cost of doing so.
87. You are considering staying in college another semester so that you can complete a major in economics. In decid-
ing whether or not to stay you should
a.
compare the total cost of your education to the total benefits of your education.
b.
compare the total cost of your education to the benefits of staying one more semester.
c.
compare the cost of staying one more semester to the benefits of staying one more semester.
d.
compare the total benefits of your education to the cost of staying one more semester.
88. Kyle is planning to take a roadtrip. After he makes his plans, he has to make some unexpected auto repairs. Also,
he sees the price of gas has gone up. Which of these two events should Kyle consider in deciding if it is still
worthwhile to go on the trip?
a.
the unexpected repairs and the increase in the price of gas
b.
the unexpected increase for repairs, but not the increase in the price of gas
c.
the increase in the price of gas, but not the unexpected repairs
d.
neither the unexpected increase in the price of gas nor the unexpected repairs
89. You have eaten two bowls of ice cream at Sundae School Ice Cream store. You consider eating a third. As a ra-
tional consumer you should make your choice by comparing
a.
the benefits from eating all three bowls of ice cream to how much three bowls of ice cream costs.
b.
the benefits from eating all three bowls of ice cream to how much one more bowl of ice cream
costs.
c.
the benefits from eating one more bowl of ice cream to how much three bowls of ice cream costs.
d.
the benefits from eating one more bowl of ice cream to how much one more bowl of ice cream
costs.
22 ❖ Chapter 1/Ten Principles Of Economics
90. Olivia was accepted to Notre Dame and another college. She is trying to decide where to go. Which of the follow-
ing should she include in making her decision?
a.
how much she spent applying to Notre Dame, and the difference between living expenses at Notre
Dame and the other college
b.
how much she spent applying to Notre Dame, but not the difference between living expenses at
Notre Dame and the other college
c.
the difference between living expenses at Notre Dame and her second choice, but not how much
she spent applying to Notre Dame
d.
neither how much she spent applying to Notre Dame nor the difference between living expenses at
Notre Dame and her second choice
91. You go to the movieplex where movies ordinarily cost $10. You are intending to see a movie for which you have
a $3 off coupon good for only that movie at that time. However, when you get there you see a friend who asks if
you would rather see a new release. Both movies start and end at the same time. If you decide to see the new re-
lease with your friend, what is your opportunity cost?
a.
the amount you value the first movie + $3
b.
the amount you value the first movie + $10
c.
$3
d.
$10
92. Max and Maddy charge people to park on their lawn while attending a nearby craft fair. At the current price of
$10, seven people park on their lawn. If they raise the price to $15, they know that only five people will want to
park on their lawn. Whether they have seven or five cars parked on their lawn does not affect their costs. From
this information it follows that
a.
they should leave the price at $10.
b.
it does not matter if they charge $10 or $15.
c.
they would do better charging $15 than $10.
d.
they should raise the price even more.
93. Your professor loves her work, teaching economics. She has been offered other positions in the corporate world
that would increase her income by 25 percent, but she has decided to continue working as a professor. Her decision
would not change unless the marginal
a.
cost of teaching increased.
b.
benefit of teaching increased.
c.
cost of a corporate job increased.
d.
benefit of a corporate job decreased.
Chapter 1/Ten Principles of Economics ❖ 23
94. Suppose your management professor has been offered a corporate job with a 30 percent pay increase. He has de-
cided to take the job. For him, the marginal
a.
cost of leaving was greater than the marginal benefit.
b.
benefit of leaving was greater than the marginal cost.
c.
benefit of teaching was greater than the marginal cost.
d.
All of the above are correct.
95. Economists are particularly adept at understanding that people respond to
a.
laws.
b.
incentives.
c.
punishments more than rewards.
d.
rewards more than punishments.
96. People are likely to respond to a policy change
a.
only if they think the policy is a good one.
b.
only if the policy change changes the costs of their behavior.
c.
only if the policy change changes the benefits of their behavior.
d.
if the policy changes either the costs or benefits of their behavior.
97. Government policies can change the costs and benefits that people face. Those policies have the potential to
a.
alter people’s behavior.
b.
alter people’s decisions at the margin.
c.
produce results that policymakers did not intend.
d.
All of the above are correct.
98. Ralph Nader’s book Unsafe at Any Speed caused Congress to require
a.
safety glass in all new cars.
b.
seat belts in all new cars.
c.
air bags in all new cars.
d.
stricter drunk driving laws in all states.
99. Following the implementation of laws requiring automobiles to have seat belts, which of the following occurred?
a.
An individual’s probability of surviving an auto accident rose.
b.
There was an increase in pedestrian deaths.
c.
There was an increase in automobile accidents.
d.
All of the above are correct.
24 ❖ Chapter 1/Ten Principles Of Economics
100. U.S. laws requiring that drivers wear seat belts have resulted in
a.
a reduction in both driver deaths and pedestrian deaths.
b.
fewer accidents and fewer deaths per accident.
c.
fewer driver deaths, fewer accidents and fewer pedestrian deaths.
d.
little change in the number of driver deaths, but more accidents and more pedestrian deaths.
101. Evidence indicates that seat belt laws have led to
a.
fewer pedestrian deaths.
b.
fewer automobile accidents.
c.
fewer deaths per automobile accident.
d.
All of the above are correct.
102. One effect of the government-imposed seat belt law in the U.S. has been
a.
a dramatic decrease in the number of pedestrian deaths.
b.
safer driving.
c.
an increase in the number of accidents.
d.
a dramatic decrease in the number of driver deaths.
103. Based on the available evidence, which of the following groups benefits most from mandatory seat belt laws?
a.
automakers
b.
pedestrians
c.
drivers
d.
owners of collision-repair shops
104. Which of the following can policy do?
a.
alter incentives
b.
alter trade-offs
c.
change opportunity costs
d.
All of the above are correct.
105. Suppose the state of Massachusetts passes a law that increases the tax on alcoholic beverages. As a result, resi-
dents in Massachusetts start purchasing their alcohol in surrounding states. Which of the following principles does
this best illustrate?
a.
People respond to incentives
b.
Rational people think at the margin
c.
Trade can make everyone better off
d.
Markets are usually a good way to organize economic activity
Chapter 1/Ten Principles of Economics ❖ 25
106. Suppose the state of Illinois passes a law that bans smoking in restaurants. As a result, residents of Wisconsin who
do not like breathing second-hand smoke begin driving across the border to Illinois to eat at restaurants there.
Which of the following principles does this best illustrate?
a.
People respond to incentives
b.
Rational people think at the margin
c.
Trade can make everyone better off
d.
Markets are usually a good way to organize economic activity
107. In the former Soviet Union, producers were paid for meeting output targets, not for selling products. Under those
circumstances, what were the economic incentives for producers?
a.
to produce good quality products so that society would benefit from the resources used
b.
to conserve on costs, so as to maintain efficiency in the economy
c.
to produce enough to meet the output target, without regard for quality or cost
d.
to produce those products that society desires most
108. Which of the following principles is not one of the four principles of individual decisionmaking?
a.
People face tradeoffs.
b.
Trade can make everyone better off.
c.
People respond to incentives.
d.
Rational people think at the margin.
109. Which of the following statements exemplifies a principle of individual decisionmaking?
a.
Trade can make everyone better off.
b.
Governments can sometimes improve market outcomes.
c.
The cost of something is what you give up to get it.
d.
All of the above are correct.
110. According to a recent study of Chilean bus drivers, drivers who are paid by the number of passengers they
transport have higher productivity than drivers who are paid by the hour. This result is an example of which prin-
ciple of economics?
a.
People face tradeoffs.
b.
The cost of something is what you give up to get it.
c.
Rational people think at the margin.
d.
People respond to incentives.
26 ❖ Chapter 1/Ten Principles Of Economics
111. Which of the following is not an example of a group responding to an incentive?
a.
Students attend class because of an attendance policy that reduces their grade for absences.
b.
Consumers buy more of a product when it is on sale at a reduced price.
c.
Universities offer fewer online classes when they generate more revenue than traditional classes.
d.
Employees work harder to earn higher commissions.
HOW PEOPLE INTERACT
1. Which of the following is a principle concerning how people interact?
a.
Markets are usually a good way to organize economic activity.
b.
Rational people think at the margin.
c.
People respond to incentives.
d.
All of the above are correct.
2. Which is the most accurate statement about trade?
a.
Trade can make every nation better off.
b.
Trade makes some nations better off and others worse off.
c.
Trading for a good can make a nation better off only if the nation cannot produce that good itself.
d.
Trade helps rich nations and hurts poor nations.
3. The principle that “trade can make everyone better off” applies to interactions and trade between
a.
families.
b.
states within the United States.
c.
nations.
d.
All of the above are correct.
4. The principle that trade can make everyone better off applies to
a.
individuals.
b.
families.
c.
countries.
d.
All of the above
5. Which of the following statements about trade is false?
a.
Trade increases competition.
b.
With trade, one country wins and one country loses.
c.
Bulgaria can benefit, potentially, from trade with any other country.
d.
Trade allows people to buy a greater variety of goods and services at lower cost.
Chapter 1/Ten Principles of Economics ❖ 27
6. Trade between the United States and India
a.
benefits both the United States and India.
b.
is a losing proposition for the United States because India has cheaper labor.
c.
is a losing proposition for India because capital is much more abundant in the U.S. than in India.
d.
is a losing proposition for India because U.S. workers are more productive.
7. England can benefit from trade
a.
only with nations that can produce goods England cannot produce.
b.
only with less developed nations.
c.
only with nations outside of Europe.
d.
with any nation.
8. If Germany chooses to engage in trade, it
a.
will only benefit if it trades with countries that produce goods Germany cannot produce.
b.
cannot benefit if it trades with less developed countries.
c.
should first attempt to produce the good itself.
d.
can benefit by trading with any other country.
9. If the United States decides to trade with Mexico, we know that
a.
Mexico will benefit, but trade with a less developed country could not benefit the United States.
b.
it will not benefit Mexico because workers in the United States are more productive.
c.
Mexico and the United States can both benefit.
d.
it will not benefit either country because their cultural differences are too vast.
10. Kevin is the CEO of a large firm and a homeowner who pays a landscaper to maintain his lawn rather than do it
himself. Kevin has determined that he can earn more in the hour it would take him to work on his lawn than he
must pay his landscaper. This scenario is an example of which principle of economics?
a.
Trade can make everyone better off.
b.
Markets are usually a good way to organize economic activity.
c.
Governments can sometimes improve market outcomes.
d.
Prices rise when the government prinst too much money.
11. Brenda is an excellent baker and Floyd has a plentiful farm. If Floyd trades eggs and butter to Brenda for some of
Brenda’s bread and pastries,
a.
only Floyd is made better off by trade.
b.
only Brenda is made better off by trade.
c.
both Floyd and Brenda are made better off by trade.
d.
neither Floyd nor Brenda are made better off by trade.
28 ❖ Chapter 1/Ten Principles Of Economics
12. Penny is piano teacher and Dan is a tile layer. If Penny teaches Dan’s daughter to play the piano in exchange for
Dan tiling her kitchen floor,
a.
only Penny is made better off by trade.
b.
only Dan is made better off by trade.
c.
both Penny and Dan are made better off by trade.
d.
neither Penny nor Dan are made better off by trade.
13. Senator Bright, who understands economic principles, is trying to convince workers in her district that trade with
other countries is beneficial. Senator Bright should argue that trade can be beneficial
a.
only if it allows us to obtain things that we couldn’t make for ourselves.
b.
because it allows specialization, which increases total output.
c.
to us if we can gain and the others involved in the trade lose.
d.
in only a limited number of circumstances because others are typically self-interested.
14. Suppose that a country that has a high level of output per person agrees to trade with a country that has a low level
of output per person. Which country can benefit?
a.
only the one with a low level of output per person.
b.
only the one with a high level of output per person.
c.
both
d.
neither
15. Suppose that a country that has a high average wage level agrees to trade with a country that has a low average
wage level. Which country can benefit?
a.
only the one with a low level of output per person.
b.
only the one with a high level of output per person.
c.
both
d.
neither
16. Suppose Country A has a high average wage level and a high level of output per person, while Country B has a
low average wage level and a low level of output per person. Which country can benefit from trade?
a.
Only Country A can benefit.
b.
Only Country B can benefit.
c.
Both Country A and Country B can benefit.
d.
Neither Country A nor Country B can benefit.
Chapter 1/Ten Principles of Economics ❖ 29
17. Trade between countries tends to
a.
reduce both competition and specialization.
b.
reduce competition and increase specialization.
c.
increase competition and reduce specialization.
d.
increase both competition and specialization.
18. Trade
a.
allows specialization, which increases costs.
b.
allows specialization, which reduces costs.
c.
reduces specialization, which increases costs.
d.
reduces specialization, which reduces costs.
19. Trade makes costs
a.
higher and reduces the variety of goods and services available.
b.
higher but raises the variety of goods and services available.
c.
lower but reduces the variety of goods and services available.
d.
lower and raises the variety of goods and services available.
20. When the France trades with Russia,
a.
both countries are likely made better off.
b.
only Russia benefits since France can produce all goods at a higher level of quality than Russia.
c.
only France benefits since Russia’s low wages guarantee profitable firms in Russia regardless of
trade.
d.
neither country will benefit since France is more efficient than Russia at producing all goods.
21. Benefits from trade would not include
a.
the ability of people and nations to specialize.
b.
a greater variety of goods and services becoming available.
c.
less competition.
d.
lower prices.
22. Central planning refers to
a.
markets guiding economic activity. Today many countries that had this system have abandoned it.
b.
markets guiding economic activity. Today many countries that did not have this system have
implemented it.
c.
government guiding economic activity. Today many countries that had this system have abandoned
it.
d.
government guiding economic activity. Today many countries that did not have this system have
implemented it.
30 ❖ Chapter 1/Ten Principles Of Economics
23. In communism, central planners decide which of the following?
a.
what goods and services will be produced
b.
how much will be produced
c.
who produced and consumed the goods and services
d.
All of the above are correct.
24. One advantage market economies have over centrally-planned economies is that market economies
a.
provide an equal distribution of goods and services to households.
b.
establish a significant role for government in the allocation of resources.
c.
solve the problem of scarcity.
d.
are more efficient.
25. The basic principles of economics suggest that
a.
markets are seldom, if ever, a good way to organize economic activity.
b.
government should become involved in markets when trade between countries is involved.
c.
government should become involved in markets when those markets fail to produce efficient or fair
outcomes.
d.
All of the above are correct.
26. Which of the following statements best characterizes a basic difference between market economies and centrally–
planned economies?
a.
Society relies more upon prices to allocate resources when the economy is centrally-planned than
when it is market-based.
b.
The self-interest of households is reflected more fully in the outcome of a centrally-planned
economy than in the outcome of a market economy.
c.
Government plays a larger role in the economic affairs of a market economy than in the economic
affairs of a centrally-planned economy.
d.
None of the above are correct.
27. Market economies are distinguished from other types of economies largely on the basis of
a.
the political affiliations of government officials.
b.
the process by which government officials are elected or appointed.
c.
the ways in which scarce resources are allocated.
d.
the number of retail outlets available to consumers.
Chapter 1/Ten Principles of Economics ❖ 31
28. The collapse of communism in the Soviet Union and Eastern Europe took place mainly in the
a.
1960s.
b.
1970s.
c.
1980s.
d.
1990s.
29. The economy of the former Soviet Union is best described as a
a.
primitive economy.
b.
market economy.
c.
hybrid economy.
d.
centrally-planned economy.
30. Communist countries worked under the premise that
a.
markets were the best way to organize economic activity.
b.
central planners were in the best position to determine the allocation of scarce resources in the
economy.
c.
households and firms, guided by an “invisible hand,” could achieve the most efficient allocation of
scarce resources.
d.
allowing the market forces of supply and demand to operate with no government intervention
would achieve the most efficient allocation of scarce resources.
31. Prior to the collapse of communism, communist countries worked on the premise that economic well-being could
be best attained by
a.
a market economy.
b.
a strong reliance on prices and individuals’ self-interests.
c.
a system of large privately-owned firms.
d.
the actions of government central planners.
32. The idea that only the government can organize economic activity in a way that promotes economic well-being for
a country as a whole
a.
is a basic principle regarding individual decisionmaking.
b.
amounts to a denial of one of the basic principles regarding interactions among people.
c.
supports the idea that the “invisible hand” should guide economic activity.
d.
was promoted by the economist Adam Smith in a well–known 1776 book.
32 ❖ Chapter 1/Ten Principles Of Economics
33. Which of the following statements about markets is most accurate?
a.
Markets are usually a good way to organize economic activity.
b.
Markets are usually inferior to central planning as a way to organize economic activity.
c.
Markets fail and are therefore not an acceptable way to organize economic activity.
d.
Markets are a good way to organize economic activity in developed nations, but not in less
developed nations.
34. Which of the following observations was made famous by Adam Smith in his book The Wealth of Nations?
a.
There is no such thing as a free lunch.
b.
People buy more when prices are low than when prices are high.
c.
No matter how much people earn, they tend to spend more than they earn.
d.
Households and firms interacting in markets are guided by an “invisible hand” that leads them to
desirable market outcomes.
35. The term “invisible hand” was coined by
a.
Adam Smith.
b.
David Ricardo.
c.
Karl Marx.
d.
Benjamin Franklin.
36. The famous observation that households and firms interacting in markets act as if they are guided by an “invisible
hand” that leads them to desirable market outcomes comes from whose 1776 book?
a.
David Ricardo
b.
Thorstein Veblen
c.
John Maynard Keynes
d.
Adam Smith
37. Adam Smith’s book The Wealth of Nations was published in
a.
1692.
b.
1776.
c.
1816.
d.
1936.
38. Both The Wealth of Nations and the Declaration of Independence share the point of view that
a.
every person is entitled to life, liberty, and the pursuit of happiness.
b.
individuals are best left to their own devices without the government guiding their actions.
c.
the government plays a central role in organizing a market economy.
d.
because of human nature a strong legal system is necessary for a market system to survive.
Chapter 1/Ten Principles of Economics ❖ 33
39. The “invisible hand” directs economic activity through
a.
advertising.
b.
prices.
c.
central planning.
d.
government regulations.
40. The invisible hand refers to
a.
how central planners made economic decisions.
b.
how the decisions of households and firms lead to desirable market outcomes.
c.
the control that large firms have over the economy.
d.
government regulations without which the economy would be less efficient.
41. The invisible hand’s ability to coordinate the decisions of the firms and households in the economy can be hindered
by
a.
government actions that distort prices.
b.
increased competition in markets.
c.
enforcement of property rights.
d.
too much attention paid to efficiency.
42. When the “invisible hand” guides economic activity, prices of products reflect
a.
only the values that society places on those products.
b.
only the costs to society of producing those products.
c.
both the values that society places on those products and the costs to society of producing those
products.
d.
none of the above; when the “invisible hand” guides economic activity, prices of products are set by
the government in a manner that is thought to be “fair.”
43. The invisible hand works to promote general well-being in the economy primarily through
a.
government intervention.
b.
the political process.
c.
people’s pursuit of self-interest.
d.
altruism.
44. According to Adam Smith, the success of decentralized market economies is primarily due to
a.
the basic benevolence of society.
b.
society’s legal system.
c.
individuals’ pursuit of self-interest.
d.
partnerships that are forged between business and government.
34 ❖ Chapter 1/Ten Principles Of Economics
45. The self-interest of the participants in an economy is guided into promoting general economic self-interest by
a.
the invisible hand.
b.
market power.
c.
government intervention.
d.
oikonomos.
46. In an economy in which decisions are guided by prices and individual self-interest, there is
a.
the potential to achieve efficiency in production.
b.
a strong need for government intervention in the market.
c.
less efficiency than would be observed in a centrally-planned economy.
d.
more need for a strong legal system to control individual greed than would be needed in a centrally–
planned economy.
47. In a market economy, who makes the decisions that guide most economic activity?
a.
firms only
b.
households only
c.
firms and households
d.
government
48. In a market economy, economic activity is guided by
a.
the government.
b.
corporations.
c.
central planners.
d.
self-interest and prices.
49. In a market economy,
a.
households decide which firms to work for and what to buy with their incomes.
b.
firms decide whom to hire and what to make.
c.
a central planner makes decisions about production and consumption.
d.
Both a and b are correct.
50. Which of the following statements does not apply to a market economy?
a.
Firms decide whom to hire and what to produce.
b.
The “invisible hand” usually maximizes the well-being of society as a whole.
c.
Households decide which firms to work for and what to buy with their incomes.
d.
Government policies are the primary forces that guide the decisions of firms and households.
Chapter 1/Ten Principles of Economics ❖ 35
51. The decisions of firms and households are guided by prices and self-interest in a
a.
command economy.
b.
centrally-planned economy.
c.
market economy.
d.
All of the above are correct.
52. For markets to work well, there must be
a.
market power.
b.
a central planner.
c.
property rights.
d.
abundant, not scarce, resources.
53. Prices usually reflect
a.
only the value of a good to society.
b.
only the cost to society of making a good.
c.
both the value of a good to society and the cost to society of making the good.
d.
neither the value of a good to society nor the cost to society of making the good.
54. Prices direct economic activity in a market economy by
a.
influencing the actions of buyers and sellers.
b.
reducing scarcity of the goods and services produced.
c.
eliminating the need for government intervention.
d.
allocating goods and services in the most equitable way.
55. A friend of yours asks you why market prices are better than government-determined prices. Because you under-
stand economic principles, you say that market-determined prices are better because they generally reflect
a.
the value of a good to society, but not the cost of making it.
b.
the cost of making a good to society, but not its value.
c.
both the value of a good to society and the cost of making it.
d.
neither the value of a good to society nor the cost of making it.
36 ❖ Chapter 1/Ten Principles Of Economics
56. If the price of visiting a doctor were fixed below the current price, then we would expect
a.
an increase in the number of visits people want to make and an increase in the number of visits
health care providers want to provide.
b.
an increase in the number of visits people want to make and a decrease in the number of visits
health care providers want to provide.
c.
a decrease in the number of visits people want to make and an increase in the number of visits
health care providers want to provide.
d.
a decrease in the number of visits people want to make and a decrease in the number of visits health
care providers want to provide.
57. If the rent for apartments in New York City were fixed below the current price, then we would expect
a.
an increase in the number of people wanting to rent apartments in New York City.
b.
a decrease in the number of people wanting to rent apartments in New York City.
c.
an increase in the number of apartments available for rent in New York City.
d.
None of the above is correct.
58. If the price of a dozen eggs were fixed above the current price, then we would expect
a.
an increase in the number of eggs people want to buy and an increase in the number of eggs farmers
want to sell.
b.
an increase in the number of eggs people want to buy and a decrease in the number of eggs farmers
want to sell.
c.
a decrease in the number of eggs people want to buy and an increase in the number of eggs farmers
want to sell.
d.
a decrease in the number of eggs people want to buy and a decrease in the number of eggs farmers
want to sell.
59. If the wage for unskilled labor were fixed above the current wage, then we would expect
a.
an increase in the number of unskilled jobs available.
b.
a decrease in the number of unskilled jobs available.
c.
a decrease in the number of workers wanting unskilled jobs.
d.
None of the above is correct.
60. When the government prevents prices from adjusting naturally to supply and demand,
a.
it equates the amount buyers want to buy with the amount sellers want to sell.
b.
it adversely affects the allocation of resources.
c.
it improves equality and efficiency.
d.
it improves efficiency but reduces equality.
Chapter 1/Ten Principles of Economics ❖ 37
61. One reason we need government, even in a market economy, is that
a.
there is insufficient market power in the absence of government.
b.
property rights are too strong in the absence of government.
c.
the invisible hand is not perfect.
d.
Both a and b are correct.
62. The government enforces property rights by
a.
requiring property owners to pay property taxes.
b.
providing police and courts.
c.
forcing people to own property.
d.
providing public parks and recreation facilities.
63. A company that formerly produced software went out of business because too many potential customers bought
illegally-produced copies of the software instead of buying the product directly from the company. This instance
serves as an example of
a.
market power.
b.
inefficient trade.
c.
inadequate enforcement of property rights.
d.
the invisible hand at work.
64. For which of the following problems can well-designed public policy enhance economic efficiency?
a.
both externalities and market power
b.
externalities, but not market power
c.
market power, but not externalities
d.
neither externalities nor market power
65. Public policies
a.
may be able to improve either economic efficiency or equality.
b.
may be able to improve economic efficiency but cannot improve equality.
c.
may be able to improve equality but cannot improve economic efficiency.
d.
cannot improve either equality or economic efficiency.
66. To say that government intervenes in the economy to promote efficiency is to say that government is attempting to
a.
create a more fair distribution of income.
b.
change the way in which the economic pie is divided.
c.
enlarge the economic pie.
d.
All of the above are correct.
38 ❖ Chapter 1/Ten Principles Of Economics
67. Which of the following could reduce economic efficiency?
a.
laws that encourage lawsuits
b.
policies that redistribute income
c.
policies that impose significant restrictions on international trade
d.
All of the above are correct
68. The term used to describe a situation in which markets do not allocate resources efficiently is
a.
economic meltdown.
b.
market failure.
c.
equilibrium.
d.
the effect of the invisible hand.
69. A rationale for government involvement in a market economy is
a.
markets sometimes fail to produce a fair distribution of economic well-being.
b.
markets sometimes fail to produce an efficient allocation of resources.
c.
property rights have to be enforced.
d.
All of the above are correct.
70. The term market failure refers to
a.
a situation in which the market on its own fails to allocate resources efficiently.
b.
an unsuccessful advertising campaign which reduces demand for a product.
c.
a situation in which competition among firms becomes ruthless.
d.
a firm which is forced out of business because of losses.
71. Which of the following is not generally regarded by economists as a legitimate reason for the government to inter-
vene in a market?
a.
to promote efficiency
b.
to promote equality
c.
to enforce property rights
d.
to protect an industry from foreign competition
72. Which of the following can lead to market failure?
a.
externalities and market power
b.
externalities but not market power
c.
market power but not externalities
d.
neither externalities nor market power
Chapter 1/Ten Principles of Economics ❖ 39
73. Causes of market failure include
a.
externalities and market power.
b.
market power and incorrect forecasts of consumer demand.
c.
externalities and foreign competition.
d.
incorrect forecasts of consumer demand and foreign competition.
74. Market failure can be caused by
a.
low consumer demand.
b.
equilibrium prices.
c.
externalities and market power.
d.
high prices and foreign competition.
75. Thousands of people develop lung cancer from second-hand exposure to cigarette smoke. This is an example of
a.
a market failure caused by an externality.
b.
a market failure caused by market power.
c.
a market failure caused by equality.
d.
There is no market failure in this case.
76. When a species of fish dies off due to pollution in a river where it once lived, this is an example of
a.
a market failure caused by an externality.
b.
a market failure caused by market power.
c.
a market failure caused by equality.
d.
There is no market failure in this case.
77. The term “market failure”
a.
means the same thing as “market power.”
b.
refers to the dissolution of a market when firms decide to quit producing a certain product.
c.
refers to the failure of a market to produce an efficient allocation of resources.
d.
refers to government’s failure to enforce the property rights of households or firms that participate
in a certain market.
78. If an externality is present in a market, economic efficiency may be enhanced by
a.
government intervention.
b.
a decrease in foreign competition.
c.
fewer market participants.
d.
weaker property rights.
40 ❖ Chapter 1/Ten Principles Of Economics
79. An example of an externality is the impact of
a.
bad weather on the income of farmers.
b.
the personal income tax on a person’s ability to purchase goods and services.
c.
pollution from a factory on the health of people in the vicinity of the factory.
d.
increases in health care costs on the health of individuals in society.
80. Which of the following is an example of an externality?
a.
Annie purchases a handbag.
b.
Bob’s dog barks loudly during the night waking his neighbors.
c.
Clark sells a book to Calvin.
d.
David watches a scary movie.
81. The willingness of citizens to pay for vaccinations does not include the benefit society receives from having vac-
cinated citizens who cannot transmit an illness to others. This extra benefit society gets from vaccinating its citi-
zens is known as
a.
productivity.
b.
an externality.
c.
market power.
d.
property rights.
82. If a paper factory does not bear the entire cost of the pollution it emits, it will
a.
not emit any pollution so as to avoid the entire cost of the pollution.
b.
emit lower levels of pollution.
c.
emit an acceptable level of pollution.
d.
emit too much pollution.
83. Laws that restrict the smoking of cigarettes in public places are examples of government intervention that is in-
tended to reduce
a.
efficiency.
b.
equality.
c.
externalities.
d.
productivity.
84. Which of these activities will most likely impose an external cost?
a.
An athlete works out at a gym.
b.
A secretary smokes a cigarette in a crowded break room.
c.
A young mother pushes her baby in a stroller.
d.
A construction worker eats a hotdog during his lunch break.