76) The study of how a particular firm might choose to maximize its profits would fall into what
type of analysis?
A) macroeconomics
B) microeconomics
C) political economics
D) aggregate economics
77) What type of economics would most typically deal with aggregates?
A) macroeconomics
B) microeconomics
C) normative economics
D) financial economics
78) Which of the following is a microeconomic topic?
A) the increase in the amount of imports from China to the United States
B) the rate at which the cost of living has increased in Canada
C) the marketing strategy of the Apple Computer company
D) the increase in the employment level of the United States in the past year
79) Which of the following topics is a macroeconomic subject?
A) a proposed merger between two companies
B) the level of sales at a particular department store
C) increases in the overall price level of a nation
D) the pricing decision of a firm
80) Which of the following is an aggregate?
A) the number of shoes in one man’s closet
B) the bushels of apples one farmer sells
C) the price of a particular textbook
D) the total production of all goods and services
81) All of the following are aspects of microeconomics EXCEPT
A) monopolies.
B) a firm maximizing profit.
C) a worker choosing one job over another.
D) the average level of prices of all goods and services produced in a country in a year.
82) The impact of an increase in the gasoline tax on sales of electric vehicles is
A) a macroeconomics topic because it deals with taxes.
B) a microeconomics topic because it deals with one industry.
C) not an economic issue, but rather a political issue.
D) a normative issue and so it is not an economic topic.
83) Which of the following would most likely be part of the study of microeconomics?
A) how General Motors makes decisions regarding its production goals
B) national income
C) the total economic output of our domestic economy
D) overall price stability in the United States
84) All of the following are aspects of macroeconomics EXCEPT
A) the U.S. unemployment rate.
B) the production decisions of a pharmaceutical firm.
C) the budget deficit of the United States.
D) foreign trade.
85) Individual decision making by consumers and producers is the focus of
A) macroeconomics.
B) microeconomics.
C) aggregate measures.
D) any economic model.
86) Aggregate measures are
A) anything to do with economics.
B) a total measure of a variable in the economy.
C) used only by policymakers but not by firms.
D) determined by the government.
87) Microeconomics is the study of
A) aggregate measures of the economy.
B) economic issues for an entire region.
C) federal budget details.
D) individual decision making.
88) An example of a microeconomic decision is a situation in which
A) the Federal Reserve considers how much to increase the money supply during the coming
month in an effort to constrain the rate of inflation.
B) Congress and the president seek to reach a compromise on how much to increase government
spending in an effort to influence national expenditures.
C) a firm evaluates how much to reduce the price of its product in an effort to influence sales and
boost its profits.
D) the U.S. Treasury contemplates buying foreign currencies in an effort to influence exchange
rates with an aim to boosting demand for U.S. goods and services.
89) What is the economic way of thinking, and why is it important?
90) What is economics and what does it try to explain?
91) Explain the study of economics.
92) Is inflation a macroeconomic or a microeconomic question? Why?
93) Distinguish between macroeconomics and microeconomics.
1.2 The Three Basic Economic Questions and Two Opposing Sets of Answers
1) An economic system is
A) the universe of all resources.
B) a way to create new resources.
C) a mechanism to allocate scarce resources.
D) an organization that generates profits.
2) The way that a society uses to allocate resources to satisfy human wants is called
A) an economic system.
B) an assumption.
C) realism.
D) a physical science.
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3) The questions that an economic system attempts to solve include
A) what to produce.
B) how to produce items.
C) for whom items are produced.
D) all of the above.
4) Which of the following is NOT one of the basic questions that an economic system attempts
to answer?
A) How to identify what people need?
B) What to produce?
C) How will goods and services be produced?
D) For whom will goods and services be produced?
5) What is the type of economic system that relies on one central authority to make economic
decisions?
A) free market
B) price system
C) command and control
D) mixed economic system
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6) What is the type of mechanism that answers the basic economic questions through a
decentralized decision making process?
A) market system
B) dictatorship
C) command and control
D) mixed economic system
7) Central planning is a key characteristic of which economic system?
A) free market
B) price system
C) command and control
D) mixed economic system
8) Under a pure price system, the decision of resource allocation is made by
A) the head of the government.
B) those who have the right to vote in government elections.
C) individuals who own the resources.
D) no one.
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9) In a market system, the what, how and for whom questions in economics are determined by
A) those who are not in the market.
B) buyers and sellers together.
C) the central authority.
D) no one.
10) Prices provide signals about resource allocation to all individuals in a ________ system.
A) market
B) command and control
C) central planning
D) political
11) In a market system, ________ provide signals about whether resources are relatively scarce
or abundant.
A) prices
B) buyers alone
C) government officials
D) scientists
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12) The United States is best known as a
A) pure market system.
B) dictatorship.
C) command and control system.
D) mixed economic system.
13) A mixed economic system is best described as an economy with a mix of
A) state and federal governments.
B) domestic and foreign firms.
C) free markets and government control.
D) for-profit organizations and not-for-profit organizations.
14) Distinguish between a command-and-control economic system and a price system.
15) Describe the signaling aspect of the price system regarding the three basic economic
questions.
1.3 The Economic Approach: Systematic Decisions
1) In his book, An Inquiry into the Nature and Causes of the Wealth of Nations, economist Adam
Smith argued that individuals
A) always tend to act in an altruistic manner.
B) always consider the impact of their actions on the welfare of others.
C) are motivated by self-interest.
D) are never concerned with economic issues.
2) Economists assume that people are motivated by
A) benevolence.
B) altruism.
C) greed.
D) rational self-interest.
3) One major assumption of economics is that people
A) act as if they systematically pursue self-interest.
B) behave randomly without any predictable pattern.
C) are sometimes rational and sometimes irrational.
D) always pursue the interests of others.
4) If people act as if they systematically pursue their own self-interest, then they will most likely
A) respond irrationally to any incentive.
B) respond to a given incentive in a random manner.
C) respond predictably to a given incentive.
D) not respond to any incentive.
5) When studying individuals’ economic behavior, economists assume that
A) individuals understand the rationale for all their actions.
B) individuals act as if they were rational.
C) only educated people act as if they were rational.
D) self-interest is of limited relevance in predicting an individual’s actions.
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6) The assumption that people do NOT intentionally make decisions that would leave them
worse off is known as
A) the rationality assumption.
B) the false assumption.
C) the ceteris paribus assumption.
D) the normative assumption.
7) When the text refers to rational self-interest, it means
A) your looking out for what is best for you as an individual.
B) your focus on your own contributions to society.
C) behavior that makes society better off.
D) behavior that hurts other people.
8) In economics, the concept that individuals are motivated by self-interest and respond
predictably to opportunities is known as
A) rational behavior.
B) altruism.
C) normative bias.
D) empiricism.
9) Economists assume people behave rationally, which means that people
A) never make a mistake.
B) do not intentionally make decisions that make themselves worse off.
C) have the necessary information to always make correct decisions.
D) always understand the consequences of their decisions.
10) Sara looks into her closet and discovers a pair of like-new shoes she no longer wears because
they are out of fashion. From the economist’s perspective, was Sara behaving rationally when she
bought those shoes?
A) No. If any of a person’s decisions have poor results, that person is irrational.
B) Yes, Sara didn’t buy those shoes when they were out of fashion.
C) No. The rationality assumption states that rational people never make mistakes.
D) It’s not clear because psychology, not economics, deals with the rationality assumption.
11) Do economists analyze people’s thought processes or do they look at what people actually
do?
A) Economists focus only on people’s thought processes.
B) Economists focus on what people do, not their thought processes.
C) An economist’s focus is about half-and-half between actions and thought processes.
D) Macroeconomists focus on thought processes while microeconomists focus on actions.
12) When people donate money to a charity, they behave
A) rationally if the act gives them satisfaction.
B) irrationally because the act does not benefit anyone.
C) in an unpredictable manner because the act involves no incentive.
D) in a way that only makes themselves worse off.
13) The potential rewards that are available to an individual if a particular activity is undertaken
are known as
A) greed.
B) irrational thought processes.
C) incentives.
D) intrinsic values.
14) Father says, “Earn a B-average on your next report card and I’ll help you buy a car.” An
economist would say that this parent is providing his child a(n)
A) study disincentive.
B) reason to slack off and not worry about her grades.
C) bribe.
D) incentive.
15) Some pet owners are using an “invisible fence” to keep their animals from straying. Every
time the animal steps over the edge of the property, it gets a mild shock. A social scientist would
call the shock
A) a price signal.
B) a reward.
C) a disincentive.
D) a normative incentive.
16) Which of the following is TRUE of incentives?
A) Different people are motivated by different incentives.
B) Money is the only measure of incentives.
C) All of the people in a particular nation are motivated by the same incentives.
D) In economics, people are assumed to respond to disincentives instead of incentives.
17) Economists assume people are motivated by
A) unlimited resources.
B) pride.
C) self-interest.
D) social justice.
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18) Self-interest relates to
A) only monetary objectives.
B) both monetary and nonmonetary objectives.
C) the ceteris paribus assumption.
D) normative economic analysis and not positive economic analysis.
19) Economists assume people behave
A) instinctively.
B) rationally.
C) irrationally.
D) greedily.
20) Which of the following is always TRUE of rational behavior?
A) It always entails pursuing one’s own best interest.
B) It always yields the best possible outcome for all individuals.
C) It never involves the pursuit of greedy self-interest.
D) It never involves taking into account the interests of others.
21) John has a math test tomorrow. He has decided to go to the gym today and then study math
for several hours. Which of the following statements is TRUE?
A) John did not use the economic way of thinking because his decision on how to allocate his
time did not involve money.
B) John’s decision on how to allocate his time is inconsistent with the rationality assumption
since he has decided to go to the gym.
C) John’s decision on how to allocate his time is consistent with the rationality assumption since
the decision is intended to make him better off.
D) John’s decision does not involve his pursuit of self-interest.
22) People behave rationally when they
A) follow the advice of government leaders.
B) never have regrets about their decisions.
C) make decisions they think will make themselves better off.
D) make decisions with a focus only on financial outcomes.
23) Which of the following is a TRUE statement about the economic assumption of rationality?
A) Individuals who are rational necessarily ignore the interests of others.
B) Individuals generally act as though they are rational.
C) Individual behavior may be irrational but group behavior is always rational.
D) People make decisions as if they are most selfish in the world.
24) A decision made by a rational person
A) is intended to make the person worse off.
B) would always make the person wealthier.
C) is identical to a decision that would be made by any other person facing the same choices.
D) is intended to make the person better off.
25) The assumption that individuals will not intentionally make decisions that will leave them
worse off is known as
A) microeconomic analysis.
B) macroeconomic analysis.
C) a model or theory.
D) the rationality assumption.
26) The rationality assumption says that
A) people do not intentionally make decisions that would leave them worse off.
B) people never make decisions that would leave them worse off.
C) people do not respond to incentives since incentives require scarce resources.
D) all economic analysis must be normative.
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27) Jose is rational if he
A) does not intentionally make decisions that would leave him worse off.
B) never makes a mistake in his life.
C) only responds to rewards that involve money.
D) always uses a model or mathematical formula to help him make a decision.
28) A possible rational reason why older people, on average, show less interest in learning how
to use new technologies is because
A) older people are not as smart as (today’s) young people.
B) they are acting irrationally.
C) they have fewer years to gain a return from learning how to use new technologies.
D) the financial cost for older people is greater than the cost to younger people.
29) Incentives are
A) potential rewards available if a particular activity is undertaken.
B) ineffective as a device to get people to behave in a certain fashion.
C) inappropriate ways to obtain a certain kind of behavior.
D) useless when people behave rationally.
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30) Which of the following would provide an incentive to increase the amount of beef
consumed?
A) a decrease in the price of beef
B) a tax on beef sales
C) promotion of chicken consumption
D) a ban on beef sales by the Food and Drug Administration
31) People respond to incentives
A) by ignoring negative incentives and responding to positive incentives only.
B) only when they are irrational.
C) as they never intentionally make decisions that would leave them worse off.
D) when they have low incomes.
32) The threat of a large fine for failure to pay income taxes is an example of
A) the excessive power of the Internal Revenue Service.
B) the ineffectiveness of incentives to get people to pay their taxes.
C) a negative incentive to get all people to pay taxes.
D) people failing to consider all the benefits the government provides them.