Chapter 1 The Nature of Economics 21
84) 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.
85) Explain the study of economics.
86) Is inflation a macroeconomic or a microeconomic question? Why?
87) Distinguish between macroeconomics and microeconomics.
22 Miller Economics Today, 16th Edition
1.3 The Three Basic Economic Questions and Two Opposing 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.
3) The issues 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 eliminate choices?
B) What to produce?
C) How much 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
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) a queen or king.
C) individuals who own the resources. D) no one.
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)
b
uyers and sellers together.
C) the central authority. D) no one.
10) In a market system, ________ provide signals about whether resources are relatively scarce or
abundant.
A) prices B) economists
C) government officials D) scientists and engineers
11) The United States is best known as a
A) pure price system. B) dictatorship.
C) command and control system. D) mixed economic system.
12) A mixed economic system is best described an economy with a mix of
A) state and federal governments.
B) domestic and foreign buyers.
C) free markets and government control.
D) for profit organizations and not for profit organizations.
13) Distinguish between a command and control economic system and a price system.
Chapter 1 The Nature of Economics 25
1.4 The Economic Approach: Systematic Decisions
1) In his book,
A
n 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 generally not concerned with economic questions.
2) Economists assume that people are motivated by
A)
b
enevolence. 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)
b
ehave 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.
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 microeconomic 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)
b
ehavior that makes society better off.
D)
b
ehavior that helps your employer earn higher profits.
8) In economics, the concept that individuals are motivated by self interest and respond
predictably to opportunities for gain is known as
A) rational self interest. B) altruism.
C) sufficiency. 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 give her blisters. 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, as long as Sara didn t intentionally purchase blister causing shoes.
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) premiums. B) gifts.
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)
b
ribe.
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 bribe. 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.
18) Self interest relates to
A) only monetary objectives.
B)
b
oth 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)
J
ohn has an economics test tomorrow. He must study and has planned the rest of his day so
that he can fit some study time in. He has decided to go to the gym and then study for several
hours. Which of the following statements is true?
A)
J
ohn did not use the economic way of thinking because his decision on how to allocate his
time did not involve money.
B)
J
ohn s decision on how to allocate his time is inconsistent with the rationality assumption
since he has decided to go to the gym.
C)
J
ohn 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)
J
ohn 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 solely based 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 omniscient.
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.
27)
J
ose 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.
30) Which of the following would NOT provide an incentive to reduce the amount of beef
consumed?
A) An increase in the price of beef
B) A subsidy to buyers of beef
C) A decrease in the price of chicken
D) A ban on beef sales by the Food and Drug Administration
31) People respond to incentives
A)
b
y ignoring negative incentives and responding to positive incentives only.
B) only when they are irrational.
C)
b
y calculating their individual costs and benefits and determining which is greater.
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.
33) A politician says that the government should tax behavior they want less of and subsidize
behavior they want more of. This is an example of
A) cynical behavior in modern democracies.
B) failing to consider the alternatives available to the government.
C) a concern that people are not rational when they make decisions.
D) using incentives to alter behavior.
34) Which of the following ways to recruit soldiers utilizes incentives?
A) a draft B) universal service
C) higher salaries D) longer lengths of service
35) Self interest
A) implies that a person must try to increase wealth at all times.
B) implies that people will not give away wealth.
C) is consistent with many goals that people pursue, including betterment of others.
D) applies only to people in market settings.
36) Self interest
A) relates strictly to material well
b
eing, such as a person s stock of wealth at a point in time.
B) is measured entirely based on an individual s income, whether earned from labor or
inherited.
C) is inconsistent with economic analysis, which suggests that self interest is irrational.
D) can involve any action that makes a person feel better off, such as charitable contributions.
37) Shelley s grandmother gave her a sweater for her birthday, but Shelley wanted a DVD. This
implies that
A) Shelley s grandmother is not acting out of self interest because she knows that Shelley
really wanted a DVD.
B) Shelley s grandmother is acting out of self interest because she wanted to give Shelley
something useful.
C) it is in Shelley s self interest to refuse to wear the sweater.
D) Shelley should exchange the sweater for a DVD.
38) Charitable donations to the Red Cross
A) can be explained by the rational ignorance theory.
B) can be explained by the rational self interest theory.
C) cannot be explained by the rational self interest theory.
D) prove that there is no scarcity in the United States.
39) A five cent deposit on beer bottles
A) provides a positive incentive because it rewards people for recycling.
B) provides a negative incentive because it punishes people who do not recycle.
C) is an irrational policy, because it fails to take into account incentives.
D) is an irrational policy, because it fails to take into account self interest.
40) If a teacher tells a student that those who attend the study session typically score higher on the
final exam,
A) the student has a positive incentive to attend the study session because she may get a
higher grade.
B) the student has a negative incentive to attend the study session because she will be
punished if she does not go.
C) the student has no greater incentive to attend because there is no guarantee she will get a
higher grade on the exam.
D) a C student will be making an irrational decision if she decides to skip the study session
since she has plenty of time to go.
41) Consider the case of a teacher who tells students that those who miss more than three classes for
any reason will automatically receive a lower grade.
A) This is an example of a positive incentive for students to attend class.
B) This is an example of a negative incentive for students to attend class.
C) The teacher is assuming that students are irrational, and she must force them to attend
class.
D) Students who miss more than three classes are irrational.
42) If the government offers to reduce your property taxes by 10 percent if you install solar heating
for your home, this would be an example of
A) police power. B) incentives. C) disincentives. D) ceteris paribus.
43) Economists assume that people are motivated by
A) a desire to please others. B) the interests of the community at large.
C) self interest. D) morally correct behavior.
44) When we say that an individual behaves according to rational self interest, we mean that this
individual
A) is motivated by greed.
B) will always buy the most fashionable items available.
C) will always buy the cheapest products available on the market.
D) is making choices that he or she believes will leave him or her better off.
45) Rational behavior for an economist means that individuals
A) are motivated by self interest. B) never change their minds.
C) always make positive choices. D) are self sacrificing.
46) According to economists, when two people make exactly the opposite decision,
A) one of them is acting irrationally.
B) each person evaluates the situation according to his/her individual self interest.
C) one of them is acting out of spite.
D) one of them should compromise.
47) It is assumed in economics that people make decisions based upon
A) altruism. B) rational self interest.
C) tradition. D) governmental persuasion.
48) An incentive is a
A) need. B) want.
C) reward for desired behavior. D) resource.
49) The assumption that individuals do NOT intentionally make decisions that would leave them
worse off is referred to as
A) the premium assumption. B) the law of comparative advantage.
C) the rationality assumption. D) the law of demand.
50) The author of the book
A
n Inquiry into the Nature and Causes of the Wealth of Nations is
A) Thorstein Veblen. B) Adam Smith.
C) Milton Friedman. D) Alan Greenspan.
51) Rational self interest means
A) always increasing your wealth.
B) pursuing what makes you better off.
C) pursuing activities that maximize income.
D) always pursuing activities that are consistent with your faith.
52) The rationality assumption states that
A) all actions taken by consumers are based on what is good for society.
B) people make decisions regardless of how the outcome will affect them.
C) people make decisions to buy only those goods that they need rather than goods that they
want.
D) people do not intentionally make decisions that would leave them worse off.
38 Miller Economics Today, 16th Edition
53) Economic theory predicts that people make choices in a manner that
A) makes them well liked by others.
B) makes them better off.
C) reflects the fact that resources are unlimited.
D) shows that they do not respond to monetary incentives.
54) How could Adam Smith s comment about the butcher, the brewer, and the baker be accurately
rephrased in modern terms?
A) The butcher, the brewer, and the baker give us our dinner because they want to be well
liked in the community.
B) The butcher, the brewer, and the baker give us our dinner because they will be sued if they
don t do so.
C) The butcher, the brewer, and the baker give us our dinner because they each earn a living
by doing so.
D) The butcher, the brewer, and the baker give us our dinner because they view doing so as a
public service.
55) According to economic theory, how do people make decisions?
A) They make decisions in the same manner as their parents did.
B) They make decisions by looking at what others have done in the same situation and then
doing the opposite.
C) They make decisions by looking at what others have done in the same situation and then
doing the same.
D) They make decisions based on their own self interest.
56) Underlying economic theory is the idea that
A) people respond only to negative incentives, not to positive ones.
B) choices are affected by both positive and negative incentives.
C) value judgments do not play a role in the economic decisions people make.
D) money is the only incentive that matters.
57) High gasoline prices give people all of the following incentives EXCEPT
A) to drive less.
B) to car pool.
C) to buy a hybrid car.
D) to take vacations that require driving more miles.
58) The idea that people will not consciously make decisions that make them worse off is known as
A) rationality assumption. B) the decision duality.
C) Adam Smith s doctrine. D) incentive assumption.
59) Explain what economists mean when they apply the rationality assumption.
60) Economists assume people are selfish. Do you agree with this statement or not? Explain.
61) Rational, self interested people would never end up worse off by any decision they make.
Obviously, people often make mistakes or have regrets. Therefore, people do not act rationally
or out of self interest. Do you agree with these statements? Why or why not?
62) What assumption about human motivation is made in economics? Explain.
63) What is meant by the term incentives, and why are they important?
64) During the Middle Ages, heretics were often burned at the stake. Were the heretics violating the
assumption of rational self interest? Explain.
1.5 Economics as a Science
1) Another term for economic models is
A) economic designs. B) economic theories.
C) economic science. D) economic maps.
2) A simplified representation of the real world that is used to explain economic phenomena is a(n)
A) map. B) model. C) assumption. D) implication.