63) Optimal decisions are made at the point where marginal benefit is maximized.
64) If it costs Hobie $900 to produce 5 lamps and $1,200 to produce 6 lamps, then the difference of $300
is the marginal cost of producing the 5th lamp.
65) Suppose the extra cost to a car wash of advertising one additional day each month on a local radio
station is $175. Then, the car wash should advertize that one additional day each month if doing so
brings in additional revenue of $175 or more each month.
66) What is scarcity, and why is it a fundamental concept in economics?
67) What is an economic market?
68) What does the word “marginal” mean in economics? What is a marginal benefit? What is a marginal
cost? What is marginal analysis?
69) Assume that a health spa can earn an additional $35,000 of revenue each year from advertising
every day in a local newspaper. What must the additional cost of this daily advertising be to make this
advertising economically rational?
70) Explain the term “economics.”
71) Describe what has happened to state obesity rates in the United States since 1994.
1.2 The Economic Problem That Every Society Must Solve
1) Trade-offs force society to make choices when answering what three fundamental questions?
A) What will be the prices of goods and services; how will these goods and services be produced; and
who will receive them?
B) What goods and services to produce; how will these goods and services be produced; and who
receives them?
C) Who gets jobs; what wages do workers earn; and who owns what property?
D) How much will be saved; what will be produced; and how can these goods and services be fairly
distributed?
2) Every society faces economic trade-offs. This means
A) some people live better than others do.
B) not everyone can have enough goods to survive.
C) producing more of one good means less of another good can be produced.
D) society’s output cannot be made available to all.
3) Which of the following statements is false?
A) Anytime you have to decide which action to take you are facing an economic trade-off.
B) Trade-offs do not apply when the consumers purchase a product for which there is excess supply,
such as a stock clearance sale.
C) Every individual, no matter how rich or poor, is faced with making trade-offs.
D) Economics is a social science that studies the trade-offs we are forced to make because of scarcity.
4) Which of the following is an example of an economic trade-off that a firm has to make?
A) whether it is cheaper to produce with more machines or with more workers
B) deciding why consumers want its products
C) whether or not consumers will buy its products
D) deciding what profit margin it desires for its products
5) Opportunity cost is defined as
A) the benefit of an activity.
B) the monetary expense associated with an activity.
C) the highest valued alternative that must be given up to engage in an activity.
D) the total value of all alternatives that must be given up to engage in an activity.
6) The Stogie Shop, a cigar store in the mall, sells hand-rolled cigars for $10.00 and machine-made cigars
for $2.50 each. What is the opportunity cost of buying a hand-rolled cigar?
A) 4 machine-made cigars
B) one-quarter of a machine-made cigar
C) $10.00
D) $2.50
7) Ted quits his $60,000-a-year job to be a stay-at-home dad. What is the opportunity cost of his
decision?
A) zero, since he will no longer be earning a salary
B) depends on the “going rate” for stay-at-home dads
C) at least $60,000
D) the value he attributes to the joy of parenting
8) Skeeter’s Skeeball Castle has seen its business slow down ever since Kerrie’s Off-Key Karaoke opened
up next door. Since the opening of Kerrie’s Off-Key Karaoke, the opportunity cost of playing skeeball at
Skeeter’s has
A) decreased.
B) increased.
C) fallen to zero.
D) not changed.
9) Who receives the goods and services produced in the United States depends largely on
A) how income is distributed.
B) how the goods and services are produced.
C) what goods and services are produced.
D) government redistribution.
10) Fast food restaurants produce a range of menu items such as hamburgers, chicken sandwiches,
salads, and french fries. What fundamental economic question are they addressing by offering this
range of items?
A) How to produce goods that consumers want?
B) Why produce a variety of menu items?
C) What to produce?
D) Who to produce the menu items for?
11) Consider the following economic agents:
a. the government
b. consumers
c. producers
Who, in a modern mixed economy, decides what goods and services will be produced with the scarce
resources available in that economy?
A) the government
B) producers
C) consumers
D) consumers and producers
E) the government, consumers, and producers
12) In a market economy, who decides what goods and services will be produced?
A) only the producers
B) only consumers
C) consumers and producers
D) the government
13) Which of the following is correct about the economic decisions consumers, firms, and the
government have to make?
A) Governments may face the problem of shortages but not scarcity in making economic decisions.
B) Only individuals face scarcity; firms and the government do not.
C) Firms and the government face scarcity, individuals only face shortages.
D) Each faces the problem of scarcity which necessitates trade-offs in making economic decisions.
14) It is necessary for all economic systems to provide people with goods and services and also restrict
them from getting as much of these goods and services as they wish, because failure to do this could
________ the efficiency of the system by producing some goods and services that are ________.
A) reduce; not as highly valued as others
B) increase; not as highly valued as others
C) reduce; valued more than others
D) increase; valued more than others
15) How does a market system prevent people from getting as many goods and services as they wish?
A) Governments interfere with the market mechanism to influence the allocation of goods and services.
B) In a market system, firms can charge any price they want, thus preventing poor people from getting
as many goods and services as they wish.
C) The market system allocates goods and services to those who are able to pay for those products and
therefore income is a limiting factor.
D) The government imposes taxes on those who earn beyond a certain amount of income.
16) In a market economy, those who are willing and able to buy what is produced
A) receive what the government allows them to receive.
B) receive the most of what is produced.
C) receive no more than everyone else in the market.
D) solely determine what is produced.
17) How are the fundamental economic decisions determined in Cuba?
A) Individuals, firms, and the government interact in a market to make these economic decisions.
B) These decisions are made by the country’s elders who have had much experience in answering these
questions.
C) The government decides because Cuba is a centrally planned economy.
D) The United Nations decides because Cuba is a developing economy.
18) In a market economy, ________ interact in markets to decide the answers to the fundamental
economic questions.
A) state and local governments
B) large corporations
C) households and firms
D) the judicial and legislative branches of the federal government
19) Which of the following is a problem inherent in centrally planned economies?
A) There are no problems and everyone, including consumers, is satisfied.
B) There is too much production of low-cost, high-quality goods and services.
C) Production managers are more concerned with satisfying government’s orders than with satisfying
consumer wants.
D) Unemployment is too high.
20) Which of the following contributed to the downfall of the Soviet Union in 1991?
A) public dissatisfaction with low living standards and political repression
B) producing higher-quality goods than were desired by consumers
C) the rapidly increasing standard of living
D) the lack of a strong dictator who could coordinate economic activities
21) When goods and services are produced at the lowest possible cost, ________ occurs.
A) allocative efficiency
B) productive efficiency
C) equity
D) efficient central planning
22) Productive efficiency is achieved when firms produce goods and services
A) most desired by society.
B) at the highest profit margin.
C) at the lowest cost.
D) of the highest quality.
23) When every good or service is produced up to the point where the last unit provides a marginal
benefit to society equal to the marginal cost of producing it, ________ occurs.
A) allocative efficiency
B) productive efficiency
C) equity
D) efficient central planning
24) Allocative efficiency is achieved when
A) goods and services are fairly distributed among consumers in an economy.
B) firms produce the goods and services that consumers value most.
C) firms produce goods and services at the lowest cost.
D) there are no shortages or surpluses in the market.
25) Which of the following contributes to the efficiency of markets?
A) Governments play an active role in the day-to-day operations of markets.
B) Markets are able to bring about an equitable distribution of goods and services.
C) Markets promote equal standards of living.
D) Markets promote competition and voluntary exchange.
26) Competition forces firms to produce and sell products as long as the ________ to consumers exceeds
the ________ of production.
A) marginal benefit; marginal cost
B) marginal benefit; marginal benefit
C) marginal cost; marginal cost
D) marginal cost; marginal benefit
27) Voluntary exchange increases economic efficiency
A) because neither the buyer nor the seller would agree to a trade unless they both benefit.
B) because voluntary exchange only takes place with government permission.
C) because it is free and consequently does not cost anything.
D) because it allows wealthy individuals to act altruistically and give to the poor.
28) All ________ economies have been political dictatorships.
A) centrally planned
B) mixed
C) market
D) mixed and market
31
29) Which of the following generates allocative efficiency in a market economy?
A) national government intervention
B) voluntary exchange between buyers and sellers
C) United Nations rules for competition
D) equity
30) Competition among sellers generates
A) productive efficiency.
B) allocative efficiency.
C) equity.
D) scarcity.
31) Dr. Goldfinger decides to invest in companies which he believes can “improve the productivity and
efficiency” of health care services. How can Dr. Goldfinger strive to achieve this productive efficiency?
A) by investing in companies that produce goods and services based on consumer preferences
B) by investing in companies that produce goods and services at the lowest possible cost
C) by investing in companies that fairly distribute their products and services
D) by investing in companies that produce up to the point where the marginal benefit of the last unit
produced is equal to the marginal cost of producing it
32) Dr. Goldfinger decides to invest in companies which he believes can “improve the productivity and
efficiency” of health care services. What would Dr. Goldfinger need to do to try to achieve allocative
efficiency?
A) invest in companies that produce goods and services based on consumer preferences
B) invest in companies that produce goods and services at the lowest possible cost
C) invest in companies that fairly distribute their products and services
D) invest in companies that produce up to the point where the marginal cost of the last unit produced is
zero
33) Mrs. Lovejoy decides to invest in companies which she believes are producing its goods based on
the preferences of consumers. Mrs. Lovejoy is investing in companies that are
A) productively efficient.
B) allocatively efficient.
C) both productively and allocatively efficient.
D) always going to be profitable.
34) Mrs. Lovejoy decides to invest in companies which she believes can produce their goods at the
lowest possible cost. Mrs. Lovejoy is investing in companies that are
A) productively efficient.
B) allocatively efficient.
C) both productively and allocatively efficient.
D) always going to be profitable.
35) Selling tickets to graduation ceremonies has long been a tradition among students at institutions that
limit the number of guests. Suppose your classmate, Heidi, purchased two tickets for $40 each. Is this
transaction economically efficient?
A) No, people should never be allowed to sell items they received for free.
B) Yes, it was a voluntary exchange that benefited both parties.
C) No, Heidi paid too much for the tickets.
D) Yes, it is efficient only from the perspective of the seller and not from the perspective of the buyer.
36) ________ occurs when economic benefits are distributed fairly.
A) Productive efficiency
B) Allocative efficiency
C) Equality
D) Equity
37) Which of the following is motivated by an equity concern?
A) Some U.S. colleges have cut back on merit scholarships since these programs siphon money from
need-based programs, thus harming lower-income students with greater financial need.
B) Following the removal of subsidies in urban water use, household demand for water decreased quite
significantly in Bogor, Indonesia.
C) In November 2003, the Federal Communications Commission implemented the “local number
portability” rule which gives cell phone customers the option of keeping their number when they switch
carriers within the same geographic region.
D) The United States protects intellectual property rights, allowing inventors to prevent others from
using their inventions without payment.
38) Which of the following is motivated by an efficiency concern?
A) In 2009, the Obama administration increased unemployment benefits.
B) As part of an economic stimulus package, each taxpayer received a $3,000 tax rebate check.
C) Following a six-month drought, a city banned homeowners from watering their lawns in an effort to
conserve water.
D) Some U.S. colleges have cut back on merit scholarships since these programs siphon money from
need-based programs, thus harming lower-income students with greater financial need.
39) Which of the following is not an example of an efficiency-equity trade-off faced by economic agents?
A) According to an article by in the American Journal of Public Health by Edward Kaplan and Michael
Merson of Yale University School of Medicine, the federal government’s current method of allocating
HIV-prevention resources is not cost-effective. Instead of allocating resources to states in proportion to
reported AIDS cases, resources should flow first to those activities that prevent more infections per
dollar and then to less and less effective combinations of programs and populations until funds are
exhausted, even if it means that some populations would be left without any prevention services.
B) Concerned about the falling birth rate, the French government has pledged more money for families
with three children, in an effort to encourage working women to have more babies.
C) The growing demand for corn by ethanol producers has led to a surge in the price of tortillas, a
staple in the Mexican diet. To quell public outcry over rising tortilla prices, the Mexican government
released government corn stocks at prices well below the market, and pressured states to impose price
ceilings on tortillas.
D) Some U.S. colleges cut back on merit scholarships since these programs siphon money from need-
based programs, thus harming lower-income students with greater financial need.
40) There is often a trade-off between
A) productive efficiency and allocative efficiency.
B) limited and unlimited resources.
C) voluntary and involuntary exchanges.
D) economic efficiency and economic equity.
41) The Farm Factory, a booth at the local Farmer’s Market, sells fresh eggs for $1.50 per dozen and fresh
milk for $2.50 per gallon. What is the opportunity cost of buying a dozen eggs?
A) 1 2/3 gallons of milk
B) 3/5 of a gallon of milk
C) $2.50
D) $1.50
42) The Farm Factory, a booth at the local Farmer’s Market, sells fresh eggs for $1.50 per dozen and fresh
milk for $2.50 per gallon. What is the opportunity cost of buying a gallon of milk?
A) 1 2/3 dozen eggs
B) 3/5 of a dozen eggs
C) $2.50
D) $1.50
43) The decision about what goods and services will be produced in a market economy is made by
A) lawmakers in the government voting on what will be produced.
B) workers deciding to produce only what the boss says must be produced.
C) producers deciding what society wants most.
D) consumers and firms choosing which goods and services to buy or produce.
E) consumers dictating to firms what they need most.
44) The decision about what goods and services will be produced in a centrally planned economy is
made by
A) lawmakers in the government deciding on what will be produced.
B) workers deciding to produce only what the boss says must be produced.
C) producers deciding what society wants most.
D) consumers and firms choosing which goods and services to buy or produce.
E) consumers dictating to firms what they need most.
45) How are the fundamental economic decisions determined in Canada?
A) Individuals, firms, and the government interact in a market to make these economic decisions.
B) These decisions are made by the country’s elders who have had much experience in answering these
questions.
C) The government decides because Canada is a centrally planned economy.
D) The United Nations decides because Canada is a developing economy.
46) Which of the following contributed to the downfall of the Soviet Union in 1991?
A) government dissatisfaction with high living standards and political freedom
B) an inability to produce low-cost consumer goods that households wanted
C) an overabundance of high-quality goods and services
D) the lack of a strong dictator who could coordinate economic activities
Article Summary
Recent studies about wealth inequality and income inequality indicate that the American public’s
estimates of the distribution of wealth and income are quite different than actual data suggests.
With respect to wealth, the top 20 percent of households hold more than 84% and the bottom 40
percent hold less than 1%, yet the public’s estimates were 59% and 9%, respectively. In terms of
income inequality, the public estimated that the CEO-to-worker pay-ratio was 30-to-1, whereas data
suggests the actual ratio is 354-to-1, up from 20-to-1 in the 1960s.
President Obama has referred to economic inequality as “the defining challenge of our time,” and
although Americans seem to recognize that income and wealth gaps have widened, only 5 percent
indicate that this inequality is a problem that needs to be addressed.
Source: Nicholas Fitz, “Economic Inequality: It’s Far Worse Than You Think,” Scientific American,
March 31, 2015.
47) Refer to the Article Summary. The article discusses income inequality, and for some people this
means a more equitable distribution of income is needed in the economy. What is meant by a more
equitable distribution of income?
A) a more allocatively efficient distribution of income
B) a more productively efficient distribution of income
C) a more fair distribution of income
D) income distributed based on skill levels
48) Refer to the Article Summary. The article discusses income inequality, and for some people this
means a more equitable distribution of income is needed in the economy. Would an equitable
distribution of income necessarily be the most efficient distribution of income?
A) Yes, equitable and efficient are two different words which have the same definition.
B) Yes, in order for the distribution to be equitable, it must also be efficient.
C) No, it is impossible to have an economically efficient distribution which is also an equitable
distribution.
D) No, an economically efficient distribution of income would not necessarily be equitable.
49) The government makes all economic decisions in a centrally planned economy.
50) When voluntary exchange takes place, only one party gains from the exchange.
51) A college must decide if it wants to offer more evening and weekend classes. This decision involves
answering the economic question of “for whom to produce.”
52) In a centrally planned economy, the government decides how economic resources will be allocated.
53) Consumers make all economic decisions in a mixed economy.
54) When voluntary exchange takes place, neither party usually gains from the exchange.
55) A university must decide if it should stop offering foreign language classes. This decision involves
answering the economic question of “how to produce.”
56) In market economies, income distribution is always going to be completely equitable.
57) Every society faces trade-offs. Explain the concept of trade-offs.
58) Trade-offs force society to make choices when answering what three fundamental questions?
59) What is the difference between economic efficiency and equity?
60) What is a market economy?
61) Define allocative efficiency. Explain the significance of this concept in economics?
1.3 Economic Models
1) Economic models
A) make no assumptions in order to remain as accurate as possible.
B) are simplified versions of reality.
C) can not be used to analyze real-world issues.
D) magnify the complexity of economic issues in order to provide useful data.
2) Which of the following is part of an economic model?
A) assumptions
B) norms
C) opinions
D) preferences of economic agents