The Economic Way of Thinking, 13e (Heyne)
Chapter 4 Cost and Choice: The Concept of Supply
1) The economizing process (choosing from among alternatives to maximize benefits)
A) applies only to consumers.
B) applies only to privately-owned firms.
C) applies only to producers.
D) is the same for producers as it is for consumers.
2) The concept of “opportunity cost” helps us explain the choices of
A) consumers only.
B) producers only.
C) greedy people only.
D) politicians only.
E) any individual.
3) The opportunity cost of an action is
A) everything that makes an action possible.
B) the monetary payments that make an action possible.
C) the sum of the human efforts that contribute to an action.
D) the value of the next-best alternative that must be sacrificed to take the action.
4) The cost of an action is
A) indeterminate from a strictly economic point of view.
B) the value of the next-best alternative opportunity sacrificed
C) the cost to the consumer plus the cost to the producer.
D) the number of consumers needed to set the price.
E) measured only in money.
5) Lisa decided to give up being on the soccer team for piano lessons. Her opportunity cost of
pursuing piano lessons is
A) zero, as long as someone other than Lisa pays for the lessons.
B) zero, as long as someone other than Lisa paid for her soccer fees and equipment.
C) the satisfaction Lisa had enjoyed by being on the soccer team.
D) the satisfaction Lisa enjoys by studying the piano.
E) both A and B above.
6) Ron regularly deposits $200 each week into a savings account, which earns 3% interest per
year. This month he decides instead to invest $200 into the stock market. What is the opportunity
cost of Ron’s decision to invest rather than save?
A) $200
B) The 3% interest he could have earned by depositing another $200 into his savings account
C) The difference between the rate of return he enjoys in the stock market and the 3% interest
return he could have earned by depositing that $200 into his savings account
D) Zero, because Ron already had the $200
7) Which is the most likely reason why more students continue on to graduate school when the
economy is in bad shape and job prospects are poor?
A) They finally see the value of continuing their education.
B) They are pressured by parents to stay in school a few more years.
C) Their opportunity cost of attending college has fallen.
D) They are irrational in this case, as they will have to take on more debt to finance the graduate
degree.
8) Which is the most likely reason why more young people from low-income regions are more
likely to join the military, compared to those in high income regions?
A) They are more easily pressured by recruitment officers.
B) Their opportunity costs are relatively lower.
C) They are more patriotic than their richer counterparts.
D) They are, to put it bluntly, more foolish than their richer counterparts.
9) Suppose a student is attending your college on an athletic scholarship, and doesn’t pay a penny
for tuition. According to the economic way of thinking, the student’s cost of attending college is
A) zero.
B) bore completely by the college’s athletic fund.
C) positive, because the student sacrificed some other opportunity to attend your college.
D) positive, because the student still needs food and housing.
E) negative, because nobody really gains by trying to combine athletics with higher education.
10) It is impossible to figure out the “true” or “final” cost of getting an education at public
schools because
A) no one has an incentive to keep accurate figures.
B) an education at any public school is in most, if not all cases, a free good.
C) an education is necessary.
D) things in themselves have no cost.
11) According to your textbook authors, the belief that economizing implies greedy behavior is
A) common but mistaken.
B) uncommon but true.
C) both common and true.
D) neither common nor true.
12) Pick the true statement from your textbook:
A) Land has a cost.
B) Fruit has a cost.
C) Fertilizer has a cost.
D) Only actions can have costs.
13) Which of the following things does not have an objective cost?
A) Platinum
B) Water
C) Ski lift tickets
D) Medical equipment
E) None of the above has an objective cost.
14) Strictly speaking, which has a cost?
A) A decision
B) A cup
C) A cup of diamonds
D) A gallon of water
E) Checking accounts that charge fees for deposits below $100
15) Strictly speaking, which has a cost?
A) Land
B) Electricity
C) Business inventory
D) Any human action
E) All of the above.
16) Who can determine the true cost of a tin whistle?
A) A good accountant
B) A good economist
C) A good tin whistle collector
D) Nobody
17) Who knows how to measure the true cost of a pint of B-positive blood?
A) An economist
B) A clerk at the blood bank
C) Only the Surgeon General of the United States
D) Any competent medical authority
E) None of the above.
18) Who can determine the true cost of water?
A) Nobody
B) Anybody who puts their mind to it
C) Only the most competent hydrologist
D) A good accountant
19) Objects in and of themselves have no costs. Lunches are an object, so they presumably have
no cost. Yet we often hear economists say, “There is no such thing as a free lunch.” Are
economists being inconsistent?
A) It is impossible to tell.
B) Yes, if the statement implies lunch actually has a cost.
C) No, if the statement implies the decision to offer lunches free of charge entails the sacrifice of
scarce resources, which could have served other useful purposes.
D) Both B and C are true.
20) The demand for goods reflects people’s values
A) and so does the supply of goods.
B) but the supply of goods rests on objective realities rather than values.
C) insofar as they are material values.
D) insofar as they can be satisfied by spending money.
E) insofar as the demand is completely inelastic.
21) The opportunity costs perceived by decision makers determine
A) both demand and supply curves.
B) demand curves.
C) either demand or supply curves, but not both in the same case.
D) supply curves.
22) The opportunity costs of land is largely determined by
A) need.
B) real estate agents.
C) demand.
D) government.
23) The opportunity costs of labor is largely determined by
A) demand.
B) supply.
C) need.
D) greed.
24) The costs affecting decisions to supply goods and services are always
A) average costs.
B) costs not yet incurred.
C) sunk costs.
D) total costs.
E) unavoidable costs.
25) The costs affecting decisions to supply are always
A) accounting costs.
B) marginal costs.
C) past costs.
D) per unit costs.
E) non-taxable costs.
26) The costs affecting decisions to supply always lie in the
A) future.
B) opportunities already forgone.
C) past.
D) present.
E) surplus between demand and supply.
27) The high price of agricultural land is basically
A) the cause of high food prices.
B) the result of high food prices.
C) unrelated to food prices because processing costs dominate food prices.
D) unrelated to food prices because there is no opportunity cost of producing land.
28) According to opportunity-cost theory, if more people learned how to repair their own
automobiles, the wages of automotive mechanics would
A) decline as the highest-cost mechanics left the business.
B) decline, because the marginal quality of the services provided would go down.
C) not change because no change has occurred in demand or supply.
D) rise, because mechanics would have to obtain more per hour to maintain their incomes.
E) rise in order to compensate for the smaller demand.
29) Why are suburban stores more likely than downtown stores to provide free parking for their
customers?
A) Fewer people drive their cars to downtown stores than to suburban stores.
B) Suburban people are more addicted to the automobile than are inner-city residents.
C) The cost of using land is higher in the downtown area.
D) There is not much land available in the downtown area.
30) What effect will an increased demand for housing in the suburbs of a major city have on the
cost of vegetable farming in the suburbs?
A) No effect, since one cannot grow vegetables on land on which housing has been constructed.
B) The cost will decline because only very fertile land will now be used for growing vegetables.
C) The cost will rise because it will become more expensive to grow vegetables.
D) The cost won’t change, because there has been no change in physical conditions.
E) We cannot predict unless we know what has happened to the demand for vegetables.
31) The opportunity cost to a cab driver of taking the day off increases when
A) it rains.
B) more cabs enter the business.
C) the price of gasoline rises.
D) the weather is so pleasant everyone prefers to walk.
E) many other cabs are out on the streets.
32) If land suitable for growing corn is also suitable for growing soybeans, and soybeans were
found to prevent cancer,
A) the demand for corn would decrease.
B) there would be no effect on the cost of growing corn.
C) the supply (curve) of soybeans would increase.
D) the cost of growing corn would rise.
E) the cost of growing corn would fall.
33) Land suitable for growing corn is usually suitable for growing soybeans. From the farmer’s
perspective, an increase in the price of corn will therefore tend to
A) decrease the demand for soybeans.
B) increase the demand for soybeans.
C) increase the supply (curve) of corn.
D) raise the cost of growing soybeans.
E) reduce the cost of growing soybeans.
34) Land used for commercial Christmas trees can also produce pulpwood. Therefore, an
increase in the expected market price of Christmas trees tends to
A) reduce the demand for Christmas trees.
B) increase the supply of Christmas trees.
C) increase the cost of producing pulpwood.
D) decrease the cost of producing pulpwood.
35) A grower of commercial Christmas trees can raise blue spruce and Douglas fir. Therefore, an
increase in the expected market price of Douglas firs tends to
A) reduce the planting of Douglas firs.
B) reduce the planting of blue spruce trees.
C) increase the cost of planting Douglas firs.
D) do none of the above.
36) Land suitable for growing wheat can also be used to farm dairy cattle. Therefore, from the
farmer’s perspective, an increase in the price of wheat tends to
A) reduce the demand for wheat.
B) increase the demand for dairy cattle.
C) decrease the cost of farming dairy cattle.
D) increase the cost of farming dairy cattle.
37) Real estate suitable for condominium development is also suitable for single-family home
development. Therefore, a rise in the price of condominiums relative to single-family homes
tends to
A) increase the opportunity cost of building new single-family homes.
B) reduce the demand for condominiums.
C) increase the demand for condominiums.
D) do none of the above.
38) A fish hatchery raises brook trout and rainbow trout. An increase in the market price of
brook trout therefore tends to
A) reduce the demand for brook trout.
B) increase the hatchery’s cost of raising rainbow trout.
C) increase the demand for brook trout.
D) decrease the hatchery’s cost of raising rainbow trout.
39) A commercial bakery makes white bread and wheat bread. Therefore, a decrease in the
market price of white bread tends to
A) increase the demand for wheat bread.
B) increase the demand for white bread.
C) increase the baker’s cost of making wheat bread.
D) decrease the baker’s cost of making wheat bread.
40) Suppose a record company produces both swing and rhythm & blues music. An increase in
the market demand for swing music therefore tends to
A) increase the demand for rhythm & blues music.
B) increase the cost of producing rhythm & blues music.
C) decrease the cost of producing rhythm & blues music.
D) leave the cost of producing swing music unchanged.
41) Suppose scientists discover that eating soybeans prevents cancer and heart disease. Other
things constant,
A) demand for soybeans will increase and soybean prices will fall.
B) the price of soybeans will increase and demand will fall.
C) demand and prices of soybeans will increase.
D) the quantity demanded of soybeans will change, but demand will remain the same.
42) Suppose eating soybeans leads to less cancer and heart disease. What effect would people
eating more soybeans likely have on feed corn (a product also grown on land used to grow
soybeans)?
A) The supply of feed corn will decrease.
B) The cost of producing feed corn will increase.
C) The price of feed corn will increase.
D) All of the above.
43) The owner of a scenic waterfall is trying to decide whether to rent the site to a manufacturing
firm as an industrial power source or to rent it to a recreational association, which would turn the
site into a park and campground. Which of the following statements is true?
A) An increase in the price of fossil fuels will increase the cost of renting it to the recreation
association.
B) Social welfare is maximized when the owner rents to the higher bidder.
C) The cost to the owner of renting to one or the other depends entirely upon the owner’s
preferences between economic growth and recreational facilities.
D) The owner can choose without regard to cost because the site is a free natural resource.
E) The owner can choose without regard to cost insofar as the waterfall is privately owned.
44) A reduced demand for lawyers’ services to prosecute damage suits
A) lowers the cost of hiring a lawyer to draw up a will.
B) raises the cost of hiring a lawyer to draw up a will.
C) raises the demand for lawyers’ services in drawing up wills.
D) will not affect the cost of hiring a lawyer to draw up a will though it could affect lawyers’
fees.
45) People who run their own businesses
A) can keep their labor costs down by not hiring any employees.
B) have lower labor costs if they dislike working for anyone else than if they don’t mind working
for others.
C) have no labor costs unless the business is incorporated.
D) have the same labor costs as people who hire employees to run their businesses.
46) According to opportunity-cost theory, people will find themselves increasingly “short of
time” when
A) their demand curves become less elastic.
B) their demand curves become more elastic.
C) their income declines.
D) they become wealthier.
E) they lose valuable opportunities.
47) The rules of the National Collegiate Athletic Association (NCAA) limit the amount of
money colleges can offer to athletes to
A) assure balanced competition on collegiate athletic fields.
B) maintain high ethical standards in college sports.
C) preserve the spirit of amateurism in an age of professionalism.
D) prevent competition for star athletes from raising the price of enrolling them.
E) prevent the schools with the most profitable athletic programs from attracting more than their
share of the best athletes.
48) According to opportunity-cost theory, the cost to an airline of letting its employees fly at no
charge
A) depends upon the alternatives available to the employees.
B) is greater around the Christmas holidays.
C) is zero.
D) will depend upon the value employees place upon travel.
49) The price paid by a tenant to rent an apartment most closely reflects the cost to the
A) landlord of constructing (or purchasing), maintaining, and operating the apartment.
B) landlord of not renting to someone else.
C) society of the opportunities thereby forgone.
D) tenant of finding an alternative place to live.
50) Based on opportunity cost, where would one expect to have the most difficulty finding a
teenager to baby-sit?
A) A high-income area with lots of teenagers
B) A low-income area with lots of teenagers
C) A middle-income area with lots of teenagers
D) Any income area because teenagers no longer like babysitting
51) Wealthy people are more likely than poor people to use airplanes rather than busses for
interurban travel because
A) their demand for transportation is more elastic.
B) their demand for transportation is more inelastic.
C) they can better afford to use a higher-cost mode of transportation.
D) they are more likely to ignore the relative costs of busses and airplanes.
E) traveling by airplane usually costs them less than traveling by bus.
52) Someone who wants to rent an urban lot in order to grow vegetables should expect the rental
cost to reflect the
A) expenses incurred in developing the lot.
B) fact that land is a free gift of nature.
C) property taxes paid on the lot.
D) value of the lot to other people who would also like to use it.
53) In a community where poor people do not associate with members of the opposite sex until
they are 21 years old, the cost of hiring a babysitter on weekends will be
A) higher than in other communities.
B) lower than in other communities.
C) prohibitive.
D) zero.
54) Why do multinational corporations typically pay vastly different wage rates for the same
work in different countries?
A) Prospective employees have much better alternative opportunities in some countries than in
others.
B) The cost of living is much lower in some countries than in others.
C) The demand for labor is much more elastic in some countries than in others.
D) Supply and demand determine wage rates in some countries but not in others.
E) Unions exist in some countries but not in others.
55) The high-school dropout rate usually declines in an economic recession because
A) a decline in job opportunities lowers the opportunity cost of remaining in high school.
B) high schools begin to offer more practical and relevant courses.
C) laws are passed to prevent teenagers from entering the labor market.
D) recessions increase the demand for education.
E) tuition and book prices usually fall in a recession.
56) The high-school dropout rate typically declines during a recession because
A) more money flows into the public sector as the flow declines in the private sector.
B) teachers become more readily available during a recession.
C) the opportunity cost of continuing in school falls in a recession.
D) the demand for education rises in a recession.
E) the legal school-leaving age is a function of the unemployment rate.
57) There is only one supermarket in Beverly Hills, California because
A) supermarkets can’t compete effectively against residents in buying land.
B) supermarket owners are paying attention to sunk costs in their location decisions.
C) the demand for food is highly elastic in wealthy neighborhoods.
D) the demand for food is highly inelastic in wealthy neighborhoods.
E) wealthy people rarely do their own grocery shopping.
58) Does an increase in the demand for Introductory Economics increase the cost to students of
taking the course?
A) No, because tuition rates are not set to clear the market.
B) Not if the college refuses to hire additional people to teach the course.
C) Yes, if the course is consequently taught in a larger room, which costs more to heat.
D) Yes, insofar as students have to accept less satisfactory class schedules in order to take the
course.
59) A sunk cost has no effect on supply because it
A) applies to all suppliers.
B) can be passed on to consumers.
C) cannot be avoided by not supplying.
D) cannot be passed on to consumers.
E) did not have to be incurred in order for the good to be supplied.
60) Sunk costs are irrelevant to economic decisions because
A) they are merely opportunity costs rather than monetary expenditures.
B) they cannot affect a firm’s net revenue.
C) they do not appear on financial statements.
D) they represent no opportunity for choice.
61) Suppose you must pay a non-refundable $200 down payment to order a new item. Pick the
true statement below.
A) The $200 represents a marginal cost before you commit to the down payment.
B) The $200 represents a sunk cost after you’ve committed to the down payment.
C) Both A and B are true.
D) Neither A nor B are true.
62) Suppose a university refunds students 75% of their tuition if they drop out before the third
week of class, 50% if they drop out between their third and fifth week, 25% if they drop out
between their sixth and eighth week, and 0% after the eighth week. Flint paid $1,000 tuition, and
is in his second week of class. What’s his sunk cost?
A) $0
B) $250
C) $500
D) $750
E) $1,000
63) Suppose a university refunds students 75% of their tuition if they drop out before the third
week of class, 50% if they drop out between their third and fifth week, 25% if they drop out
between their sixth and eighth week, and 0% after the eighth week. Flint paid $1,000 tuition, and
is in his fourth week of class. What’s his sunk cost?
A) $0
B) $250
C) $500
D) $750
E) $1,000
64) Suppose a university refunds students 75% of their tuition if they drop out before the third
week of class, 50% if they drop out between their third and fifth week, 25% if they drop out
between their sixth and eighth week, and 0% after the eighth week. Flint paid $1,000 tuition, and
is in his seventh week of class. What’s his sunk cost?
A) $0
B) $250
C) $500
D) $750
E) $1,000
65) Suppose a university refunds students 75% of their tuition if they drop out before the third
week of class, 50% if they drop out between their third and fifth week, 25% if they drop out
between their sixth and eighth week, and 0% after the eighth week. Flint paid $1,000 tuition, and
is in his eleventh week of class. What’s his sunk cost?
A) $0
B) $250
C) $500
D) $750
E) $1,000
66) Suppose a new textbook sells for $100 at the college bookstore. The bookstore will buy it
back at the end of the semester for $35, and sell then it used to somebody else for $75. Christina
agrees to the deal, and pays $100. Once she buys the book, her sunk cost is
A) $25.
B) $35.
C) $40
D) $65
E) $100.
67) Exactly what is a “sunk cost”?
A) A decision somebody regrets having made
B) A mistaken choice
C) Unrecoverable costs
D) A cost that haunts you for the rest of your life
68) Laura purchased a brand new Pontiac for $20,000. The moment she assumed ownership, and
drove it off the lot, its market value immediately fell to $17,500. Is the $2,500 difference in value
a sunk cost?
A) No.
B) Yes it is, but only if Laura regrets her decision to have purchased the new Pontiac.
C) Yes it is, but only if Laura receives no compensating benefit from the new Pontiac.
D) Yes it is, but only if Laura decided to immediately resell the car.
E) Yes it is, period.
69) You and your roommate go to a Sunday brunch at the local restaurant. All you can eat for
$4.95. You enjoyed your meal. Your roommate didn’t care for it at all. Each of you paid your bill
in full. Who incurred a sunk cost?
A) Both you and your roommate
B) Only you
C) Only your roommate
D) Neither of you
70) Consider the following situation. Tuition at State University is $10,000 per year. Each of the
students listed below paid their own tuition bills. Who among them incurred the greatest sunk
cost?
A) The student who received a two-year associate’s degree
B) The student who took five years to complete the bachelor’s degree
C) The student who took ten years to complete the bachelor’s, master’s, and Ph.D. degrees
D) The student who dropped out during their first semester
E) The student who dropped out after their third year
71) Mrs. Wallace and Mrs. Jackson both signed up for 6 months (each incurred a $200 total
payment required in advance, and nonrefundable) at the local workout club. Wallace enjoyed all
6 months. Jackson dropped out after three months due to other unexpected commitments. Which
of the following is true?
A) Wallace’s sunk cost was zero.
B) Jackson’s sunk cost was $100.
C) Jackson’s sunk cost was $200, and so was Wallace’s.
D) Wallace’s sunk cost was $100.
E) None of the above.
72) Maxine and Deborah both got hair extensions, costing each of them $300. Maxine’s hair was
done perfectly. She enjoyed the new look. The job on Deborah’s hair was all botched up. The
hairdresser apologized for her mistake, took the extensions out, and refunded all of Deborah’s
money. Which of the following, in dollar terms, is true?
A) Deborah did not incur a sunk cost.
B) Maxine did not incur a sunk cost.
C) Both Maxine and Deborah each incurred a $300 sunk cost.
D) Only the hairdresser incurred a sunk cost.
73) When a business fails to cover sunk costs, it usually
A) declares a stock split.
B) declares bankruptcy.
C) does not immediately stop operating.
D) stops operating until sunk costs are recovered.
74) If business firms do not have to generate revenues sufficient to cover their sunk costs, does
anyone have to pay for mistaken decisions?
A) No, because sunk costs are irrelevant.
B) No, because the past cannot be undone.
C) Only if they value their integrity or credit standing.
D) The entire economy ends up paying.
E) Yes. The people who committed resources to mistaken decisions pay the costs.
75) If a business firm operates indefinitely without covering any of its sunk costs, what happens
to the firm’s sunk costs?
A) Nothing happens to them; they have ceased to exist.
B) They are distributed across the whole economy.
C) They continue unpaid for as long as the firm fails to make a profit large enough to cover
them.
D) They reduce the wealth of the investors who risked their wealth to make mistaken decisions
possible.
76) Past expenses are irrelevant to supply decisions, because
A) expenses incurred in the past never affect the opportunities available in the present.
B) it is essential to avoid bankruptcy.
C) no one remembers the past.
D) supply decisions depend on opportunities that will have to be forgone, not opportunities
already forgone.
77) Who ends up paying when sunk costs are incurred as a result of erroneous forecasting?
A) No one pays them because they are sunk.
B) The consumer, because they eventually show up as higher prices.
C) The government, since they fall evenly on the entire community.
D) The taxpayer, because they produce a decline in assessed valuations.
E) Whoever invested in the unsuccessful project.
78) Economic theory assumes people make decisions by weighing additions to cost against
additions to benefit, which can best be described as
A) additivism.
B) capitalism.
C) marginalism.
D) opportunism.
E) rationalism.
79) Economic theory is sometimes referred to as marginalism or marginal analysis because
A) it deals with matters not central to most people’s personal lives.
B) it emphasizes the effects of additional benefits and additional costs.
C) it has such a minor effect on political decisions.
D) it is only useful when it is added to a large stock of other knowledge.
E) it was created by abstracting from experience.
80) Marginal costs are the costs relevant to a decision because they
A) are the costs that will be affected by the decision.
B) the cost of producing one more unit of output.
C) total cost divided by units of output.
D) total cost minus sunk costs.
81) Opportunity costs are
A) always marginal costs.
B) never marginal costs.
C) not related to marginal costs.
D) sometimes marginal costs.
E) sunk costs.
82) In a centrally planned economy, the concept of marginal cost
A) is important if planners want to achieve their objectives at the lowest possible cost.
B) is irrelevant because resources can be obtained by government decree.
C) is irrelevant because socialist firms do not have to earn profits.
D) is irrelevant if industries can be subsidized.