Principals of Economics (Q&A) Part 2

Ten Principles of Economics 11 b. determines Ashley’s marginal cost of the first and second bananas. c. does not depend on how many bananas Ashley has already eaten. d. cannot be determined unless we know how much she paid for the bananas. 54. After much consideration, you have chosen Cancun over Ft. Lauderdale as your Spring Break destination this year. However, Spring Break is still months away, and you may reverse this decision. Which of the following events would prompt you to reverse this decision? a. The marginal benefit of going to Cancun increases. b. The marginal cost of going to Cancun decreases. c. The marginal benefit of going to Ft. Lauderdale decreases. d. The marginal cost of going to Ft. Lauderdale decreases. 55. A barber currently cuts hair for 50 clients per week and earns a profit. He is considering expanding his operation in order to serve more clients. Should he expand? a. Yes, because cutting hair is profitable. b. No, because he may not be able to sell more services. c. It depends on the marginal cost of serving more clients and the marginal revenue he will earn from serving more clients. d. It depends on the average cost of serving more clients and the average revenue he will earn from serving more clients. 56. The Get-There-Safe Bus company incurs an average cost of $45 for each passenger it carries on its trip from Atlanta to Chattanooga. In advance of a particular trip, four seats remain unsold. The bus company could increase its profit only if it a. charged any ticket price above $0 for the four remaining seats. b. charged at least $11.25 for each of the four remaining seats. c. charged at least $45 for each of the four remaining seats. d. paid four people to occupy the four remaining seats. 57. Suppose the cost of flying a 200-seat plane for an airline is $100,000 and there are 10 empty seats on a flight. If the marginal cost of flying a passenger is $200 and a standby passenger is willing to pay $300, the airline should a. sell the ticket because the marginal benefit exceeds the marginal cost. b. sell the ticket because the marginal benefit exceeds the average cost. c. not sell the ticket because the marginal benefit is less than the marginal cost. d. not sell the ticket because the marginal benefit is less than the average cost. 58. Suppose the cost of flying a 100-seat plane for an airline is $50,000 and there are 10 empty seats on a flight. The marginal cost of flying a passenger is a. $50. b. $500. c. $50,000. d. This cannot be determined from the information given. 59. Stephen is restoring a car and has already spent $4,000 on the restoration. He expects to be able to sell the car for $5,800. Stephen discovers that he needs to do an additional $2,400 of work to make the car worth $5,800 to potential buyers. He could also sell the car now, without completing the additional work, for $3,800. What should he do? a. He should sell the car now for $3,800. 12 Ten Principles of Economics b. He should keep the car since it wouldn’t be rational to spend $6,400 restoring a car and then sell it for only $5,800. c. He should complete the additional work and sell the car for $5,800. d. It does not matter which action he takes since the outcome will be the same either way. 60. Cole is refinishing an antique china cabinet and has already spent $180 on the restoration. He expects to be able to sell the cabinet for $360. Cole discovers that he needs to do an additional $200 worth of work to make the cabinet worth $360 to potential buyers. He could also sell the cabinet now, without completing the additional work, for $100. What should Cole do? a. He should sell the cabinet now for $100. b. He should keep the cabinet since it wouldn’t be rational to spend $380 restoring a cabinet and then sell it for only $360. c. He should complete the additional work and sell the cabinet for $360. d. It does not matter which action he takes since the outcome will be the same either way. 61. Bridget drinks three sodas during a particular day. The marginal benefit she enjoys from drinking the third soda a. can be thought of as the total benefit Bridget enjoys by drinking three sodas minus the total benefit she would have enjoyed by drinking just two sodas. b. determines Bridget’s willingness to pay for the third soda. c. is likely different from the marginal benefit provided to Bridget by the second soda. d. All of the above are correct. 62. A construction company has built 30 houses so far this year at a total cost to the company of $7.5 million. If the company builds a 31st house, its total cost will increase to $7.76 million. Which of the following statements is correct? a. For the first 30 houses, the average cost per house was $250,000. b. The marginal cost of the 31st house, if it is built, will be $260,000. c. If the company can experience a marginal benefit of $275,000 by building the 31st house, then the company should build it. d. All of the above are correct. 63. Suppose the cost of operating a 100 room hotel for a night is $10,000 and there are 5 empty rooms for tonight. If the marginal cost of operating one room for one night is $30 and a customer is willing to pay $60 for the night, the hotel manager should a. rent the room because the marginal benefit exceeds the marginal cost. b. rent the room because the marginal benefit exceeds the average cost. c. not rent the room because the marginal benefit is less than the marginal cost. d. not rent the room because the marginal benefit is less than the average cost. 64. Suppose the cost of operating a 75 room hotel for a night is $6,000 and there are 5 empty rooms for tonight. The marginal cost per room per night a. is $40. b. is $80. c. is $120. d. cannot be determined from the information given. 65. Betty’s Bakery bakes fresh bread every morning. Any bread not sold by the end of the day is thrown away. A loaf of bread costs Betty $2.00 to produce, and she prices loaves of bread at Ten Principles of Economics 13 $3.50 per loaf. Suppose near the end of one day Betty still has 12 loaves of bread on hand. Which of the following is correct? a. Betty should only sell the remaining bread for $3.50 per loaf since that is the regular price. b. Betty should only sell the remaining bread for $2.00 per loaf or more since that is what the bread costs to make. c. Betty should be willing to sell the remaining bread for any price above $0 per loaf since she will have to throw it away if she does not sell it for something. d. Betty should just throw the bread away and change the price of her bread starting tomorrow to make sure she sells all of her bread each day. 66. A bagel shop sells fresh baked bagels from 5 a.m. until 7 p.m. every day. The shop does not sell day-old bagels, so all unsold bagels are thrown away at 7 p.m. each day. The cost of making and selling a dozen bagels is $1.00; there are no costs associated with throwing bagels away. If the manager has 8 dozen bagels left at 6:30 p.m. on a particular day, which of the following alternatives is most attractive? a. Lower the price of the remaining bagels, even if the price falls below $1.00 per dozen. b. Lower the price of the remaining bagels, but under no circumstances should the price fall below $1.00 per dozen. c. Throw the bagels away and produce 8 fewer dozen bagels tomorrow. d. Starting tomorrow, lower the price on all bagels so they will all be sold earlier in the day. 67. You are considering staying in college another semester so that you can complete a major in economics. In deciding 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. 68. 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 69. Olivia was accepted by Northwestern and by another university. She is trying to decide where to go. Which of the following should influence her decision? a. how much she spent applying to Northwestern, and the difference between living expenses at Northwestern and the other university b. how much she spent applying to Northwestern, but not the difference between living expenses at Northwestern and the other university c. the difference between living expenses at Northwestern and her second choice, but not how much she spent applying to Northwestern d. neither how much she spent applying to Northwestern nor the difference between living expenses at Northwestern and her second choice 70. You go to the movieplex where movies ordinarily cost $9. 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 14 Ten Principles of Economics 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 release 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 + $9 c. $3 d. $9 71. 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. 72. 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. 73. Something that induces a person to act is called a. a trade-off. b. a policy. c. an incentive. d. an opportunity cost. 74. A tax on gasoline encourages people to drive smaller, more fuel-efficient cars. Which principle of economics does this illustrate? 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. 75. 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. 76. 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. Ten Principles of Economics 15 77. 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. 78. 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. 79. 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 80. 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. 81. 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 82. 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. 83. 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. Multiple Choice – Section 02: 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. 16 Ten Principles of Economics 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. Trade between the United States and Guatemala a. benefits both the United States and Guatemala. b. is a losing proposition for the United States because Guatemalan labor is less expensive than U.S. labor. c. is a losing proposition for Guatemala because capital is much more abundant in the U.S. than in Guatemala. d. is a losing proposition for Guatemala because U.S. workers are more productive than Guatemalan workers. 4. Dee is an accomplished actress and a homeowner who pays a landscaper to maintain her lawn rather than do it herself. Dee has determined that she can earn more in the hour it would take her to work on her lawn than she must pay her 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 prints too much money. 5. 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. 6. 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 7. 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. Ten Principles of Economics 17 8. 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. 9. 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. 10. 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. 11. 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. 12. 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. 13. 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. 14. The collapse of communism in the Soviet Union and Eastern Europe took place mainly in the a. 1960s. b. 1970s. c. 1980s. d. 1990s. 18 Ten Principles of Economics 15. 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. 16. 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. 17. The failure of communism in a large number of countries is at least partly explained by a. the fact that those countries relied absolutely on the invisible hand. b. the fact that those countries did little or nothing to restrict trade with other countries. c. the lack of information, on the part of central planners in those countries, about tastes and preferences in their economies. d. the lack of information, on the part of central planners in those countries, about how much authority the government had in affecting economic outcomes. 18. 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. 19. 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. 20. 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. 21. 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 Ten Principles of Economics 19 b. Thorstein Veblen c. John Maynard Keynes d. Adam Smith 22. 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. 23. The "invisible hand" directs economic activity through a. advertising. b. prices. c. central planning. d. government regulations. 24. 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. 25. 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." 26. The “invisible hand” works to promote general wellbeing in the economy primarily through a. government intervention. b. the political process. c. people’s pursuit of selfinterest. d. altruism. 27. 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. 28. 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. 20 Ten Principles of Economics d. more need for a strong legal system to control individual greed than would be needed in a centrally-planned economy. 29. 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 30. 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. 31. 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 wellbeing 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. 32. Which of the following statements about market economies is correct? a. In a market economy, no one is looking out for the economic well-being of society as a whole. b. Market economies are characterized by decentralized decision making and self-interested decision makers. c. Market economies have proven remarkably successful in promoting overall economic wellbeing. d. All of the above are correct. 33. For markets to work well, there must be a. market power. b. a central planner. c. property rights. d. abundant, not scarce, resources. 34. 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. 35. 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.