Chapter 1 Thinking Like an Economist

MULTIPLE CHOICE

	1.	In economics, choices are necessary because of the presence of:
a.	luxuries.	d.	scarcity.	
b.	inefficiency.	e.	incentives.	
c.	needs.	

ANS:	D	DIF:	Easy	REF:	What Is Economics?	
TOP:	I.	MSC:	Remembering		

	2.	Economics is the study of:
a.	how to make money.	
b.	how to allocate resources to satisfy wants and needs.	
c.	capitalism.	
d.	how to make workers more productive and firms more profitable.	
e.	markets.	

ANS:	B	DIF:	Easy	REF:	What Is Economics?	
TOP:	I.	MSC:	Remembering		

	3.	The need to study economics would cease to exist if:
a.	the government stopped controlling people’s actions.	
b.	people were free to make decisions on their own.	
c.	people put forth the effort required to attain the goods and services they wanted.	
d.	people earned more than they spent.	
e.	there were enough resources to produce all the goods and services people would like to obtain.	

ANS:	E	DIF:	Easy	REF:	What Is Economics?	
TOP:	I.	MSC:	Understanding		

	4.	Thomas Malthus’s prediction of mass starvation failed to come true because of increases in:
a.	population.	d.	government involvement.	
b.	productivity.	e.	income.	
c.	temperature.	

ANS:	B	DIF:	Moderate	REF:	What Is Economics?	
TOP:	I.	MSC:	Remembering		

	5.	The basic goal of economics is:
a.	controlling the effects of government actions.	
b.	determining how to distribute all that is produced in an economy.	
c.	addressing the scarcity problem created because the population’s desire for goods exceeds the ability to produce them.	
d.	matching limited resources to people’s limited wants and needs.	
e.	controlling tastes and wishes so that there will be enough resources to produce all the goods and services that people want.	

ANS:	C	DIF:	Moderate	REF:	What Is Economics?	
TOP:	I.	MSC:	Remembering		

	6.	As a discipline, economics is best described by which of the following?
a.	the study of how to control the effects of government actions	
b.	the study of how to control the preferences of consumers so that there will be enough resources to produce all the goods and services that consumers want	
c.	the study of how to use scarce resources to satisfy unlimited wants and needs	
d.	the study of how to dispose of excess goods and services that nobody wants	
e.	the study of how to maximize profits for firms	

ANS:	C	DIF:	Moderate	REF:	What Is Economics?	
TOP:	I.	MSC:	Understanding		

	7.	When a parent tells you not to study economics because it is a pointless discipline, why is he or she INCORRECT?
a.	The government continues to play a role in our daily lives.	
b.	People have the freedom to do whatever they want, and economists have nothing to add to their decision-making process.	
c.	There are not enough resources to produce all the goods and services that are wanted and needed.	
d.	Economics has nothing to offer in terms of understanding the stock market.	
e.	Economics has nothing to offer in terms of understanding government programs like Social Security.	

ANS:	C	DIF:	Moderate	REF:	What Is Economics?	
TOP:	I.	MSC:	Understanding		

	8.	When consumers discard their gasoline-powered automobiles for electric-powered ones, this partially reflects the ________ of gasoline.
a.	scarcity	d.	specialization	
b.	luxury	e.	incentive	
c.	necessity	

ANS:	A	DIF:	Moderate	REF:	What Is Economics?	
TOP:	I.	MSC:	Applying

	9.	Because of scarcity:
a.	individuals and societies are allowed no choice about which wants and needs to satisfy.	
b.	individuals and societies must choose which wants and needs to satisfy.	
c.	all choices about wants and using resources must be made by the government.	
d.	choices can be made about which wants to satisfy, but not about which resources to use.	
e.	choices must be made about which resources to use, but not about which wants to satisfy.	

ANS:	B	DIF:	Moderate	REF:	What Is Economics?	
TOP:	I.	MSC:	Understanding		

	10.	What is the strongest argument for why we need more economists today than ever before?
a.	We have a need for more wealth given the higher standard of living that individuals demand.	
b.	Economists are needed to address the allocation of scarce resources as a result of the world’s growing population.	
c.	Economists are needed to make sure that firms continue to make profits.	
d.	Economists are needed to make sure that consumers are well informed about their possible purchase options and that they budget their finances appropriately.	
e.	Economists are needed to make sure that the government does not involve itself too much in the economy.	

ANS:	B	DIF:	Moderate	REF:	What Is Economics?	
TOP:	I.	MSC:	Evaluating

	11.	Macroeconomics is the study of:
a.	the economic motives of voters and elected officials.	
b.	individual decision-making units such as households and businesses.	
c.	how government purchases affect specific markets.	
d.	the operation of the economy as a whole.	
e.	the interaction between the government and businesses.	

ANS:	D	DIF:	Easy	REF:	Microeconomics and Macroeconomics
TOP:	I.A.	MSC:	Remembering		

	12.	Which of the following is a macroeconomic question?
a.	How many textbooks should be published by a publisher?	
b.	How much should English majors earn after college?	
c.	How do members of a household decide whether to clean their own house or hire someone else to do it?	
d.	What is the rate of unemployment?	
e.	What is the price of a new 40-inch television?	

ANS:	D	DIF:	Easy	REF:	Microeconomics and Macroeconomics
TOP:	I.A.	MSC:	Applying

	13.	Microeconomics is the study of:
a.	how government activities affect the economy.	
b.	individual decision-making units.	
c.	collective decision-making.	
d.	the operation of the economy as a whole.	
e.	the interaction between the government and businesses.	

ANS:	B	DIF:	Easy	REF:	Microeconomics and Macroeconomics
TOP:	I.A.	MSC:	Remembering		

	14.	Microeconomics is the branch of economics that focuses on the:
a.	entire economy.	
b.	production side of the economy.	
c.	consumption side of the economy.	
d.	involvement of the government in the entire economy.	
e.	choices and decision-making of individuals and firms.	

ANS:	E	DIF:	Easy	REF:	Microeconomics and Macroeconomics
TOP:	I.A.	MSC:	Remembering		

	15.	Which of the following is a microeconomic question?
a.	What are the total production levels in the economy?	
b.	How can we best encourage economic growth?	
c.	What is the overall price level in the economy?	
d.	What are the variables that determine the price of a specific good?	
e.	How can we reduce the unemployment rate among Hispanic men?	

ANS:	D	DIF:	Easy	REF:	Microeconomics and Macroeconomics
TOP:	I.A.	MSC:	Applying

	16.	Which of the following statements best represents the fact that I cannot put in extra hours of work because of scarcity?
a.	I do not have enough time for additional work because I need to spend time with my family and there are only so many hours in the day.	
b.	I do not like going to work, so why would I work more than I have to?	
c.	I do not think that overtime pay is high enough.	
d.	I am worried that if I work extra hours, I will get bored with my job.	
e.	I do not want my coworkers to feel pressure to work more because I am working additional hours.	

ANS:	A	DIF:	Easy	REF:	What Are Four Ways to Think Like an Economist?
TOP:	II.	MSC:	Applying

	17.	An economist is an individual who would be LEAST able to answer which research question?
a.	how much of a product is purchased at a specific price	
b.	how the tastes and preferences of consumers are determined	
c.	what firms decide to produce	
d.	how goods and services are distributed to the population	
e.	how firms decide to produce a good or service	

ANS:	B	DIF:	Moderate	REF:	What Are Four Ways to Think Like an Economist?
TOP:	II.	MSC:	Understanding		

	18.	As a new firm in the apple-picking business, you have considered adding an economist to your management team. With what would this economist be UNABLE to help your managerial team?
a.	determining the lowest-cost way of picking apples	
b.	determining how many apples consumers will purchase at different prices	
c.	determining why people eat apples	
d.	determining the effect government regulations would have on the price of apples	
e.	determining the lowest-cost way of distributing apples	

ANS:	C	DIF:	Moderate	REF:	What Are Four Ways to Think Like an Economist?
TOP:	II.	MSC:	Applying

	19.	Which scenario describes studying for an economics course WITHOUT applying the scarcity principle?
a.	I study two hours for every one hour I am in the classroom.	
b.	I study three afternoons a week until I understand the material or until dinner, whichever comes first.	
c.	I study with my roommate, who is also taking the course, and we discuss economic concepts during any free time we can find.	
d.	I study for this course and do nothing else.	
e.	I talk to an economist whenever I have a chance to do so.	

ANS:	D	DIF:	Moderate	REF:	What Are Four Ways to Think Like an Economist?
TOP:	II.	MSC:	Applying

	20.	The cost of a trade-off is known as the ________ cost of that decision.
a.	marginal	d.	comparative	
b.	net	e.	explicit	
c.	opportunity	

ANS:	C	DIF:	Easy	REF:	All Choices Entail Opportunity Costs
TOP:	II.A.	MSC:	Remembering		

	21.	Opportunity cost is the ________ alternative forfeited when a choice is made.
a.	least-valued	d.	most convenient	
b.	highest-valued	e.	first	
c.	most recently considered	

ANS:	B	DIF:	Easy	REF:	All Choices Entail Opportunity Costs
TOP:	II.A.	MSC:	Remembering		

	22.	An opportunity cost is the:
a.	lowest possible cost.	
b.	highest possible cost.	
c.	monetary price paid for a good or service.	
d.	cost of a purchase or decision as measured by what is given up.	
e.	cost of finding the lowest price for a product.	

ANS:	D	DIF:	Easy	REF:	All Choices Entail Opportunity Costs
TOP:	II.A.	MSC:	Remembering		

	23.	The opportunity cost of a purchase is:
a.	zero if the item is what you want most.	
b.	always equal to the selling price of what you purchased.	
c.	always greater for people who are out of work than for people who are working.	
d.	the alternative good or service that one sacrifices because a different good was purchased.	
e.	the lowest possible price.	

ANS:	D	DIF:	Easy	REF:	All Choices Entail Opportunity Costs
TOP:	II.A.	MSC:	Remembering		

	24.	An opportunity cost:
a.	can be measured only when the decision involves expenditures of money.	
b.	can be measured only when the decision involves spending time on one thing and not on another.	
c.	is impossible to measure.	
d.	is equal to the value of what is given up to make a purchase or take an action.	
e.	exists for every decision made by individuals and businesses, but not by the government.	

ANS:	D	DIF:	Easy	REF:	All Choices Entail Opportunity Costs
TOP:	II.A.	MSC:	Understanding		

	25.	A good is ________ even if it takes a small amount of time, energy, or money to acquire.
a.	abundant	d.	scarce	
b.	in shortage	e.	virtually free	
c.	cheap	

ANS:	D	DIF:	Moderate	REF:	All Choices Entail Opportunity Costs
TOP:	II.A.	MSC:	Understanding		

	26.	Economics is concerned with the trade-offs that emerge because of scarcity. The term “trade-offs” refers to:
a.	the decision about whether households or businesses should bear the entire burden of the scarcity problem.	
b.	the buying and selling that occur as unwanted goods are exchanged for goods that are desired.	
c.	the alternatives given up when making choices.	
d.	recycling and transforming old goods into new goods to reduce scarcity problems.	
e.	forcing businesses to produce some goods and services and not others.	

ANS:	C	DIF:	Moderate	REF:	All Choices Entail Opportunity Costs
TOP:	II.A.	MSC:	Understanding		

	27.	What is the opportunity cost of taking this exam?
a.	all of the things that you could have done by not studying	
b.	each of the questions that you miss on the exam	
c.	the highest-valued alternative that you gave up to prepare for and attend the exam	
d.	the money you spent purchasing the textbook and the other materials with which you study	
e.	the money you spent on tuition	

ANS:	C	DIF:	Moderate	REF:	All Choices Entail Opportunity Costs
TOP:	II.A.	MSC:	Applying

	28.	The trade-offs that are made because of scarcity:
a.	are important in developing economies, but they do not apply to developed economies.	
b.	are important in developed economies, but they do not apply to developing economies.	
c.	are different when they involve the wants of people, but they are similar when they involve the needs of people.	
d.	can be accurately made to the extent that they can be quantified.	
e.	depend on the decision-maker’s value judgments about the relative importance of the alternatives.	

ANS:	E	DIF:	Moderate	REF:	All Choices Entail Opportunity Costs
TOP:	II.A.	MSC:	Understanding		

	29.	How are changes in opportunity cost related to decision-making behavior?
a.	The lower the opportunity cost of doing an activity X, the more likely activity X will be done.	
b.	The higher the opportunity cost of doing activity X, the more likely activity X will be done.	
c.	Changes in the opportunity cost play no role in decision-making.	
d.	The lower the opportunity cost of doing activity Y, the more likely activity X will be done.	
e.	The higher the opportunity cost of doing activity Y, the less likely activity X will be done.	

ANS:	A	DIF:	Moderate	REF:	All Choices Entail Opportunity Costs
TOP:	II.A.	MSC:	Understanding		

	30.	I asked my neighbor to rake the leaves on his lawn because they were blowing into my yard. He responded that it would not be rational for him to do so. Why would this be the case?
a.	My neighbor lacks the equipment to rake leaves and thinks it would take too long to do the job.	
b.	My neighbor is a busy person and does not have time to rake leaves.	
c.	My neighbor is getting revenge on me because I did not rake the leaves on my lawn last year.	
d.	My neighbor is a lawyer who values his time at $200 an hour and knows that he can hire a high school kid to rake leaves for $20 an hour.	
e.	My neighbor is a high school teacher and values his time at $15 an hour, and he knows that he can hire one of his students to rake leaves for $20 an hour.	

ANS:	D	DIF:	Moderate	REF:	All Choices Entail Opportunity Costs
TOP:	II.A.	MSC:	Applying

	31.	Instead of taking an economics course, you could have taken a history course that meets at the exact same time. The total cost of taking the economics course would be the:
a.	tuition cost for the economics course.	
b.	fact that you could not take the history course at the same time.	
c.	tuition cost for the economics course plus the price of the textbook and a notebook for the economics course.	
d.	tuition cost, the cost of the textbook and notebook, and the fact that you could not take the history course at the same time.	
e.	price of the textbook and a notebook for the economics course.	

ANS:	D	DIF:	Moderate	REF:	All Choices Entail Opportunity Costs
TOP:	II.A.	MSC:	Applying

	32.	The opportunity cost for Elijah of going to a water park is:
a.	the price of the admission pass.	
b.	zero, if he can go with his parents who will pay.	
c.	zero, if it is raining that day and the water park is closed.	
d.	the price of the admission pass plus the highest-valued alternative activity Elijah could have done instead.	
e.	the highest-valued alternative activity Elijah could have done instead.	

ANS:	E	DIF:	Moderate	REF:	All Choices Entail Opportunity Costs
TOP:	II.A.	MSC:	Applying

	33.	Why would economists find it surprising if the CEO of a large company does his or her own housework?
a.	The opportunity cost of a CEO’s time is quite high because he or she has an abundance of time to spend on housework.	
b.	The opportunity cost of a CEO’s time is quite low because he or she has a scarcity of time to spend on housework.	
c.	The opportunity cost of a CEO’s time is quite low because he or she has an abundance of time to spend on housework.	
d.	The opportunity cost of a CEO’s time is quite high because he or she has a scarcity of time to spend on housework.	
e.	The opportunity cost of a CEO’s time is equal to that of everyone else that works at the same company.	

ANS:	D	DIF:	Moderate	REF:	All Choices Entail Opportunity Costs
TOP:	II.A.	MSC:	Applying

	34.	The opportunity cost of going to school rather than working is the cost of:
a.	food.	d.	health care.	
b.	housing.	e.	potential wages.	
c.	clothing.	

ANS:	E	DIF:	Moderate	REF:	All Choices Entail Opportunity Costs
TOP:	II.A.	MSC:	Applying

	35.	The opportunity cost of working rather than going to school is:
a.	the cost of food and housing.	
b.	the cost of clothing and transportation.	
c.	zero because the person is earning an income by working.	
d.	the higher wages that come with additional education.	
e.	the annual wages earned by working.	

ANS:	D	DIF:	Moderate	REF:	All Choices Entail Opportunity Costs
TOP:	II.A.	MSC:	Applying

	36.	When you chose a major, you likely thought about your skills. Let’s say you do not enjoy dealing with numbers. How could you explain to your parents, using logic from economics, why you chose to major in English instead of mathematics?
a.	The opportunity cost of learning mathematics is too high.	
b.	The opportunity cost of learning to appreciate literature is too high.	
c.	The expected value of a major in English after graduation is low.	
d.	The expected value of a major in mathematics after graduation is high.	
e.	The opportunity cost of going to college is too low.	

ANS:	A	DIF:	Moderate	REF:	All Choices Entail Opportunity Costs
TOP:	II.A.	MSC:	Applying

	37.	Restaurants, bars, and convenience stores are often located near college campuses. These businesses frequently charge higher-than-normal prices. They are taking advantage of the fact that students:
a.	are able to pay higher prices than the rest of the population, so the businesses can charge higher prices than they otherwise would have been able to charge.	
b.	are unable to pay higher prices than the rest of the population, but they are able to succeed because they can sell to a large number of people.	
c.	place a high value on their scarce time and are willing to pay higher prices than they would at locations farther from campus.	
d.	place a low value on their scarce time and are willing to pay higher prices than they would at locations farther from campus.	
e.	place a high value on their scarce time and are unwilling to pay higher prices, but because students are spending their parents’ money, they buy from businesses closer to campus anyway.	

ANS:	C	DIF:	Moderate	REF:	All Choices Entail Opportunity Costs
TOP:	II.A.	MSC:	Applying

	38.	The government has been considering doing away with minting pennies because they are rarely used for purchases (with most people collecting them or throwing them away). How would an economist best explain this?
a.	More people are using credit and debit cards, so they are not in the habit of using monetary change.	
b.	Prices have increased over time, and it would take far too many pennies to buy anything of value.	
c.	Prices have increased over time, and the opportunity cost of carrying around large quantities of pennies has become too large.	
d.	Prices have increased over time, and the opportunity cost of carrying around pennies has fallen.	
e.	People who use pennies probably are not spending enough money; removing the penny will force people to spend more.	

ANS:	C	DIF:	Moderate	REF:	All Choices Entail Opportunity Costs
TOP:	II.A.	MSC:	Applying

	39.	The government has been trying to mint dollar coins instead of printing paper dollar bills, but people have been reluctant to use coins instead of paper bills. How would an economist explain this reluctance?
a.	More people are using credit and debit cards, so people are not accustomed to using change.	
b.	Retailers find it too expensive to deal with coins and would have to raise their prices if consumers used coins more.	
c.	The opportunity cost of carrying around large quantities of coins is too large.	
d.	Prices have increased over time, and the opportunity cost of carrying around a large number of coins would be low.	
e.	People who receive a dollar coin are more likely to collect than spend the money, and the economy will not grow as quickly because less is being spent.	

ANS:	C	DIF:	Moderate	REF:	All Choices Entail Opportunity Costs
TOP:	II.A.	MSC:	Applying

	40.	According to economists, one reason few professional athletes have PhD’s is that the:
a.	opportunity cost of going to graduate school is too high.	
b.	marginal benefit of going to graduate school is too high.	
c.	marginal cost of going to graduate school is too high.	
d.	comparative cost of going to graduate school is too high.	
e.	explicit cost of going to graduate school would be too high.	

ANS:	A	DIF:	Moderate	REF:	All Choices Entail Opportunity Costs
TOP:	II.A.	MSC:	Evaluating

	41.	Rational decision-making under conditions of scarcity requires individuals to:
a.	place a monetary value on everything.	
b.	know the prices of all goods they might buy.	
c.	be alert to price reductions on desired products.	
d.	understand that trade-offs are necessary.	
e.	earn as much income as possible.	

ANS:	D	DIF:	Difficult	REF:	All Choices Entail Opportunity Costs
TOP:	II.A.	MSC:	Remembering		

	42.	Kelly is an architect, and she is trying to decide whether to hire Mike, a draftsman, to assist with her work. Kelly could hire Mike at $20 per hour, but it would take him three times as long to complete a task as it takes Kelly. Kelly is able to earn $90 per hour and has more architectural jobs than she is able to handle. Which of the following is true?
a.	Kelly should not hire Mike because it would be faster for her to do the work herself.	
b.	Kelly should do the drafting work herself because she has the lower opportunity cost.	
c.	Kelly should hire Mike at the $20 per hour wage rate.	
d.	Kelly should hire Mike, but only if he is paid more than $30 per hour.	
e.	Kelly should hire someone who earns minimum wage instead of Mike.	

ANS:	C	DIF:	Difficult	REF:	All Choices Entail Opportunity Costs
TOP:	II.A.	MSC:	Applying

	43.	Economists believe that individuals compare the benefits and costs of various options when making a decision and in so doing act:
a.	fairly.	d.	unpredictably.	
b.	selfishly.	e.	rationally.	
c.	collectively.	

ANS:	E	DIF:	Easy	REF:	Decisions Are Made at the Margin
TOP:	II.B.	MSC:	Remembering		

	44.	The term ________ means “additional.”
a.	“marginal”	d.	“opportunity cost”	
b.	“comparative”	e.	“trade-off”	
c.	“incentive”	

ANS:	A	DIF:	Easy	REF:	Decisions Are Made at the Margin
TOP:	II.B.	MSC:	Remembering		

	45.	When most economists wake up in the morning, their first decision is whether to hit the snooze bar on the alarm clock. What statement best represents their thought process as rational decision-makers?
a.	I had a really late night grading exams, and I deserve 10 more minutes of sleep.	
b.	The total amount of work I have to do today is rather small, so the total benefit to going to work for a full 8 hours is also small.	
c.	The total amount of work I have to do today is rather small, so the marginal cost of going to work 10 minutes late is small.	
d.	The total amount of work I have to do today is rather small, so the marginal benefit of sleeping 10 more minutes is rather large.	
e.	The marginal benefit of sleeping 10 more minutes is greater than the marginal benefit of 10 more minutes of work.	

ANS:	E	DIF:	Moderate	REF:	Decisions Are Made at the Margin
TOP:	II.B.	MSC:	Applying

	46.	One way to promote a new business is to offer free items. If you were to open a new restaurant and offer free food, you likely would have a line out the door. How would an economist understand the behavior of those standing in line?
a.	Those waiting in line place a high value on the use of their time.	
b.	Those waiting in line believe that the marginal cost of waiting in line exceeds the marginal benefit of waiting in line.	
c.	Those waiting in line place a low value on the use of their time.	
d.	Those waiting in line believe that the marginal cost of waiting in line is zero.	
e.	Those waiting in line believe that the marginal benefit of waiting in line is zero.	

ANS:	C	DIF:	Moderate	REF:	Decisions Are Made at the Margin
TOP:	II.B.	MSC:	Applying

	47.	You could quit high school and work full-time, but you decide to finish high school and get your high school degree. How would an economist explain your decision?
a.	The cost of going to high school was greater than the benefit of working full-time.	
b.	The benefit of working full-time was greater than the benefit of going to high school.	
c.	The benefit of going to high school was greater than the benefit of working full-time.	
d.	The cost of working full-time was greater than the benefit of going to high school.	
e.	The benefit of working full-time was greater than the cost of going to high school.	

ANS:	C	DIF:	Moderate	REF:	Decisions Are Made at the Margin
TOP:	II.B.	MSC:	Applying

	48.	Many stores are open 24 hours a day. When store managers make the decision to stay open 24 hours, it must be the case that the:
a.	marginal benefit of staying open all day and the marginal cost to remaining open all day are at least equal.	
b.	marginal benefit of staying open all day must always be greater than the marginal cost to remaining open all day.	
c.	marginal cost of staying open all day must always be greater than the marginal benefit to remaining open all day.	
d.	calculation of marginal benefits or marginal costs of remaining open all day play no role.	
e.	marginal benefit of remaining open all day is zero.	

ANS:	A	DIF:	Difficult	REF:	Decisions Are Made at the Margin
TOP:	II.B.	MSC:	Applying

	49.	In 2009, the federal government created a program called Cash for Clunkers whereby consumers could trade in a less efficient car for a more efficient car and receive a higher value than they would have otherwise. How would an economist understand the decision that consumers faced?
a.	Consumers would compare the marginal benefits to the marginal costs of replacing their cars, and this program made sure that marginal benefits would exceed marginal costs.	
b.	Consumers would compare the marginal benefits to the marginal costs of replacing their cars, and this program made sure that marginal costs would exceed marginal benefits.	
c.	The Cash for Clunkers program increased the opportunity cost of replacing a car.	
d.	The Cash for Clunkers program served as a negative incentive to replacing a fuel-inefficient car.	
e.	The Cash for Clunkers program served as an indirect incentive to replacing a fuel-inefficient car.	

ANS:	A	DIF:	Difficult	REF:	Decisions Are Made at the Margin
TOP:	II.B.	MSC:	Applying

	50.	Which of the following is NOT a type of incentive?
a.	positive	d.	indirect	
b.	negative	e.	direct	
c.	complementary	

ANS:	C	DIF:	Easy	REF:	Incentives Matter	
TOP:	II.C.	MSC:	Remembering		

	51.	Which of the following is the primary concept that economists use to explain how humans make decisions?
a.	fairness	d.	incentives	
b.	money	e.	justice	
c.	emotions	

ANS:	D	DIF:	Moderate	REF:	Incentives Matter	
TOP:	II.C.	MSC:	Remembering		

	52.	Public buildings in the United States are required to be accessible to the disabled and, as a result, almost all have an elevator. What would be an example of a positive, direct incentive for those who can use stairs?
a.	Using the stairs will make it seem that you care about your health and that you are not lazy.	
b.	Using the stairs will increase the risk of tripping and falling.	
c.	Using the stairs will take more time than taking the elevator and will increase the risk of missing an important meeting.	
d.	Using the stairs will give you some exercise and make you healthier.	
e.	Using the stairs will put elevator repair professionals out of work.	

ANS:	D	DIF:	Moderate	REF:	Incentives Matter	
TOP:	II.C.	MSC:	Applying

	53.	If the government wanted to give people a negative, direct incentive not to save money, what would be the appropriate policy?
a.	providing individuals a subsidy to save their money	
b.	providing funding for an advertising campaign encouraging people to spend more money	
c.	informing individuals that saving money causes people not to spend money, which will cause them to lose their jobs	
d.	imposing a tax on individuals for saving their money	
e.	informing consumers about all that they could buy with their money with the hope that they spend more	

ANS:	D	DIF:	Moderate	REF:	Incentives Matter	
TOP:	II.C.	MSC:	Applying

	54.	An example of a direct, negative incentive is:
a.	providing a commission for sales.	
b.	awarding a promotion for hard work.	
c.	threatening to fire those who do not perform well.	
d.	providing an orientation for new employees.	
e.	providing generous benefits and pay for employees.	

ANS:	C	DIF:	Moderate	REF:	Incentives Matter	
TOP:	II.C.	MSC:	Applying

	55.	An example of a direct, positive incentive is:
a.	a prison sentence for committing a crime.	
b.	unemployment insurance for those who are laid off.	
c.	providing a workplace safety program.	
d.	providing a commission for sales.	
e.	threatening to fire those who do not perform well.	

ANS:	D	DIF:	Moderate	REF:	Incentives Matter	
TOP:	II.C.	MSC:	Applying

	56.	Actions and activities are encouraged with which type of incentive?
a.	positive	d.	complementary	
b.	negative	e.	unintended	
c.	neutral	

ANS:	A	DIF:	Easy	REF:	Positive and Negative Incentives
TOP:	II.C.1.	MSC:	Remembering		

	57.	Actions and activities are discouraged with which type of incentive?
a.	positive	d.	complementary	
b.	negative	e.	unintended	
c.	neutral	

ANS:	B	DIF:	Easy	REF:	Positive and Negative Incentives
TOP:	II.C.1.	MSC:	Remembering		

	58.	A parent that pays a child an allowance for doing chores is providing a(n) ________ incentive.
a.	positive	d.	complementary	
b.	negative	e.	unintended	
c.	neutral	

ANS:	A	DIF:	Moderate	REF:	Positive and Negative Incentives
TOP:	II.C.1.	MSC:	Applying

	59.	Economics professors are well aware of the importance of incentives. Which of the following situations shows the use of a positive incentive?
a.	Students who show up late to class will not be allowed in the classroom.	
b.	Students who do not have a doctor’s note will not be allowed to take an exam at a different time.	
c.	Students can choose whether they want to attend class—there is no attendance policy.	
d.	Students can choose to do extra credit at the end of the semester.	
e.	The professor decides to teach the class by reading out of the textbook to the entire class.	

ANS:	D	DIF:	Moderate	REF:	Positive and Negative Incentives
TOP:	II.C.1.	MSC:	Applying

	60.	A car insurance company is willing to offer accident-free drivers a discount. This is an example of:
a.	a positive incentive.	d.	a comparative advantage.	
b.	a negative incentive.	e.	scarcity.	
c.	an opportunity cost.	

ANS:	A	DIF:	Moderate	REF:	Positive and Negative Incentives
TOP:	II.C.1.	MSC:	Applying

	61.	Many professors have a policy that punishes individuals if they do not come to class. Instead of punishing students who do not attend class, what could the professor do to provide a positive incentive to come to class?
a.	Those who come to class are given extra points.	
b.	Those who do not come to class have their grades reduced.	
c.	Those who come to class will be asked questions, and if they answer them incorrectly, their grades will be lowered.	
d.	Those who come to class will be ridiculed.	
e.	Those who do not come to class might be dropped from the course.	

ANS:	A	DIF:	Moderate	REF:	Positive and Negative Incentives
TOP:	II.C.1.	MSC:	Applying

	62.	A camera takes a picture of drivers who do not stop at a red light, and this practice is used to issue a traffic ticket. These red light cameras can be understood as serving a(n):
a.	positive incentive to encourage individuals to stop at a red light.	
b.	negative incentive to discourage individuals from driving through a red light.	
c.	indirect incentive to encourage individuals to stop at a red light.	
d.	direct incentive to encourage individuals to stop at a red light.	
e.	negative incentive to encourage individuals to drive through a red light.	

ANS:	B	DIF:	Moderate	REF:	Positive and Negative Incentives
TOP:	II.C.1.	MSC:	Applying

	63.	The government places warnings on cigarette and liquor packages. These warnings serve as a(n):
a.	positive incentive.	
b.	negative incentive.	
c.	indirect incentive.	
d.	opportunity cost.	
e.	way to make cigarettes and liquor more scarce.	

ANS:	B	DIF:	Moderate	REF:	Positive and Negative Incentives
TOP:	II.C.1.	MSC:	Applying

	64.	When a ticket is given to a pedestrian for jaywalking, what type of incentive exists?
a.	positive	d.	complementary	
b.	negative	e.	unintended	
c.	neutral	

ANS:	B	DIF:	Moderate	REF:	Positive and Negative Incentives
TOP:	II.C.1.	MSC:	Applying

	65.	Google has started a project to scan all books and make those that are not copyrighted available to people free of charge. Why is it important that only books without a copyright are available?
a.	If all books were scanned and available free of charge, copyright holders would face a positive incentive to continue writing and publishing books.	
b.	If all books were scanned and available free of charge, copyright holders would face a negative incentive to continue writing and publishing books.	
c.	If only copyrighted texts were scanned and available free of charge, copyright holders would face an indirect incentive to continue writing and publishing books.	
d.	If only non-copyrighted books were scanned and available free of charge, copyright holders would face a negative incentive to continue writing and publishing books.	
e.	If only non-copyrighted books were scanned and available free of charge, copyright holders would face an indirect incentive to continue writing and publishing books.	

ANS:	B	DIF:	Difficult	REF:	Positive and Negative Incentives
TOP:	II.C.1.	MSC:	Applying

	66.	The U.S. federal government offers homeowners a tax deduction for their home loan interest payments. This reduction in taxes serves as a(n) ________ incentive to buy a house.
a.	direct	d.	complementary	
b.	indirect	e.	unintended	
c.	neutral	

ANS:	A	DIF:	Moderate	REF:	Direct and Indirect Incentives
TOP:	II.C.2.	MSC:	Applying

	67.	In a growing number of cities, stores are required either not to make available plastic or paper bags or to do so only for an additional fee. What kind of incentive is this fee?
a.	direct	d.	complementary	
b.	indirect	e.	unintended	
c.	neutral	

ANS:	A	DIF:	Moderate	REF:	Direct and Indirect Incentives
TOP:	II.C.2.	MSC:	Applying

	68.	In a growing number of cities, stores are required either not to make available plastic or paper bags or to do so only for an additional fee. If this fee can be refunded when you recycle the bag, the refund acts as a(n) ________ incentive.
a.	direct	d.	complementary	
b.	indirect	e.	unintended	
c.	neutral	

ANS:	A	DIF:	Moderate	REF:	Direct and Indirect Incentives
TOP:	II.C.2.	MSC:	Applying

	69.	If you do not like changing the oil in your car and pay your father to do it for you, you have provided him with a(n) ________ incentive.
a.	direct	d.	complementary	
b.	indirect	e.	unintended	
c.	neutral	

ANS:	A	DIF:	Moderate	REF:	Direct and Indirect Incentives
TOP:	II.C.2.	MSC:	Applying

	70.	A health insurance company may offer its policyholders a discount on their premiums if they prove that they have stopped smoking. What type of incentive is the health insurance company offering?
a.	direct	d.	complementary	
b.	indirect	e.	unintended	
c.	neutral	

ANS:	A	DIF:	Moderate	REF:	Direct and Indirect Incentives
TOP:	II.C.2.	MSC:	Applying

	71.	What is the indirect incentive in the unemployment insurance program?
a.	Workers get paid when they are laid off.	
b.	Workers face an incentive to find a new job as quickly as possible.	
c.	Workers face no incentive to find a new job until the insurance runs out.	
d.	Workers are paid only a portion of their wages by the unemployment insurance program.	
e.	Workers on unemployment insurance are given training opportunities.	

ANS:	C	DIF:	Moderate	REF:	Direct and Indirect Incentives
TOP:	II.C.2.	MSC:	Understanding		

	72.	The U.S. federal government offers homeowners a tax deduction for their home loan interest payments. This reduction in taxes may have encouraged too many people to own a home. If the tax deduction caused people to buy who otherwise could not have afforded to own, the tax deduction serves as a(n) ________ incentive.
a.	direct	d.	complementary	
b.	indirect	e.	unintended	
c.	neutral	

ANS:	B	DIF:	Moderate	REF:	Direct and Indirect Incentives
TOP:	II.C.2.	MSC:	Applying

	73.	The government has been trying to encourage the use of fuel-efficient cars. One way it has been doing this has been by allowing fuel-efficient cars to use a separate highway lane. This encourages people to use fuel-efficient cars because those who:
a.	place a high value on their scarce time may be encouraged to buy a fuel-efficient car to take advantage of the speedier separate highway lane.	
b.	place a low value on their scarce time may be encouraged to buy a fuel-efficient car to take advantage of the speedier separate highway lane.	
c.	are more concerned about the environment are also those who happen to place a high value on their time.	
d.	purchase a fuel-efficient car are forced to pay more for a new car, and the use of the separate highway lane compensates them for this.	
e.	purchase a fuel-efficient car are likely to be unhappy because it is less powerful or more cramped inside; use of the separate highway lane compensates them for this.	

ANS:	A	DIF:	Difficult	REF:	Direct and Indirect Incentives
TOP:	II.C.2.	MSC:	Applying

	74.	In the area of many college campuses, parking spaces are often scarce. If these parking spaces have parking meters, which population described below would pay for parking?
a.	a population that is willing to take risks and believes that they will not be caught if they do not place change in the meter	
b.	a population that places a high opportunity cost on making sure they have change and placing change in the meter	
c.	a population that is willing to take risks, believes that they will not be caught if they do not place change in the meter, and disregards any possible $5 ticket for parking illegally	
d.	a population that is unwilling to take risks and believes there is a high chance that they will not be caught if they do not pay for parking	
e.	a population that is unwilling to take risks, believes there is a high chance that they will be caught if they do not pay their share, and places a high value on doing the “right” thing	

ANS:	E	DIF:	Difficult	REF:	Direct and Indirect Incentives
TOP:	II.C.2.	MSC:	Applying

	75.	Some public transit systems use an “honor system” whereby patrons have to show that they have paid their fare only when asked for it by an enforcement officer. With what population would such a system be successful?
a.	a population that is willing to take risks and believes that they will not be caught if they do not pay their fare	
b.	a population that places a high opportunity cost on taking time to purchase a ticket	
c.	a population that is willing to take risks, believes that they will not be caught if they do not pay their fare, and treats fines for not paying a fare as a nuisance	
d.	a population that is unwilling to take risks and believes there is a high chance that they will be caught if they do not pay their fare	
e.	a population that is unwilling to take risks, believes there is a high chance that they will not be caught if they do not pay their fare, and places a low value on doing the right thing	

ANS:	D	DIF:	Difficult	REF:	Direct and Indirect Incentives
TOP:	II.C.2.	MSC:	Applying

	76.	Indirect incentives create ________ consequences.
a.	positive	d.	direct	
b.	negative	e.	unintended	
c.	indirect	

ANS:	E	DIF:	Moderate	REF:	How Incentives Create Unintended Consequences
TOP:	II.C.2.a.	MSC:	Remembering		

	77.	The government controls for many indirect incentives in safety net social programs by:
a.	limiting payment to a specified time period.	
b.	providing only a partial payment.	
c.	allowing individuals to apply to only a certain number of safety net social programs.	
d.	requiring individuals to repay the benefits they received.	
e.	establishing income limits for those who apply for safety net social programs.	

ANS:	A	DIF:	Moderate	REF:	How Incentives Create Unintended Consequences
TOP:	II.C.2.a.	MSC:	Remembering		

	78.	While generous disability insurance can help those who have been permanently injured, it can also increase the likelihood that individuals will falsely claim to be disabled. This likelihood is a(n):
a.	direct incentive.	d.	innovation.	
b.	indirect incentive.	e.	marginal cost.	
c.	positive incentive.	

ANS:	B	DIF:	Moderate	REF:	How Incentives Create Unintended Consequences
TOP:	II.C.2.a.	MSC:	Applying

	79.	Who benefits from voluntary trade?
a.	buyers	d.	buyers and sellers	
b.	sellers	e.	buyers and the government	
c.	the government	

ANS:	D	DIF:	Easy	REF:	Trade Creates Value	
TOP:	II.D.	MSC:	Remembering		

	80.	Comparative advantage emerges because of the presence of:
a.	trade.	
b.	differing opportunity costs.	
c.	marginal benefits equaling marginal costs.	
d.	scarcity.	
e.	incentives.	

ANS:	B	DIF:	Easy	REF:	Trade Creates Value	
TOP:	II.D.	MSC:	Remembering		

	81.	A person has a comparative advantage in the production of a good when he or she can produce the product at a(n) ________ opportunity cost compared to another person.
a.	higher	d.	diminishing	
b.	lower	e.	increasing	
c.	equal	

ANS:	B	DIF:	Easy	REF:	Trade Creates Value	
TOP:	II.D.	MSC:	Understanding		

	82.	When trade is voluntary, who benefits?
a.	the seller	d.	both the buyer and the seller	
b.	the buyer	e.	Trade is never voluntary.	
c.	No one benefits.	

ANS:	D	DIF:	Easy	REF:	Trade Creates Value	
TOP:	II.D.	MSC:	Understanding		

	83.	What enhances comparative advantage?
a.	lower costs	d.	scarcity	
b.	higher opportunity costs	e.	population growth	
c.	specialization	

ANS:	C	DIF:	Moderate	REF:	Trade Creates Value	
TOP:	II.D.	MSC:	Remembering		

	84.	The opportunity cost to free trade is:
a.	economic growth.	d.	lower prices.	
b.	government involvement.	e.	greater efficiency.	
c.	some domestic jobs.	

ANS:	C	DIF:	Moderate	REF:	Trade Creates Value	
TOP:	II.D.	MSC:	Remembering		

	85.	More oranges are grown in Florida than North Dakota because Florida’s warm climate gives it a ________ advantage in growing oranges.
a.	comparative	d.	producer	
b.	public	e.	planning	
c.	revenue	

ANS:	A	DIF:	Moderate	REF:	Trade Creates Value	
TOP:	II.D.	MSC:	Understanding		

	86.	The United States is able to experience economic growth to the extent that:
a.	specialization and trade are encouraged.	
b.	the government involves itself in the economy.	
c.	trade is restricted.	
d.	jobs are protected from outsourcing.	
e.	consumers are encouraged to buy domestically produced goods.	

ANS:	A	DIF:	Moderate	REF:	Trade Creates Value	
TOP:	II.D.	MSC:	Understanding		

	87.	Saudi Arabia has a comparative advantage in producing oil because it:
a.	has specialized in the production of oil given its natural resources.	
b.	has forced other countries not to sell their oil.	
c.	has specialized in the production of all goods.	
d.	forces the use of oil for the production of all electricity.	
e.	benefits from the heavy use of oil for transportation.	

ANS:	A	DIF:	Moderate	REF:	Trade Creates Value	
TOP:	II.D.	MSC:	Applying

SHORT ANSWER

	1.	List and briefly explain each of the four key principles for thinking like an economist.

ANS:	
The four foundations of economic thought are opportunity cost, marginal thinking, incentives, and the idea that trade creates value. We have to remember that every activity has a trade-off, valued by an opportunity cost, that is, there was an alternative activity that we could have done. Thinking about opportunity cost forces us to think about the costs and benefits to each activity. The comparison of the opportunity costs associated with each activity is called marginal thinking. Incentives encourage or discourage individuals or firms to do certain things and influence their decision-making process. As individuals specialize in the production of goods in which they have a comparative advantage (face the lowest opportunity costs), there are gains to be had from trade.

DIF:	Moderate	REF:	What Are Four Ways to Think Like an Economist?
TOP:	II.	MSC:	Understanding		

	2.	Using any of the four key principles of thinking like an economist, explain why farms are not located in major metropolitan areas.

ANS:	
In terms of incentives, major metropolitan areas often restrict the types of activities one can do, and farmers would face a negative incentive to locate in a congested area because their neighbors would heavily scrutinize the smells, runoff, and machinery. In a congested area, space is scarce and city planners would likely prefer to have retail and housing rather than farming. City planners would know that there is a trade-off between these activities but would realize that the opportunity cost to farming in the city is too high. Thus, for each acre of land in the city, city planners consider the marginal benefit to having food grown closer to where it is consumed versus the marginal cost to having less housing and fewer retail establishments. In almost all cases, the marginal benefit to having farms closer to the population is less than the marginal cost of having less housing.

DIF:	Moderate	REF:	What Are Four Ways to Think Like an Economist?
TOP:	II.	MSC:	Understanding		

	3.	What are opportunity costs, and why do economists spend so much time talking about them?

ANS:	
The opportunity cost is the highest valued alternative that one gives up when making a decision to do something else. Economists tend to spend so much time talking about opportunity costs because of scarcity—doing an activity or buying something always means not doing something else or not being able to buy something else.

DIF:	Easy	REF:	All Choices Entail Opportunity Costs	
TOP:	II.A.	MSC:	Understanding		

	4.	One of the first major decisions that one faces after graduation is getting an apartment. Describe how you might employ the concepts of opportunity costs and making decisions at the margin in deciding which apartment to rent.

ANS:	
Apartments have varying sizes, prices, and amenities. Someone who wants a pet, a balcony, hardwood floors, and an elevator may have to either pay more rent, get an apartment in a less than desirable location, or get a smaller apartment. Among the variables of size, price, location, and amenities, apartments can then be compared to one another (and trade-offs among these variables identified); the opportunity cost to having a pet, a balcony, hardwood floors, or an elevator can be understood, and the marginal benefits and marginal costs of these variables can be appreciated.

DIF:	Moderate	REF:	All Choices Entail Opportunity Costs	
TOP:	II.A.	MSC:	Applying

	5.	What is meant when one says that decisions are made at the margin? Provide an example of how you have made a decision at the margin.

ANS:	
When decisions are made at the margin, one is saying that he or she compares the benefit and the cost to doing something or buying something one more time. All of our decisions involve this marginal analysis. Examples might include how much to study for a course, how much sleep to get, where one lives, and what one eats.

DIF:	Easy	REF:	Decisions Are Made at the Margin	TOP:	II.B.
MSC:	Understanding		

	6.	Health insurance companies have the goal of reducing payments to doctors and hospitals. One way they have done this is by requiring individuals to pay a deductible. For example, a $1,000 deductible means that individuals are responsible for the first $1,000 in healthcare expenses over the course of a year. In terms of incentives, explain how the presence of a deductible reduces expenses for the health insurance company.

ANS:	
Deductibles act as a positive and direct incentive to encourage individuals either to refrain from going to the doctor for a minor ailment or to be responsible in the choices made for the care they receive.

DIF:	Moderate	REF:	Incentives Matter		TOP:	II.C.
MSC:	Understanding		

	7.	The discipline of economics is largely based on encouraging individuals to engage in certain activities and discouraging them from engaging in others. Why is encouraging or discouraging individuals through incentives so important?

ANS:	
Economics as a discipline focuses on how people allocate their scarce resources to satisfy their wants and needs. Due to the fact that individuals are generally free to do what they want, when they want, the only way to get individuals to do what you want is to reward them (either monetarily or non-monetarily) through a positive incentive or punish them (either monetarily or non-monetarily) through a negative incentive.

DIF:	Moderate	REF:	Incentives Matter		TOP:	II.C.
MSC:	Evaluating

	8.	A dangerous habit among those who own cell phones is driving while talking or texting. While a great deal has been done to inform drivers of the risks of doing multiple tasks while driving, this informational campaign has been ineffective in the face of increased ownership of cell phones. If you were a policymaker, what types of negative incentives would you suggest to discourage individuals from driving, talking, and texting at the same time?

ANS:	
Some possible answers would include making it illegal to drive and do other things at the same time, and the negative incentive would be avoiding a traffic ticket and fine. Another negative incentive might be setting up cameras to take pictures of people driving and talking on the phone at the same time, and making the pictures public. Another negative incentive might be making mandatory the installation in cars of equipment that interferes with a cell phone signal, so that using the phone in the car becomes inconvenient.

DIF:	Moderate	REF:	Incentives Matter		TOP:	II.C.
MSC:	Applying

	9.	Economic growth in developed countries has been altered by the increased popularity of the Internet. How has the Internet, in terms of both negative and positive incentives, promoted but also discouraged economic growth?

ANS:	
The Internet has certainly done a great deal to encourage economic growth: those who are creative and those who invent something now have a way to sell their products to a larger set of individuals and thus face a positive incentive to sell their work and products over the Internet. The Internet has also made it more convenient to buy things and has provided a positive incentive to consumers to consume more. There has been some discouragement of economic growth through negative incentives provided by the Internet. With the use of the Internet, there has been more theft of digital music, movies, and ideas. These thefts provide a negative incentive for creative and inventive individuals.

DIF:	Difficult	REF:	Incentives Matter		TOP:	II.C.
MSC:	Applying

	10.	Due to the fact that firms concern themselves primarily with earning profits, a common complaint is that they often damage the environment in the process. More recently, markets have been set up so that firms can actually reduce their costs and profit more by damaging the environment less and selling their “right to pollute” to other companies. Discuss how this serves as a positive incentive for a firm to act in an environmentally responsible manner. What would be a way to discourage firms from polluting through the use of negative incentives?

ANS:	
Market environmentalism is a way by which firms can profit by polluting less. As they create less pollution, they can sell their right to pollute to others and thereby capture additional revenue (and perhaps reduce their costs as well because they employ more efficient technology). Firms do not care directly about preserving the environment. Rather, they are given a positive incentive not to pollute by increasing their profits. The alternative would be to provide a negative incentive not to pollute through the use of fines and government regulations (through an organization like the Environmental Protection Agency).

DIF:	Difficult	REF:	Incentives Matter		TOP:	II.C.
MSC:	Applying