Multiple Choice Answers

Which of these activities will most likely result in an external benefit?
Jake purchases a dilapidated house and cleans up the yard and exterior of the house.
John purchases an iPhone and downloads new apps.
Jack purchases a new SUV and drives it to work every day.
Joe purchases a suit and wears it on his interviews.

Rick buys a 1966 Mustang for $3,000, planning to restore and sell the car. He goes on to spend $9,000 restoring the car. At this point he can sell the car for $10,000. As an alternative, he can spend an additional $3,000 replacing the engine. With a new engine the car would sell for $13,000. Rick should
complete the repairs and sell the car for $13,000.
sell the car now for $10,000.
never try such an expensive project again.
be indifferent between (i) selling the car now and (ii) replacing the engine and then selling it.

When government policies are enacted,
equality can usually be enhanced without an efficiency loss, but efficiency can never be enhanced without a reduction in equality.
efficiency can usually be enhanced without a reduction in equality, but equality can never be enhanced without an efficiency loss.
it is always the case that either efficiency and equality are both enhanced, or efficiency and equality are both diminished.
None of the above are correct.

Which of the following can lead to market failure?
externalities and market power
externalities but not market power
market power but not externalities
neither externalities nor market power
Caroline eats two bananas during a particular day. The marginal benefit she enjoys from eating the second banana
can be thought of as the total benefit Caroline enjoys by eating two bananas minus the total benefit she would have enjoyed by eating just the first banana.
determines Caroline’s marginal cost of the first and second bananas.
does not depend on how many bananas Caroline has already eaten.
All of the above are correct.

When computing the opportunity cost of attending a concert you should include
the price you pay for the ticket and the value of your time.
the price you pay for the ticket, but not the value of your time.
the value of your time, but not the price you pay for the ticket.
neither the price of the ticket nor the value of your time.

The marginal benefit Colin gets from eating a fourth slice of pizza is
the total benefit Colin gets from eating four slices of pizza minus the total benefit Colin gets from eating three slices of pizza.
the same as the total benefit of eating four slices of pizza.
less than the marginal cost of eating the fourth slice of pizza since he chose to eat the fourth slice.
the total benefit Colin gets from eating five slices of pizza minus the total benefit Colin gets from eating four slices of pizza.

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?
Yes, because cutting hair is profitable.
No, because he may not be able to sell more services.
It depends on the marginal cost of serving more clients and the marginal revenue he will earn from serving more clients.
It depends on the average cost of serving more clients and the average revenue he will earn from serving more clients.

Which of the following can policy do?
alter incentives
alter trade-offs
change opportunity costs
All of the above are correct.

Which of the following examples does not illustrate the principle represented by the adage, “There is no such thing as a free lunch”?
Joe needs to pay his rent and his electric bill.
Pete must choose between buying a new flat screen television and buying his textbooks for this semester.
Kevin must decide between studying for his economics exam and working at his part-time job.
Lisa can spend her money on a new sweater or a pair of jeans.

Which is the most accurate statement about trade?
Trade can make every nation better off.
Trade makes some nations better off and others worse off.
Trading for a good can make a nation better off only if the nation cannot produce that good itself.
Trade helps rich nations and hurts poor nations.

A marginal change is a
change that involves little, if anything, that is important.
large, significant adjustment.
change for the worse, and so it is usually a short-term change.
small, incremental adjustment.

Olivia was accepted to Notre Dame and another college.  She is trying to decide where to go.  Which of the following should she include in making her decision?
how much she spent applying to Notre Dame, and the difference between living expenses at Notre Dame and the other college
how much she spent applying to Notre Dame, but not the difference between living expenses at Notre Dame and the other college
the difference between living expenses at Notre Dame and her second choice, but not how much she spent applying to Notre Dame
neither how much she spent applying to Notre Dame nor the difference between living expenses at Notre Dame and her second choice

Evidence indicates that seat belt laws have led to
fewer pedestrian deaths.
fewer automobile accidents.
fewer deaths per automobile accident.
All of the above are correct.

High-school athletes who skip college to become professional athletes
obviously do not understand the value of a college education.
usually do so because they cannot get into college.
understand that the opportunity cost of attending college is very high.
are not making a rational decision since the marginal benefits of college outweigh the marginal costs of college for high-school athletes.

Which of the following principles is not one of the four principles of individual decisionmaking?
People face tradeoffs.
Trade can make everyone better off.
People respond to incentives.
Rational people think at the margin.

One advantage market economies have over centrally-planned economies is that market economies
provide an equal distribution of goods and services to households.
establish a significant role for government in the allocation of resources.
solve the problem of scarcity.
are more efficient.

When the government redistributes income from the wealthy to the poor,
efficiency is improved, but equality is not.
both wealthy people and poor people benefit directly.
people work less and produce fewer goods and services.
the government collects more revenue in total.

An example of a firm with market power is a
delicatessen in New York.
cable TV provider in St. Louis.
clothing store in Los Angeles.
family farm in Illinois.

President Gerald Ford referred to inflation as
a blight on our nation’s economy.
a necessary evil to combat high unemployment.
public enemy number one.
a fly in the ointment.

Ellie decides to spend two hours taking a nap rather than attending her classes. Her opportunity cost of napping is
the value of the knowledge she would have received had she attended class.
the $24 she could have earned if she had worked at her job for those two hours.
the value of her nap less the value of attending class.
nothing, since she valued sleep more than attendance at class.

In the early 1920s,
Germany experienced a very high rate of inflation.
the quantity of German money was declining rapidly.
the value of German money remained almost constant.
All of the above are correct.

The collapse of communism in the Soviet Union and Eastern Europe took place mainly in the
1960s.
1970s.
1980s.
1990s.

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?
Lower the price of the remaining bagels, even if the price falls below $1.00 per dozen.
Lower the price of the remaining bagels, but under no circumstances should the price fall below $1.00 per dozen.
Throw the bagels away and produce 8 fewer dozen bagels tomorrow.
Starting tomorrow, lower the price on all bagels so they will all be sold earlier in the day.

If a paper factory does not bear the entire cost of the pollution it emits, it will
not emit any pollution so as to avoid the entire cost of the pollution.
emit lower levels of pollution.
emit an acceptable level of pollution.
emit too much pollution.

n the short run, which of the following rates of growth in the money supply is likely to lead to the lowest level of unemployment in the economy?
3 percent per year
5 percent per year
7 percent per year
9 percent per year

Inflation is defined as
a period of rising productivity in the economy.
a period of rising income in the economy.
an increase in the overall level of output in the economy.
an increase in the overall level of prices in the economy.

A rational decisionmaker
ignores marginal changes and focuses instead on “the big picture.”
ignores the likely effects of government policies when he or she makes choices.
takes an action only if the marginal benefit of that action exceeds the marginal cost of that action.
takes an action only if the combined benefits of that action and previous actions exceed the combined costs of that action and previous actions.

Penny is piano teacher and Dan is a tile layer.  If Penny teaches Dan’s daughter to play the piano in exchange for Dan tiling her kitchen floor,
only Penny is made better off by trade.
only Dan is made better off by trade.
both Penny and Dan are made better off by trade.
neither Penny nor Dan are made better off by trade.

Adam Smith’s book The Wealth of Nations was published in
1692.
1776.
1816.
1936.

Incomes of U.S. households in the 1970s and 1980s
grew rapidly, due to the widespread success of labor unions in pushing up wages during those decades.
grew rapidly, due to several increases in the minimum wage during those decades.
grew rapidly, due to government policies that discouraged the importation of foreign products during those decades.
grew slowly, due to slow growth of the output of goods and services per hour of U.S. workers’ time during those decades.

Which of the following statements about trade is false?
Trade increases competition.
With trade, one country wins and one country loses.
Bulgaria can benefit, potentially, from trade with any other country.
Trade allows people to buy a greater variety of goods and services at lower cost.

When the government implements programs such as progressive income tax rates, which of the following is likely to occur?
equality is increased and efficiency is increased.
equality is increased and efficiency is decreased.
equality is decreased and efficiency is increased.
equality is decreased and efficiency is decreased.

Causes of market failure include
externalities and market power.
market power and incorrect forecasts of consumer demand.
externalities and foreign competition.
incorrect forecasts of consumer demand and foreign competition.

Which of the following statements does not apply to a market economy?
Firms decide whom to hire and what to produce.
The “invisible hand” usually maximizes the well-being of society as a whole.
Households decide which firms to work for and what to buy with their incomes.
Government policies are the primary forces that guide the decisions of firms and households.

A company that formerly produced software went out of business because too many potential customers bought illegally-produced copies of the software instead of buying the product directly from the company. This instance serves as an example of
market power.
inefficient trade.
inadequate enforcement of property rights.
the invisible hand at work.

In the 1990s, inflation in the United States was
very close to zero.
about 3 percent per year.
about 6 percent per year.
commonly referred to as “public enemy number one.”

The invisible hand works to promote general well-being in the economy primarily through
government intervention.
the political process.
people’s pursuit of self-interest.
altruism.

Communist countries worked under the premise that
markets were the best way to organize economic activity.
central planners were in the best position to determine the allocation of scarce resources in the economy.
households and firms, guided by an “invisible hand,” could achieve the most efficient allocation of scarce resources.
allowing the market forces of supply and demand to operate with no government intervention would achieve the most efficient allocation of scarce resources.

Based on the available evidence, which of the following groups benefits most from mandatory seat belt laws?
automakers
pedestrians
drivers
owners of collision-repair shops

Which of the following is an example of an externality?
Annie purchases a handbag.
Bob’s dog barks loudly during the night waking his neighbors.
Clark sells a book to Calvin.
David watches a scary movie.

When a society cannot produce all the goods and services people wish to have, it is said that the economy is experiencing
scarcity.
surpluses.
inefficiencies.
inequalities.

Which of these activities will most likely impose an external cost?
Betty plants flowers in her garden.
Bonnie gets a flu vaccine.
Bridget drives her car after having too much alcohol to drink.
Becky buys a new flat screen television.

Which of the following observations was made famous by Adam Smith in his book The Wealth of Nations?
There is no such thing as a free lunch.
People buy more when prices are low than when prices are high.
No matter how much people earn, they tend to spend more than they earn.
Households and firms interacting in markets are guided by an “invisible hand” that leads them to desirable market outcomes.

Which of the following is true?
Efficiency refers to the size of the economic pie; equality refers to how the pie is divided.
Government policies usually improve upon both equality and efficiency.
As long as the economic pie continually gets larger, no one will have to go hungry.
Efficiency and equality can both be achieved if the economic pie is cut into equal pieces.

Large or persistent inflation is almost always caused by
excessive government spending.
excessive growth in the quantity of money.
foreign competition.
higher-than-normal levels of productivity.

One effect of the government-imposed seat belt law in the U.S. has been
a dramatic decrease in the number of pedestrian deaths.
safer driving.
an increase in the number of accidents.
a dramatic decrease in the number of driver deaths.

If an externality is present in a market, economic efficiency may be enhanced by
government intervention.
a decrease in foreign competition.
fewer market participants.
weaker property rights.

The slow growth of U.S. incomes during the 1970s and 1980s can best be explained by
unstable economic conditions in Eastern Europe.
increased competition from abroad.
a decline in the rate of increase in U.S. productivity.
a strong U.S. dollar abroad, hurting U.S. exports.

For markets to work well, there must be
market power.
a central planner.
property rights.
abundant, not scarce, resources.