Microeconomics Test 1 (Problem Set 1)

2. US citizens have better nutrition, better healthcare, and a longer life expectancy than citizens of Ghana. Which of the following conclusions can be drawn from this statement?
a. Average income in the US is higher than the average income in Ghana.
b. The US has a higher standard of living than Ghana.
c. Productivity in the US is higher than productivity in Ghana.
d. All of the above are correct.

1. Rationale for government involvement in a market economy is

a. markets sometimes fail to produce a fair distribution of economic well-being
b. markets sometimes fail to produce an efficient allocation of resources.
c. property rights have to be enforced.
d. All of the above are correct.

3. Most economists believe that an increase in the quantity of money results in
a. an increase in the demand for goods and services
b. lower unemployment in the short run
c. higher inflation in the long run.
d. All of the above are correct.

4. A tradeoff exists between a clean environment and a higher level of income in that
a. studies show that individuals with higher levels of income pollute less than low-income individuals.
b. efforts to reduce pollution typically are not completely successful.
c. laws that reduce pollution raise costs of production and reduce incomes
d. employing individuals to clean up pollution causes increases in employment and income

5. The word "economy" comes from the Greek word oikonomos, which means
a. "environment."
b. "production."
c. "one who manages a household."
d. "one who makes decisions."

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

7. In considering how to allocate its scarce resources among its various members, a household considers
a. each member's abilities
b. each member's efforts
c. each member's desires
d. all of the above

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

9. Economics deals primarily with the concept of
a. scarcity
b. money
c. poverty
d. banking

10. It costs a company $50,000 to produce 5000 beach towels. The company's cost will be $50,009 if it produces an additional beach towel. If the company produces 5,000 beach towels then
a. its average cost is greater than its marginal cost
b. its average cost and its marginal cost are equal
c. its average cost is less than its marginal cost
d. there is insufficient information to compute average and marginal costs

11. The adage, "There is no such thing as a free lunch," means
a. even people on welfare have to pay for food
b. the cost of living is always increasing
c. people face tradeoffs
d. all costs are included in the price of a product

12. Bill is restoring a car and has already spent $4000 on the restoration. He expects to be able to sell the car for $5800. Bill discovers that he needs to do an additional $2400 of work to make the car worth $5800 to potential buyers. He could also sell the car now, without completing the additional work, for $3800. What should he do?
a. He should sell the car now for $3800.
b. He should keep the car since it wouldn't be rational to spend $6400 restoring a car and then sell it for only $5800
c. He should complete the additional work and sell the car for $5800.
d. It does not matter which action he takes since the outcome will be the same either way

13. The opportunity cost of an item is
a. the number of hours needed to earn money to buy the item.
b. what you give up to get that item
c. usually less than the dollar value of the item
d. the dollar value of the item

14. 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.

15. Which of the following is not an example of the opportunity cost of going to school?
a. The money a student could have earned by working if he had not gone to college
b. The nap a student could have enjoyed if he had not attended class
c. The party a student could have enjoyed if he had not stayed in to study for his exam
d. The money a student spends on rent for his apartment while attending school

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

17. Suppose the state of Massachusetts passes a law that increases the tax on alcoholic beverages. As a result, residents in Massachusetts start purchasing their alcohol in surrounding states. Which of the following principles does this best illustrate?
a. People respond to incentives
b. Rational people think at the margin
c. Trade can make everyone better off
d. Markets are usually a good way to organize economic activity

18. People are willing to pay more for a diamond than for a bottle of water because
a. the marginal cost of producing an extra diamond far exceeds the marginal cost of producing an extra bottle of water.
b. the marginal benefit of an extra diamond far exceeds the marginal benefit of an extra bottle of water
c. producers of diamonds have a much greater ability to manipulate diamond prices than producers of water have to manipulate water prices
d. water prices are held artificially low by governments, since water is necessary for life

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

20. 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?
a. how much she spent applying to Notre Dame, and the difference between living expenses at Notre Dame and the other college
b. how much she spent applying to Notre Dame, but not the difference between living expenses at Notre Dame and the other college
c. the difference between living expenses at Notre Dame and her second choice, but not how much she spent applying to Notre Dame
d. neither how much she spent applying to Notre Dame nor the difference between living expenses at Notre Dame and her second choice

21. To increase living standards, public policy should
a. ensure that workers are well educated and have the necessary tools and technology.
b. make unemployment benefits more generous
c. move workers into jobs directly from high school
d. ensure a greater degree of equality, taking all income-earners into account

22. Which of the following principles is not one of the four principles of individual decision making?
a. People face tradeoffs.
b. Trade can make everyone better off.
c. People respond to incentives.
d. Rational people think at the margin

23. 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.

T or F: 24. If the average cost of transporting a passenger on the train from Chicago to St. Louis is $75, it would be irrational for the railroad to allow any passenger to ride for less than $75.

25. 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