Principe’s of Microeconomics: Chapter 1 Quiz

Economics is best defined as the study of

A. how society manages its scarce resources.
B. how to run a business most profitably.
C. how to predict inflation, unemployment, and stock prices.
D. how the government can stop the harm from unchecked self-interest.

Your opportunity cost of going to a movie is

A. the price of the ticket.
B. the price of the ticket plus the cost of any soda and popcorn you buy at the theater.
C. the total cash expenditure needed to go to the movie plus the value of your time.
D. zero, as long as you enjoy the movie and consider it a worthwhile use of time and money.

A marginal change is one that

A. is not important for public policy.
B. incrementally alters an existing plan.
C. makes an outcome inefficient.
D. does not influence incentives.

Adam Smith's "invisible hand" refers to

A. the subtle and often hidden methods that businesses use to profit at consumers' expense.
B. the ability of free markets to reach desirable outcomes, despite the self-interest of market participants.
C. the ability of government regulation to benefit consumers, even if the consumers are unaware of the regulations.
D. the way in which producers or consumers in unregulated markets impose costs on innocent bystanders.

Governments may intervene in a market economy in order to

A. protect property rights.
B. correct a market failure due to externalities.
C. achieve a more equal distribution of income.
D. All of the above.

If a nation has high and persistent inflation, the most likely explanation is

A. the central bank creating excessive amounts of money.
B. unions bargaining for excessively high wages.
C. the government imposing excessive levels of taxation.
D. firms using their monopoly power to enforce excessive price hikes.

Describe some of the trade-offs faced by each of the following:

A. a family deciding whether to buy a new car
B. a member of Congress deciding how much to spend on national parks
C. a company president deciding whether to open a new factory
D. a professor deciding how much to prepare for class

You are trying to decide whether to take a vacation. Most of the costs of the vacation (airfare, hotel, and forgone wages) are measured in dollars, but the benefits of the vacation are psychological. How can you compare the benefits to the costs?

You were planning to spend Saturday working at your part-time job, but a friend asks you to go skiing. What is the true cost of going skiing? Now suppose you had been planning to spend the day studying at the library. What is the cost of going skiing in this case? Explain.

You win $100 in a basketball pool. You have a choice between spending the money now and putting it away for a year in a bank account that pays 5% interest. What is the opportunity cost of spending the $100 now?

The company that you manage has invested $5Million in developing a new product, but the development is not quite finished. At a recent meeting, your salespeople report that the introduction of competing products has reduced the expected sales of your new product to $3Million. If it would cost $1Million to finish development and make the product, should you go ahead and do so? What is the most that you should pay to complete development?

The Social Security system provides income for people over age 65. If a recipient of Social Security decides to work and earn some income, the amount received in Social Security benefits is typically reduced.

A. How does the provision of Social Security affect people's incentive to save while working?

B. How does the reduction in benefits associated with higher earnings affect people's incentive to work past age 65?

A 1996 bill reforming the federal government's antipoverty programs limited many welfare recipients to only two years of benefits.

A. How does this change affect the incentives for working?

B. How might this change represent a trade-off between equality and efficiency?

Explain whether each of the following government activities is motivated by a concern about equality or a concern about efficiency. In the case of efficiency, discuss the type of market failure involved.

A. regulating cable TV prices
B. providing some poor people with vouchers that can be used to buy food
C. prohibiting smoking in public places
D. breaking up Standard Oil (which once owned of all oil refineries) into several smaller companies
E. imposing higher personal income tax rates on people with higher incomes
F. instituting laws against driving while intoxicated

Discuss each of the following statements from the standpoints of equality and efficiency.

A. "Everyone in society should be guaranteed the best healthcare possible."
B. "When workers are laid off, they should be able to collect unemployment benefits until they find a new job."

In what ways is your standard of living different from that of your parents or grandparents when they were your age? Why have these changes occurred?

Suppose Americans decide to save more of their incomes. If banks lend this extra saving to businesses, which use the funds to build new factories, how might this lead to faster growth in productivity? Who do you suppose benefits from the higher productivity? Is society getting a free lunch?

During the Revolutionary War, the American colonies could not raise enough tax revenue to fully fund the war effort; to make up the difference, the colonies decided to print more money. Printing money to cover expenditures is sometimes referred to as an "inflation tax." Who do you think is being "taxed" when more money is printed? Why?