ap micro unit 1

1. The word that comes from the Greek word for "one who manages a household" is A. market. | B. consumer. | C. producer. | D. economy. D. economy.

2. Resources are A. scarce for households but plentiful for economies. | B. plentiful for households but scarce for economies. | C. scarce for households and scarce for economies. | D. plentiful for households and plentiful for economies. C. scarce for households and scarce for economies.

3. Economics deals primarily with the concept of A. scarcity. | B. money. | C. poverty. | D. banking. A. scarcity.

4. The overriding reason as to why households and societies face many decisions is that A. resources are scarce. | B. goods and services are not scarce. | C. incomes fluctuate with business cycles. | D. people, by nature, tend to disagree. A. resources are scarce.

5. The phenomenon of scarcity stems from the fact that A. most economies’ production methods are not very good. | B. in most economies, wealthy people consume disproportionate quantities of goods and services. | C. governments restrict production of too many goods and services. | D. resources are limited. D. resources are limited.

6. Which of the following products would be considered scarce? A. golf clubs | B. Picasso paintings | C. apples | D. All of the above are correct. D. All of the above are correct.

7. Economics is the study of A. production methods. | B. how society manages its scarce resources. | C. how households decide who performs which tasks. | D. the interaction of business and government. B. how society manages its scarce resources.

8. In most societies, resources are allocated by A. a single central planner. | B. a small number of central planners. | C. those firms that use resources to provide goods and services. | D. the combined actions of millions of households and firms. D. the combined actions of millions of households and firms.

9. 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. C. people face tradeoffs.

10. Which of the following statements best represents the principle represented by the adage, "There is no such thing as a free lunch"? A. Melissa can attend the concert only if she takes her sister with her. | B. Greg is hungry and homeless. | C. Brian must repair the tire on his bike before he can ride it to class. | D. Kendra must decide between going to Colorado or Cancun for spring break. D. Kendra must decide between going to Colorado or Cancun for spring break.

11. The principle that "people face tradeoffs" applies to A. individuals. | B. families. | C. societies. | D. All of the above are correct. D. All of the above are correct.

12. Mitch has $100 to spend and wants to buy either a new amplifier for his guitar or a new mp3 player to listen to music while working out. Both the amplifier and the mp3 player cost $100, so he can only buy one. This illustrates the basic concept that A. trade can make everyone better off. | B. people face trade-offs | C. rational people think at the margin. | D. people respond to incentives. B. people face trade-offs

13. Guns and butter are used to represent the classic societal tradeoff between spending on A. durable and nondurable goods. | B. imports and exports. | C. national defense and consumer goods. | D. law enforcement and agriculture. C. national defense and consumer goods.

14. The terms equality and efficiency are similar in that they both refer to benefits to society. However they are different in that A. equality refers to uniform distribution of those benefits and efficiency refers to maximizing benefits from scarce resources. | B. equality refers to maximizing benefits from scarce resources and efficiency refers to uniform distribution of those benefits. | C. equality refers to everyone facing identical tradeoffs and efficiency refers to the opportunity cost of the benefits. | D. equality refers to the opportunity cost of the benefits and efficiency refers to everyone facing identical tradeoffs. A. equality refers to uniform distribution of those benefits and efficiency refers to maximizing benefits from scarce resources.

15. Which of the following phrases best captures the notion of efficiency? A. absolute fairness | B. equal distribution | C. minimum waste | D. equitable outcome C. minimum waste

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

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

18. 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. C. laws that reduce pollution raise costs of production and reduce incomes.

19. A likely effect of government policies that redistribute income and wealth from the wealthy to the poor is that those policies A. enhance equality. | B. reduce efficiency. | C. reduce the reward for working hard. | D. All of the above are correct. D. All of the above are correct.

20. Senator Smith wants to increase taxes on people with high incomes and use the money to help the poor. Senator Jones argues that such a tax will discourage successful people from working and will therefore make society worse off. An economist would say that A. we should agree with Senator Smith. | B. we should agree with Senator Jones. | C. a good decision requires that we recognize both viewpoints. | D. there are no tradeoffs between equity and efficiency. C. a good decision requires that we recognize both viewpoints.

21. Senator Smith argues that replacing the income tax with a national sales tax would increase the level of output. Senator Wells objects that this policy would benefit the rich at the expense of the poor. A. Both Senators’ arguments are primarily about equality. | B. Both Senators’ arguments are primarily about efficiency. | C. Senator Smith’s argument is primarily about equality, while Senator Well’s argument is primarily about efficiency. | D. Senator Smith’s argument is primarily about efficiency, while Senator Well’s argument is primarily about equality. D. Senator Smith’s argument is primarily about efficiency, while Senator Well’s argument is primarily about equality.

22. The government has just passed a law requiring that all residents earn the same annual income regardless of work effort. This law is likely to A. increase efficiency and increase equality. | B. increase efficiency but decrease equality. | C. decrease efficiency but increase equality. | D. decrease efficiency and decrease equality. C. decrease efficiency but increase equality.

23. 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. B. what you give up to get that item.

24. Which of the following is correct concerning opportunity cost? A. Except to the extent that you pay more for them, opportunity costs should not include the cost of things you would have purchased anyway. | B. To compute opportunity costs, you should subtract benefits from costs. | C. Opportunity costs and the idea of trade-offs are not closely related. | D. Rational people should compare various options without considering opportunity costs. A. Except to the extent that you pay more for them, opportunity costs should not include the cost of things you would have purchased anyway.

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

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

27. Mallory decides to spend three hours working overtime rather than watching a video with her friends. She earns $8 an hour. Her opportunity cost of working is A. the $24 she earns working. | B. the $24 minus the enjoyment she would have received from watching the video. | C. the enjoyment she would have received had she watched the video. | D. nothing, since she would have received less than $24 of enjoyment from the video. C. the enjoyment she would have received had she watched the video.

28. Moira decides to spend two hours taking a nap rather than attending her classes. Her opportunity cost of napping is A. the value of the knowledge she would have received had she attended class. | B. the $30 she could have earned if she had worked at her job for those two hours. | C. the value of her nap less the value of attending class. | D. nothing, since she would valued sleep more than attendance at class. A. the value of the knowledge she would have received had she attended class.

29. Suppose after graduating from college you get a job working at a bank earning $30,000 per year. After two years of working at the bank earning the same salary, you have an opportunity to enroll in a one-year graduate program that would require you to quit your job at the bank. Which of the following should not be included in a calculation of your opportunity cost? A. the cost of tuition and books to attend the graduate program | B. the $30,000 salary that you could have earned if you retained your job at the bank | C. the $45,000 salary that you will be able to earn after having completed your graduate program | D. the value of insurance coverage and other employee benefits you would have received if you retained your job at the bank. C. the $45,000 salary that you will be able to earn after having completed your graduate program

30. For which of the following individuals would the opportunity cost of going to college be highest? A. a promising young mathematician who will command a high salary once she earns her college degree | B. a student with average grades who has never held a job | C. a famous, highly-paid actor who wants to take time away from show business to finish college and earn a degree | D. a student who is the best player on his college basketball team, but who lacks the skills necessary to play professional basketball C. a famous, highly-paid actor who wants to take time away from show business to finish college and earn a degree

31. Suppose your college institutes a new policy requiring you to pay for a permit to park your car in a campus parking lot. A. The cost of the parking permit is not part of the opportunity cost of attending college if you would not have to pay for parking otherwise. | B. The cost of the parking permit is part of the opportunity cost of attending college if you would not have to pay for parking otherwise. | C. Only half of the cost of the parking permit is part of the opportunity cost of attending college. | D. The cost of the parking permit is not part of the opportunity cost of attending college under any circumstances. B. The cost of the parking permit is part of the opportunity cost of attending college if you would not have to pay for parking otherwise.

32. You have driven 1,000 miles on a vacation and then you notice that you are only 50 miles from an attraction you hadn’t known about, but would really like to see. In computing the opportunity cost of visiting this attraction you had not planned to visit, you should include A. both the cost of driving the first 1,000 and the next 50 miles. | B. the cost of driving the first 1,000 miles, but not the cost of driving the next 50. | C. the cost of driving the next 50 miles, but not the cost of driving the first 1,000. | D. neither the cost of driving the first 1,000 miles nor the cost of driving the next 50 miles. C. the cost of driving the next 50 miles, but not the cost of driving the first 1,000.

33. A rational decision maker takes an action only if the A. marginal benefit is less than the marginal cost. | B. marginal benefit is greater than the marginal cost. | C. average benefit is greater than the average cost. | D. marginal benefit is greater than both the average cost and the marginal cost. B. marginal benefit is greater than the marginal cost.

34. Making rational decisions "at the margin" means that people A. make those decisions that do not impose a marginal cost. | B. evaluate how easily a decision can be reversed if problems arise. | C. compare the marginal costs and marginal benefits of each decision. | D. always calculate the marginal dollar costs for each decision. C. compare the marginal costs and marginal benefits of each decision.

35. 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. D. small, incremental adjustment.

36. 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. B. the marginal benefit of an extra diamond far exceeds the marginal benefit of an extra bottle of water.

37. It costs a company $40,000 to produce 4000 basketballs. The company’s cost will be $40,009 if it produces an additional basketball. If the company produces 4,000 basketballs 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. A. its average cost is greater than its marginal cost.

38. The marginal benefit John gets from eating a fourth cheeseburger at a picnic is A. the total benefit John gets from eating four cheeseburgers minus the total benefit John gets from eating three cheeseburgers. | B. the same as the total benefit of eating four cheeseburgers. | C. less than the marginal cost of eating the fourth cheeseburger since he chose to eat the fourth cheeseburger. | D. the total benefit John gets from eating five cheeseburgers minus the total benefit John gets from eating four cheeseburgers. A. the total benefit John gets from eating four cheeseburgers minus the total benefit John gets from eating three cheeseburgers.

39. 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. D. The marginal cost of going to Ft. Lauderdale decreases.

40. The average cost per seat on the 50-passenger Floating-On-Air Bus company's trip from Kansas City to St. Louis, on which no refreshments are served, is $45. In advance of a particular trip, three seats remain unsold. The bus company could increase its profit only if it A. charged any ticket price above $0 for the three remaining seats. | B. charged at least $15 for each of the three remaining seats. | C. charged at least $45 for each of the three remaining seats. | D. paid three people to occupy the three remaining seats. A. charged any ticket price above $0 for the three remaining seats.

41. Tom is restoring a car and has already spent $3500 on the restoration. He expects to be able to sell the car for $5000. Tom discovers that he needs to do an additional $2000 of work to make the table worth $5000 to potential buyers. He could also sell the car now, without completing the additional work, for $2800. What should he do? A. He should sell the car now for $2800. | B. He should keep the car since it wouldn’t be rational to spend $5500 restoring a car and then sell it for only $5000. | C. He should complete the additional work and sell the car for $5000. | D. It does not matter which action he takes since the outcome will be the same either way. C. He should complete the additional work and sell the car for $5000.

42. A construction company has built 50 houses so far this year at a total cost to the company of $8 million. If the company builds a 51st house, its total cost will increase to $8.18 million. Which of the following statements is correct? A. For the first 50 houses, the average cost per house was $160,000. | B. The marginal cost of the 51st house, if it is built, will be $180,000. | C. If the company can experience a marginal benefit of $190,000 by building the 51st house, then the company should build it. | D. All of the above are correct. D. All of the above are correct.

43. Bill’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 Bill $1.50 to produce, and he prices loaves of bread at $4 per loaf. Suppose near the end of one day Bill still has 12 loaves of bread on hand. Which of the following is correct? A. Bill should only sell the remaining bread for $4 per loaf since that is the regular price. | B. Bill should only sell the remaining bread for $1.50 per loaf or more since that is what the bread costs to make. | C. Bill should be willing to sell the remaining bread for any price above $0 per loaf since he will have to throw it away if he does not sell it for something. | D. Bill should just throw the bread away and change the price of his bread starting tomorrow to make sure he sells all of his bread each day. C. Bill should be willing to sell the remaining bread for any price above $0 per loaf since he will have to throw it away if he does not sell it for something.

44. Sarah buys and sells real estate. Two weeks ago, she paid $280,000 for a house on Pine Street, intending to spend $40,000 on repairs sell the house for $350,000. Last week, the city government announced a plan to build a new landfill on Pine Street just down the street from the house Sarah purchased. As a result of the city’s announced plan, Sarah is weighing two alternatives: She can go ahead with the $40,000 in repairs and then sell the house for $270,000, or she can forgo the repairs and sell the house as it is for $240,000. Sarah should A. keep the house and live in it. | B. go ahead with the $40,000 in repairs and sell the house for $270,000. | C. forgo the repairs and sell the house as it is for $240,000. | D. move the house from Pine Street to a more desirable location, regardless of the cost of doing so. C. forgo the repairs and sell the house as it is for $240,000.

45. 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. C. compare the cost of staying one more semester to the benefits of staying one more semester.

46. 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 teaching decreased. | D. cost of a corporate job increased. A. cost of teaching increased.

47. 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. D. All of the above are correct.

48. Suppose the state of Massachusetts passes a law that bans smoking in restaurants. As a result, residents of Rhode Island who do not like breathing second-hand smoke begin driving across the border to Massachusetts to eat at restaurants there. 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 A. People respond to incentives

49. 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 C. to produce enough to meet the output target, without regard for quality or cost

50. Which of the following statements exemplifies a principle of individual decisionmaking? A. Trade can make everyone better off. | B. Governments can sometimes improve market outcomes. | C. The cost of something is what you give up to get it. | D. All of the above are correct. Answer not provided in source

1. Which of the following is a principle concerning how people interact? A. Markets are usually a good way to organize economic activity. | B. Rational people think at the margin. | C. People respond to incentives. | D. All of the above are correct. A. Markets are usually a good way to organize economic activity.

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. A. Trade can make every nation better off.

3. The principle that "trade can make everyone better off" applies to interactions and trade between A. families. | B. states within the United States. | C. nations. | D. All of the above are correct. D. All of the above are correct.

4. The principle that trade can make everyone better off applies to A. individuals. | B. families. | C. countries. | D. All of the above D. All of the above

5. Trade between the United States and India A. benefits both the United States and India. | B. is a losing proposition for the United States because India has cheaper labor. | C. is a losing proposition for India because capital is much more abundant in the U.S. than in India. | D. is a losing proposition for India because U.S. workers are more productive. A. benefits both the United States and India.

6. If the United States decides to trade with Mexico, we know that A. Mexico will benefit, but trade with a less developed country could not benefit the United States. | B. it will not benefit Mexico because workers in the United States are more productive. | C. Mexico and the United States can both benefit. | D. it will not benefit either country because their cultural differences are too vast. C. Mexico and the United States can both benefit.

7. Senator Smart, who understands economic principles, is trying to convince workers in her district that trade with other countries is beneficial. Senator Smart 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. B. because it allows specialization, which increases total output.

8. 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 C. both

9. When the United States trades with Singapore, A. both countries are likely made better off. | B. only Singapore benefits since the United States can produce all goods at a higher level of quality than Singapore. | C. only the United States benefits since Singapore’s low wages guarantee profitable firms in Singapore regardless of trade. | D. niether country will benefit since the United States is more efficient than Singapore at producing all goods. A. both countries are likely made better off.

10. Benefits from trade would not include A. the ability of people and nations to specialize. | B. a greater variety of goods and services becoming available. | C. less competition. | D. lower prices. C. less competition.

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

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. D. None of the above are correct.

13. 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. B. central planners were in the best position to determine the allocation of scarce resources in the economy.

14. The term "invisible hand" was coined by A. Adam Smith. | B. David Ricardo. | C. Karl Marx. | D. Benjamin Franklin. A. Adam Smith.

15. The "invisible hand" directs economic activity through A. advertising. | B. prices. | C. central planning. | D. government regulations. B. prices.

16. Canada can benefit from trade A. only with nations that can produce goods Canada cannot produce. | B. only with less developed nations. | C. only with nations outside of North America. | D. with any nation. D. with any nation.

17. The invisible hand refers to A. how central planners made economic decisions. | B. how the decisions of households and firms lead to desirable market outcomes. | C. the control that large firms have over the economy. | D. government regulations without which the economy would be less efficient. B. how the decisions of households and firms lead to desirable market outcomes.

18. 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. A. government actions that distort prices.

19. 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." C. both the values that society places on those products and the costs to society of producing those products.

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

21. According to Adam Smith, the success of decentralized market economies is primarily due to A. the basic benevolence of society. | B. society's legal system. | C. individuals' pursuit of self-interest. | D. partnerships that are forged between business and government. C. individuals' pursuit of self-interest.

22. 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. A. the invisible hand.

23. 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. | D. more need for a strong legal system to control individual greed than would be needed in a centrally-planned economy. A. the potential to achieve efficiency in production.

24. 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 C. firms and households

25. In a market economy, economic activity is guided by A. the government. | B. corporations. | C. central planners. | D. self-interest and prices. D. self-interest and prices.

26. For markets to work well, there must be A. market power. | B. a central planner. | C. property rights. | D. abundant, not scarce, resources. C. property rights.

27. 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. C. both the value of a good to society and the cost to society of making the good.

28. 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. A. influencing the actions of buyers and sellers.

29. A friend of yours asks you why market prices are better than government-determined prices. Because you understand economic principles, you say that market-determined prices are better because they generally reflect A. the value of a good to society, but not the cost of making it. | B. the cost of making a good to society, but not its value. | C. both the value of a good to society and the cost of making it. | D. neither the value of a good to society nor the cost of making it. C. both the value of a good to society and the cost of making it.

30. If the price of a gallon of milk were fixed above the current price, then we would expect A. an increase in the number of gallons of milk people want to buy and an increase in the number of gallons of milk dairy farmers want to sell. | B. an increase in the number of gallons of milk people want to buy and a decrease in the number of gallons of milk dairy farmers want to sell. | C. a decrease in the number of gallons of milk people want to buy and an increase in the number of gallons of milk dairy farmers want to sell. | D. a decrease in the number of gallons of milk people want to buy and a decrease in the number of gallons of milk dairy farmers want to sell. C. a decrease in the number of gallons of milk people want to buy and an increase in the number of gallons of milk dairy farmers want to sell.

31. When the government prevents prices from adjusting naturally to supply and demand, A. it equates the amount buyers want to buy with the amount sellers want to sell. | B. it adversely affects the allocation of resources. | C. it improves equality and efficiency. | D. it improves efficiency but reduces equality. B. it adversely affects the allocation of resources.

32. For which of the following problems can well-designed public policy enhance economic efficiency? A. both externalities and market power | B. externalities, but not market power | C. market power, but not externalities | D. neither externalities nor market power A. both externalities and market power

33. A rationale for government involvement in a market economy is as follows: 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. D. All of the above are correct.

34. To say that government intervenes in the economy to promote efficiency is to say that government is attempting to A. create a more fair distribution of income. | B. change the way in which the economic pie is divided. | C. enlarge the economic pie. | D. All of the above are correct. C. enlarge the economic pie.

35. The term used to describe a situation in which markets do not allocate resources efficiently is A. economic meltdown. | B. market failure. | C. equilibrium. | D. the effect of the invisible hand. B. market failure.

36. The term market failure refers to A. a situation in which the market on its own fails to allocate resources efficiently. | B. an unsuccessful advertising campaign which reduces demand for a product. | C. a situation in which competition among firms becomes ruthless. | D. a firm which is forced out of business because of losses. A. a situation in which the market on its own fails to allocate resources efficiently.

37. Which of the following is not generally regarded by economists as a legitimate reason for the government to intervene in a market? A. to promote efficiency | B. to promote equality | C. to enforce property rights | D. to protect an industry from foreign competition D. to protect an industry from foreign competition

38. An example of an externality is the impact of A. bad weather on the income of farmers. | B. the personal income tax on a person's ability to purchase goods and services. | C. pollution from a factory on the health of people in the vicinity of the factory. | D. increases in health care costs on the health of individuals in society. C. pollution from a factory on the health of people in the vicinity of the factory.

39. Which of the following is an example of an externality? A. Aaron purchases a new flat screen television. | B. Bonnie cannot catch the flu from Bobby because Bobby got a flu vaccine. | C. Clyde sells a book to Cathy. | D. Doug turns up the heat in his apartment. B. Bonnie cannot catch the flu from Bobby because Bobby got a flu vaccine.

40. The willingness of citizens to pay for a vaccinations does not include the benefit society receives from having vaccinated citizens who cannot transmit an illness to others. This extra benefit society gets from vaccinating its citizens is known as A. productivity. | B. an externality. | C. market power. | D. property rights. B. an externality.

41. Which of these consumption activities will most likely impose an external cost? A. An athlete works out at a gym. | B. A secretary smokes a cigarette in a crowded break room. | C. A young mother pushes her baby in a stroller. | D. A construction worker eats a hotdog during his lunch break. B. A secretary smokes a cigarette in a crowded break room.

42. Which of these activities will most likely result in an external benefit? A. A college student buys a deck of cards to play solitaire in her dorm room. | B. An elderly woman plants a flower garden on the vacant lot next to her house. | C. An executive purchases a book to read on a business trip. | D. A ten-year-old uses his allowance to buy new Nike shoes. B. An elderly woman plants a flower garden on the vacant lot next to her house.

43. Market power refers to the A. power of a single person or small group to influence market prices. | B. ability of a person or small group to successfully market new products. | C. power of the government to regulate a market. | D. importance of a certain market in relation to the overall economy. A. power of a single person or small group to influence market prices.

44. Which of the following firms is most likely to have market power? A. a grocery store in a metropolitan area | B. a gas station in a suburb | C. a pub in a college town | D. the only hotel in a rural area D. the only hotel in a rural area

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

1. The term "productivity" A. means the same thing as "efficiency." | B. is seldom used by economists, as its meaning is not precise. | C. refers to the quantity of goods and services produced from each unit of labor input. | D. refers to the variety of goods and services from which households can choose when they shop. C. refers to the quantity of goods and services produced from each unit of labor input.

2. The income of a typical worker in a country is most closely linked to which of the following? A. population | B. productivity | C. market power | D. government policies B. productivity

3. A direct or positive relationship exists between a country's A. productivity and its standard of living. | B. amount of government spending and its productivity. | C. total population and its average citizen’s income. | D. rate of population growth and the extent of its trade with other countries. A. productivity and its standard of living.

4. The historical rise in living standards of American workers is primarily a result of A. the influence of labor unions in America. | B. tariff protection imposed by the American government. | C. the enactment of minimum-wage laws in America. | D. the rise in American productivity. D. the rise in American productivity.

5. Suppose that the average income of a Kenyan is higher than the average income of a South African. You might conclude that A. Kenyan firms are faced with stricter government regulations than South African firms. | B. total income is divided among fewer workers in Kenya since it has a smaller labor force than South Africa. | C. Kenya's climate allows for longer growing seasons and therefore Kenya can produce large quantities of grain and other crops. | D. productivity in Kenya is higher than in South Africa. D. productivity in Kenya is higher than in South Africa.

6. Suppose a typical worker in France can produce 32 units of product in an eight-hour day, while a typical worker in Germany can produce 30 units of product in a 10-hour day. We can conclude that A. worker productivity in Germany is higher than in France. | B. the standard of living will likely be higher in France than in Germany. | C. productivity is 4 units per hour for the German worker and 3 units per hour for the French worker. | D. there will be no difference between the standard of living in France and Germany. B. the standard of living will likely be higher in France than in Germany.

7. Suppose that in Chile total annual output is worth $600 million and people work 70 million hours. In Argentina total annual output is worth $450 million and people work 40 million hours. Productivity is higher A. in Chile. Most variation in the standard of living across countries is due to differences in productivity. | B. in Chile. Differences in productivity explain very little of the variation in the standard of living across countries. | C. in Argentina. Most variation in the standard of living across countries is due to differences in productivity. | D. in Argentina. Differences in productivity explain very little of the variation in the standard of living across countries. C. in Argentina. Most variation in the standard of living across countries is due to differences in productivity.

8. In a particular country in 1998, the average worker needed to work 25 hours to produce 40 units of output. In that same country in 2008, the average worker needed to work 40 hours to produce 68 units of output. In that country, the productivity of the average worker A. decreased by 1.7 percent between 1998 and 2008. | B. remained unchanged between 1998 and 2008. | C. increased by 4.75 percent between 1998 and 2008. | D. increased by 6.25 percent between 1998 and 2008. D. increased by 6.25 percent between 1998 and 2008.

9. A worker in Thailand can earn $2 per day making cotton cloth on a hand loom. A worker in the United States can earn $80 per day making cotton cloth with a mechanical loom. What accounts for the difference in wages? A. U.S. textile workers belong to a union. | B. There is little demand for cotton cloth in Thailand and great demand in the U.S. | C. Labor is more productive making cotton cloth with a mechanical loom than with a hand loom. | D. Thailand has a low-wage policy to make its textile industry more competitive in world markets. C. Labor is more productive making cotton cloth with a mechanical loom than with a hand loom.

10. To raise productivity, policymakers could A. increase spending on education. | B. provide tax credits to firms for capital improvements. | C. fund research and development. | D. All of the above are correct. D. All of the above are correct.

11. 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. A. ensure that workers are well educated and have the necessary tools and technology.

12. An increase in the overall level of prices in an economy is referred to as A. the income effect. | B. inflation. | C. deflation. | D. the substitution effect. B. inflation.

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

14. 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. D. All of the above are correct.

15. In 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? A. 3 percent per year | B. 5 percent per year | C. 7 percent per year | D. 9 percent per year D. 9 percent per year

16. In the short run, an increase in the money supply is likely to lead to A. lower unemployment and lower inflation. | B. lower unemployment and higher inflation. | C. higher unemployment and lower inflation. | D. higher unemployment and higher inflation. B. lower unemployment and higher inflation.

17. Suppose that the Federal Reserve Bank announces that it will be making a change to a key interest rate to increase the money supply. This is likely because A. the Federal Reserve Bank is worried about inflation. | B. the Federal Reserve Bank is worried about unemployment. | C. the Federal Reserve Bank is hoping to reduce the demand for goods and services. | D. the Federal Reserve Bank is worried that the economy is growing too quickly. B. the Federal Reserve Bank is worried about unemployment.

18. Low rates of inflation are generally associated with A. low rates of government spending. | B. small or nonexistent government budget deficits. | C. low rates of productivity growth. | D. low rates of growth of the quantity of money. D. low rates of growth of the quantity of money.

19. Which of the following is the most correct statement about the relationship between inflation and unemployment? A. In the short run, falling inflation is associated with falling unemployment. | B. In the short run, falling inflation is associated with rising unemployment. | C. In the long run, falling inflation is associated with falling unemployment. | D. In the long run, falling inflation is associated with rising unemployment. B. In the short run, falling inflation is associated with rising unemployment.

20. Which of the following is an important cause of inflation in an economy? A. increases in productivity in the economy | B. the influence of positive externalities on the economy | C. lack of property rights in the economy | D. growth in the quantity of money in the economy D. growth in the quantity of money in the economy

21. For a very long time Tropicland has had inflation of 12%. Suddenly its inflation rate drops to 4%. The drop in the inflation rate A. could be due to slower money supply growth. We would expect unemployment to be higher. | B. could be due to slower money supply growth. We would expect unemployment to be lower. | C. could be due to higher money supply growth. We would expect unemployment to be higher. | D. could be due to higher money supply growth. We would expect unemployment to be lower. A. could be due to slower money supply growth. We would expect unemployment to be higher.

22. During the 1990s, the United Kingdom experienced low levels of inflation while Turkey experienced high levels of inflation. A likely explanation of these facts is that A. the United Kingdom has a better education system than Turkey. | B. the rate of growth of the quantity of money was slower in the United Kingdom than in Turkey. | C. workers in Turkey are more productive than workers in the United Kingdom. | D. there are more instances of market power in Turkey than in the United Kingdom. B. the rate of growth of the quantity of money was slower in the United Kingdom than in Turkey.

23. In the short run, which of the following is not correct? A. Increasing the money supply increases the demand for goods and services. | B. Increasing the money supply encourages firms to hire more workers. | C. Lowering the money supply leads to a higher level of unemployment. | D. Policies that encourage higher employment will also induce a lower rate of inflation. D. Policies that encourage higher employment will also induce a lower rate of inflation.

24. The short-run tradeoff between inflation and unemployment implies that, in the short run, A. a decrease in the growth rate of the quantity of money will be accompanied by an increase in the unemployment rate. | B. an increase in the growth rate of the quantity of money will be accompanied by an increase in the unemployment rate. | C. policymakers are able to reduce the inflation rate and, at the same time, reduce the unemployment rate. | D. policymakers can influence the inflation rate, but not the unemployment rate. A. a decrease in the growth rate of the quantity of money will be accompanied by an increase in the unemployment rate.

25. It once took 90 percent of our population to grow our food. It now takes only 3 percent of the population to grow our food. Which of the following statements is true? A. This loss of jobs has been detrimental to our economy. | B. The government should provide subsidies to encourage more people to become farmers. | C. This reduction in the number of farmers explains the increase in the price of food. | D. Economists understand this is progress because the proportion of the population that used to be farmers is now employed in other professions. D. Economists understand this is progress because the proportion of the population that used to be farmers is now employed in other professions.