PRINCIPLES OF MICROECONOMICS INSTRUCTOR: MSc.

NGUYEN VIET HOA

CHAPTER 1: TEN PRINCIPLES OF ECONOMICS

1. What concept does economics deal primarily with?
A. Money and banking
B. Poverty and wealth
C. Scarcity and choice
D. Debits and credits
2. Which of the following is NOT included in the decisions that every society must make?
A. what goods will be produced
B. who will produce the goods
C. what determines consumer preferences
D. who will consume the goods
3. For what reason do both households and societies face many decisions?
A. because resources are scarce
B. because populations may increase or decrease over time
C. because wages for households and therefore society fluctuate with business cycles
D. because people, by nature, tend to disagree
4. When is a good considered scarce in a society?
A. when more output of the good is possible
B. when everyone in that society cannot have all they want of the good
C. when the government restricts production of the good
D. when only the richest people in the economy can buy all they want of the good
5. When does scarcity exist?
A. when there is less than an infinite amount of a resource or good
B. when society can meet the wants of every individual
C. when there is less of a good or resource available than people wish to have
D. when the government fails to produce goods
6. Which of the following would NOT be true in a world without scarcity?
A. There would be no need for the science of economics.
B. Everyone would have all the goods and services they wanted.
C. There would have to be an infinite supply of every resource.
D. There would be opportunity costs.
7. What is the economy experiencing when a society cannot produce all the goods and
services people wish to have?
A. scarcity
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B. communism
C. externalities
D. market failure
8. For society, when is a good NOT scarce?
A. if at least one individual in society can obtain all he or she wants of the good
B. if firms are producing at full capacity
C. if all members of society can have all they want of it
D. if those who have enough income can buy all they want of the good
9. What does economics study?
A. How society manages its scarce resources
B. The government's role in society
C. How to increase production
D. How firms make profits
10. Which of the following is NOT a major area of study for economists?
A. how people make decisions
B. how countries choose national leaders
C. how people interact with each other
D. how forces and trends affect the overall economy
11. What concept is illustrated by the adage, “There is no such thing as a free lunch”?
A. tradeoffs
B. scarcity
C. productivity
D. efficiency
12. What does the adage, “There is no such thing as a free lunch” mean?
A. Even people on welfare have to pay for food.
B. The cost of living is always increasing.
C. To get something we like, we usually have to give up another thing we like.
D. All costs are included in the price of a product.
13. What do economists illustrate when they use the phrase "There is no such thing as a
free lunch"?
A. How inflation increases prices
B. That to get one thing, we must give up something else
C. That nothing is free in a market economy
D. That if something looks too good to be true, it probably is
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14. Henry decides to spend 2 hours playing golf rather than working at his job which pays
$8 per hour. What is Henry's tradeoff?
A. the $16 he could have earned working for 2 hours
B. nothing, because he enjoys playing golf more than working
C. the increase in skill he obtains from playing golf for those 2 hours
D. nothing, because he spent $16 for green fees to play golf
15. When society requires that firms reduce pollution, what happens?
A. There is a trade-off because of reduced incomes to the firms' owners, workers, and
customers.
B. There is no trade-off, since everyone benefits from reduced pollution.
C. There is no trade-off for society as a whole, since the cost of reducing pollution falls
only on the firms affected by the requirements.
D. There is a trade-off only if some firms are forced to close.
16. Daniel decides to spend the last two hours of the night before his economics exam
studying instead of sleeping. For Daniel, what would his tradeoff be?
A. nothing, since no dollar value can be put on sleep
B. nothing, since studying would be more beneficial than sleep
C. the six hours of sleep he could have had if he had gone to bed before midnight
D. the two hours of rest he would have gotten
17. A rational person does not act unless
A. The action produces marginal costs that exceed marginal benefits.
B. The action produces marginal benefits that exceed marginal costs.
C. The action makes money for the person.
D. None of the above
18. Who guide most of the economic activity in the market economy?
A. Government
B. Sellers
C. Buyers
D. Both sellers and buyers
19. What does efficiency mean?
A. Society is conserving resources in order to save them for the future.
B. Society’s goods and services are distributed fairly among society's members.
C. Society has lessened its dependence on foreign energy sources.
D. Society is getting the most it can from its scarce resources.
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20. In which of the following situations would economists use the word equity?
A. Each member of society has the same income.
B. Society is getting the most it can from its scarce resources.
C. Those in society who have the least will receive the most.
D. The benefits of society's resources are distributed fairly among society's members.
21. What happens when government policies are being designed?
A. There is usually a tradeoff between equity and efficiency.
B. Equity and efficiency goals are usually independent of each other.
C. Equity can usually be achieved without an efficiency loss.
D. Increasing efficiency usually results in more equity.
22. When government policies such as the welfare system try to help the neediest
members of society, what happens?
A. It increases equity and reduces efficiency.
B. It reduces charitable contributions in an economy.
C. It increases the productivity of the needy in the society.
D. It causes market failure to occur.
23. When the government attempts to cut the economic pie into more equal slices, what
happens?
A. It is easier to cut the pie, and therefore the economy can produce a larger pie.
B. The government can more easily allocate the pie to those most in need.
C. The pie gets smaller, and there will be less pie for everyone.
D. The economy will spend too much time cutting and loses the ability to produce enough
pie for everyone.
24. When the government attempts to improve equity in an economy, what is often the
result?
A. an increase in overall output in the economy
B. additional government revenue since overall income will increase
C. an actual reduction in equity
D. reduced efficiency in the economy
25. What is the opportunity cost of going to college?
A. the total spent on food, clothing, books, transportation, tuition, lodging, and other
expenses
B. the value of the best opportunity a student gives up to attend college

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C. zero for students who are fortunate enough to have all of their college expenses paid by
someone else
D. zero, since a college education will allow a student to earn a larger income after
graduation
26. For most students, what is the largest single cost of an university education?
A. the wages given up to attend school
B. tuition, fees, and books
C. room and board
D. transportation, parking, and entertainment
27. What is the opportunity cost of an item?
A. the number of hours needed to earn money to buy it
B. what you give up to get that item
C. usually more than the dollar value of the item
D. usually less than the dollar value of the item
28. Russell spends an hour studying instead of playing tennis. What is the opportunity
cost to him of studying?
A. the improvement in his grades from studying for the hour
B. the difference between the improvement in his grades from studying minus the
enjoyment of playing tennis
C. the enjoyment and exercise he would have received had he played tennis
D. Zero, Since Russell chose to study rather than to play tennis, the value of studying must
have been greater than the value of playing tennis
29. What do we know about college-age athletes who drop out of college to play
professional sports?
A. They are not rational decision makers.
B. They are well aware that their opportunity cost of attending college is very high.
C. They are concerned more about present circumstances than their future.
D. They underestimate the value of a college education.
30. Rational people think at
A. The utility
B. The benefit
C. The cost
D. The margin
31. How do people make decisions at the margin?
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A. by following tradition
B. by experience
C. by calculating dollar costs
D. by comparing costs and benefits
32. What does making decisions "at the margin" mean?
A. that people make those decisions that do not impose a marginal cost
B. that people evaluate how easily a decision can be reversed if problems arise
C. that people compare the marginal costs and marginal benefits of each decision
D. that people always calculate the marginal dollar costs for each decision
33. After much consideration, you have chosen Cancun over Ft. Lauderdale for your
Spring Break trip this year. For this decision to change, which of the following must
occur?
A. The marginal benefit of Cancun must increase.
B. The marginal cost of Cancun must decrease.
C. The marginal benefit of Ft. Lauderdale must increase.
D. The marginal cost of Ft. Lauderdale must increase.
34. The average cost per seat on a bus trip from Montreal to Toronto is $140. Suppose no
refreshments are served and 3 seats are empty. How could the bus company increase its
profit?
A. if it charged no less than $140 for the 3 remaining seats
B. if it charged more than $140 for the 3 remaining seats
C. if it charged any ticket price above $0 for the remaining seats
D. if it left the seats empty
35. When does a rational decision maker take an action?
A. only if the marginal benefit is less than the marginal cost
B. only if the marginal benefit is greater than the marginal cost
C. only if the average benefit is greater than the average cost
D. only if the marginal benefit is greater than both the average cost and the marginal cost
36. Mike has spent $500 purchasing and repairing an old fishing boat, which he expects
to sell for $800 once the repairs are complete. He discovers that he needs an additional
repair, which will cost $400, in order to complete the repairs. He can sell the boat as it is
now for $300. What should he do?
A. He should cut his losses and take the $300.
B. He should never sell something for less than it cost.
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C. He should complete the repairs and sell the boat.

D. It doesn't matter which action he takes; the outcome is the same either way.
37. Stan buys a 1966 Mustang, which he plans to restore and sell. He anticipates that the
cost of the car and the repairs will be $8,000 and that he can sell it for $10,000. When he
has spent $7,000, he discovers he needs to replace the engine, which will cost $4,000. He
can sell the car without the new engine for $9,000. What should Stan do?
A. complete the repairs and sell the car for $10,000
B. cut his losses and sell the car now for $9,000
C. never try such an expensive project again
D. be totally indifferent between finishing the project and selling the car now
38. A furniture maker currently produces 100 tables per week and sells them for a profit.
She is considering expanding her operation in order to make more tables. Should she
expand?
A. Yes, because making tables is profitable.
B. No, because she may not be able to sell the additional tables.
C. It depends on the marginal cost of producing more tables and the marginal revenue she
will earn from selling more tables.
D. It depends on the average cost of producing more tables and the average revenue she
will earn from selling more tables.
39. Suppose your management professor has been offered a corporate job with a 30%
pay increase. He has decided to take the job. What happened for him?
A. The marginal cost of leaving was greater than the marginal benefit.
B. The marginal benefit of leaving was greater than the marginal cost.
C. The marginal benefit of teaching was greater than the marginal cost.
D. The marginal cost of teaching was greater than the marginal benefit.
40. A friend of yours asks you why market prices are better than government-determined
prices. What do you say?
A. because they generally reflect the value of a good to society, but not the cost of making
it
B. because they generally reflect the cost of making a good to society, but not its value
C. because they generally reflect both the value of a good to society and the cost of making
it
D. because they generally reflect neither the value of a good to society nor the cost of
making it
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41. Which is the most correct statement about the invisible hand?
A. The invisible hand always ensures both equity and efficiency.
B. The invisible hand cannot ensure either equity or efficiency.
C. The invisible hand is more effective at ensuring efficiency than it is at ensuring equity.
D. The invisible hand is more effective at ensuring equity than it is at ensuring efficiency.
42. How does the "invisible hand" direct economic activity?
A. through advertising
B. through prices
C. through central planning
D. through government regulations
43. What does the term market failure refer to?
A. a situation in which the market on its own fails to allocate resources efficiently
B. an unsuccessful advertising campaign that reduces buyer demand
C. a situation in which competition among firms becomes ruthless
D. a firm that is forced out of business because of losses
44. What are two causes of market failure?
A. externalities and market power
B. market power and incorrect forecasts of consumer demand
C. externalities and foreign competition
D. incorrect forecasts of consumer demand and foreign competition

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