Review questions on chapter 1

1- Economics is best defined as the study of

a) prices and quantities.
b) inflation and interest rates.
c) how people make choices under the conditions of scarcity.
d) wages and incomes.

2- Economic questions always deal with

a) financial matters.
b) political matters.
c) insufficient resources.
d) choices in the face of limited resources.

3- The range of topics or issues that fit within the definition of economics is
a) limited to market activities, e.g., buying soap.
b) limited to individuals and firms.
c) extremely wide, requiring only the ideas of choice and scarcity.
d) very limited.

4- The central concern of economics is

a) poverty.
b) scarcity.
c) wealth accumulation.
d) overconsumption.

5- The scarcity principle indicates that

a) no matter how much one has, it is never enough.
b) compared to 100 years ago, individuals have less time today.
c) with limited resources, having more of "this" means having less of "that."
d) because tradeoffs must be made, resources are therefore scarce.

6- The logical implication of the scarcity principle is that

a) one will never be satisfied with what one has.
b) as wealth increases, making tradeoffs becomes less necessary.
c) as wealth decreases, making tradeoffs becomes less necessary.
d) choices must be made.
 7- If all the world's resources were to magically increase 100 fold, then
a) the scarcity principle would still govern behavior.
b) economics would no longer be relevant.
c) the scarcity principle would disappear.
d) tradeoffs would become unnecessary.

8- The principle of scarcity applies to

a) the poor exclusively.
b) all consumers.
c) all firms.
d) everyone; consumers, firms, governments, and nations.

9- At the very least, poor and wealthy individuals are identically limited by
a) their wealth.
b) the 24 hours that comprise a day.
c) their knowledge.
d) their influence.

10- Forest is a mountain man living in complete isolation. He is completely self-sufficient through
hunting, fishing, and farming. He has not been in the city to buy anything in five years. One can infer
a) the scarcity principle does not apply to Forest.
b) Forest is not required to make choices.
c) the scarcity principle still applies because more hunting means less fishing and farming.
d) Forest is very satisfied.

11- The scarcity principle applies to

a) all decisions.
b) only market decisions, e.g., buying a car.
c) only non-market decisions, e.g., watching a sunset.
d) only the poor.

12- Karim has a one-hour break between classes every Wednesday. Karim can either stay at the library
and study or go to the gym and work out. This is
a) not an economic problem, because neither one costs money.
b) not an economic problem, because it's an hour that is wasted no matter what Karim does.
c) an economic problem because the tuition Karim pays covers both the gym and the library.
d) an economic problem, because the one-hour time limit means Karim must make a choice.

13- Jamal wants to go to the football game this weekend, but he has a paper due on Monday. It will take
him the whole weekend to write the paper. Jamal decided to stay home and work on the paper. According to
the scarcity principle, the reason Jamal didn't go to the game is that
a) Jamal prefers schoolwork to football games
b) writing the paper is easier than going to the game
c) Jamal doesn't have enough time for writing the paper and going to the game
d) it's too expensive to go to the game

14- Whether studying the size of an economy or the number of children a couple will choose to have, the
unifying concept is that wants are
a) limited, resources are limited, and thus tradeoffs must be made.
b) unlimited, resources are limited, and thus tradeoffs must be made.
c) unlimited, resources are limited to some but not to others and thus some people must make tradeoffs.
d) unlimited, resources are limited, and thus government needs to do more.

15- The cost-benefit principle indicates that an action should be taken a) if the total
benefits exceed the total costs.
b) if the average benefit exceed the average cost.
c) if the net benefit (benefit minus cost) is zero.
d) if the extra benefit is greater than or equal to the extra cost.

16- When a person decides to pursue an activity as long as the extra benefit is at least equal to the extra
cost, that person is
a) violating the cost-benefit principle.
b) following the scarcity principle.
c) following the cost-benefit principle.
d) pursuing the activity too long.

17- Choosing to study for an exam until the extra benefit (improved score) equals the extra cost (mental
fatigue) is
a) not rational.
b) an application of the cost-benefit principle.
c) an application of the scarcity principle.
d) the relevant opportunity cost.

18- The scarcity principle indicates that __________ and the cost-benefit principle indicates
__________.
a) choices must be made; how to make the choices
b) choices must be made; the costs can never outweigh the benefits of the choices
c) rare goods are expensive; the costs should outweigh the benefits of the choices
d) rare goods are expensive; the costs can never outweigh the benefits of the choices

19- According to the cost-benefit principle,

a) the lowest cost activity usually gives the lowest benefit.
 b) a person should always choose the activity with the lowest cost.
c) a person should always choose the activity with the greatest benefit.
d) the extra costs and benefits of an activity are more important considerations than the total costs and
benefits.

20- A rational person is one who a) is reasonable.

b) makes choices that are easily understood.
c) possesses well-defined goals and seeks to achieve them.
d) is highly cynical.

21- The 7th glass of soda that Tariq consumes will produce an extra benefit of 10 cents and has an extra
cost of zero (Tariq is eating at the cafeteria). The cost-benefit principle predicts that Tariq will
a) realize he has had too much soda to drink and go home.
b) drink the 7th glass and continue until the marginal benefit of drinking another glass of soda is zero.
c) volunteer to empty out the fountain.
d) not drink the 7th glass.

22- Jihan must either mow the lawn or wash clothes, earning her a benefit of $30 or $45, respectively.
She dislikes both equally and they both take the same amount of time. Jihan will therefore choose to
_________because the economic surplus is ________.
a) mow; greater
b) wash; greater
c) mow; smaller
d) wash; smaller

23- Darwish decided to play tennis rather than prepare for his exam in economics that is the day after
tomorrow. One can infer that
a) Darwish has made an irrational choice.
b) Darwish is doing poorly in his economics class.
c) the economic surplus from playing tennis exceeded the surplus from studying.
d) the cost of studying was less than the cost of playing tennis.

Required information for the following four questions

Samir studied 5 hours for his first Economics test and his test score was 85; 6 hours for his second
Economics test and scored 90; and 7 hours for his third Economics test and scored 95. He also studied 5
hours for his first Math test and his test score was 68; 6 hours for his second Math test and scored 78; and 7
hours for his third Math test and scored 88.

24- Based on the information above, the average benefit per hour studied for the Economics tests was
________ and the average benefit per hour studied for the Math tests was _______ .
a) 15; 13
 b) 5; 10
c) 13; 15
d) 10; 5

25- Based on the information above, Samir's marginal benefit from the seventh hour spent studying
Economics is
a) 5
b) 10
c) 15
d) 45

26- Based on the information above, Samir's marginal benefit from the seventh hour spent studying Math
is:
a) 5
b) 10
c) 15
d) 78

27- Based on the information above, if Samir has already spent 5 hours studying
Economics and 5 hours studying Math, he should spend the next hour
a) Studying Math for half an hour and Economics for half an hour
b) Studying only Economics
c) Studying only Math
d) Studying Economics for 45 minutes and Math for 15 minutes

28- You have eaten two bowls of ice cream at Sundae School Ice Cream store. You consider eating a
third. As a rational consumer you should make your choice by comparing
a. the benefits from eating all three bowls of ice cream to how much three bowls of ice cream cost
b. the benefits from eating all three bowls of ice cream to how much one more bowl of ice cream
c. the benefits from eating one more bowl of ice cream to how much three bowls of ice cream cost
d. the benefits from eating one more bowl of ice cream to how much one more bowl of ice cream cost

29- Which of the following is an example of a normative - as opposed to a positive - statement?

a. The discount rate is the interest rate the Federal Reserve charges banks to borrow funds.
b. The US income tax rate increases with the amount of income earned.
c. The government should increase the tax on gasoline.
d. The US unemployment rate increased to 10 percent in 2009.
 30- Positive statements are
a. prescriptive.
b. claims about how the world should be.
c. claims about how the world is.
d. made by economists speaking as policy advisers.

31- Which of the following areas of study typifies microeconomics as opposed to macroeconomics?
a. the impact of faster money growth on the rate of inflation
b. a comparison of alternative tax policies and their respective impacts on the rate of the nation’s economic
growth
c. the impact of minimum-wage laws on employment in the fast food industry
d. the effect of changes in household saving rates on the growth rate of national income

32- Economists make assumptions in order to

a. focus their thinking on the essence of the problem at hand.
b. minimize the number of experiments that yield no useful data.
c. minimize the methodologies employed by other scientists.
d. minimize the likelihood that some aspect of the problem at hand is being overlooked.

33- Indicate whether each of the following statements applies to microeconomics or macroeconomics:
a. The unemployment rate in the United States was 4.9
percent in January 2008.
b. A U.S. software firm discharged 15 workers last month
and transferred the work to India.
c. An unexpected freeze in central Florida reduced the citrus
crop and caused the price of oranges to rise.
d. U.S. output, adjusted for inflation, grew by 2.2 percent in
2007.
e. Last week Wells Fargo Bank lowered its interest rate on
business loans by one-half of 1 percentage point.
f. The consumer price index rose by 2.8 percent in 2007.