Chapter 1/Ten Principles of Economics ? 5

29. Which of the following words and phrases best captures the notion of equity?

a. minimum waste b. maximum benefit c. sameness d. fairness ANS: D DIF: 1 REF: 1-1 TOP: Equity MSC: Definitional

30. When government policies are enacted,

a. equity can usually be enhanced without an efficiency loss, but efficiency can never be enhanced without an

equity loss.

b. efficiency can usually be enhanced without an equity loss, but equity can never be enhanced without an

efficiency loss.

c. it is always the case that either efficiency and fairness are both enhanced, or efficiency and equity are both

diminished.

d. None of the above are correct. ANS: D DIF: 2 REF: 1-1 TOP: Government, Efficiency, Equity MSC: Applicative 31. A likely effect of government policies that redistribute income and wealth from the wealthy to the poor is that those

policies

a. enhance equity. b. reduce efficiency.

c. reduce the reward for working hard. d. All of the above are correct. ANS: D DIF: 2 REF: 1-1 TOP: Government, Efficiency, Equity MSC: Interpretive 32. When the government implements programs such as progressive income tax rates, which of the following is likely to

occur?

a. Equity is increased and efficiency is increased. b. Equity is increased and efficiency is decreased. c. Equity is decreased and efficiency is increased. d. Equity is decreased and efficiency is decreased. ANS: B DIF: 2 REF: 1-1 TOP: Government, Efficiency, Equity MSC: Interpretive 33. As a result of a successful attempt by government to cut the economic pie into more equal slices,

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 overall.

d. government will spend too much time cutting and it causes the economy to lose the ability to produce enough pie

for everyone.

ANS: C DIF: 3 REF: 1-1 TOP: Government, Efficiency, Equity MSC: Analytical 34. When the government attempts to improve equity in an economy the result is often

a. an increase in overall output in the economy.

b. additional government revenue since overall income will increase. c. a reduction in equity. d. a reduction in efficiency. ANS: D DIF: 2 REF: 1-1 TOP: Government, Efficiency, Equity MSC: Interpretive

35. When the government redistributes income from the wealthy to the poor,

a. efficiency is improved, but equity is not.

b. both wealthy people and poor people benefit directly. c. people work less and produce fewer goods and services.

d. wealthy people consume fewer goods, but poor people consume more goods, resulting in no real change. ANS: C DIF: 2 REF: 1-1 TOP: Government, Efficiency, Equity MSC: Interpretive

6 ? Chapter 1/Ten Principles of Economics

36. In economics, the cost of something is

a. the dollar amount of obtaining it.

b. always measured in units of time given up to get it. c. what you give up to get it.

d. often impossible to quantify, even in principle. ANS: C DIF: 1 REF: 1-1 TOP: Opportunity cost MSC: Definitional 37. What you give up to obtain an item is called your

a. opportunity cost. b. explicit cost. c. true cost. d. direct cost. ANS: A DIF: 1 REF: 1-1 TOP: Opportunity cost MSC: Definitional

38. The opportunity cost of going to college is

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.

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. ANS: B DIF: 2 REF: 1-1 TOP: Opportunity cost MSC: Interpretive 39. Maurice receives $100 as a birthday gift. In deciding how to spend the money, he narrows his options down to four

choices: Option A, Option B, Option C, and Option D. Each option costs $100. Finally he decides on Option B. The opportunity cost of this decision is

a. the value to Maurice of the option he would have chosen had Option B not been available. b. the value to Maurice of Options A, C and D combined. c. $100. d. $300. ANS: A DIF: 2 REF: 1-1 TOP: Opportunity cost MSC: Applicative 40. 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.

ANS: C DIF: 2 REF: 1-1 TOP: Marginal changes MSC: Applicative 41. For most students, the largest single cost of a college education is

a. the wages given up to attend school. b. tuition, fees, and books. c. room and board.

d. transportation, parking, and entertainment. ANS: A DIF: 2 REF: 1-1 TOP: Opportunity cost MSC: Interpretive

42. For a college student who wishes to calculate the true costs of going to college, the costs of room and board

a. should be counted in full, regardless of the costs of eating and sleeping elsewhere.

b. should be counted only to the extent that they are more expensive at college than elsewhere. c. usually exceed the opportunity cost of going to college.

d. plus the cost of tuition, equals the opportunity cost of going to college. ANS: B DIF: 2 REF: 1-1 TOP: Opportunity cost MSC: Applicative

Chapter 1/Ten Principles of Economics ? 7

43. 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

ANS: C DIF: 2 REF: 1-1 TOP: Opportunity cost MSC: Applicative 44. When you calculate your true costs of going to college, what portion of your room-and-board expenses should be

included?

a. Your full room-and-board expenses should always be included. b. None of your room-and-board expenses should ever be included.

c. You should include only the amount by which your room-and-board expenses exceed the income you earn while

attending college.

d. You should include only the amount by which your room-and-board expenses exceed the expenses for rent and

food if you were not in college.

ANS: D DIF: 2 REF: 1-1 TOP: Opportunity cost MSC: Applicative 45. 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. ANS: B DIF: 1 REF: 1-1 TOP: Opportunity cost MSC: Definitional

46. 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. ANS: C DIF: 3 REF: 1-1 TOP: Opportunity cost MSC: Applicative 47. Russell spends an hour studying instead of playing tennis. The opportunity cost to him of studying is

a. the improvement in his grades from studying for the hour.

b. 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.

ANS: C DIF: 3 REF: 1-1 TOP: Opportunity cost MSC: Applicative 48. College-age athletes who drop out of college to play professional sports

a. are not rational decision makers.

b. are well aware that their opportunity cost of attending college is very high. c. are concerned more about present circumstances than their future. d. underestimate the value of a college education. ANS: B DIF: 2 REF: 1-1 TOP: Opportunity cost MSC: Interpretive

8 ? Chapter 1/Ten Principles of Economics

49. 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.

ANS: C DIF: 2 REF: 1-1 TOP: Marginal changes MSC: Interpretive 50. Rational people make decisions at the margin by

a. following marginal traditions. b. behaving in a random fashion. c. thinking in black-and-white terms.

d. comparing marginal costs and marginal benefits. ANS: D DIF: 1 REF: 1-1 TOP: Marginal changes MSC: Interpretive 51. The word \

a. edge. b. distance. c. space. d. measure. ANS: A DIF: 1 REF: 1-1 TOP: Marginal changes MSC: Definitional

52. Making rational decisions \

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. ANS: C DIF: 2 REF: 1-1 TOP: Marginal changes MSC: Interpretive

53. A person’s willingness to pay for a good is based on

a. the availability of the good.

b. the marginal benefit that an extra unit of the good would provide for that person. c. the marginal cost of producing an extra unit of the good.

d. esoteric factors, the study of which lies beyond the boundaries of economics. ANS: B DIF: 2 REF: 1-1 TOP: Marginal changes MSC: Interpretive

54. To say that \

a. changes in costs (but not changes in benefits) influence people's decisions and their behavior. b. changes in benefits (but not changes in costs) influence people's decisions and their behavior. c. changes in benefits or changes in costs influence people's decisions and their behavior. d. tradeoffs can be eliminated by rational people who think at the margin. ANS: C DIF: 1 REF: 1-1 TOP: Incentives MSC: Definitional

55. 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. ANS: D DIF: 1 REF: 1-1 TOP: Marginal changes MSC: Definitional