Test for Chapter One MULTIPLE CHOICE1.Economics is the study of how society manages itsa.limited wants and unlimited resources.b.unlimited wants and unlimited resources.c.limited wants and limited resources.d.unlimited wants and limited resources. Answer: D2.John is an athlete. He has $120 to spend and wants to buy either a heart rate monitor or new running shoes. Both the heart rate monitor and running shoes cost $120, so he can only buy one. This illustrates the principle 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. Answer: B3.Consider Deborahs decision to go to college. If she goes to college, she will spend $20,000 on tuition, $10,000 on room and board, and $2,000 on books. If she does not go to college, she will earn $18,000 working in a store and spend $8,000 on room and board. Deborahs cost of going to college isa.$32,000.b.$42,000.c.$50,000.d.$58,000.Answer: B4. Suppose that you have received $200 as a birthday gift. You can spend it today or you can put the money in a bank account for a year and earn 4 percent interest. The opportunity cost of spending the money today is a.$0.b.$8.c.$200.d.$208.Answer: B5. Rational people make decisions “at the margin” by comparinga. average costs and benefits.b. total costs and benefits.c. additional costs and benefits.d. opportunity costs and benefits.Answer: C6.Suppose the cost of flying a 200-seat plane for an airline is $100,000 and there are 10 empty seats on a flight. If the marginal cost of flying a passenger is $200 and a standby passenger is willing to pay $300, the airline shoulda.sell the ticket because the marginal benefit exceeds the marginal cost.b.sell the ticket because the marginal benefit exceeds the average cost.c.not sell the ticket because the marginal benefit is less than the marginal cost.d.not sell the ticket because the marginal benefit is less than the average cost. Answer: A7. Suppose the cost of flying a 100-seat plane for an airline is $50,000 and there are 10 empty seats on a flight. The average cost per seat isa. $50.b. $500.c. $50,000.d. This cannot be determined from the information given.Answer: B8. Suppose the cost of flying a 100-seat plane for an airline is $50,000 and there are 10 empty seats on a flight. The marginal cost of flying a passenger isa.$50.b.$500.c.$50,000.d.This cannot be determined from the information given.Answer: D9. Suppose the cost of flying a 200-seat plane for an airline is $100,000 and there are 10 empty seats on a flight. The airline should sell a ticket to a standby passenger only if the passenger is willing to paya.more than $200.b.more than $300.c.more than $500.d.This cannot be determined from the information given. Answer: D10. It costs a company $35,000 to produce 500 calculators. The companys cost will be $35,050 if it produces an additional calculator. If the company produces 500 calculators thena.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.This cannot be determined from the information given.Answer: A11. Something that induces a person to act is calleda.a trade-off.b.a policy.c.an incentive.d.an opportunity cost. Answer: C12. When United States trades with China,a.both countries will likely benefit.b.only United States will benefit.c.only China will benefit.d.neither country will benefit.Answer: A13.The invisible hand refers toa.the government.b.the free market.c.central planners.d.large businesses.Answer: B14. Air pollution from burning fossil fuels causes damages to crops and public health. This is an example ofa.a market failure caused by an externality.b.a market failure caused by market power.c.a market failure caused by equality.d.There is no market failure in this case. Answer: A15. Which of the following is an example of an externality?a. A paper mill dumps waste into the river.b.A neighbors loud music disrupts sleep.c. A drunk driver causes an accident that injures another person.d.All of the above are correct. Answer: DPROBLEM1.The term _ refers to the size of the economic pie, and the term _ refers to how the pie is divided.efficiencyequality2.Explain how government policies that redistribute income from the rich to the poor might reduce efficiency.They reduce the reward for working hard. As a result, people work less and produce fewer goods and services.Scenario 1-1You have the afternoon free. You have a choice between going to the movies with a friend or studying economics for three hours. If you go to the movies, you will spend $8.00 on a ticket and $4.50 on popcorn. If you choose to study economics for three hours, you will raise your exam grade by 10 points.3.Refer to Scenario 1-1. What is your opportunity cost of going to the movies?$12.50 and 10 points on your exam grade4.Refer to Scenario 1-1. What is your opportunity cost of studying economics?The enjoyment you would have received from going to the movies with your friend.Scenario 1-2Suppose that you have a choice between going to the movies with a friend for two hours or working at your job. If you go to the movies, you will spend $7 on a ticket and $5 on popcorn. If you choose to work, you will earn $10 an hour.5.Refer to Scenario 1-2. What is your opportunity cost of going to the movies?$326.Refer to Scenario 1-2. What is your opportunity cost of working?The enjoyment you would have received from going to the movies with your friend.7. Debbie quits her job, which pays $30,000 a year, to finish her college degree. Her annual college expenses are $10,000 for tuition, $2,000 for books, and $700 for food. What is her opportunity cost of attending college for the year?$42,0008. Zack quits his job at a consulting firm, which pays $40,000 a year, to enroll in a two-year graduate program. His annual school expenses are $30,000 for tuition, $2,000 for books, and $600 for food. What is his opportunity cost of attending the two-year graduate program?$144,0009. What is another word for “marginal”?incrementaladditional10. The term _ refers to a small incremental adjustment to an existing plan of action.Marginal changeScenario 1-3It costs a company $35,000 to produce 700 calculators. The companys cost will be $35,070 if it produces an additional calculator. The company is currently producing 700 calculators.11.Refer to Scenario 1-3. What is the companys average cost?$5012.Refer to Scenario 1-3. What is the companys marginal cost?$70Scenario 1-3It costs a company $35,000 to produce 700 calculators. The companys cost will be $35,070 if it produces an additional calculator. The company is currently producing 700 calculators.13.Refer to Scenario 1-3. A customer is willing to pay $60 for the 701th calculator. Should the company produce and sell it? Explain.No, because the marginal cost ($70) is more than the marginal benefit ($60).Scenario 1-3It costs a company $35,000 to produce 700 calculators. The companys cost will be $35,070 if it produces an additional calculator. The company is currently producing 700 calculators.14.Refer to Scenario 1-3. What is the minimum price the company will charge for the 701th calculator?$7015. Explain how trade with other countries is beneficial.Trade allows countries to specialize in what they do best, which increases total output.16. What are the two basic types of economies?Centrally planned economies and market economies17. What is the main difference between a centrally planned economy and a market economy?In a market economy, decisions are guided by prices and individual self-interest. In a centrally planned economy, economic activity is guided by the government.18. Invisible hand is a term used by the economist _ to describe how the decisions of households and firms lead to desirable market outcomes.Adam Smith19. Economists use the term _ to refer to a situation in which the market on its own fails to produce an efficient allocation of resources.market failure20.What are the two possible causes of market failure?Externality and market power21.Explain the concept of externality and give an example.The impact of one persons actions on the well-being of a bystander; pollution22. What are the two reasons for the government to intervene in a market?To promote efficiency and equality23. Economists use the term _ to refer to an increase in the overall level of prices in the economy.Inflation24. In the short run, an increase in the money supply is likely to lead to _ inflation and _ unemployment.higherlower25. Economists use the term _ to refer to fluctuations in economic activity, such as employment and production. business cycle