Chapter 1 Study Guide

Multiple Choice
1. Economics is the study of 2. In economics, the cost of something is 3. High school athletes who skip college to become highly paid professional athletes 4. A rational decision maker takes an action only if the 5. Mike has spent $500 purchasing and repairing an old fishing boat, which he expects to sell for $800 once the repairs are complete. Mike discovers that, in addition to the $500 he has already spent, he needs to make one more repair, which will cost another $400, in order to make the boat worth $800 to potential buyers. He can sell the boat as it is now for $300. What should he do? 6. Which is the most accurate statement about trade? 7. One advantage market economies have over centrally planned economies is that market economies 8. Which of the following questions is not answered by the decisions that every society must make? 9. The term used to describe a situation in which markets do not allocate resources efficiently is 10. Laws that restrict smoking cigarettes in public places are examples of government intervention that is intended to reduce 11. In the United States, incomes historically have grown about 2 percent per year. At this rate, average income doubles every 12. Which of the following is the most correct statement about the relationship between inflation and unemployment?
 * 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.
 * e. the earning and spending of money.
 * 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.
 * e. the dollar cost of producing it.
 * 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 because the marginal benefits of college outweigh the marginal costs of college for high school athletes.
 * e. understand that the opportunity cost of becoming a professional athlete is very high.
 * a. marginal benefit is less than the marginal cost.
 * b. marginal benefit is greater than the marginal cost.
 * c. total benefit is maximized.
 * d. total cost is minimized.
 * e. the opportunity cost is less than the marginal cost.
 * a. He should sell the boat as it is now for $300.
 * b. He should sell the boat for no less than the $900 he has spent on it.
 * c. He should complete the repairs and sell the boat for $800.
 * d. It does not matter which action he takes; the outcome is the same either way.
 * e. He should sell the boat for the $500 he has already spent.
 * 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.
 * e. Trade helps poor nations and hurts rich nations.
 * 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.
 * e. are better at directing resources toward achieving national goals.
 * a. What determines consumer preferences?
 * b. What goods will be produced?
 * c. How will goods be produced?
 * d. Who will consume the goods produced?
 * e. Who will produce the goods being consumed?
 * a. economic meltdown.
 * b. market failure.
 * c. government failure.
 * d. equilibrium.
 * e. disequilibrium.
 * a. efficiency.
 * b. equality.
 * c. externalities.
 * d. productivity.
 * e. equity.
 * a. fifteen years.
 * b. twenty-five years.
 * c. thirty-five years.
 * d. forty-five years.
 * e. fifty years.
 * 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 short run, falling inflation is unrelated to unemployment.
 * d. In the long run, falling inflation is associated with falling unemployment.
 * e. In the long run, falling inflation is associated with rising unemployment.

Answers

 * B
 * C
 * C
 * B
 * B
 * A
 * D
 * A
 * B
 * C
 * C
 * B

Free Response
1. Greg is trying to make a decision about going on vacation. The following are costs he is considering: transportation expenses ($750); lodging expenses ($600); recreation expenses ($250); food expenses while on vacation ($500); and food expenses while at home ($300). Greg also knows that while on vacation, he will not earn $1,500 from work. Complete the following. 2. Define scarcity. Two ways that societies have used to deal with the economic problem of scarcity are markets and government. List one economic advantage of each of those systems of dealing with the problem of scarcity.
 * a. Calculate the total cost of Greg going on vacation.
 * b. List the name of each of the expenses you included and their dollar amount.