Deck 2: The Key Principles of Economics

Question 1

Figure 2.2
Figure 2.2 presents a production possibilities curve for a country that can either produce highways or provide people with medical care in a given year. The reason why the production possibilities curve is shaped as it is (bowed outward) is because inputs for healthcare and highways are:

A) perfectly substitutable.
B) substitutable, but not perfectly substitutable.
C) not substitutable at all.
D) used in precisely the same ratios.

Answer 1

substitutable, but not perfectly substitutable.

Question 2

When people interact in markets for their own self interest, it is described as the:

A) principle of scarcity.
B) principle of voluntary exchange.
C) laws of each state.
D) principle of supply and demand.

Answer 2

principle of voluntary exchange.

Question 3

The economic reason why you voluntarily pay tuition to get into the university/college that you are in right now is because:

A) you believe the value of education is higher than the tuition costs.
B) the marginal benefit of education is positive.
C) you believe the value of education is lower than the tuition costs.
D) the marginal benefit of money is zero.

Answer 3

you believe the value of education is higher than the tuition costs.

Question 4

Spending money on a fixed budget is an example of:

A) a bad thing to do because you run out of money.
B) living on the edge.
C) how to survive with unlimited financial resources.
D) the principle of opportunity cost.

Question 5

Suppose prices increase by 4% per year. What nominal percentage return on your savings account would you require to get a 1% real return?

A) 7%
B) 0%
C) 5%
D) 2%

Question 6

Suppose your bank pays you 6% interest per year on your savings account, so that $100 grows to $106 over a one- year period. If prices increase by 3% per year over that time, approximately how much real value do you gain by keeping $100 in the bank for a year?

A) $0
B) $3
C) $4
D) $1

Question 7

If a consumer can buy four pizzas for $24 and five pizzas for $25, then the marginal cost of the fifth pizza is:

A) $25.
B) $6.
C) $1.
D) $5.

Question 8

Figure 2.1
On the production possibilities curve in Figure 2.1 the gain from decreasing manufacturing production from 700 tons to 500 tons is:

A) 500 tons of agriculture.
B) 700 tons of agriculture.
C) 200 tons of agriculture.
D) 100 tons of agriculture.

Question 9

Figure 2.4
Joe runs a business and needs to decide how many hours to stay open. Figure 2.4 illustrates his marginal benefit of staying open for each additional hour. Suppose that Joe's marginal cost of staying open per hour is $40. How many hours should Joe stay open?

A) 4 hours
B) 5 hours
C) 3 hours
D) 6 hours

Question 10

Julianne runs a business and needs to decide how many hours to stay open. Table 2.2 illustrates her marginal costs of staying open for each additional hour. Suppose that Julianne's marginal benefit of staying open per hour is $3. If she is following the marginal principle, how many hours should Julianne stay open?

A) 6 hours
B) 3 hours
C) 1 hour
D) none of the above

Question 11

The marginal principle states that "we should increase the level of an activity as long as:

A) its marginal cost exceeds its marginal benefit."
B) its total benefit exceeds its total cost."
C) its total cost exceeds its total benefit."
D) its marginal benefit exceeds it marginal cost."

Question 12

Recall Application 2, "Why Not Walk Up an Escalator?," to answer the following questions
According to the application, an individual would walk up the stairs to listen to a music being played if:

A) the marginal benefit exceeds the marginal cost of walking up the stairs.
B) the total benefit of walking up the stairs exceeds zero.
C) the marginal cost exceeds the marginal benefit of walking up the stairs.
D) the marginal benefit of walking up the stairs exceeds zero.

Question 13

Figure 2.4
Joe runs a business and needs to decide how many hours to stay open. Figure 2.4 illustrates his marginal benefit of staying open for each additional hour. Suppose that we observe Joe staying open 4 hours per day. If he is following the marginal principle, what must his marginal cost be?

A) $40
B) $32
C) $24
D) $16

Question 14

Suppose your bank pays you 5% interest per year on your savings account while prices increase by 3% per year over that time. Approximately how much nominal value do you gain by keeping $100 in the bank for a year?

A) $0
B) $2.00
C) $5
D) $2.50

Question 15

According to the marginal principle, an individual will do best by producing or consuming where:

A) marginal benefit is less than marginal cost.
B) total benefit equals total cost.
C) marginal benefit equals marginal cost.
D) marginal benefit exceeds total benefits.

Question 16

Recall Application 5, "The Declining Real Minimum Wage," to answer the following questions:
According to the application, if the nominal minimum wage is unchanged while prices fall, then the real minimum wage:

A) falls.
B) stays the same.
C) is unaffected.
D) rises.

Question 17

What is the nominal value of money?

A) discounts taken by multiple purchases
B) what can be purchased with the money
C) savings by shopping on specific days of the week
D) its actual face value

Question 18

Figure 2.2
Figure 2.2 presents a production possibilities curve for a country that can either produce highways or provide people with medical care in a given year. The opportunity cost of the second new highway built in a year is:

A) 40,000 people provided with medical care.
B) 50,000 people provided with medical care.
C) 500,000 people provided with medical care.
D) 30,000 people provided with medical care.

Question 19

Recall Application 2, "Why Not Walk Up an Escalator?," to answer the following questions:
According to the application, most people stand still while using the escalator because:

A) the marginal benefit of standing still is greater than zero.
B) the marginal benefit is less than the marginal cost of walking up the escalator.
C) the marginal benefit exceeds the marginal cost of walking up the escalator.
D) the marginal benefit of standing still is zero.

Question 20

When deciding whether to engage in an activity or how much to do, people should follow:

A) the law of supply and demand.
B) the principle of macroeconomics.
C) the marginal principle.
D) the principle of microeconomics.

Question 21

Suppose your bank pays you 6% interest per year on your savings account. If prices increase by 3% per year over that time, approximately how much nominal value do you gain by keeping $100 in the bank for a year?

A) $3
B) $106
C) $0
D) $6

Question 22

The extra benefit resulting from a small increase in some activity is called the:

A) marginal equilibrium.
B) marginal benefit.
C) marginal cost.
D) marginal value.

Question 23

Figure 2.1
On the production possibilities curve in Figure 2.1 the opportunity costs of increasing agricultural production from 200 tons to 400 tons is:

A) 500 tons of manufacturing products.
B) 600 tons of manufacturing products.
C) 200 tons of manufacturing products.
D) 100 tons of manufacturing products.

Question 24

Figure 2.4
Joe runs a business and needs to decide how many hours to stay open. Figure 2.4 illustrates his marginal benefit of staying open for each additional hour. Suppose that we observe Joe staying open 5 hours per day. If he is following the marginal principle, what must his marginal cost be?

A) $40
B) $32
C) $16
D) $24

Question 25

Refer to Table 2.3. The principle of diminishing returns sets in with the addition of the _ worker.

A) 1st
B) 2nd
C) 3rd
D) 4th

Question 26

You borrow money to buy a house in 2006 at a variable interest rate of 6.5%. Your interest rate is always 2% more than the rate of inflation. By 2009, the inflation rate has risen to 8.5%. Considering only your mortgage, is inflation good news or bad news for you?

A) good news, because it makes the real value of your mortgage payments decrease
B) bad news, because inflation hurts everyone
C) bad news, because it makes the nominal value of your mortgage payments increase
D) neither, because your interest rate is tied to the rate of inflation

Question 27

Figure 2.4
Joe runs a business and needs to decide how many hours to stay open. Figure 2.4 illustrates his marginal benefit of staying open for each additional hour. Suppose that we observe Joe staying open 3 hours per day. If he is following the marginal principle, what must his marginal cost be?

A) $32
B) $24
C) $48
D) $40

Question 28

Figure 2.3
In Figure 2.3, point B:

A) is the optimum.
B) implies unemployment of some resources.
C) cannot be produced.
D) all of the above.

Question 29

Steven lives in a big city where there is a shortage of parking. He has a parking spot in his driveway where he parks his car. Which of the following statement is most correct?

A) Steven has a lower opportunity cost of owning a car than his neighbor, who must rent a parking spot.
B) The opportunity cost of using the parking spot is the price he could charge someone else for using the spot.
C) The opportunity cost of using the parking spot is zero, because Steven owns the house.
D) The opportunity cost depends on how much Steven's mortgage payment is.

Question 30

Refer to Table 2.3. The marginal product of the 3rd worker is:

A) 60 units of output.
B) 100 units of output.
C) 40 units of output.
D) 80 units of output.

Question 31

Mark quit his job as a salesman where he made $43,000 per year to start his own t- shirt making business. His business expenses are $6,000 per year on rent, $12,000 per year on supplies, and $4,000 per year on part- time help. As for his personal expenses, his apartment costs him $4,800 per year and his personal bills are an extra $1,200 per year. What is Mark's opportunity cost of running the business?

A) $65,000
B) $43,000
C) $71,000
D) $57,000

Question 32

Figure 2.2
Figure 2.2 presents a production possibilities curve for a country that can either produce highways or provide people with medical care in a given year. The opportunity cost of the fourth new highway built in a year is:

A) the sum of the opportunity costs of the first three highways built.
B) the same as the opportunity cost of the third new highway.
C) greater than the opportunity cost of the third new highway.
D) less than the opportunity cost of the third new highway.

Question 33

Julianne runs a business and needs to decide how many hours to stay open. Table 2.2 illustrates her marginal costs of staying open for each additional hour. Suppose that Julianne's marginal benefit of staying open per hour is $12. If she is following the marginal principle, how many hours should Julianne stay open?

A) 6 hours
B) 7 hours
C) 4 hours
D) 3 hours

Question 34

Figure 2.4
Joe runs a business and needs to decide how many hours to stay open. Figure 2.4 illustrates his marginal benefit of staying open for each additional hour. Suppose that Joe's marginal cost of staying open per hour is $32. How many hours should Joe stay open?

A) 6 hours
B) 4 hours
C) 7 hours
D) 5 hours

Question 35

A group of people has formed a house cleaning and yard maintenance business. The number of houses or yards that they can clean or maintain in any given day is depicted in Table 2.1. As the group cleans more houses, the opportunity cost of doing yard work:

A) rises.
B) falls.
C) stays the same.
D) becomes equal to the opportunity cost of cleaning houses.

Question 36

The principle that "as one input increases while the other inputs are held fixed, output beyond some point will exhibit increases at a decreasing rate" is known as the:

A) principle of opportunity cost.
B) spillover principle.
C) marginal principle.
D) principle of diminishing returns.

Question 37

The principle of diminishing returns occurs:

A) when there are two or more inputs and all inputs are allowed to vary.
B) when there is only one input.
C) when there are two or more inputs and at least one input is held fixed.
D) when there are two or more inputs and all inputs are held fixed.

Question 38

When referring to "marginal" changes, the economic focus is on:

A) graduated changes on the high end.
B) changes that affect only a few people or products.
C) small or incremental changes.
D) large changes on the low end.

Question 39

According to the marginal principle, a rational firm will introduce a movie sequel as long as:

A) total benefit equals total cost.
B) marginal benefit exceeds marginal cost.
C) marginal benefit is less than marginal cost.
D) marginal benefit equals marginal cost.

Question 40

Recall Application 4, "Fertilizer and Crop Yields" to answer the following questions:
According to the application, the corn production exhibited the principle of diminishing returns because:

A) the amount of nitrogen in each bag is decreasing.
B) the size of the land and the amount of machinery were held constant.
C) the type of fertilizer was held constant.
D) the type of soil was held constant.

Question 41

Mark quit his job as a salesman where he made $43,000 per year to start his own t- shirt making business. His business expenses are $6,000 per year on rent, $12,000 per year on supplies, and $4,000 per year on part- time help. As for his personal expenses, his apartment costs him $4,800 per year and his personal bills are an extra $1,200 per year. Which of the following is not part of the opportunity cost of running his business?

A) his personal bills
B) his apartment costs
C) his part- time labor costs
D) his apartment costs and his personal bills

Question 42

Suppose that your tuition to attend college is $5,000 per year and you spend $5,000 per year on room and board. If you were working full time, you could earn $22,000 per year. What is your opportunity cost of attending college?

A) $13,000
B) $35,000
C) $27,000
D) $30,000

Question 43

Recall Application 5, "The Declining Real Minimum Wage," to answer the following questions:
According to the application, the weekly income earned in 2007 at that time could buy standard baskets of goods and services.

A) 2.81
B) 1.70
C) 1.16
D) 1.54

Question 44

Firms expect to make money on repeat business because:

A) firms have more power than customers.
B) the management of the firm expects both the firm and their customers to be made better off by their exchange.
C) all firms are monopolists.
D) they think they can put one over on their customers.

Question 45

The principle that individuals and firms pick the activity level where the incremental benefit of that activity equals the incremental cost of that activity is known as the:

A) principle of opportunity cost.
B) spillover principle.
C) marginal principle.
D) principle of diminishing returns.

Question 46

Suppose it costs a firm $200 million to produce and promote a sequel. If the firm follows the marginal principle and decides not to produce the movie, which of the following must be true?

A) The firm believes that the marginal benefit is less than $200 billion.
B) The firm believes that the marginal benefit is larger than $200 billion.
C) The firm believes that the marginal cost is less than $200 billion.
D) The firm believes that the marginal cost is larger than $200 billion.

Question 47

If real salaries decrease but nominal salaries do not, this means that:

A) prices have fallen.
B) the purchasing power of money has increased.
C) prices have not changed.
D) prices have risen.

Question 48

Recall Application 5, "The Declining Real Minimum Wage," to answer the following questions:
According to the application, if the nominal minimum wage is unchanged while prices rise, then the real minimum wage:

A) rises.
B) declines.
C) is unaffected.
D) stays the same.

Question 49

Recall Application 1, "Don't Forget the Costs of Time and Invested Funds," to answer the following questions.
According to the application,if this year Betty spends $100,000 of her own money on materials, the interest rate is 5%, has living expenses of $20,000 and could have made $50,000 in her former line of employment, then Betty's opportunity cost of operating the business this year is:

A) $155,000.
B) $150,000.
C) $50,000.
D) $55,000.

Question 50

The economic reason why some individuals choose keep their tuition money and not to go to school is:

A) they believe the value of education is lower than the tuition costs.
B) the marginal cost of education is zero.
C) they believe the value of education is higher than the tuition costs.
D) the marginal benefit of money is zero.

Question 51

The opportunity cost of going to college:

A) includes wages you lose by going to school instead of working.
B) is equal to the cost of tuition, room and board, and other expenses.
C) is zero if your parents pay your tuition.
D) is the same for all students at a particular school who pay full tuition.

Question 52

Refer to Table 2.4. The principle of diminishing returns sets in with the addition of the _ tank of fertilizer.

A) 2nd
B) 3rd
C) 4th
D) 5th

Question 53

Julianne runs a business and needs to decide how many hours to stay open. Table 2.2 illustrates her marginal costs of staying open for each additional hour. Suppose that we observe Julianne staying open 3 hours per day. If she is following the marginal principle, what must her marginal benefit be?

A) $16
B) $24
C) $18
D) $12

Question 54

Figure 2.2
Figure 2.2 presents a production possibilities curve for a country that can either produce highways or provide people with medical care in a given year. The opportunity cost of the third new highway built in a year is:

A) 450,000 people provided with medical care.
B) 10,000 people provided with medical care.
C) 50,000 people provided with medical care.
D) 90,000 people provided with medical care.

Question 55

The extra benefit resulting from a small increase in an activity is called the:

A) marginal benefit.
B) marginal cost.
C) opportunity cost.
D) diminishing returns of the activity.

Question 56

The real value of money:

A) matters less to people than its nominal value.
B) reflects the purchasing power of the sum of money.
C) is another word for the face value.
D) Both B and C are correct.

Question 57

What is the real value of money?

A) the amount of it you have
B) the quantity of goods and services it can buy
C) its compounded earnings in banks
D) its face value

Question 58

Recall Application 6, "Repaying Student Loans," to answer the following questions:
The application shows that high inflation results in fewer years to pay back student loans because:

A) when inflation is high, the nominal value of wages decreases.
B) when inflation is high, the nominal value of the loan increases.
C) when inflation is high, the nominal value of the wages decrease.
D) when inflation is high, the nominal value of the loan decreases.

Question 59

When two people engage in voluntary trade,

A) each will expect to lose.
B) one will necessarily lose.
C) both will expect to be made better off.
D) both will necessarily lose.

Question 60

Figure 2.1
On the production possibilities curve in Figure 2.1 the opportunity costs of increasing agricultural production from 400 tons to 600 tons is:

A) 200 tons of manufacturing.
B) 500 tons of manufacturing.
C) 100 tons of manufacturing.
D) 600 tons of manufacturing.

Question 61

The saying that "There's no such thing as a free lunch" refers to the:

A) marginal principle.
B) reality principle.
C) spillover principle.
D) principle of opportunity cost.

Question 62

Recall Application 5, "The Declining Real Minimum Wage," to answer the following questions:
According to the application, if the weekly income from 1974 to 2007 increased from $80 to $234, but the number of standard baskets of goods that the weekly income decreased from 1.70 to 1.16 in 2007, then we can conclude that:

A) prices decreased faster than the wage increase between 1974 and 2007.
B) prices increased faster than the wage increase between 1974 and 2007.
C) prices decreased slower than the wage increase between 1974 and 2007.
D) prices increased slower than the wage increase between 1974 and 2007.

Question 63

Refer to Table 2.4. The marginal product of the 3rd tank of fertilizer is:

A) 29.33 truckloads of fruit.
B) 1.67 truckloads of fruit.
C) 5 truckloads of fruit.
D) 20 truckloads of fruit.

Question 64

The principle of diminishing returns implies that when one input increases while the other inputs are held fixed, output: beyond some point will exhibit:

A) increases at a decreasing rate.
B) decreases at a decreasing rate.
C) decreases at an increasing rate.
D) increases at an increasing rate.

Question 65

Figure 2.3
In Figure 2.3, point A:

A) is the optimum.
B) cannot be produced.
C) implies unemployment of some resources.
D) all of the above.

Question 66

According to the principle of diminishing returns, if the number of workers is increased beyond the point of diminishing returns, then the additional worker:

A) increases total output by less than the amount of previous workers.
B) increases total output by the same amount as previous workers.
C) decreases total output.
D) increases total output by more than the amount of previous workers.

Question 67

Figure 2.4
Joe runs a business and needs to decide how many hours to stay open. Figure 2.4 illustrates his marginal benefit of staying open for each additional hour. Suppose that we observe Joe staying open 6 hours per day. If he is following the marginal principle, what must his marginal cost be?

A) $16
B) $32
C) $48
D) $24

Question 68

Recall Application 3, "Jasper Johns and House Painting," to answer the following questions
Suppose that a house painter can earn $200 per day painting houses while Jasper Johns earns $5,000 per day painting art. According to the application, Jasper Johns should:

A) never hire a house painter.
B) never paint his house.
C) paint his house if he can paint it in less than 25 days.
D) paint his house if he can paint his house at least 25 times faster than a house painter.

Question 69

You have an hour between your economics and math classes. What is the opportunity cost of that time if you use it to do math homework?

A) It depends on what you would do if you had no math homework.
B) It depends on how much you like math.
C) Zero, because an hour isn't long enough to go to a paying job.
D) Zero, because it doesn't cost any money to do your math homework.

Question 70

Recall Application 2, "Why Not Walk Up an Escalator?," to answer the following questions:
According to the application, the marginal benefit of walking up the escalator:

A) is the benefit of of hearing music played.
B) is not using the escalator.
C) is the benefit of arriving sooner.
D) is the benefit of getting more exercise.

Question 71

Suppose that your tuition to attend college is $10,000 per year and you spend $4,000 per year on room and board. If you were working full time instead of attending college, you could earn $20,000 per year. What is your opportunity cost of attending college for one year?

A) $30,000
B) $34,000
C) $24,000
D) $14,000

Question 72

Recall Application 6, "Repaying Student Loans," to answer the following questions:
According to the application, if you are a debtor who owes student loans, you are helped in paying back your student loans by:

A) expected inflation.
B) expectedly deflation.
C) unexpected inflation.
D) unexpected deflation.

Question 73

Diminishing returns occurs because:

A) people have not satisfied their self- interests.
B) consumers do not buy enough of the products produced.
C) not enough people have jobs.
D) one of the inputs to the production process is fixed.

Question 74

Figure 2.1
On the production possibilities curve in Figure 2.1 as agricultural production increases by 200 tons per year from 200 tons to 400 tons and then to 600 tons, the opportunity cost in terms of tons of manufacturing goods:

A) rises.
B) becomes negative.
C) falls.
D) is constant.

Question 75

The additional cost resulting from a small increase in some activity is called the:

A) marginal cost.
B) marginal benefit.
C) diminishing returns of the activity.
D) opportunity cost.

Question 76

Figure 2.3
In Figure 2.3, the move from production possibility curve XV to production possibility curve YZ could be caused by:

A) decreased unemployment.
B) a decline in technology.
C) more land, labor or capital.
D) all of the above.

Question 77

Refer to Table 2.3. The marginal product of the 4th worker is:

A) 60 units of output.
B) 80 units of output.
C) 100 units of output.
D) 40 units of output.

Question 78

The firm depicted in Table 2.4 is likely to face diminishing returns because:

A) land is fixed but fertilizer is variable.
B) land and fertilizer are both fixed.
C) land and fertilizer are both variable.
D) the amount of fertilizer can only be increased to 5.

Question 79

The saying that "There is no such thing as a free lunch" refers to:

A) the principle of opportunity cost.
B) the principle of reality in a modern world.
C) the price of fast food in today's economy.
D) the principle of diminishing returns.

Question 80

According to the marginal principle, a rational individual should undertake an economic activity as long as the:

A) marginal benefit equals marginal cost.
B) total benefit equals total cost.
C) marginal benefit exceeds marginal cost.
D) marginal benefit is less than marginal cost.