Deck 2: Some Tools of the Economist

Question 1

If a motorist is stranded in front of a pay phone and has only dollar bills, and he ends up buying a quarter from a passerby for $1,

A)the stranded motorist must not understand that four quarters are worth $1.
B)economic theory is unable to explain this transaction.
C)both parties have gained from this exchange.
D)the passerby was made better off and the motorist worse off.

Answer 1

both parties have gained from this exchange.

Question 2

An economics professor points to a student in the front row and announces that "sitting in class is the thing you value most during this time period." Is the professor correct? Why or why not?

Answer 2

If the student is rational (and this is an assumption made in economics), he allocates time to its highest valued use. By attending class, the student has revealed that this activity was valued most during that time period. If this were not True, the student wouldn't be there.

Question 3

Suppose an airline ticket from Charlotte to Dallas costs $525. A bus ticket is $325. Traveling by plane will take 5 hours, compared with 25 hours by bus. Thus, the plane costs $200 more but saves 20 hours of time (Hint: Note how we are "thinking at the margin" here by looking at the changes). Other things constant, an individual will gain by choosing air travel if, and only if, each hour of her time is valued at more than

A)$10 per hour.
B)$13 per hour.
C)$20 per hour.
D)$105 per hour.

Answer 3

$10 per hour.

Question 4

In a market economy,

A)a larger income for one person means a smaller one for another.
B)the government answers all the basic economic questions.
C)a larger income for one person means it is possible for others to earn more too.
D)economic output shrinks as we discover better ways of doing things.

Question 5

Which of the following attributes of trade explain why it is important for economic prosperity?

A)Trade moves goods from people who value them less to people who value them more.
B)Trade makes it possible to produce a larger output as a result of lower per unit costs that often accompany large-scale production.
C)Trade makes it possible to produce a larger output as a result of gains from division of labor and specialization.
D)All of the above.

Question 6

When private ownership rights are well-defined and enforced, owners

A)can ignore the wishes of others, without bearing the cost.
B)have little incentive to take care of things.
C)can do anything they want with their property.
D)can be held accountable for damage to others through misuse of their property.

Question 7

After the terrorist attacks on September 11, 2001, the United States began devoting substantial resources toward the War on Terrorism, homeland security, and relief efforts. Use the production possibilities curve to demonstrate how this might affect the production of other goods in the United States.

Question 8

Sophia is an architect and she is trying to decide whether to hire Jacob, a draftsman, to assist with her work. Sophia could hire Jacob at $20 per hour but it would take him three times as long to complete a task as it takes Sophia. Sophia is able to earn $90 per hour and has more architectural jobs than she is able to handle. Which of the following is true?

A)Sophia should not hire Jacob because it would be faster for her to do the work herself.
B)Sophia should do the drafting work herself because she has the lower opportunity cost.
C)Jacob should be hired at the $20 per hour wage rate.
D)Jacob should be hired, but only if he is paid more than $30 per hour.

Question 9

Middlemen, such as grocers, stockbrokers, and realtors

A)specialize in reducing transactions costs.
B)provide nothing of value to either the buyer or the seller.
C)have no effect on economic output in society.
D)do not exist in capitalist economies.

Question 10

Melanie decided to sleep in today rather than attend her 9 a.m.economics class.According to economic analysis, her choice was

A)irrational, because economic analysis suggests you should always attend classes that you have already paid for.

B)irrational, because oversleeping is not in Melanie's self-interest.
C)rational if Melanie has not missed any other classes.
D)rational if Melanie values sleep more highly than the benefit she expects to receive from attending the class.

Question 11

A production possibilities curve graphically represents the maximum quantities of two products produced when all resources in the economy are being used efficiently. If an economy operates at a point inside its production possibilities curve,

A)it lacks the resources necessary to produce at full employment.
B)it is utilizing some resources inefficiently.
C)it does not confront the problem of scarce goods relative to unlimited wants.
D)it does not exist in the real world since it is impossible for an economy to operate inside its production possibilities curve.

Question 12

The president of a large public university proclaims, "If we can get the state government to fund our new football stadium, it will not cost us anything." Evaluate this view from an economic perspective.

Question 13

Given freedom of movement for both goods and resources, if Florida producers specialize in oranges and Georgia producers specialize in peaches, then it would be reasonable to conclude that

A)the opportunity cost of growing oranges is higher in Florida than in Georgia.
B)Georgia has a comparative advantage in producing peaches.
C)Florida has a comparative advantage in producing peaches.
D)total output will be expanded when Georgia allocates more resources to producing oranges and Florida allocates more resources to producing peaches.

Question 14

The size of a country's "economic pie" is thought of as the total dollar value of all goods and services produced during some period of time. The economic pie

A)is a fixed total waiting to be divided up among people.
B)determines how much wealth an individual can obtain.
C)is variable, not fixed, across time periods.
D)depends solely upon the natural resources of a country.

Question 15

The production possibilities curve illustrates the basic principle that

A)an economy's capacity to produce increases in proportion to its population.
B)if the resources of an economy are being used efficiently, more of one good can be produced only if less of another is produced.
C)an economy will automatically seek the output at which all of its resources are fully employed.
D)the distribution of income among households is the major determinant of the economic welfare of a nation.

Question 16

The law of comparative advantage indicates that

A)a group of people will reduce their output when each good or service is supplied by the low opportunity cost producer.
B)trading partners lose when they can acquire a good through trade cheaper than they can produce it.
C)trade is most effective when people trade only among those in their own nation.
D)a group of people can increase their output when each good or service is supplied by the low opportunity cost producer.

Question 17

Explain the idea of capital investment by using the story of Robinson Crusoe. What is sacrificed, and what is gained?

Question 18

A popular video program used to teach economics to primary school children defines opportunity cost as "what you give up to get something." In light of your understanding of opportunity cost, how would you modify this definition?

Question 19

Which of the following is NOT true of opportunity cost?

A)Opportunity costs are subjective because they depend upon how the decision-maker values his or her options.
B)Opportunity costs are only the monetary costs of lost options.
C)Opportunity costs are the highest-valued alternative sacrificed in order to choose an option.
D)Only the decision-maker can determine his or her opportunity costs for any particular action.

Question 20

According to the law of comparative advantage, a particular task is performed most efficiently by the individual with the lowest

A)wage rate.
B)tax liability.
C)net worth.
D)opportunity cost.

Question 21

Which of the following will most likely occur under a system of clearly defined and enforced private property rights?

A)Resource owners will fail to conserve vital resources, even if they expect their supply to be highly limited in the future.
B)Resource owners will ignore the wishes of others, including others who would like to use the resource that is privately owned.
C)Resource owners will fail to consider the wishes of potential future buyers when they decide how to employ privately owned resources.
D)Resource owners will gain by discovering and employing their resources in ways that are highly valued by others.

Question 22

The opportunity cost of an activity

A)depends on the individual's subjective values and opinions
B)is the same for everyone
C)must be calculated and known before undertaking that activity
D)is irrelevant to decision making
E)is not influenced by time costs

Question 23

"Now that Terrance paints the broad surfaces and I do the trim work, we can paint a house in three-fourths the time that it took for each of us to do both." This statement most clearly reflects

A)the importance of secondary effects.
B)the fallacy of composition.
C)the law of comparative advantage.
D)behavior inconsistent with economizing.

Question 24

Suppose the price of an airline ticket from Dallas to Boston costs $600. A bus ticket costs $150. Traveling by plane takes 6 hours compared with 51 hours by bus. Other things constant, an individual would gain by choosing air travel if, and only if, his time were valued at more than

A)$6 per hour.
B)$8 per hour.
C)$10 per hour.
D)$15 per hour.

Question 25

Jim values his car at $2,000, and Kelly values it at $5,000. Can value be created in this situation? How? Suppose Jim refuses to sell for less than $6,000. Is value destroyed? Why or why not?

Question 26

The opportunity cost of an action is

A)objective and will be the same for all individuals.
B)a measure of the undesirable aspects involved in the action.
C)applicable only to choices involving material goods like commodities.
D)the highest valued alternative forgone as the result of choosing an option.

Question 27

Three basic decisions must be made by all economies. What are they?

A)how much will be produced, when it will be produced, and how much it will cost
B)what the price of each good will be, who will produce each good, and who will consume each good
C)what will be produced, how goods will be produced, and for whom goods will be produced
D)how the opportunity cost principle will be applied, if and how the law of comparative advantage will be utilized, and whether the production possibilities constraint will apply

Question 28

The primary benefit that results when a nation employs its resources in accordance with the principle of comparative advantage is

A)an expansion in investment resulting from a reallocation of resources away from consumption.
B)a larger output resulting from a more efficient use of resources.
C)greater equality of income resulting from an increase in the number of workers.
D)an increase in the profitability of business enterprises resulting from an increase in investment.

Question 29

A department store buys a wool coat for $120 and sets its retail price at $300. The coat costs $85 to produce. When the coat doesn't sell, the store marks the price down to $200, then $100, and finally $70. At $70, Amy buys the coat. What was the coat's true value? Why?

Question 30

Mark and John are 10-year-old twins who do not get along. They have opened separate lemonade stands and are competing with each other, selling lemonade on their block. Their mother observes that Mark is very good at making lemonade and John is an excellent young salesman. She suggests they both could make more money if they worked together. John counters that two stands will always make more money than one. Who is right? Why?

Question 31

Which of the following sayings best reflects the concept of opportunity cost?

A)"You can't teach an old dog new tricks."
B)"Time is money."
C)"I have a baker's dozen."
D)"There's no business like show business."

Question 32

Market economies are often criticized for how they answer the basic question, "For whom are goods produced?" This criticism usually comes from people who believe that the distribution of income is not "fair." Is there some way to separate production from distribution so that we can leave production just as it is but make the distribution of income "fairer"?

Question 33

It can be said that, ultimately, consumers are the driving force in answering the three basic economic questions. Explain the consumer's role in providing these answers.

Question 34

The opportunity cost of an option

A)measures the undesirable aspects of the option.
B)includes only the monetary cost of the option.
C)is the highest-valued alternative that must be given up as the result of choosing the option.
D)is objective, and it will be the same for all individuals.

Question 35

If a firm or a nation desires to maximize its output, each productive assignment should be carried out by those persons who

A)have the highest opportunity cost.
B)have a comparative advantage in the productive activity.
C)can complete the productive activity most rapidly.
D)least enjoy performing the productive activity.

Question 36

If an economy is operating at a point inside the production possibilities curve,

A)its resources are not being used efficiently.
B)the curve will begin to shift inward.
C)the curve will begin to shift outward.
D)This is a trick question because an economy cannot produce at a point inside the curve.

Question 37

Hutch Technology makes computer monitors, which sell for $500 each. What is the opportunity cost of producing ten monitors?

A)$5,000
B)the other goods that could be produced with the resources that produce the ten monitors
C)the profits that Hutch earns when it sells the ten monitors
D)the profits that Hutch loses if it does not produce the monitors
E)All of the above are correct.

Question 38

With voluntary exchange,

A)both the buyer and seller will be made better off.
B)the buyer will be made better off, while the seller will be made worse off.
C)the seller will be made better off, while the buyer will be made worse off.
D)both the buyer and the seller will be made worse off.

Question 39

Opportunity cost is defined

A)only in terms of money spent
B)as the value of all alternatives not chosen
C)as the value of the best alternative not chosen
D)as the difference between the benefits from a choice and the benefits from the next best alternative
E)as the difference between the benefits from a choice and the costs of that choice

Question 40

A ticket to a concert costs $45. You have a ticket and can resell it for $75. Your opportunity cost of actually attending the concert is

A)$30.
B)$45.
C)$75.
D)$120.

Question 41

Retired persons travel by bus and automobile more frequently than do business executives, who more commonly use air travel. An economic explanation for this would be that

A)business executives have more time to travel.
B)it is more important for retired persons to save time.
C)business executives value their time more highly.
D)retired persons have more money than do business executives.

Question 42

Suppose an airline ticket from Portland to Orlando costs $760. A bus ticket costs $360. Traveling by plane will take 6 hours, compared with 26 hours by bus. Other things constant, the minimum value of one's time that would induce a rational individual to fly rather than drive would be

A)$18 per hour.
B)$20 per hour.
C)$38 per hour.
D)$44 per hour.

Question 43

The wages of house painters will tend to rise when

A)more people recognize that house painters have very low incomes.
B)the alternative earning opportunities of house painters improve.
C)house painters can no longer find good paying alternatives for their labor.
D)unemployment in the economy is high and there are few alternative jobs available for house painters.

Question 44

Which of the following most accurately reflects the opportunity cost to a pharmacist who drives a taxi?

A)the dollars spent on his previously acquired education in pharmacy
B)the revenue derived from operating the cab
C)zero if the pharmacist received his education on a scholarship that paid his full tuition
D)the value of the pharmacist's time in its highest valued use other than driving a cab

Question 45

Which of the following statements about exchange is false?

A)The expectation of gain motivates people to engage in trade.
B)If a party to a potential exchange does not believe that it will lead to personal gain, he or she can chose not to engage in the trade.
C)Voluntary exchange is generally mutually beneficial to the trading partners.
D)If one trading partner gains, the other must lose.

Question 46

Which of the following would be most likely to increase your opportunity cost of attending college?

A)a recession in the economy that made finding a job more difficult
B)receiving a very attractive offer to start a job today that would permit you to earn about 50 percent more than you expected to make after graduation
C)the retirement of your favorite professor under whom you hoped to study during the next semester
D)information indicating that salaries were declining and that there were very few openings for college graduates in your field

Question 47

In voluntary exchange, if the seller of a product gains,

A)the buyer will generally lose an amount greater than the gain to the seller.
B)the buyer must lose an amount equal to what the seller gains.
C)someone else must lose an equal amount.
D)the buyer must also gain; mutual gain provides the foundation for exchange.

Question 48

In an informed and voluntary exchange,

A)both parties receive something they value more than what they gave up.
B)both parties place an equal value on what they received and what they gave up.
C)neither party can gain more than the other.
D)one trader can gain only at the expense of the other.

Question 49

Which of the following activities describes the opportunity cost of attending an economics class?

A)the value of the time it takes to get to campus every day
B)the cost of the gasoline needed to drive a car to campus
C)the value of the highest valued alternative that must be forgone because of attending the class
D)transportation costs plus the cost of tuition and textbooks for the course

Question 50

Air travel from New York to Miami costs $300 and takes 6 hours. A bus ticket between the cities costs $150 and takes 56 hours. Other things constant, the minimum value of one's time that would induce a rational individual to fly rather than drive would be

A)$1 per hour.
B)$3 per hour.
C)$5 per hour.
D)$50 per hour.

Question 51

Recent legislation provides parents with a substantial reduction in their personal income tax liability for each child that they have. The economic way of thinking indicates that legislation of this type will

A)make it more costly for parents to provide for their children.
B)reduce the value of children to their parents and, therefore, lead to a reduction in the birth rate.
C)reduce the after-tax cost of raising children and, therefore, increase the birth rate.
D)exert no impact on either the cost of raising children or the birth rate since having children is a not an economic activity.

Question 52

Melanie has a choice of driving or flying from Durham, North Carolina to Knoxville, Tennessee for a one-day business trip. If she travels by air, she will be able to work seven hours in Knoxville, while if she drives, she will only have time to work four hours once there. Her expected income from each hour of work in Knoxville is $40. If Melanie a rational decision maker, she will chose to fly if and only if the price differential (air cost minus driving cost) is less than

A)$40.
B)$120.
C)$160.
D)$280.

Question 53

Isabella decides to buy a dress that Olivia has for sale; they agree on a price of $20. Which of the following best describes who gains and who loses from the transaction?

A)If the dress originally costs more than $20, Isabella gains and Olivia loses.
B)If the dress originally costs less than $20, Olivia gains and Isabella loses.
C)Both parties expect to gain from this transaction.
D)If Olivia gains from the transaction, Isabella must lose an equal amount.

Question 54

Land used to grow corn could also be used to grow soybeans. Which of the following is true when the farmer plants soybeans and the market price of corn rises?

A)The opportunity cost of producing soybeans decreases.
B)The opportunity cost of producing soybeans increases.
C)There will be no change in the opportunity cost of producing soybeans.
D)The opportunity cost of producing corn increases.

Question 55

For most students attending state universities, the largest cost component of going to college is

A)the cost of books and supplies.
B)the cost of room and board.
C)tuition.
D)the opportunity cost in terms of forgone current income from the time spent attending college.

Question 56

Land used to grow alfalfa could also be used to grow hay. Which of the following is true when the farmer plants hay and the market price of alfalfa rises?

A)The opportunity cost of producing hay decreases.
B)The opportunity cost of producing hay increases.
C)There will be no change in the opportunity cost of producing hay.
D)The opportunity cost of producing alfalfa increases.

Question 57

Maurice can drive or fly from Jacksonville, Florida to Atlanda, Georgia, for a one-day business trip. If he drives, he will be able to work three hours once he arrives in Atlanta, whereas traveling by plane will enable him to work eight hours. His expected income from each hour of work in Atlanta is $30. If Maurice is a rational decision maker, he will fly if and only if the price differential (air cost minus driving cost) is less than

A)$30.
B)$90.
C)$150.
D)$240.

Question 58

Statistical data provided by the U.S. Department of Transportation shows that the median income of individuals traveling on the nation's bus systems is $18,000 compared to $65,000 for those who normally travel by air. This finding is best explained by which of the following statements?

A)Persons with high income are more likely to fly because the opportunity cost of their time is generally higher than those with lesser income.
B)Traditionally, lower income groups prefer slower methods of transportation.
C)Wealthy individuals own stock in the airlines and, therefore, receive preferential treatment.
D)Low-income groups are generally located near bus stations; wealthy groups congregate around airports.

Question 59

Based on the idea of opportunity cost, which of the following students would be most likely to drop out of college before completing their degree?

A)a senior mathematics major with a solid B average
B)a junior physical therapy student who has just read about the fantastic job offers available to students with degrees in her area
C)a star college football player in his junior year that just received a $5 million offer from a professional team
D)a junior economics major who wants to attend graduate school

Question 60

The opportunity cost of building a park in your hometown would be the

A)money cost of constructing the park.
B)highest valued bundle of other goods and services that must be forgone because of the park construction.
C)necessary increase in tax revenues to finance the construction.
D)amount of time spent in leisure activities in the park once it is constructed.

Question 61

Middlemen are individuals who

A)add to the buyer's expense without performing a useful function.
B)add to the seller's cost without performing a useful function.
C)provide services that reduce the cost of transactions and help achieve additional gains from trade.
D)act as a middle person between the top management of a business firm and the hourly employees who actually produce the goods and services.

Question 62

In economics, transaction costs refer to the

A)time, effort, and other resources needed to search out and negotiate an exchange.
B)dollar cost or price of the item traded.
C)cost an economy suffers when it allows specialization according to comparative advantage.
D)amount by which the price of an item increases due to the presence of a middleman.

Question 63

Which of the following is true regarding value, transaction costs, and exchange?

A)Middlemen can be viewed as agents who create value by reducing transaction costs and, thereby, facilitating gains from exchange.
B)Middlemen fail to create value since they do not expand the supply of physical goods.
C)A good or service has a given value regardless of who uses it or how it is used.
D)Voluntary exchange reduces value by channeling goods into the hands of people who value them least.

Question 64

In economics, the term for a person who reduces transaction costs by arranging trades for buyers and sellers is

A)an exchange broker.
B)a middleman.
C)a transactions specialist.
D)an opportunity finder.

Question 65

A nation with cheap, efficient communications is likely to be

A)richer, ceteris paribus, because transaction costs will be lower and trade greater.
B)richer only if production of goods is cheaper, too, since trade itself cannot create value.
C)poorer since it spends so much on communication instead of true productivity.
D)spending too much on communications, which adds nothing to the value of output.

Question 66

Internet sites such as eBay make it easier for sellers and buyers to find one another and, by doing so,

A)reduce transactions costs.
B)increase transaction costs.
C)reduce the number of exchanges that occur.
D)lower the value created by the goods and services available.

Question 67

If Sean sells Tom a tennis racket for $50, we would expect

A)both parties to gain from this transaction.
B)Sean to gain from the transaction, while Tom loses.
C)Tom to gain from the transaction, while Sean loses.
D)the well-being of both parties to be unchanged.

Question 68

Which of the following is true with regard to value and exchange?

A)Exchange generally moves a good from a person who values it more to a person who values it less.
B)Transaction costs reduce our ability to gain from potentially advantageous trades.
C)Middlemen increase transaction costs and, thereby, reduce the potential gains derived from trade.
D)Physical goods have an objective value that is unrelated to time and the person of ownership.

Question 69

If the Internet makes it easier for sellers to find buyers and makes it easier for buyers to learn about the products that are available for sale, we would expect that

A)the volume of trade will decline.
B)transaction costs will rise.
C)the gains from trade will increase.
D)buyers and sellers will be worse off.

Question 70

In economics, the term that refers to the time, effort, and other resources needed to search out, negotiate, and consummate an exchange is

A)transaction costs.
B)specialization costs.
C)pecuniary costs.
D)comparative costs.

Question 71

Which of the following is true regarding value and exchange?

A)Middlemen fail to create value since they do not expand the supply of physical goods.
B)A good or service has a given value regardless of who uses it or how it is used.
C)If it were not for middlemen, transaction costs would be zero.
D)Voluntary exchange creates value by channeling goods into the hands of people who value them most.

Question 72

Which of the following most accurately states the function of middlemen?

A)Middlemen add to the expense of buyers and sellers without providing any benefit.
B)Our economy would work just as well without middlemen since they do not expand the availability of physical goods.
C)Middlemen reduce the number of transactions since they increase the buyer's price and reduce the seller's net revenue.
D)Middlemen create value by arranging trades and providing information to buyers and sellers.

Question 73

Compared to a situation where transaction costs are zero, the existence of transaction costs

A)will reduce the volume of trade.
B)will reduce the gains from trade.
C)may lead some buyers and sellers to employ middlemen.
D)All of the above are correct.

Question 74

A middleman is a person who

A)specializes in arranging trades and selling, guaranteeing, and servicing items traded.
B)acts as a middle person between the top management of a business firm and the hourly employees who actually produce the goods and services.
C)adds to the seller's expense and the buyer's buying price without providing a service to either.
D)levies a tax on private sector activity and uses the funds to support government activities.

Question 75

Which of the following most accurately states the economic significance of exchange?

A)Physical goods have value because they exist; exchange can neither increase nor decrease their value.
B)Production of physical goods creates value; exchange merely redistributes this value.
C)Exchange creates value by moving goods from parties who value them less to parties who value them more.
D)Exchange reduces value since it consumes resources without adding to the physical supply of goods.

Question 76

Noah values his car at $10,000, and Emily values it at $14,000. If Emily buys it from Noah for $11,000, which of the following is true?

A)Noah gains $1,000 of value, and Emily gains $3,000 of value.
B)Noah gains $11,000 of value, and Emily loses $11,000 of value.
C)Noah gains $10,000 of value, and Emily loses $14,000 of value.
D)Noah and Emily both gain $11,000 of value.

Question 77

Which of the following most accurately states the function of middlemen?

A)Middlemen reduce transaction costs.
B)Middlemen add to the expense of buyers and sellers without providing any benefit.
C)Our economy would work just as well without middlemen since they do not expand the availability of physical goods.
D)Middlemen reduce the number of transactions since they increase the buyer's price and reduce the seller's net receipts.

Question 78

Mateo values his camper at $4,000, and Nicole values it at $9,000. If Nicole buys it from Mateo for $7,000, which of the following is true?

A)Mateo gains $3,000 of value, and Nicole gains $2,000 of value.
B)Mateo gains $7,000 of value, and Nicole loses $7,000 of value.
C)Mateo gains $7,000 of value, and Nicole gains $6,000 of value.
D)Mateo and Nicole both gain $7,000 of value.

Question 79

High transaction costs will tend to

A)reduce the number of mutually beneficial exchanges that occur.
B)allow easier specialization according to the law of comparative advantage.
C)increase the value created by exchanges in an economy.
D)increase the number of mutually beneficial exchanges that occur.

Question 80

Which of the following about trade is true?

A)Trade does not produce anything new; therefore, it cannot create value.
B)The value of a good is determined by the cost of the material resources required for its production.
C)The value of a good generally depends on who uses it and circumstances such as when and where it is used.
D)All of the above are true.