Deck 1: Economics: Foundations and Models

Question 1

Economists assume that rational people do all of the following except

A)use all available information as they act to achieve their goals.
B)undertake activities that benefit others and hurt themselves.
C)weigh the benefits and costs of all possible alternative actions.
D)respond to economic incentives.

Answer 1

B

Question 2

Suppose that some teachers have decided that economic and financial uncertainty have made the prospect of retiring more risky, and therefore carry a higher cost than not retiring.By using all available information as they act to achieve their goals, these teachers are exemplifying the economic idea that

A)people are rational.
B)people respond to economic incentives.
C)optimal decisions are made at the margin.
D)equity is more important than efficiency.

Answer 2

A

Question 3

Consider the following statements:
A.Car owners purchase more gasoline from a gas station that sells gasoline at a lower price than other rival gas stations in the area.
B.Banks do not take steps to increase security since they believe it is less costly to allow some bank robberies than to install expensive security monitoring equipment.
C.Firms produce more of a particular DVD when its selling price rises.
Which of the above statements demonstrates that economic agents respond to incentives?

A)a only
B)b only
C)c only
D)a and b
E)a, b, and c

Answer 3

E

Question 4

In economics, choices must be made because we live in a world of

A)unemployment.
B)scarcity.
C)greed.
D)unlimited resources.

Question 5

Suppose the U.S.government encouraged consumers to trade in their old automobiles for more efficient, new models by paying up to $5,000 for the old automobiles.These consumers who did trade in their old automobiles to take advantage of the government offer would be exemplifying the economic idea that

A)people are rational.
B)people respond to economic incentives.
C)optimal decisions are made at the margin.
D)equity is more important than efficiency.

Question 6

Economists assume that individuals

A)behave in unpredictable ways.
B)will never take actions to help others.
C)prefer to live in a society that values fairness above all else.
D)are rational and respond to incentives.

Question 7

Which of the following statements about scarcity is true?

A)Scarcity refers to the situation in which unlimited wants exceed limited resources.
B)Scarcity is not a problem for the wealthy.
C)Scarcity is only a problem when a country has too large a population.
D)Scarcity only arises when there is a wide disparity in income distribution.

Question 8

In economics, the term ________ means "additional" or "extra."

A)allocative
B)marginal
C)equity
D)optimal

Question 9

Suppose that some investors have decided that economic and financial uncertainty have made the prospect of investing in domestic stock markets more risky than investing in foreign stock markets, and therefore choose to invest in foreign markets.By using all available information as they act to achieve their goals, these investors are exemplifying the economic idea that

A)people are rational.
B)people respond to economic incentives.
C)optimal decisions are made at the margin.
D)equity is more important than efficiency.

Question 10

The basic economic problem of ________ has always existed and will continue to exist.

A)scarcity
B)efficiency
C)inflation
D)recession

Question 11

Economics does not study correct or incorrect behaviors but rather it assumes that economic agents behave ________, meaning they make the best decisions given their knowledge of the costs and benefits.

A)equitably
B)rationally
C)emotionally
D)selfishly

Question 12

Holding all other personal characteristics-such as age, gender, and income-constant, economists would expect that

A)people with health insurance are less likely to be overweight than people without health insurance.
B)people with health insurance are more likely to be overweight than people without health insurance.
C)people with health insurance are equally likely to be overweight as people without health insurance.
D)there is no correlation between having health insurance and being overweight.

Question 13

Where do economic agents such as individuals, firms, and nations interact with each other?

A)in public locations monitored by the government
B)in any arena that brings together buyers and sellers
C)in any physical location where people can physically get together for selling goods, such as shopping malls
D)in any location where transactions can be monitored by consumer groups and taxed by the government

Question 14

In economics, the term ________ refers to a group of buyers and sellers of a product and the arrangement by which they come together to trade.

A)collective
B)cooperative
C)market
D)trade-off

Question 15

By definition, economics is the study of

A)how to make money in the stock market.
B)how to make money in a market economy.
C)the choices people make to attain their goals, given their scarce resources.
D)supply and demand.

Question 16

Suppose the U.S.government encouraged new medical school graduates to take over existing practices from doctors wishing to retire by paying both the new and retiring doctors $100,000.These doctors would be exemplifying the economic idea that

A)people are rational.
B)people respond to economic incentives.
C)optimal decisions are made at the margin.
D)equity is more important than efficiency.

Question 17

Since 1994, obesity rates in the United States

A)have been on a slow and steady decline.
B)have increased in all 50 states.
C)have primarily increased in the Southeast and remained constant or slightly decreased in the remainder of the country.
D)have remained fairly constant throughout the country.

Question 18

An economic ________ is a simplified version of some aspect of economic life used to analyze an economic issue.

A)market
B)trade-off
C)variable
D)model

Question 19

In an effort to serve consumers who have become more health conscious, a number of firms have begun developing small electronic devices which allow people to monitor various health conditions.These firms are reacting to which of the three key economic ideas?

A)people are rational
B)people respond to economic incentives
C)optimal decisions are made at the margin
D)firms attempt to maximize revenues

Question 20

Economists assume that rational behavior is useful in explaining choices people make

A)because irrational people do not make economic choices.
B)even though people may not behave rationally all the time.
C)because individuals act rationally all the time in all circumstances.
D)even though people rarely, if ever, behave in a rational manner.

Question 21

Scenario 1-1
Suppose a cell phone manufacturer currently sells 20,000 cell phones per week and makes a profit of $5,000 per week.A manager at the plant observes, "Although the last 3,000 cell phones we produced and sold increased our revenue by $6,000 and our costs by $6,700, we are still making an overall profit of $5,000 per week so I think we're on the right track.We are producing the optimal number of cell phones."
Refer to Scenario 1-1.Had the firm not produced and sold the last 3,000 cell phones, would its profit be higher or lower, and by how much?

A)Its profit will be $6,700 higher.
B)Its profit will be $700 higher.
C)Its profit will be $700 lower.
D)Its profit will be $6,000 lower.

Question 22

The extra cost associated with undertaking an activity is called

A)net loss.
B)marginal cost.
C)opportunity cost.
D)foregone cost.

Question 23

Table 1-2

Thuy Anh runs a small flower shop in the town of Florabunda.She is debating whether she should extend her hours of operation.Thuy Anh figures that her sales revenue will depend on the number of extra hours the flower shop is open as shown in the table above.She would have to hire a worker for those extra hours at a wage rate of $16 per hour.
Refer to Table 1-2.Using marginal analysis, by how many hours should Thuy Anh extend her flower shop's hours of operations?

A)2 hours
B)3 hours
C)4 hours
D)5 hours
E)6 hours

Question 24

Making optimal decisions "at the margin" requires

A)making decisions according to one's whims and fancies.
B)making consistently irrational decisions.
C)weighing the costs and benefits of a decision before deciding if it should be pursued.
D)making borderline decisions.

Question 25

The revenue received from the sale of ________ of a product is a marginal benefit to the firm.

A)an additional unit
B)the total number of units
C)no units
D)only profitable units

Question 26

Economists reason that the optimal decision is to continue any activity up to the point where the

A)marginal benefit is zero.
B)marginal benefit is greater than the marginal cost.
C)marginal cost is zero.
D)marginal benefit equals the marginal cost.

Question 27

Table 1-1

Lydia runs a small nail salon in the town of New Hope.She is debating whether she should extend her hours of operation.Lydia figures that her sales revenue will depend on the number of extra hours the nail salon is open as shown in the table above.She would have to hire a worker for those extra hours at a wage rate of $10 per hour.
Refer to Table 1-1.Using marginal analysis, by how many hours should Lydia extend her nail salon's hours of operations?

A)2 hours
B)3 hours
C)4 hours
D)5 hours
E)6 hours

Question 28

Allison's Auto Art is a company that applies pinstripes to vehicles.Allison's cost for a basic 1-color pinstriping job is $35, and she charges $95 for this service.For a total price of $175, Allison will apply a fancier 3-color pinstripe application to an automobile, a service that adds an additional $40 to the total cost of the package.What is Allison's marginal benefit if she sells a basic 1-color job?

A)$35
B)$60
C)$95
D)The marginal benefit cannot be determined.

Question 29

Table 1-1

Lydia runs a small nail salon in the town of New Hope.She is debating whether she should extend her hours of operation.Lydia figures that her sales revenue will depend on the number of extra hours the nail salon is open as shown in the table above.She would have to hire a worker for those extra hours at a wage rate of $10 per hour.
Refer to Table 1-1.What is Lydia's marginal cost if she decides to stay open for an extra two hours instead of one hour?

A)$10
B)$20
C)$25
D)$40

Question 30

Making "how much" decisions involves

A)calculating the total benefits of the activity and determining if you are satisfied with that amount.
B)calculating the total costs of the activity and determining if you can afford to incur that expenditure.
C)calculating the average benefit and the average cost of an activity to determine if it is worthwhile undertaking that activity.
D)determining the additional benefits and the additional costs of that activity.

Question 31

Scenario 1-1
Suppose a cell phone manufacturer currently sells 20,000 cell phones per week and makes a profit of $5,000 per week.A manager at the plant observes, "Although the last 3,000 cell phones we produced and sold increased our revenue by $6,000 and our costs by $6,700, we are still making an overall profit of $5,000 per week so I think we're on the right track.We are producing the optimal number of cell phones."
Refer to Scenario 1-1.Using marginal analysis terminology, what is another economic term for the incremental revenue received from the sale of the last 3,000 cell phones?

A)gross earnings
B)marginal revenue
C)sales revenue
D)gross profit

Question 32

DeShawn's Detailing is a service that details cars at the customers' homes or places of work.DeShawn's cost for a basic detailing package is $40, and he charges $75 for this service.For a total price of $90, DeShawn will also detail the car's engine, a service that adds an additional $20 to the total cost of the package.What is the marginal cost of adding the engine detailing to the basic detailing package?

A)$20
B)$30
C)$60
D)$60 plus the value of his time

Question 33

DeShawn's Detailing is a service that details cars at the customers' homes or places of work.DeShawn's cost for a basic detailing package is $40, and he charges $75 for this service.For a total price of $90, DeShawn will also detail the car's engine, a service that adds an additional $20 to the total cost of the package.What is DeShawn's marginal benefit if he sells a basic detailing package?

A)$35
B)$75
C)He makes a marginal loss of $15, not a marginal benefit.
D)The marginal benefit cannot be determined.

Question 34

DeShawn's Detailing is a service that details cars at the customers' homes or places of work.DeShawn's cost for a basic detailing package is $40, and he charges $75 for this service.For a total price of $90, DeShawn will also detail the car's engine, a service that adds an additional $20 to the total cost of the package.Should DeShawn continue to offer the engine detailing service?

A)yes, he still makes a profit by selling the engine detailing service with the basic detailing package
B)yes, but only if he raises the price of the basic detailing package
C)no, his marginal benefit is less than his marginal cost
D)More information is needed for DeShawn to make this decision.

Question 35

A grocery store sells a bag of potatoes at a fixed price of $2.30.Which of the following is a term used by economists to describe the money received from the sale of an additional bag of potatoes?

A)marginal revenue
B)gross earnings
C)pure profit
D)marginal costs
E)net benefit

Question 36

Allison's Auto Art is a company that applies pinstripes to vehicles.Allison's cost for a basic 1-color pinstriping job is $35, and she charges $95 for this service.For a total price of $175, Allison will apply a fancier 3-color pinstripe application to an automobile, a service that adds an additional $40 to the total cost of the package.Should Allison continue to offer the 3-color pinstripe application?

A)yes, she still makes a profit by selling the 3-color application
B)yes, but only if she lowers the price of the 1-color application
C)no, her marginal benefit is less than her marginal cost
D)More information is needed for Allison to make this decision.

Question 37

Allison's Auto Art is a company that applies pinstripes to vehicles.Allison's cost for a basic 1-color pinstriping job is $35, and she charges $95 for this service.For a total price of $175, Allison will apply a fancier 3-color pinstripe application to an automobile, a service that adds an additional $40 to the total cost of the package.What is the marginal cost of moving up from the 1-color application to the 3-color application?

A)$35
B)$40
C)$80
D)$175

Question 38

Marginal analysis involves undertaking an activity

A)until its marginal costs start declining.
B)only when its marginal benefits are positive.
C)until its marginal benefits equal marginal costs.
D)only if its marginal costs are greater than its marginal benefits.

Question 39

Scenario 1-1
Suppose a cell phone manufacturer currently sells 20,000 cell phones per week and makes a profit of $5,000 per week.A manager at the plant observes, "Although the last 3,000 cell phones we produced and sold increased our revenue by $6,000 and our costs by $6,700, we are still making an overall profit of $5,000 per week so I think we're on the right track.We are producing the optimal number of cell phones."
Refer to Scenario 1-1.Using marginal analysis terminology, what is another economic term for the incremental cost of producing the last 3,000 cell phones?

A)marginal cost
B)operating cost
C)explicit cost
D)Any of the above terms are correct.

Question 40

Table 1-1

Lydia runs a small nail salon in the town of New Hope.She is debating whether she should extend her hours of operation.Lydia figures that her sales revenue will depend on the number of extra hours the nail salon is open as shown in the table above.She would have to hire a worker for those extra hours at a wage rate of $10 per hour.
Refer to Table 1-1.What is Lydia's marginal benefit if she decides to stay open for an extra two hours instead of one hour?

A)$25
B)$50
C)$75
D)$125

Question 41

Scenario 1-2
Suppose a hat manufacturer currently sells 2,000 hats per week and makes a profit of $5,000 per week.The plant owner observes, "Although the last 300 hats we produced and sold increased our revenue by $1,000 and our costs by $1,100, we are still making an overall profit of $5,000 per week so I think we're on the right track.We are producing the optimal number of hats."
Refer to Scenario 1-2.Using marginal analysis terminology, another economic term for the incremental revenue received from the sale of the last 300 hats is

A)gross earnings.
B)marginal revenue.
C)sales revenue.
D)gross profit.

Question 42

Table 1-2

Thuy Anh runs a small flower shop in the town of Florabunda.She is debating whether she should extend her hours of operation.Thuy Anh figures that her sales revenue will depend on the number of extra hours the flower shop is open as shown in the table above.She would have to hire a worker for those extra hours at a wage rate of $16 per hour.
Refer to Table 1-2.What is Thuy Anh's marginal benefit if she decides to stay open for an extra three hours instead of two hours?

A)$0
B)$20
C)$25
D)$45
E)$70

Question 43

Scarcity refers to a situation in which unlimited wants exceed the limited resources available to fulfill those wants.

Question 44

If the marginal cost for Dinky's Donuts to advertise one additional day each week in the local newspaper is $200, then Dinky's Donuts should advertize that additional day

A)only if the marginal benefit the company receives each week is greater than $200 plus an acceptable profit margin.
B)as long as the marginal benefit the company receives each week is just equal to or greater than $200.
C)as long as the weekly marginal cost does not rise.
D)until the marginal benefit the company receives reaches zero.

Question 45

Scenario 1-2
Suppose a hat manufacturer currently sells 2,000 hats per week and makes a profit of $5,000 per week.The plant owner observes, "Although the last 300 hats we produced and sold increased our revenue by $1,000 and our costs by $1,100, we are still making an overall profit of $5,000 per week so I think we're on the right track.We are producing the optimal number of hats."
Refer to Scenario 1-2.Using marginal analysis terminology, another economic term for the incremental cost of producing the last 300 hats is

A)marginal cost.
B)operating cost.
C)explicit cost.
D)Any of the above terms are correct.

Question 46

Scenario 1-2
Suppose a hat manufacturer currently sells 2,000 hats per week and makes a profit of $5,000 per week.The plant owner observes, "Although the last 300 hats we produced and sold increased our revenue by $1,000 and our costs by $1,100, we are still making an overall profit of $5,000 per week so I think we're on the right track.We are producing the optimal number of hats."
Refer to Scenario 1-2.Had the firm not produced and sold the last 300 hats, would its profit be higher or lower, and by how much?

A)Its profit will be $1,100 higher.
B)Its profit will be $100 higher.
C)Its profit will be $100 lower.
D)Its profit will be $1,000 lower.

Question 47

Table 1-3

Santiago runs a comic book store in the town of East Arbor.He is debating whether he should extend his hours of operation.Santiago figures that his sales revenue will depend on the number of extra hours the store is open as shown in the table above.He would have to hire a worker for those extra hours at a wage rate of $18 per hour.
Refer to Table 1-3.Using marginal analysis, by how many hours should Santiago extend his store's hours of operations?

A)2 hours
B)3 hours
C)4 hours
D)5 hours
E)6 hours

Question 48

Scarcity is a problem that will eventually disappear as technology advances.

Question 49

Which of the following is an example of a "how much" decision?

A)Dinah's Diner is only open for breakfast and lunch. Dinah is trying to decide whether to open for dinner as well.
B)Zander has torn up his front yard and is debating whether to plant grass or install a rock garden.
C)You received a nice birthday check from your grandmother and are deciding on whether to spend it on a trip to New York or a trip to San Francisco.
D)Sergio quit his job to go back to school full time.

Question 50

The ________ the sale of an additional unit of a product is a marginal benefit to the firm.

A)revenue received from
B)extra cost of
C)total value of
D)sales tax on

Question 51

A restaurant sells a large soft drink at a fixed price of $1.79.A term used by economists to describe the money received from the sale of an additional large soft drink is

A)marginal revenue.
B)gross earnings.
C)pure profit.
D)net benefit.

Question 52

Pookie's Pinball Palace restores old Pinball machines.Pookie has just spent $300 purchasing and cleaning a 1960s-era machine which he expects to sell for $2,000 once he is finished with the restoration.After having spent $300, Pookie discovers that he will need to rewire the entire machine at a cost of $1,100 in order to finish the restoration.Alternatively, he can sell the machine "as is" now for $1,000.What is his marginal benefit if he sells the machine "as is" now?

A)$300
B)$900
C)$1,000
D)The marginal benefit cannot be determined.

Question 53

Table 1-3

Santiago runs a comic book store in the town of East Arbor.He is debating whether he should extend his hours of operation.Santiago figures that his sales revenue will depend on the number of extra hours the store is open as shown in the table above.He would have to hire a worker for those extra hours at a wage rate of $18 per hour.
Refer to Table 1-3.What is Santiago's marginal benefit if he decides to stay open for an extra two hours instead of one hour?

A)$40
B)$50
C)$120
D)$190

Question 54

Damian shares a small food truck with his sister.His share of the expenses is $500 per month.He has decided to get his own, newer food truck which he will not have to share with anyone.His expenses for the newer truck are $1,400 per month.Damian is as rational as any other person.As an economics major, you rightly conclude that

A)Damian cannot afford the newer truck and will have to go back to sharing a truck with his sister.
B)Damian figures that the additional benefit of having his own truck (as opposed to sharing)is at least $900.
C)Damian figures that the additional benefit of having his own truck (as opposed to sharing)is at least $1,400.
D)the cost of having one's own truck outweighs the benefits.

Question 55

Table 1-2

Thuy Anh runs a small flower shop in the town of Florabunda.She is debating whether she should extend her hours of operation.Thuy Anh figures that her sales revenue will depend on the number of extra hours the flower shop is open as shown in the table above.She would have to hire a worker for those extra hours at a wage rate of $16 per hour.
Refer to Table 1-2.What is Thuy Anh's marginal cost if she decides to stay open for an extra three hours instead of two hours?

A)$0
B)$16
C)$25
D)$32
E)$45

Question 56

Soo Jin shares a one-bedroom apartment with her classmate.Her share of the rent is $700 per month.She is considering moving to a studio apartment which she will not have to share with anyone.The studio apartment rents for $950 per month.Recently, you ran into Soo Jin on campus and she tells you that she has moved into the studio apartment.Soo Jin is as rational as any other person.As an economics student, you rightly conclude that

A)Soo Jin did not have a choice; her roommate was a slob.
B)Soo Jin figures that the additional benefit of having her own place (as opposed to sharing)is at least $250.
C)Soo Jin figures that the additional benefit of having her own place (as opposed to sharing)is at least $950.
D)the cost of having one's own space outweighs the benefits.

Question 57

Pookie's Pinball Palace restores old Pinball machines.Pookie has just spent $300 purchasing and cleaning a 1960s-era machine which he expects to sell for $2,000 once he is finished with the restoration.After having spent $300, Pookie discovers that he will need to rewire the entire machine at a cost of $1,100 in order to finish the restoration.Alternatively, he can sell the machine "as is" now for $1,000.What is the marginal cost of completing the task?

A)$300
B)$800
C)$1,100
D)$1,400

Question 58

Table 1-3

Santiago runs a comic book store in the town of East Arbor.He is debating whether he should extend his hours of operation.Santiago figures that his sales revenue will depend on the number of extra hours the store is open as shown in the table above.He would have to hire a worker for those extra hours at a wage rate of $18 per hour.
Refer to Table 1-3.What is Santiago's marginal cost if he decides to stay open for an extra two hours instead of one hour?

A)$18
B)$36
C)$38
D)$102

Question 59

Consider the following statements:
A.Consumers buy more MP3 players from an electronics store that sells MP3 players at a lower price than other rival electronics stores in the area.
B.Schools take steps to increase security since they believe it is more costly to allow vandalism than to hire additional security guards.
C.Citrus growers produce more oranges when the selling price of oranges falls.
Which of the above statements demonstrates that economic agents respond to incentives?

A)a only
B)b only
C)c only
D)a and b
E)a, b, and c

Question 60

Pookie's Pinball Palace restores old Pinball machines.Pookie has just spent $300 purchasing and cleaning a 1960s-era machine which he expects to sell for $2,000 once he is finished with the restoration.After having spent $300, Pookie discovers that he will need to rewire the entire machine at a cost of $1,100 in order to finish the restoration.Alternatively, he can sell the machine "as is" now for $1,000.What should he do?

A)He should sell the machine now to make the most profit.
B)It does not matter what he does; he is going to take a loss on his project.
C)He should rewire the machine, complete the task and then sell the machine.
D)He should have never purchased the machine because he has already spent too much time on it and has not been paid for that time.

Question 61

An economic model is a simplified version of reality used to analyze real-world economic situations.

Question 62

The term "market" refers to trading arrangements by which buyers and sellers come together.

Question 63

What is meant by the statement that "optimal decisions are made at the margin"?

Question 64

Suppose a used car dealer can earn an additional $25,000 in revenue per year by increasing advertising on a local radio station from 3 times a day to 5 times a day.At what additional cost would this increase in advertising not be considered economically rational?

Question 65

What is an economic model?

Question 66

Marginal benefit refers to the additional benefit that your activity provides to you.

Question 67

Even if the population declines, scarcity will still exist.

Question 68

Explain the economic assumption that "people are rational."

Question 69

Suppose the extra cost to a pet store of advertising one additional day each week in the local newspaper is $450.Then, the pet store should advertize that one additional day each week if doing so brings in additional revenue of $450 or more each week.

Question 70

Optimal decisions are made at the point where marginal cost equals zero.

Question 71

Suppose the extra cost for a company to advertise for one extra day each week in the local newspaper is $200.Then, the company should advertise on that additional day if it can generate additional revenue of $200 each week.

Question 72

The additional cost to a producer of hiring an additional unit of labor is called the marginal cost.

Question 73

The sales revenue a seller receives from the sale of an additional unit of goods is called the marginal benefit.

Question 74

If it costs Danitra $225 to create 4 necklaces and $275 to create 5 necklaces, then the marginal cost of producing the 5th necklace is $50.

Question 75

What is a marginal benefit?

Question 76

All economic questions arise from the fact that resources are unlimited.

Question 77

Explain the economic idea that "people respond to incentives."

Question 78

Assume that a florist can earn an additional $20,000 of revenue each year from advertising once a week on a local television station.What must the additional cost of this once-a-week advertising be to make this advertising economically rational?

Question 79

If it costs Sinclair $300 to produce 3 suede jackets and $420 to produce 4 suede jackets, then the difference of $120 is the marginal cost of producing the 4th suede jacket.

Question 80

What is a marginal cost?