Micro chapter 1 study guide questions

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1 Micro chapter 1 study guide questions Multiple Choice Identify the choice that best completes the statement or answers the question. 1. Which of the following is true? a. Scarcity and poverty are basically the same thing. b. Poverty implies that some basic level of need has not been attained. c. Scarcity is the result of prices being set too high. d. All of the above are true. 2. Economics is the study of how a. individuals make choices because of scarcity. b. to succeed in business. c. to make money in the stock market. d. the morals and values of people are formed. 3. When an economist states a good is scarce, she means that a. production cannot expand the availability of the good. b. it is rare. c. desire for the good exceeds the amount that is freely available from nature. d. people would want to purchase more of the good at any price. 4. When economists say an individual displays economizing behavior, they simply mean that the individual is a. making a lot of money. b. purchasing only those products that are cheap and of low quality. c. learning how to run a business more effectively. d. making choices to gain the maximum benefit at the least possible cost. 5. "The national debt is too large. The government must stop spending so much money." This statement is a. a normative statement. b. a positive statement. c. a testable hypothesis. d. both b and c. 6. Which of the following is a guidepost to economic thinking? a. The value of a good can be objectively measured. b. Individuals should never make a decision without having complete information. c. Incentives matter. d. Goods are scarce for the poor but not for the rich. 7. Competitive behavior a. occurs as a reaction to scarcity. b. occurs only in a market system. c. occurs only when the government allocates goods and services. d. always generates waste. 8. In economics, the statement, "There is no such thing as a free lunch," refers to which of the following? a. Individuals must always pay personally for the lunch they consume. b. Production of a good requires the use of scarce resources regardless of whether it is supplied free to the consumers. c. Restaurant owners would never give away free lunches. d. All good theories are testable.

2 9. "If income were redistributed in favor of the poor, we would eliminate scarcity." The preceding statement is a. essentially correct. b. incorrect because scarcity has already been eliminated among the poor in wealthy countries such as the United States. c. incorrect; it fails to recognize that poverty will be present as long as resources are scarce. d. incorrect; it confuses the elimination of poverty with the elimination of the constraint imposed by scarcity. 10. Which of the following is not scarce? a. an individual's time b. air c. pencils d. automobiles 11. People make decisions at the margin. Thus, when deciding whether to purchase a second car, they would compare a. the total benefits expected from two cars with the costs of the two cars. b. the additional benefits expected from a second car with the total cost of the two cars. c. the dollar cost of the two cars with the potential income that the two cars will generate. d. the additional benefits of the second car with the additional costs of the second car. 12. The basic difference between macroeconomics and microeconomics is that a. macroeconomics looks at how people make choices, and microeconomics looks at why they make those choices. b. macroeconomics is concerned with economic policy, and microeconomics is concerned with economic theory. c. macroeconomics focuses on the aggregate economy, and microeconomics focuses on small components of that economy. d. macroeconomics is associated with the fallacy of composition, and microeconomics has little to do with the fallacy of composition. 13. The highest valued alternative that must be given up in order to choose an action is called its a. opportunity cost. b. utility. c. scarcity. d. ceteris paribus. 14. Which of the following actions is consistent with the basic economic postulate (the guidepost) that incentives matter? a. Consumers buy fewer potatoes when the price of potatoes increases. b. A politician votes against a pay raise for himself because most of his constituents are strongly opposed to it and would vote against him in the next election. c. Farmers produce less corn because corn prices have declined. d. All of the above. 15. If Susan bought nine gallons of gasoline at $1.50 per gallon, the car wash cost $1, but if she bought 10 gallons of gasoline, the car wash was free. Given that Susan is going to get the car wash, the marginal cost of the tenth gallon of gasoline is a. zero. b. $.50. c. $1.00. d. $1.50.

3 16. Positive economics differs from normative economics in that a. positive economics deals with how people react to changes in benefits, and normative economics deals with how people react to changes in costs. b. positive economic statements are testable, and normative statements are not. c. positive economic statements tell us what we should be doing, and normative economics tells us what we should have done. d. positive economic statements focus on the application of the theory, and normative economic statements are theoretical. 17. Which of the following represents a normative statement? a. Incentives matter. b. The temperature in this room is 120 degrees. c. It is too hot in this room. d. People will buy less butter at $1.50 per pound than they will at $1.00 per pound. 18. The economic way of thinking stresses that a. changes in personal costs and benefits will exert a predictable influence on the choices of human decision makers. b. only direct monetary costs matter in making decisions. c. if a good is provided free to an individual, its production will not consume valuable scarce resources. d. secondary effects are not important to consider when making decisions. 19. Which of the following is a positive economic statement? a. The federal minimum wage should be raised to $6.50 per hour. b. The United States spends too much on national defense. c. Higher rates of investment lead to higher rates of economic growth. d. Economics is more interesting to study than history. 20. When economists use the term ceteris paribus, they indicate a. the causal relationship between two economic variables cannot be determined. b. the analysis is true for the individual but not for the economy as a whole. c. all other factors are assumed to be constant. d. their conclusions are based on normative economics rather than positive economic analysis. 21. In economics, the benefit (or satisfaction) that an individual gets from an activity is called a. scarcity. b. utility. c. opportunity cost. d. ceteris paribus. Critical Thinking and Application 22. If economics is correct in its assumption that people are rational, why then would anyone choose to smoke cigarettes? 23. A radio station gives "free money" to those listeners whose names are drawn and announced over the airwaves from postcards the listeners sent into the radio station. Is the money really free for the listener? 24. Why would a radio station give money to listeners? Does this violate the economic way of thinking? 25. Joe observes that a car in 1925 sold for an average of $500 versus $20,000 for a 2005 model. He concludes that 2005 cars must be 40 times better than 1925 cars. What's wrong with this way of thinking?

4 26. Evaluate this statement: "People engaged in economizing behavior will always buy the lowest priced item they can find." 27. Homeowners can deduct interest payments on their mortgages from their federal income tax. If this deduction were removed, how would the housing market be affected? 28. If people are self-interested, why does anyone give money to public radio? 29. When Mother Theresa won the Nobel Peace Prize, the monetary award was well in excess of $100,000. Did she accept the money? If so, what did she do with it? 30. Who is more likely to drive carelessly, Sue in her 1980 Ford with bad brakes or Sally, who has a 2005 BMW with all the most recent safety options? 31. A popular video program, used to teach primary school children about economics, defines scarcity as "when you don't have enough of something." Evaluate this definition based on your understanding of the scarcity concept.

5 Macro chapter 1 study guide questions Answer Section 1. B 2. A 3. C 4. D 5. A 6. C 7. A 8. B 9. D 10. B 11. D 12. C 13. A 14. D 15. B 16. B 17. C 18. A 19. C 20. C 21. B