MacroEconomics Chapter 1

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Economics deals primarily with the concept of

scarcity

The overriding reason as to why households and societies face many decisions is that

resources are scarce

For society, a good is not scarce is

all members of society can have all they want of the good

Economics is the study of

how society manages its scarce resources

A typical society strives to get the most it can from its scarce resources. At the same time, the society
attempts to distribute the benefits of those resources to the members of the society in a fair manner.
In other words, the society faces a tradeoff between

efficiency and equity

A tradeoff exists between a clean environment and a higher level of income in that

laws that reduce pollution raise costs of production and reduce incomes

Which of the following is true?

efficiency refers to the size of the economic pie, equity refers to how the pie is divided

Efficiency means that

society is getting the maximum benefits from its scarce resources

Senator Smith wants to increase taxes on people with high incomes and use the money to help the
poor. Senator Jones argues that such a tax will discourage successful people from working and will
therefore make society worse off. An economist would say that

a good decision requires that we recognize both viewpoints

When the government attempts to improve equity in an economy the result is often

a reduction in efficiency

What you give up to obtain an item is called your

opportunity cost

A furniture maker currently produces 100 tables per week and sells them for a profit. She is
considering expanding her operation in order to make more tables. Should she expand?

It depends on the marginal cost of producing more tables and the marginal revenue she will earn
from selling more tables.

For a college student who wishes to calculate the true costs of going to college, the costs of room
and board

should be counted only to the extent that they are more expensive at college than elsewhere.

For which of the following individuals would the opportunity cost of going to college be highest?

a famous, highly-paid actor who wants to take time away from show business to finish college
and earn a degree

Mallory decides to spend three hours working overtime rather than watching a video with her
friends. She earns $8 an hour. Her opportunity cost of working is

the enjoyment she would have received had she watched the video.

College-age athletes who drop out of college to play professional sports

are well aware that their opportunity cost of attending college is very high.

The word "margin" means

edge

A rational decision maker

takes an action only if the marginal benefit of that action exceeds the marginal cost of that action

A person's willingness to pay for a good is based on

the marginal benefit that an extra unit of the good would provide for that person.

A construction company has built 50 houses so far this year at a total cost to the company of $8
million. If the company builds a 51st house, its total cost will increase to $8.18 million. Which of the
following statements is correct?

a. For the first 50 houses, the average cost per house was $160,000.
b. The marginal cost of the 51st house, if it is built, will be $180,000.
c. If the company can experience a marginal benefit of $190,000 by building the 51st house, then
the company should build it.
d. All of the above are correct.

People are willing to pay more for a diamond than for a bottle of water because

the marginal benefit of an extra diamond far exceeds the marginal benefit of an extra bottle of
water.

Government policies can change the costs and benefits that people face. Those policies have the
potential to

a. alter people's behavior.
b. alter people's decisions at the margin.
c. produce results that policymakers did not intend.
d. All of the above are correct.

Senator Smart, who understands economic principles, is trying to convince workers in her district
that trade with other countries is beneficial. Senator Smart should argue that trade can be beneficial

because it allows specialization, which increases total output.

Benefits from trade would not include

less competition

If the United States decides to trade with Mexico, we know that

Mexico and the United States can both benefit.

Which of the following statements does not apply to a market economy?

a. Firms decide whom to hire and what to produce.
b. No one is looking out for the economic well-being of society as a whole.
c. Households decide which firms to work for and what to buy with their incomes.
d. Government policies are the primary forces that guide the decisions of firms and households.

(D)

The term used to describe a situation in which markets fail to allocate resources efficiently is called

market failure

A friend of yours asks you why market prices are better than government-determined prices.
Because you understand economic principles, you say that market-determined prices are better
because they generally reflect

c. both the value of a good to society and the cost of making it.

An example of a firm with market power is a

cable TV provider in St. Louis.

Which of the following observations was made famous by Adam Smith in his book The Wealth of
Nations?

Households and firms interacting in markets are guided by an "invisible hand" that leads them to
desirable market outcomes.

The "invisible hand" directs economic activity through

prices

For markets to work well, there must be

property rights

A rationale for government involvement in a market economy is as follows:

a. Markets sometimes fail to produce a fair distribution of economic well-being.
b. Markets sometimes fail to produce an efficient allocation of resources.
c. Property rights have to be enforced.
d. All of the above are correct.
(D)

Which of the following is not generally regarded as a legitimate reason for the government to
intervene in a market?

to protect an industry from foreign competition

Causes of market failure include

externalities and market power.

Which is the most correct statement about the invisible hand?

The invisible hand is more effective at ensuring efficiency than it is at ensuring equity.

In the United States, higher income tax rates on rich people could be justified on the basis of

enhanced equity for society (the equality for everyone)

The primary determinant of a country's standard of living is

the country's ability to produce goods and services.

If the average income of an Australian is higher than the average income of a Russian, it is most
likely because

productivity is higher in Australia than in Russia.

A worker in Bangladesh can earn $1 per day making cotton cloth on a hand loom. A worker in the
United States can earn $100 per day making cotton cloth with a mechanical loom. What accounts for
the difference in wages?

Labor is more productive making cotton cloth with a mechanical loom than with a hand loom.

The historical rise in living standards of American workers is primarily a result of

the rise in American productivity.

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