Chapter 01 - Introduction

Chapter 01
Introduction

Multiple Choice Questions

1. (p. 2) Which of the following topics is related to microeconomics?
A. Explanations of why recessions occur
B. etermining how much output a firm should produce
C. !he rate of unemployment
. !he rate of economic growth

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". (p. 2) A society#s institutions
A. Include the laws and customs that determine the allocation of resources
$. %a&e no effect on people#s a'ilities to ma(e decisions
C. Are irrele&ant when studying an economy
D. Are not related to the control of society#s resources

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). (p. 2) In a capitalist economy*
A. !he state controls the means of production
B. !he means of production are mostly owned 'y pri&ate indi&iduals
C. Economic decisions are centrali+ed
. ,o&ernment officials decide what to produce* how to produce it and who gets it

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Chapter 01 - Introduction
-. (p. 2) In a communist economy*
A. !he state controls the means of production
$. Indi&iduals decide what to produce* how to produce it and who gets it
C. Economic decisions are decentrali+ed
. !he mar(et system is used to allocate resources

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.. (p. 2) In a ////// economy* the allocation of resources is go&erned 'y &oluntary trading
among 'usinesses and consumers.
A. Capitalist
$. Communist
C. 0ocialist
. !raditional

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1. (p. 3) In most countries* decisions that affect medical expenditures are
A. Centrali+ed
$. ecentrali+ed
C. etermined 'y go&ernment policy
D. $oth centrali+ed and decentrali+ed

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2. (p. 4) In a capitalist economy* the opportunities and procedures for 'uying and selling goods
and ser&ices are determined 'y
A. ,o&ernment
B. 3ar(ets
C. Custom
. 4aws

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Chapter 01 - Introduction
5. (p. 4) !he most common form of economic decentrali+ation in&ol&es
A. %a&ing &ery little go&ernment in&ol&ement in the economy
B. 3ar(ets* where people 'uy and sell goods and ser&ices
C. ,o&ernment officials ma(ing economic decisions
. ,o&ernment ownership of the means of production

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6. (p. 4) !o an economist* a mar(et refers to
A. A single group of closely related products
$. A specific location where trade ta(es place
C. $uyers and sellers trading in a particular region
. $uyers li&ing in a specific geographic location

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10. (p. 4) Economists thin( of products as 'eing in the same mar(et if they
A. Are traded in a particular geographic location
$. Cannot 'e su'stituted for other goods and ser&ices
C. Are highly interchangea'le
. 7roduced 'y companies that complete with each other

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11. (p. 4) According to economists* which of the following is the 'est example of a mar(et?
A. A flea mar(et
$. !he trading floor of the 8ew 9or( 0toc( Exchange
C. !he local shopping mall
D. !he retail mar(et for winter coats in Chicago

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Chapter 01 - Introduction
1". (p. 4) Which of the follow is 8:! an example of a mar(et?
A. ;etail trade of chocolate ice cream in $oston
$. !he 'uying and selling of homes in <ansas City
C. !he farmer#s mar(et in 3adison* Wisconsin
. !he 'uying and selling of used cars

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1). (p. 5) !he rate at which someone can swap money for a good is called the ///// of the
good.
A. 7rice
$. :pportunity cost
C. !otal cost
. ;ate of su'stitution

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1-. (p. 5) A /////// is an enforcea'le claim on a good or ser&ice.
A. eed
$. ,o&ernment decree
C. 7rice
D. 7roperty right

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1.. (p. 5) !rade can occur only if property rights are
A. 8ot enforced
B. !ransfera'le
C. 4egally 'inding
. Clearly defined

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Chapter 01 - Introduction
11. (p. 5) In a free mar(et system
A. !here is no go&ernment in&ol&ement in the economy
$. ;esources are allocated on a first-come first-ser&ed 'asis
C. $uyers and sellers ma(e all of the economic decisions
D. ,o&ernment mostly allows mar(ets to operate with little inter&ention or regulation

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12. (p. 5) 3icroeconomics
A. 0tudies indi&idual decision ma(ing
$. 0tudies aggregate 'eha&ior
C. Cannot 'e applied too 'eha&iors such as marriage
D. Cannot 'e use to address =uestions of what ought to 'e

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15. (p. 5) 3icroeconomists assume that people are moti&ated 'y
A. 0elfishness
B. 3aterial self-interest
C. Altruism
. 7roperty rights

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16. (p. 5) 7eople respond to incenti&es in different ways* depending on whether they act as
A. Indi&iduals or in a group
$. Consumers* employers or go&ernment officials
C. Consumers* go&ernment officials or owners of firms
D. Consumers* employers or owners of firms

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1-.
Chapter 01 - Introduction
"0. (p. 6) In deciding on how to spend their resources* consumers try to
A. $uy goods at the lowest possi'le price
B. Choose the com'ination of goods that yield the highest le&el of personal satisfaction
C. Choose the com'ination of goods that costs the least
. 3aximi+e profit

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"1. (p. 6) 7ositi&e economic analysis
A. In&ol&es &alue >udgments
$. Concerns what ought to happen
C. Addresses factual issues
. Is su'>ecti&e

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"". (p. 6) ?uestions that address what did* will or would actually happen are called ////////
=uestions.
A. 8ormati&e
B. 7ositi&e
C. Efficiency
. E=uity

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"). (p. 6) 7ositi&e economic =uestions
A. In&ol&e &alue >udgments
$. Address what ought to happen
C. Are potentially testa'le
. Cannot 'e tested

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Chapter 01 - Introduction
"-. (p. 6) 8ormati&e economic analysis addresses
A. What ought to happen
$. @actual issues
C. !he cause-and-effect analysis of actions and their conse=uences
. Are potentially testa'le

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".. (p. 6) ?uestions that address the cause-and-effect analysis of actions and their conse=uences
are
A. 7ositi&e =uestions
$. 8ormati&e =uestions
C. 8ot 'e testa'le
. 0u'>ecti&e

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"1. (p. 7) ?uestions that in&ol&e &alue >udgments are
A. 7ositi&e =uestions
B. 8ormati&e =uestions
C. 8ot rele&ant to microeconomics
. :'>ecti&e

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"2. (p. 7) Which of the following is a positi&e =uestion?
A. Is society 'etter off if we restrict trade with other countries?
$. 0hould we increase taxes on the rich or the middle class?
C. Will an increase in the minimum wage cause more unemployment for teenagers?
. 0hould the go&ernment pro&ide health care?

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Chapter 01 - Introduction
"5. (p. 7) Which of the following is a normati&e =uestion?
A. 0hould the go&ernment re=uire cars to 'e fuel efficient?
$. oes legali+ed a'ortion lead to lower crime rates?
C. Will mo&ing a plant o&erseas reduce production costs?
. Will an increase in the minimum wage reduce po&erty?

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"6. (p. 8) In conducting normati&e analysis* economists apply
A. !he principle of comparati&e ad&antage
B. !he principle of indi&idual so&ereignty
C. !he law of one price
. !he scientific method

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)0. (p. 7 and !) In conducting positi&e economic analysis* economists apply
A. 0u'>ecti&e &alue >udgments
$. !he principle of indi&idual so&ereignty
C. 3oral &alues
D. !he scientific method

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)1. (p. 7) In their study of the effect of legali+ed a'ortion on crime rates* 0te&en 4e&itt and Aohn
onohue applied
A. 7ositi&e economic analysis
$. 8ormati&e economic analysis
C. !he principle of indi&idual so&ereignty
. Balue >udgments

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Chapter 01 - Introduction
)". (p. 8) Which of the following top is 8:! studied using microeconomics?
A. @ord#s decision to introduce a new car model
$. An indi&idual#s decision to get married
C. A person#s decision whether or not to commit a crime
D. !he rate at which an economy can grow

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)). (p. !) !he general procedure used to learn a'out natural phenomena is called
A. 7ositi&e economics
B. !he scientific method
C. 8ormati&e economics
. A theory

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)-. (p. !) A possi'le explanation for a natural phenomenon is called
A. !he scientific method
B. A theory
C. 7ositi&e economics
. 8ormati&e economics

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).. (p. !) A theory
A. Is usually 'ased on a set of &alue >udgments
$. Cannot 'e tested
C. Is a possi'le explanation for a natural phenomenon
. Always fits with real-world data

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Chapter 01 - Introduction
)1. (p. !) !he scientific method is most consistent with
A. 8ormati&e economics
B. 7ositi&e economics
C. 3ar(et analysis
. 0u'>ecti&e >udgment

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)2. (p. !) A useful theory must
A. Apply to e&ery concei&a'le situation
B. $e 'roadly applica'le
C. $e agreed upon 'y all economists
. 8ot 'e a'le to 'e refined

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)5. (p. !) Which of the following 'est represents the theori+ing step in the scientific process?
A. :'ser&ing a line of cars outside of a gas station
B. 0uggesting that lower gasoline prices are encouraging consumers to 'uy more gas
C. Collecting data on the amount of gasoline sold at different prices
. rawing a graph of the relationship 'etween gasoline prices and the amount of gasoline
sold at each price

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)6. (p. ) A model
A. Is a complete representation of some phenomenon
B. A simplified representation of some phenomenon
C. Is always expressed mathematically
. Cannot 'e =ualitati&e in nature

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Chapter 01 - Introduction
-0. (p. ) Csing a model to explain the cause-and-effect analysis of actions and their outcomes
is most consistent with
A. 8ormati&e economics
B. 7ositi&e economics
C. 0u'>ecti&e analysis
. Institutional analysis

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-1. (p. ) Which of the following is 8:! a reason why economists usually wor( with
mathematical models?
A. $ecause most economic choices are =uantitati&e in nature
$. 3athematical models can pro&ide precision* while =uantitati&e models can not
C. 3athematical modeling imposes intellectual rigor
D. 3athematical models can 'e used to settle disputes o&er normati&e economic =uestions

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-". (p. ) In order to explain how societies deal with the pro'lem of scarcity* economists apply
simplified representations (nown as
A. 0implifying assumptions
$. !heories
C. 8ormati&e =uestions
D. 3odels

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Chapter 01 - Introduction
-). (p. 2) !he real test of a good model is
A. Its degree of mathematical rigor
$. !he degree to which it conforms to the Dreal world.D
C. Its usefulness in predicting outcomes
. %ow detailed it is

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--. (p. ) Economists use assumptions in order to
A. 3a(e models more realistic
B. 0implify complex real-world 'eha&ior
C. 3a(e their models fit the data
. A&oid using mathematics

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-.. (p. 2) Which of the following is generally 8:! a way that economists collect data?
A. ;ecords
$. 0ur&eys
C. Controlled Experiments
. 8atural Experiments

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-1. (p. 3) In a natural experiment*
A. 0imilar people face &ery different circumstances
B. !he circumstances of otherwise identical people differ entirely 'y chance
C. !he circumstances of one group of people is compared to a DcontrolD group of people
. 0imilar people face &ery similar circumstances

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Chapter 01 - Introduction
-2. (p. 4) 0uppose that two economists reach different positi&e conclusions 'ased on the same
e&idence. 3ost li(ely* the two economists
A. %a&e different &alues >udgments
B. Are using different assumptions
C. Are using different su'>ecti&e criteria
. Are not using the scientific method

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-5. (p. 4) !he application of statistical methods to empirical =uestions in economics is (nown
as
A. 7ositi&e economic analysis
$. 8ormati&e economic analysis
C. !he scientific method
D. Econometrics

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-6. (p. 4) !he accumulation of scientific e&idence
A. Can resol&e normati&e disputes
B. Can resol&e positi&e disagreements
C. Can determine whether one person#s gain is more important than another person#s loss
. Can always settle disputes o&er pu'lic policy

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.0. (p. 5) A small ad>ustment in a choice is called
A. A marginal change
$. An incremental change
C. A positi&e change
. A net change

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Chapter 01 - Introduction
.1. (p. 5) Which of the following statements is false?
A. ;ecogni+ing tradeoffs is an essential part of good decision ma(ing
$. 3ost go&ernment policies pro&ide people with incenti&es to ta(e certain actions and a&oid
others
C. 7eople will pursue an action as long as it is 'eneficial for them to do so
. E&ery choice in&ol&es a tradeoff

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.". (p. 6) 0uppose you are thin(ing a'out spending an additional hour studying for your next
microeconomics exam. 9ou should spend that extra hour studying as long as
A. !he extra study time leads to a higher grade on the exam
$. 9our only other alternati&e is spending an hour reading a no&el
C. !he 'enefit of an additional hour of study is greater than what you ha&e to gi&e up in order
to study one more hour
. 9ou en>oy studying microeconomics

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.). (p. 6) An increase in the price of a good
A. Increases the incenti&e to 'uy the good* 'ut decreases the incenti&e to sell the good
B. ecreases the incenti&e to 'uy the good* 'ut increases the incenti&e to sell the good
C. Increases 'oth the incenti&e to 'uy the good and the incenti&e to sell the good
. ecreases 'oth the incenti&e to 'uy the good and the incenti&e to sell the good

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Chapter 01 - Introduction
.-. (p. 6) Which of the following is 8:! a reason that trade can 'enefit e&eryone?
A. 0omeone who owns a good of relati&ely little &alue can trade it for something they &alue
more
$. !rade frees people from the need to produce e&erything themsel&es
C. !rade allows people to speciali+e in whate&er they do 'est
D. !rade eliminates the pro'lem of scarcity

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... (p. 7) !he competiti&e mar(et price of a good is e=ual to
A. !he &alue consumers place on the last unit they purchased
$. !he &alue consumers place on what they ha&e to gi&e up to get the good
C. !he &alue consumers place on an additional unit of the good
. !he &alue consumers place on a su'stitute good

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.1. (p. 7) !he competiti&e mar(et price of a good
A. Is e=ual to the &alue consumers place on the last unit they purchased
B. Is e=ual to the cost of producing an extra unit of the good
C. 3ust exceed the cost of producing an extra unit of the good
. 3ust 'e less than what consumers are willing to pay for an additional unit of the good

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.2. (p. 8) A mar(et failure occurs when
A. A go&ernment policy fails to impro&e the well-'eing of society
$. $uyers of a good can#t get all of the good they want at the current price
C. 0ellers can#t find 'uyers for their goods
D. !he mar(et price of a good or ser&ice fails to reflect the costs and 'enefits to all consumers
and producers

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Chapter 01 - Introduction
.5. (p. 8) In a situation where a mar(et failure occurs*
A. Any go&ernment inter&ention will impro&e on the mar(et outcome
$. !here is nothing that the go&ernment can do to impro&e on the mar(et outcome
C. ,o&ernment inter&ention might impro&e on the mar(et outcome
. It will always 'e prefera'le to ha&e the go&ernment inter&ene in the mar(et

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.6. (p. 8) Which of the following does 8:! >ustify go&ernment inter&ention in a mar(et?
A. @ree mar(ets can create ine=uality across consumers
$. !he mar(et price fails to reflect the 'enefits to consumers and the costs to producers
C. !he mar(et it price is >ust high enough to co&er the cost of producing one more unit of the
good
. !he production of some goods generates pollution

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10. (p. 2!) According to the text* which of the following 'est descri'es the process the @CC used
to allocate spectrum licenses to telecommunications pro&iders?
A. 4icenses were auctioned one at a time* to the highest 'idder
$. 4icenses were sold to telecommunications pro&iders that already had contracts with the
go&ernment
C. All licenses were auctioned of at the same time
. !he go&ernment charged the same price for each license

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Chapter 01 - Introduction

Essay Questions

11. 0carcity forces society to confront three critical issues. 4ist those issues and explain how
they are related to the pro'lem of scarcity.
What to 7roduceE When we produce more of one good* we use up scarce resources. !his
reduces our a'ility to produce other goods.
%ow to produce goodsE 0ociety must determine a production method for each good that
minimi+es the use of the scarce resources used to produce the good.
Who gets whatE A society can produce only a limited amount of goods and ser&ices. Each
society must therefore de&elop procedures for allocating those goods among consumers.

1". Compare and contrast the institutions of a capitalist economy with those of a communist
economy.
E&ery economy must ha&e institutions and procedures in place to deal with the =uestions of
what to produce* how to produce and who gets what. A capitalist economy is one in which the
means of production are mostly owned and controlled 'y indi&iduals. !he allocation of
resources and goods is go&erned 'y &oluntary trade that ta(es place in mar(ets. Capitalist
economies are also characteri+ed 'y transfera'le property rights. As a result* most economic
decisions in a capitalist economy are decentrali+ed. In contrast* the state tends to own the
means of production in a communist economy. @urther* many economic decisions are
centrali+ed* that is* they are made 'y go&ernment officials.

1). Contrast positi&e and normati&e economics. %ow can economists carry out normati&e
analysis?
7ositi&e economics in&ol&es factual =uestions a'out what did or will happen as the result of
some decision. 3ore specifically* positi&e economics deals with the cause-and-effect analysis
of actions and their conse=uences. 7ositi&e economic =uestions are testa'le using the
scientific method. In contrast* normati&e economics deals with &alue >udgments a'out what
ought to happen. Economists can carry out normati&e analysis 'y applying the principle of
indi&idual so&ereigntyF the idea that each indi&idual (nows what is 'est for him or her.

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Chapter 01 - Introduction
1-. What are the roles of mar(ets and prices in an economy?
3ar(ets are the means 'y which scarce resources are allocated. !hey are the means 'y which
'uyers and sellers carry out &oluntary exchange. 7rices are important in that they pro&ide the
incenti&es to which 'uyers and sellers respond. I relati&ely high price for a good will
discourage consumption and encourage production of the good. :n the other hand* a
relati&ely low price will encourage the consumption and discourage the production of a good.

1.. %ow does marriage fall within the scope of microeconomics?
Economists study how the allocation of scarce resources depends on institutions and customs
gi&en the o'>ecti&es that moti&ate choices. 7otential spouses with desira'le characteristics are
scare. It is the characteristics of a potential spouse that moti&ates an indi&idual to marry.
3arriage also in&ol&es dating Ga customH and a contract Ga marriage licenseH which re=uires
the institution of go&ernment. G8:!EE 0tudents may also apply some of the !hemes of
3icroeconomics here. @or example* marrying one indi&idual means trading off the
opportunity to marry another indi&idual. !he choice of whom to marry in&ol&es the
comparison of costs and 'enefits. 3arriage can ma(e 'oth partners 'etter off.H

11. %ow would you apply the scientific process to the =uestion of why men typically earn
more than women?
%ere* we might start with the simplifying assumption that men differ from women* 'ut not
from other men. !herefore* we can compare one group GmenH to another group GwomenH.
@irst* we would ha&e to o'ser&e a situation where men earn more than women for doing
essentially the same wor(. 0econd* we would ha&e to construct a theory a'out why men earn
more than women in this situation. 7erhaps the >o' is Ddangerous*D re=uires a large amount of
physical strength or is too time consuming to allow time to raise children. 7erhaps men and
women ha&e different le&els of education. !here are a &ariety of theories that could 'e applied
to this situation. !hird* we would ha&e to identify additional implications of the theory.
7erhaps men and women earn the same in occupations that are not dangerous* do not re=uire a
lot of physical strength and ha&e flexi'le wor( schedules. @ourth* we would ha&e to collect
data on earnings and the characteristics of the men and women in the occupation with the
earnings disparity. ata could 'e collected through employers# records or sur&eys. !his data
would 'e used to test the theory. @ifth* the theory would 'e refined 'ased on how well it fits
the data and whether new o'ser&ations 'ecome a&aila'le.

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Chapter 01 - Introduction
12. Csing the !hemes of 3icroeconomics* pro&ide an economic explanation of your decision
to attend college. %ow would you explain your decision to ta(e your microeconomics class?
!he choice to attend college is an all-or-nothing choice. @or most students* going to college
means trading off the opportunity to wor(. G!radeoffs are Cna&oida'leH !he incenti&e to go to
college is usually the higher earnings that students expect to get as a result of attending
college. G7eople ;espond to Incenti&esH!hey gi&e up the opportunity to earn a wage or salary
while attending college. G7rices 7ro&ide Incenti&esH 0tudents generally decide to attend
college 'y comparing the expected higher future earnings resulting from going to college to
the earnings they would recei&e if they didn#t go to college. !he choice to ta(e a
microeconomics class is more of a marginal choice. %ere students will compare the marginal
'enefits Gcredit hours* fulfilling a degree re=uirementH to the marginal cost Gnot 'eing a'le to
ta(e another class* for exampleH. @or students ta(ing the class* the 'enefits of ta(ing the class
exceed the cost of ta(ing the class.

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