Name: _________________Class:________Date: __________ ID: _________

EC1000 - Exercise 1 - Week 3

Multiple Choice

Identify the letter of the choice that best completes the statement or answers the question.

______ 1. The opportunity cost of going to college is

a. the total spent on food, clothing, books, transportation, tuition, lodging, and other
expenses.
b. the value of the best opportunity a student gives up to attend college.
c. zero for students who are fortunate enough to have all of their college expenses paid by
someone else.
d. zero, since a college education will allow a student to earn a larger income after
graduation.

______ 2. The opportunity cost of an item is

a. the number of hours needed to earn money to buy it.
b. what you give up to get that item.
c. usually less than the dollar value of the item.
d. the dollar value of the item.

______ 3. Economists understand that people respond to

a. laws.
b. incentives.
c. threats more than rewards.
d. positives, but not negatives.

______ 4. Which of the following is the best statement about markets?

a. Markets are usually a good way to organize economic activity.
b. Markets are usually inferior to central planning as a way to organize economic activity.
c. Markets fail and are therefore not an acceptable way to organize economic activity.
d. Markets are a good way to organize economic activity in developed nations, but not in
less developed nations.

______ 5. The "invisible hand" directs economic activity through

a. advertising.
b. central planning.
c. prices.
d. government regulations.

______ 6. Causes of market failure include

a. externalities and market power.
b. market power and incorrect forecasts of consumer demand.
c. externalities and foreign competition.
d. incorrect forecasts of consumer demand and foreign competition.

______ 7. An example of an externality is the impact of

a. bad weather on the income of farmers.
b. the personal income tax on a person's ability to purchase goods and services.
c. pollution from a factory on the health of people in the vicinity of the factory.
d. increases in health care costs on the health of individuals in society.
Name: _________________Class:________Date: __________ ID: _________

______ 8. Market power refers to the

a. power of a single person or group to influence market prices.
b. relative importance of a market to the overall economy.
c. power of the government to regulate a market.
d. ability of a person or group of people to successfully market new products.

______ 9. Consider the statement: Taxes on people with incomes above 100,000 should be
increased and the revenue used to help university students. The statement is
a. positive in nature.
b. normative in nature.
c. empirical in nature.
d. a claim that there are no tradeoffs between equity and efficiency.

______ 10. The production possibilities frontier demonstrates the basic economic principle that:
a. economies are always efficient.
b. assuming full employment, supply will always determine demand.
c. assuming full employment, an economy is efficient only when the production of capital
goods in a particular year is greater than the production of consumption goods in that year.
d. assuming full employment, to produce more of any one thing, the economy must produce
less of at least one other good.

______ 11. Which of the following activities would occur in a market for factors of production?
a. Reesa buys a new computer to chat online.
b. Randy pays a speeding ticket.
c. Ian mows his grass.
d. Nissan hires additional workers to run a third shift at the factory in Sunderland.

______ 12. When testing theories, economists

a. must make do with whatever data the world gives them.
b. can manipulate economic conditions easier than other scientific fields.
c. can enlist the government's help to manipulate economic conditions.
d. can achieve statistically valid results with much smaller sample sizes.

______ 13. Which of the following is NOT true about most economic models?
a. They are built using the tools of mathematics.
b. They are useful to economists, but not to policymakers.
c. They do not include every feature of the economy.
d. They are built using assumptions.

______ 14. In a circular-flow diagram,

a. taxes flow from households to firms, and transfer payments flow from firms to
households.
b. resources flow from firms to households, and goods and services flow from households to
firms.
c. income payments flow from firms to households, and sales revenue flows from
households to firms.
d. inputs and outputs flow in the same direction as the flow of dollars, from firms to
households.
Name: _________________Class:________Date: __________ ID: _________

______ 15. According to a simple circular-flow diagram, households and firms interact in
a. only one type of market.
b. two types of markets.
c. three types of markets.
d. Households and firms do not interact.

______ 16. Macroeconomics is the study of

a. individual decision-makers.
b. economic history.
c. economy-wide phenomena.
d. how firms maximize profit.

______ 17. When economists are speaking as policy advisors, they are more likely to use
a. normative statements.
b. positive statements.
c. objective statements.
d. All of the above are correct.

______ 18. The first number in an ordered pair is

a. the y-coordinate.
b. the x-coordinate.
c. either x or y, depending on the quadrant.
d. not useful to know, since most graphs in economics use p and q, not x and y.

______ 19. Suppose an economy produces two goods, food and machines. This economy always
operates on its production possibilities frontier. Last year, it produced 50 units of food and 30
machines. This year it experienced a technological advance in its machine-making industry.
As a result, this year the society wants to produce 55 units of food and 30 machines. Which of
the following statements is true?
a. Because the technological advance occurred in the machine-making industry, it will not
be possible to increase food production without reducing machine production below 30.
b. Because the technological advance occurred in the machine-making industry, increases in
output can only occur in the machine industry.
c. In order to increase food production in these circumstances without reducing machine
production, the economy must reduce inefficiencies.
d. The technological advance reduced the amount of resources needed to produce 30
machines. These resources could be used to produce more food.

______ 20. The country of Econland produces two goods, textbooks and widgets. Last year it
produced 200 textbooks and 500 widgets. This year it produced 250 textbooks and 600
widgets. Given no other information, which of the following could NOT explain the change?
a. Econland experienced a reduction in unemployment.
b. Econland experienced an improvement in widget-making technology.
c. Econland experienced an improvement in textbook-making technology.
d. Econland eliminated trade barriers.
Name: _________________Class:________Date: __________ ID: _________

True/False

Indicate whether the sentence or statement is true or false.

____ 21. With careful planning, we can usually get something that we like without having to give up
something else that we like.

____ 22. Equity refers to how the pie is divided, and efficiency refers to the size of the economic pie.

____ 23. A rational decision-maker takes an action if and only if the marginal cost exceeds the
marginal benefit.

____ 24. The relationship between inflation and economic growth is a microeconomic issue.

____ 25. An economic model can accurately explain how the economy is organized because it is
designed to include every feature of the real world.

____ 26. A circular-flow diagram is a visual model of how an economy is organized.

____ 27. In a simple circular-flow diagram, firms own the factors of production and use them to
produce goods and services.

____ 28. If A and B are two points on a production possibilities frontier, then A must lie to the
north-east of B.

____ 29. When economists are trying to explain the world they are acting as scientists, and when
they are trying to improve it, they are policymakers.

____ 30. Economists disagree on all important economic issues.

Short Answer

31. Define opportunity cost. What is the opportunity cost to you of attending college? What was your
opportunity cost of coming to class today?

32. Under what conditions might government intervention in an economy improve the market
outcome?

33. Draw a circular-flow diagram representing the interactions between households and firms in a
simple economy. Explain briefly the various parts of the diagram.