CHAPTER 1.

TEN PRINCIPLES OF ECONOMICS

MULTIPLE CHOICE QUESTIONS

1. The word that comes from the Greek word for "one who manages a household" is
a. market.
b. consumer.
c. producer.
d. economy.
2. The word “economy” comes from the Greek word oikonomos, which means
a. “environment.”
b. “production.”
c. “one who manages a household.”
d. “one who makes decisions.”
3. Resources are
a. scarce for households but plentiful for economies.
b. plentiful for households but scarce for economies.
c. scarce for households and scarce for economies.
d. plentiful for households and plentiful for economies.
4. Economics deals primarily with the concept of
a. scarcity.

1
2  Chapter 1/Ten Principles of Economics
b. poverty.
c. change.
d. power.
5. Which of the following questions is not answered by the decisions that every society must make?
a. What determines consumer preferences?
b. What goods will be produced?
c. Who will produce the goods?
d. Who will consume the goods?
6. The overriding reason as to why households and societies face many decisions is that
a. resources are scarce.
b. goods and services are not scarce.
c. incomes fluctuate with business cycles.
d. people, by nature, tend to disagree.
7. The phenomenon of scarcity stems from the fact that
a. most economies’ production methods are not very good.
b. in most economies, wealthy people consume disproportionate quantities of goods and services.
c. governments restricts production of too many goods and services.
d. resources are limited.
8. Approximately what percentage of the world's economies experience scarcity?
a. 25%
b. 50%
 Chapter 1/Ten Principles of Economics  3
c. 75%
d. 100%
9. When a society cannot produce all the goods and services people wish to have, it is said that the economy
is experiencing
a. scarcity.
b. shortages.
c. inefficiencies.
d. inequities.
10. For society, a good is not scarce if
a. at least one individual in society can obtain all he or she wants of the good.
b. firms are producing the good at full capacity.
c. all members of society can have all they want of the good.
d. those who have enough income can buy all they want of the good.
11. Which of the following products would be considered scarce?
a. golf clubs
b. Picasso paintings
c. apples
d. All of the above are correct.
12. Economics is the study of
a. production methods.
b. how society manages its scarce resources.
c. how households decide who performs which tasks.
4  Chapter 1/Ten Principles of Economics
d. the interaction of business and government.
13. Economics is the study of
a. how society manages its scarce resources.
b. the government's role in society.
c. how a market system functions.
d. how to increase production.
14. In most societies, resources are allocated by
a. a single central planner.
b. a small number of central planners.
c. those firms that use resources to provide goods and services.
d. the combined actions of millions of households and firms.
15. The adage, "There is no such thing as a free lunch," is used to illustrate the principle that
a. goods are scarce.
b. people face tradeoffs.
c. income must be earned.
d. households face many decisions.
16. The adage, "There is no such thing as a free lunch," means
a. even people on welfare have to pay for food.
b. the cost of living is always increasing.
c. to get something we like, we usually have to give up another thing we like.
d. all costs are included in the price of a product.
 Chapter 1/Ten Principles of Economics  5
17. Economists use the phrase "There is no such thing as a free lunch," to illustrate the principle that
a. inflation almost always results in higher prices over time.
b. nothing is free in a market economy.
c. making decisions requires trading off one goal against another.
d. if something looks too good to be true, it probably is not worth pursuing.
18. Which of the following statements best represents the principle represented by the adage, "There is no
such thing as a free lunch"?
a. Melissa can attend the concert only if she takes her sister with her.
b. Greg is hungry and homeless.
c. Brian must repair the tire on his bike before he can ride it to class.
d. Kendra must decide between going to Colorado or Cancun for spring break.
19. The principle that "people face tradeoffs" applies to
a. individuals.
b. families.
c. societies.
d. All of the above are correct.
20. 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
a. guns and butter.
b. efficiency and equity.
c. inflation and unemployment.
d. work and leisure.
21. Guns and butter are used to represent the classic societal tradeoff between spending on
6  Chapter 1/Ten Principles of Economics
a. durable and nondurable goods.
b. imports and exports.
c. national defense and consumer goods.
d. law enforcement and agriculture.
22. When society requires that firms reduce pollution, there is
a. a tradeoff because of reduced incomes to the firms' owners and workers.
b. a tradeoff only if some firms are forced to close.
c. no tradeoff, since the cost of reducing pollution falls only on the firms affected by the requirements.
d. no tradeoff, since everyone benefits from reduced pollution.
23. A tradeoff exists between a clean environment and a higher level of income in that
a. studies show that individuals with higher levels of income actually pollute less than low-income
individuals.
b. efforts to reduce pollution typically are not completely successful.
c. laws that reduce pollution raise costs of production and reduce incomes.
d. by employing individuals to clean up pollution, employment and income both rise.
24. Which of the following phrases best captures the notion of efficiency?
a. absolute fairness
b. equal distribution
c. minimum waste
d. equitable outcome
25. Which of the following is true?
a. Efficiency refers to the size of the economic pie; equity refers to how the pie is divided.
 Chapter 1/Ten Principles of Economics  7
b. Government policies usually improve upon both equity and efficiency.
c. As long as the economic pie continually gets larger, no one will have to go hungry.
d. Efficiency and equity can both be achieved if the economic pie is cut into equal pieces.
26. Efficiency means that
a. society is conserving resources in order to save them for the future.
b. society's goods and services are distributed equally among society's members.
c. society's goods and services are distributed fairly, though not necessarily equally, among society's
members.
d. society is getting the maximum benefits from its scarce resources.
27. Economists use the word equity to describe a situation in which
a. each member of society has the same income.
b. each member of society has access to abundant quantities of goods and services, regardless of his or
her income.
c. society is getting the maximum benefits from its scarce resources.
d. the benefits of society's resources are distributed fairly among society's members.
28. 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. we should agree with Senator Smith.
b. we should agree with Senator Jones.
c. a good decision requires that we recognize both viewpoints.
d. there are no tradeoffs between equity and efficiency.
29. Which of the following words and phrases best captures the notion of equity?
a. minimum waste
b. maximum benefit
8  Chapter 1/Ten Principles of Economics
c. sameness
d. fairness
30. When government policies are enacted,
a. equity can usually be enhanced without an efficiency loss, but efficiency can never be enhanced
without an equity loss.
b. efficiency can usually be enhanced without an equity loss, but equity can never be enhanced without an
efficiency loss.
c. it is always the case that either efficiency and fairness are both enhanced, or efficiency and equity are
both diminished.
d. None of the above are correct.
31. A likely effect of government policies that redistribute income and wealth from the wealthy to the poor is
that those policies
a. enhance equity.
b. reduce efficiency.
c. reduce the reward for working hard.
d. All of the above are correct.
32. When the government implements programs such as progressive income tax rates, which of the following
is likely to occur?
a. Equity is increased and efficiency is increased.
b. Equity is increased and efficiency is decreased.
c. Equity is decreased and efficiency is increased.
d. Equity is decreased and efficiency is decreased.
33. As a result of a successful attempt by government to cut the economic pie into more equal slices,
a. it is easier to cut the pie, and therefore the economy can produce a larger pie.
b. the government can more easily allocate the pie to those most in need.
c. the pie gets smaller, and there will be less pie overall.
 Chapter 1/Ten Principles of Economics  9
d. government will spend too much time cutting and it causes the economy to lose the ability to produce
enough pie for everyone.
34. When the government attempts to improve equity in an economy the result is often
a. an increase in overall output in the economy.
b. additional government revenue since overall income will increase.
c. a reduction in equity.
d. a reduction in efficiency.
35. When the government redistributes income from the wealthy to the poor,
a. efficiency is improved, but equity is not.
b. both wealthy people and poor people benefit directly.
c. people work less and produce fewer goods and services.
d. wealthy people consume fewer goods, but poor people consume more goods, resulting in no real
change.
36. In economics, the cost of something is
a. the dollar amount of obtaining it.
b. always measured in units of time given up to get it.
c. what you give up to get it.
d. often impossible to quantify, even in principle.
37. What you give up to obtain an item is called your
a. opportunity cost.
b. explicit cost.
c. true cost.
d. direct cost.
10  Chapter 1/Ten Principles of Economics
38. 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.
39. Maurice receives $100 as a birthday gift. In deciding how to spend the money, he narrows his options
down to four choices: Option A, Option B, Option C, and Option D. Each option costs $100. Finally he
decides on Option B. The opportunity cost of this decision is
a. the value to Maurice of the option he would have chosen had Option B not been available.
b. the value to Maurice of Options A, C and D combined.
c. $100.
d. $300.
40. 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?
a. Yes, because making tables is profitable.
b. No, because she may not be able to sell the additional tables.
c. It depends on the marginal cost of producing more tables and the marginal revenue she will earn from
selling more tables.
d. It depends on the average cost of producing more tables and the average revenue she will earn from
selling more tables.
41. For most students, the largest single cost of a college education is
a. the wages given up to attend school.
b. tuition, fees, and books.
c. room and board.
d. transportation, parking, and entertainment.
42. For a college student who wishes to calculate the true costs of going to college, the costs of room and
board
 Chapter 1/Ten Principles of Economics  11
a. should be counted in full, regardless of the costs of eating and sleeping elsewhere.
b. should be counted only to the extent that they are more expensive at college than elsewhere.
c. usually exceed the opportunity cost of going to college.
d. plus the cost of tuition, equals the opportunity cost of going to college.
43. For which of the following individuals would the opportunity cost of going to college be highest?
a. a promising young mathematician who will command a high salary once she earns her college degree
b. a student with average grades who has never held a job
c. a famous, highly-paid actor who wants to take time away from show business to finish college and earn
a degree
d. a student who is the best player on his college basketball team, but who lacks the skills necessary to
play professional basketball
44. When you calculate your true costs of going to college, what portion of your room-and-board expenses
should be included?
a. Your full room-and-board expenses should always be included.
b. None of your room-and-board expenses should ever be included.
c. You should include only the amount by which your room-and-board expenses exceed the income you
earn while attending college.
d. You should include only the amount by which your room-and-board expenses exceed the expenses for
rent and food if you were not in college.
45. The opportunity cost of an item is
a. the number of hours needed to earn money to buy the item.
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.
46. 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
a. the $24 she earns working.
12  Chapter 1/Ten Principles of Economics
b. the $24 minus the enjoyment she would have received from watching the video.
c. the enjoyment she would have received had she watched the video.
d. nothing, since she would have received less than $24 of enjoyment from the video.
47. Russell spends an hour studying instead of playing tennis. The opportunity cost to him of studying is
a. the improvement in his grades from studying for the hour.
b. the improvement in his grades from studying minus the enjoyment of playing tennis.
c. the enjoyment and exercise he would have received had he played tennis.
d. zero. Since Russell chose to study rather than to play tennis, the value of studying must have been
greater than the value of playing tennis.
48. College-age athletes who drop out of college to play professional sports
a. are not rational decision makers.
b. are well aware that their opportunity cost of attending college is very high.
c. are concerned more about present circumstances than their future.
d. underestimate the value of a college education.
49. A rational decisionmaker
a. ignores marginal changes and focuses instead on “the big picture.”
b. ignores the likely effects of government policies when he or she makes choices.
c. takes an action only if the marginal benefit of that action exceeds the marginal cost of that action.
d. takes an action only if the combined benefits of that action and previous actions exceed the combined
costs of that action and previous actions.
50. Rational people make decisions at the margin by
a. following marginal traditions.
b. behaving in a random fashion.
 Chapter 1/Ten Principles of Economics  13
c. thinking in black-and-white terms.
d. comparing marginal costs and marginal benefits.
51. The word "margin" means
a. edge.
b. distance.
c. space.
d. measure.
52. Making rational decisions "at the margin" means that people
a. make those decisions that do not impose a marginal cost.
b. evaluate how easily a decision can be reversed if problems arise.
c. compare the marginal costs and marginal benefits of each decision.
d. always calculate the marginal dollar costs for each decision.
53. A person’s willingness to pay for a good is based on
a. the availability of the good.
b. the marginal benefit that an extra unit of the good would provide for that person.
c. the marginal cost of producing an extra unit of the good.
d. esoteric factors, the study of which lies beyond the boundaries of economics.
54. To say that "people respond to incentives" is to say that
a. changes in costs (but not changes in benefits) influence people's decisions and their behavior.
b. changes in benefits (but not changes in costs) influence people's decisions and their behavior.
c. changes in benefits or changes in costs influence people's decisions and their behavior.
d. tradeoffs can be eliminated by rational people who think at the margin.
55. A marginal change is a
a. change that involves little, if anything, that is important.
b. large, significant adjustment.
c. change for the worse, and so it is usually a short-term change.
d. small, incremental adjustment.

PROBLEMS & APLICATIONS:

1.
a.) A family deciding whether to buy a new car faces trade-offs such as the cost of the car versus the conve-
nience and reliability of having a new vehicle, the cost of car payments versus the ability to save money for
other expenses, and the cost of insurance and maintenance for a new car versus the cost of keeping an older car.
b.) A member of Congress deciding how much to spend on national parks faces trade-offs such as the cost of
maintaining and improving national parks versus the need to allocate funds for other important programs, the
potential economic benefits of national parks (such as tourism) versus the cost of preserving natural resources,
and the needs of local communities versus the needs of preserving national heritage.
c.) A company president deciding whether to open a new factory faces trade-offs such as the cost of building
and maintaining a new factory versus the potential for increased production and profits, the potential for in-
creased jobs and economic growth in the area where the factory is located versus the potential negative impact
on the environment and local communities, and the cost of training and hiring new employees versus the cost of
maintaining existing employees.
d.) A professor deciding how much to prepare for class faces trade-offs such as the time and effort required to
thoroughly prepare versus the potential for better engagement and understanding from students, the cost of cre-
ating new materials versus the potential for reusing existing materials, and the cost of grading and providing
feedback on assignments versus the potential for improved student performance.
14  Chapter 1/Ten Principles of Economics
e.) A recent college graduate deciding whether to go to graduate school faces trade-offs such as the cost of tu-
ition and lost wages versus the potential for higher earning potential and career advancement, the opportunity
cost of not working in the field while in school versus the potential for practical experience and networking op-
portunities, and the potential for additional student loan debt versus the potential for higher earning potential.
2.
The cost and benefit will vary between individuals, and everyone has different motives for taking a vacation.
Some see it as a means of relaxation, some use it as a time to spend some time with family, and others use it for
their individual pleasure.

So, if a person thinks that they need some psychological relaxation, and they get it from the vacation, it can’t be
considered a cost, and it will be a benefit. At the same time, if they don't get any psychological benefits, it will
be a cost.

3.

The cost involved in skiing is the cost forgone by not working for that day, i.e., the wage for that day, plus the
cost involved in skiing. Going skiing will have to result in taking leave, and the payment for that day will not be
received.

Instead of going to the library and skiing, the cost involved will be the knowledge forgone while skiing; thus,
this gaining knowledge may be variable for each person. Suppose a student has an examination from the next
week, and instead of studying, the student goes skiing. Then, the cost will be not scoring good marks in the ex-
amination.

4.

The opportunity cost of spending $100 now will be the interest received from the bank. The interest amount will
be $5.

5.

The cost initially invested, i.e., $5 million, cannot be recovered—an additional $1 million is required to finish
the product's development. If the product development is stopped, then the entire investment will go in vain,
i.e., the loss of $5 million. Thus, the total cost will be $5 million plus $1 million additional costs for developing
the product, which is $6 million.

If the company invests more than $1 million, there will be a chance to recover the loss of $3 million. Thus, the
total is $6 million, and the chance to earn is $ 3 million. Hence, the most that will be paid for the development
of the product will be no more than $3 million as if the cost increases beyond $3 million; then the chance to
earn profit will not be there

6.
Impact of the new law on incentives for working
 Chapter 1/Ten Principles of Economics  15
The funds for the welfare program are generated from the tax revenue. The taxes are collected from the working
class of the society. With the limitation to the welfare program, the tax burden is reduced, and hence, the incen-
tive to the working class rises

The trade-off between equality and efficiency

The welfare program's limitation will negatively affect equality in society as some people will remain short of
resources. On the other hand, the efficiency rises as the incentive to work increases. With more productivity, the
resources will be utilized efficiently. This represents the trade-off between equality and efficiency.

7.

a. Motivated by the concern about efficiency, market failure due to monopoly power
b. Motivated by the concern about equality
c. Motivated by the concern about efficiency, market failure due to negative externality
d. Motivated by the concern about efficiency, market failure due to monopoly power
e. Motivated by the concern about equality
f. Motivated by the concern about efficiency, market failure due to negative externality
8.

At first, terms of equality and efficiency have to be determined.

Efficiency means getting more benefits from scarce resources. Principle of equity suggests fair distribution of
benefits among all economic agents.
Guaranteed healthcare policy matches the principle of equity, but it doesn't meet the principle of efficiency. It
can be explained by the fact that the marginal benefit of maintaining additional healthcare resource (good medi-
cal staff or modern hospital equipment) is always less than marginal cost on their formation. 
The policy of guaranteed benefits for unemployed workers suggests the principle of equity for all members of
society in meeting their basic needs. At the same time, it doesn't match the principle of efficiency since it
doesn't motivate people to look for a job and causes decrease of supply on the labor market.