Test Bank for Microeconomics, 2nd Edition

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1Microeconomics&Macroeconomics, 2e(Acemoglu)Chapter 1The Principles and Practice of Economics1.1The Scope of Economics1) Which of the following statements is true?A) All economic agents are necessarily individuals.B) A worker who shirks work is not an economic agent.C) A government is an example of an economic agent.D) A street gang is not an economic agent.Answer:CDifficulty:EasyAACSB:Analytical ThinkingTopic:Economic Agents and Economic Resources2) Which of the following best describes scarce resources?A) Resources that most people cannot afford to buyB) Resources that can only be distributed efficiently by the governmentC) Resources for which the quantity demanded is the same for all economic agentsD) Resources for which the quantity that people want exceeds the quantity that is freely availableAnswer:DDifficulty:EasyAACSB:Analytical ThinkingTopic:Economic Agents and Economic Resources3) Which of the following is NOT a scarce resource?A) GoldB) PollutionC) PetroleumD) iPhonesAnswer:BDifficulty:EasyAACSB:Application of KnowledgeTopic:Economic Agents and Economic Resources4) In economics, scarcity refers to the situation of ________.A) making the best use of limited informationB) having more wants than the amount of available resourcesC) the government rationing available goods and servicesD) sellers setting the prices of their products too high for people to be able to afford themAnswer:BDifficulty:MediumAACSB:Analytical ThinkingTopic:Economic Agents and Economic Resources

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25) Which of the following statements is true?A) Gold is not a scarce resource.B) Both life-saving drugs and ice cream are examples of scarce goods.C) If a scarce resource is given away for free, everyone will be able to consume it.D) Scarcity means that there is an imbalance between unlimited resources and limited wants.Answer:BDifficulty:EasyAACSB:Analytical ThinkingTopic:Economic Agents and Economic Resources6) What are scarce resources? Why are economic agents concerned with the allocation of these resources?Answer:Scarce resources are resources for which the quantity that agents want exceeds the quantitythat is freely available. Economic agents need to satisfy their unlimited wants in a world of limitedresources. This makes it important for them to understand how these scarce resources are to be used anddistributed in order to optimize allocation.Difficulty:EasyAACSB:Analytical ThinkingTopic:Economic Agents and Economic Resources7) Define economics. Who are economic agents?Answer:Economics is the study of how agents choose to allocate scarce resources and how these choicesaffect society. An economic agent is an individual or a group that makes choices.Difficulty:EasyAACSB:Analytical ThinkingTopic:Economic Agents and Economic Resources8) Economics is primarily the study of ________.A) the mental functions and behavior of individuals and groupsB) the state, nation, government, and politics and policies of governmentsC) the problems related to the existence and evolution of societyD) how agents choose to allocate scarce resources and how these choices affect societyAnswer:DDifficulty:EasyAACSB:Analytical ThinkingTopic:Definition of Economics9) Economics is primarily the study of ________.A) the relationship between matter and its motionB) agents' choices and their impact on societyC) events of the past and how these events affect present human behaviorD) the different types of governments and the impact of their policies on a nationAnswer:BDifficulty:EasyAACSB:Analytical ThinkingTopic:Definition of Economics

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310) ________ is analysis that generates objective descriptions or predictions about the world that can beverified with data.A) Positive economicsB) Negative economicsC) MicroeconomicsD) Normative economicsAnswer:ADifficulty:EasyAACSB:Analytical ThinkingTopic:Positive Economics and Normative Economics11) Which of the following is an example of a positive economic statement?A) The pricing policies followed in single-producer markets should be strictly supervised.B) Unemployment is more harmful than inflation.C) Higher interest rates will encourage more savings.D) Pollution is one of the most serious economic problems.Answer:CDifficulty:MediumAACSB:Application of KnowledgeTopic:Positive Economics and Normative Economics12) Which of the following is an example of a positive economic statement?A) The government should ideally work as a welfare state.B) An increase in income causes an increase in savings.C) Economics is the most useful social science.D) Eliminating poverty is more important than reducing inflation.Answer:BDifficulty:MediumAACSB:Application of KnowledgeTopic:Positive Economics and Normative Economics13) ________ economics prescribes what an individual or society ought to do.A) PositiveB) NegativeC) BehavioralD) NormativeAnswer:DDifficulty:EasyAACSB:Analytical ThinkingTopic:Positive Economics and Normative Economics14) Which of the following is an example of a normative economic statement?A) A cut in the tax rate will lead to an increase in consumption.B) Relaxation of import duties will encourage imports.C) An increase in subsidies to farmers will boost agricultural production.D) An increase in social security benefits will increase the welfare of all economic agents.Answer:DDifficulty:MediumAACSB:Application of KnowledgeTopic:Positive Economics and Normative Economics

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415) Which of the following is an example of a normative economic statement?A) An increase in government expenditure will lead to an increase in well-being.B) An increase in the money supply will lead to an increase in the inflation rate.C) An increase in income is accompanied by an increase in savings.D) An increase in income is accompanied by an increase in consumption.Answer:ADifficulty:MediumAACSB:Application of KnowledgeTopic:Positive Economics and Normative Economics16) Which of the following statements is true?A) Positive economics deals with issues that are subjective.B) Normative statements depend on personal preferences.C) Positive economics recommends what people ought to do.D) Normative economic statements can be confirmed or disproven.Answer:BDifficulty:EasyAACSB:Analytical ThinkingTopic:Positive Economics and Normative Economics17) Which of the following statements correctly differentiates between positive and normativeeconomics?A) Positive economics is descriptive, whereas normative economics is advisory.B) Positive economics describes what people ought to do, whereas normative economics describes whatpeople actually do.C) Positive economics is based on judgments, whereas normative economics is not.D) Positive economics can only be applied to microeconomics, whereas normative economics can beapplied to both microeconomics and macroeconomics.Answer:ADifficulty:EasyAACSB:Analytical ThinkingTopic:Positive Economics and Normative Economics18) Positive economics is descriptive because ________.A) it is based on ethical judgments.B) its predictions cannot be verified with data.C) it prescribes what an individual or society ought to do.D) it explains what has happened or predicts what will happen.Answer:DDifficulty:EasyAACSB:Analytical ThinkingTopic:Positive Economics and Normative Economics

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519) Which of the following statements is true?A) Positive economics describes what people ought to do.B) Normative economics describes what people actually do.C) Positive economics generates objective descriptions that can be verified with data.D) Normative economics is free from the value judgments, tastes, and preferences of economic agents.Answer:CDifficulty:EasyAACSB:Analytical ThinkingTopic:Positive Economics and Normative Economics20) Differentiate between positive and normative economics using examples.Answer:Positive economics is analysis that generates objective descriptions or predictions about theworld that can be verified with data. It is analysis that describes what people actually do. "A 5 percent fallin the unemployment rate will lead to a 2 percent increase in the inflation rate" is an example of a positiveeconomic statement. In contrast, normative economics is analysis that prescribes what an individual orsociety ought to do. It is subjective and depends on personal preferences, tastes, attitudes, feelings, orethical judgments. "Pollution in developing countries is one of the biggest global environmentalproblems" is an example of a normative economic statement.Difficulty:EasyAACSB:Analytical ThinkingTopic:Positive Economics and Normative Economics21) Robert and Janet are discussing the unemployment and inflation in their country. Robert, on the basisof a recent newspaper report, claims that a 5 percent reduction in unemployment will lead to a 2 percentrise in inflation. In contrast, Janet insists that inflation is a far bigger problem than unemployment andshould be considered as of prime importance. Classify Robert's and Janet's statements as descriptive oradvisory. Explain your answer.Answer:Robert claims that a 5 percent reduction in unemployment will lead to a 2 percent increase ininflation. This statement represents predictions that can be verified with data. Therefore, Robert'sapproach is positive, which means it is an analysis of things as they are. Positive economics describeswhat has happened or predicts what will happen. The conclusion of his statement can be verified withdata and is not subject to tastes and preferences.Janet claims that inflation is a far bigger problem than unemployment and should be addressed as anissue of prime importance. Janet's statement is normative. Normative economics is analysis thatrecommends what people ought to do. Unlike Robert's statement, Janet's belief that inflation is a biggerproblem than unemployment is based on her values or ethical judgments. Therefore, while Robert'sstatement is descriptive in nature, Janet's statement is advisory.Difficulty:MediumAACSB:Application of KnowledgeTopic:Positive Economics and Normative Economics

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622) Classify the following as positive economics statements or normative economics statements.a) An increase in an individual's income increases consumption, but by an amount less than the increasein income.b) The government should undertake the responsibility of providing healthcare to all its citizens.c) The government should fund infrastructure projects to foster economic development.d) An increase in net exports has a positive effect on a country's national income.e) The gross domestic product of India is increasing at 5 percent annually.Answer:a) Positive economic statementb) Normative economic statementc) Normative economic statementd) Positive economic statemente) Positive economic statementDifficulty:MediumAACSB:Application of KnowledgeTopic:Positive Economics and Normative Economics23) ________ is the study of how individuals, households, governments, and firms make choices and howthose choices affect prices, the allocation of resources, and the well-being of other agents.A) Cost-benefit analysisB) MicroeconomicsC) MacroeconomicsD) EmpiricismAnswer:BDifficulty:EasyAACSB:Analytical ThinkingTopic:Microeconomics and Macroeconomics24) Which of the following is a topic studied by microeconomists?A) National income calculationsB) Price determination by a firmC) Measures to combat inflationD) Interest rate determinationAnswer:BDifficulty:EasyAACSB:Application of KnowledgeTopic:Microeconomics and Macroeconomics25) Which of the following is a topic studied by microeconomists?A) Energy consumption by a firmB) Nationwide inflation rateC) Economic growth as a means to alleviate povertyD) Aggregate demand and aggregate supply in an economyAnswer:ADifficulty:MediumAACSB:Application of KnowledgeTopic:Microeconomics and Macroeconomics

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726) ________ is the study of an economy as a whole.A) MicroeconomicsB) Cost-benefit analysisC) Behavioral economicsD) MacroeconomicsAnswer:DDifficulty:EasyAACSB:Analytical ThinkingTopic:Microeconomics and Macroeconomics27) Which of the following is a topic studied by macroeconomists?A) Aggregate demand in an economyB) Price determination by a firmC) The consumption choice of a single householdD) The production decision of a firmAnswer:ADifficulty:MediumAACSB:Application of KnowledgeTopic:Microeconomics and Macroeconomics28) Which of the following is a topic studied by macroeconomists?A) The savings of a single householdB) The productivity of an agricultural farmC) The total output of an economyD) Price determination in a marketAnswer:CDifficulty:MediumAACSB:Application of KnowledgeTopic:Microeconomics and Macroeconomics29) Which of the following statements is true?A) Microeconomics is the study of an economy as a whole.B) Macroeconomics studies how individuals make choices.C) The study of the inflation rate is covered under microeconomics.D) The study of the unemployment rate is covered under macroeconomics.Answer:DDifficulty:MediumAACSB:Application of KnowledgeTopic:Microeconomics and Macroeconomics

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830) Which of the following statements correctly highlights the difference between microeconomics andmacroeconomics?A) Microeconomics is descriptive, whereas macroeconomics is advisory.B) Microeconomics primarily deals with positive analysis, whereas macroeconomics primarily deals withnormative analysis.C) Microeconomics deals with a small part of the economy, whereas macroeconomics deals withaggregate economic performance.D) Microeconomics describes what economic agents actually do, whereas macroeconomics describeswhat economic agents ought to do.Answer:CDifficulty:EasyAACSB:Analytical ThinkingTopic:Microeconomics and Macroeconomics31) Why an economy contracts during slowdowns and the analysis of appropriate policies is studiedunder ________.A) macroeconomicsB) microeconomicsC) agricultural economicsD) international economicsAnswer:ADifficulty:EasyAACSB:Application of KnowledgeTopic:Microeconomics and Macroeconomics32) The impact of carbon taxes on the energy usage of individual households and firms is studied under________.A) microeconomicsB) macroeconomicsC) normative economicsD) positive economicsAnswer:ADifficulty:MediumAACSB:Application of KnowledgeTopic:Microeconomics and Macroeconomics33) The relationship between the unemployment rate and inflation is studied under ________.A) microeconomicsB) macroeconomicsC) behavioral economicsD) international economicsAnswer:BDifficulty:MediumAACSB:Application of KnowledgeTopic:Microeconomics and Macroeconomics

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934) The relationship between a firm's advertising expenditure and its profit is studied under ________.A) microeconomicsB) macroeconomicsC) behavioral economicsD) international economicsAnswer:ADifficulty:MediumAACSB:Application of KnowledgeTopic:Microeconomics and Macroeconomics35) How does microeconomics differ from macroeconomics?Answer:Microeconomics is the study of how individuals, households, firms, and governments makechoices, and how those choices affect prices, the allocation of resources, and the well-being of otheragents. In contrast, macroeconomics is the study of the economy as a whole. The scope ofmacroeconomics extends to the study of economy-wide phenomena, like the growth rate of an economy,the national unemployment rate, or the inflation rate.Difficulty:EasyAACSB:Analytical ThinkingTopic:Microeconomics and Macroeconomics36) A recent news report stated that the unemployment rate in the country of Lithasia had increased from10.2 percent to 18.2 percent between 2003 and 2013 and that the government has adopted strict fiscalmeasures to expand employment. Would this report be considered microeconomic or macroeconomicanalysis?Answer:This report pertains to macroeconomics. Macroeconomics refers to the study of an economy asa whole. Macroeconomics covers economy-wide phenomena, like the growth rate of a country's totaleconomic output, the inflation rate, or the unemployment rate.Difficulty:MediumAACSB:Application of KnowledgeTopic:Microeconomics and Macroeconomics37) Students in a class are discussing how a firm that does not face any competition in a market shoulddecide how many units of output to supply in the market. Would this discussion be consideredmicroeconomic or macroeconomic analysis?Answer:Microeconomics is the study of how individuals, households, firms, and governments makechoices. The students are discussing how a firm should make its output decision. This is a discussionabout an individual entity and so is considered microeconomic analysis.Difficulty:MediumAACSB:Application of KnowledgeTopic:Microeconomics and Macroeconomics

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101.2Three Principles of Economics1) Which of the following correctly defines the term "equilibrium"?A) It refers to a situation in which data are used to arrive at conclusions.B) It refers to a situation in which all economic agents are simultaneously optimizing.C) It refers to a situation in which an optimizing decision is made by an individual economic agent.D) It refers to a situation in which government intervention efficiently allocates scarce resources.Answer:BDifficulty:EasyAACSB:Analytical ThinkingTopic:Three Principles of Economics2) Which of the following best describes equilibrium?A) A situation where the government intervenes to allocate resourcesB) A situation where only one individual or firm makes an optimal decisionC) A situation where no economic agent would benefit by changing his or her behaviorD) A situation where economic agents do not optimize as they do not have perfect informationAnswer:CDifficulty:EasyAACSB:Analytical ThinkingTopic:Three Principles of Economics3) Empiricism is analysis that uses ________ to test theories.A) dataB) illustrationsC) philosophyD) value judgmentsAnswer:ADifficulty:EasyAACSB:Analytical ThinkingTopic:Three Principles of Economics4) Which of the following is NOT a key principle of economics?A) OptimizationB) EquilibriumC) EmpiricismD) SubstitutionAnswer:DDifficulty:EasyAACSB:Analytical ThinkingTopic:Three Principles of Economics

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115) Define the three key principles of economics.Answer:i) Optimization: optimization refers to the process of choosing the best option from a set of alternatives,given the available information.ii) Equilibrium: equilibrium is a special situation all agents are simultaneously optimizing, so that nobodywould benefit personally by changing his or her behavior.iii) Empiricism: empiricism is analysis that is evidence-based–it uses data to test theories and todetermine what is causing things to happen in the world.Difficulty:EasyAACSB:Analytical ThinkingTopic:Three Principles of Economics1.3The First Principle of Economics: Optimization1) Which of the following statements is true of optimization?A) Optimization analysis only relates to the financial budget of an economic agent.B) Individuals who optimize do not consider costs when choosing the most feasible alternative.C) Economic agents can optimize only when they are able to perfectly estimate all future costs andbenefits.D) Economic agents who optimize attempt to choose the best feasible option, given the information thatthey have.Answer:DDifficulty:EasyAACSB:Analytical ThinkingTopic:The First Principle of Economics: Optimization2) Feasible options are options that are ________.A) available and affordableB) available but not affordableC) affordable but not availableD) optimal for an economic agentAnswer:ADifficulty:EasyAACSB:Analytical ThinkingTopic:The First Principle of Economics: Optimization3) A consumer has $40 that he wants to spend. He faces four choices: a camera that costs $60, a cell phonethat costs $150, a book that costs $10, and a Bluetooth speaker that costs $45. Which of the following is afeasible option for the consumer?A) The bookB) The cameraC) The cell phoneD) The Bluetooth speakerAnswer:ADifficulty:EasyAACSB:Analytical ThinkingTopic:The First Principle of Economics: Optimization

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124) A decision or choice that is made after optimization analysis ________.A) has zero opportunity costB) is not necessarily risk freeC) is the same for all individualsD) cannot be justified using normative analysisAnswer:BDifficulty:EasyAACSB:Analytical ThinkingTopic:The First Principle of Economics: Optimization5) Which of the following statements is true?A) Optimization requires individuals to foresee the future perfectly.B) An optimizing individual need not consider the risks involved in various choices.C) An optimizing individual is also likely to exhibit rationality.D) The less information that is available, the easier it is to make optimal decisions.Answer:CDifficulty:EasyAACSB:Analytical ThinkingTopic:The First Principle of Economics: Optimization6) Which of the following statements is true?A) Rational economic agents maximize more than just monetary income.B) An individual does not require information to make optimal decisions.C) The principle of optimization is only accurate when it comes to making monetary decisions.D) It is not necessary to consider the risks of alternatives while making an optimal decision.Answer:ADifficulty:EasyAACSB:Analytical ThinkingTopic:The First Principle of Economics: Optimization7) Which of the following correctly identifies the trade-off that a budget constraint represents?A) The amount of income that must be given up to obtain an additional unit of a goodB) The maximum amount of two goods that a consumer can purchase given his incomeC) The optimum combination of goods that a consumer with a given income should purchaseD) The amount of one good that has to be given up to purchase an additional unit of the other goodAnswer:DDifficulty:EasyAACSB:Analytical ThinkingTopic:Trade-offs and Budget Constraints8) A budget constraint represents the ________.A) total money income that an agent earns in different time periodsB) goods and services an economic agent can choose given her limited incomeC) inequality in the incomes earned by various economic agentsD) aggregate income earned by all firms in an economyAnswer:BDifficulty:EasyAACSB:Analytical ThinkingTopic:Trade-offs and Budget Constraints

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139) Which of the following statements is true?A) A budget constraint remains the same for a consumer at all levels of income.B) A budget constraint quantifies the trade-offs that economic agents face while making decisions.C) A budget constraint is a function of the income of the consumer and not of the prices of the goods andservices available for consumption.D) A budget constraint is based on the minimum amount of money that an economic agent can spend ongoods and services.Answer:BDifficulty:EasyAACSB:Analytical ThinkingTopic:Trade-offs and Budget Constraints10) A consumer has $20 that he wants to spend on two goods: pens priced at $2 each and pencils priced at$1 each. Which of the following correctly represents his budget constraint?A) $20 = ($2/Quantity of pens) + ($1/Quantity of pencils)B) $20 = ($2 × Quantity of pens) + ($1 × Quantity of pencils)C) $20 = ($3/Quantity of pens + Quantity of pencils)D) $20 = $3 × (Quantity of pens - Quantity of pencils)Answer:BDifficulty:MediumAACSB:Application of KnowledgeTopic:Trade-offs and Budget Constraints11) An individual has 8 hours to spare. She has to divide her time between two activities: reading andwriting. Which of the following allocations will completely exhaust the individual's budget?A) 3 hours of reading and 4 hours of writingB) 4 hours of reading and 6 hours of writingC) 2 hours of reading and 2 hours of writingD) 5 hours of reading and 3 hours of writingAnswer:DDifficulty:EasyAACSB:Application of KnowledgeTopic:Trade-offs and Budget Constraints12) A consumer has $50 to spend. He has to decide between buying two goods: magazines priced at $5each and DVDs priced at $10 each. Which of the following combinations of the two goods will entirelyexhaust his budget constraint?A) 3 magazines and 4 DVDsB) 2 magazines and 4 DVDsC) 6 magazines and 1 DVDD) 2 magazines and 2 DVDsAnswer:BDifficulty:MediumAACSB:Application of KnowledgeTopic:Trade-offs and Budget Constraints

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1413) Which of the following statements is true?A) All rational economic agents attempt to maximize their income.B) A rational consumer makes his decisions depending on what the majority chooses.C) A budget constraint is an economic tool that quantifies the trade-off between the consumption of twogoods.D) A trade-off refers to the exchange of goods between economic agents through the barter system ormutual exchange.Answer:CDifficulty:EasyAACSB:Analytical ThinkingTopic:Trade-offs and Budget Constraints14) Why do trade-offs occur? How are budget constraints related to trade-offs?Answer:Trade-offs occur because of scarcity–economic agents need to satisfy their wants with limitedresources. Therefore, in most cases, some benefits have to be given up to gain other benefits. Budgetconstraints quantify the relevant trade-offs that an economic agent faces. Once trade-offs are quantified,rational decision making becomes easier, allowing the individual to make an optimal decision.Difficulty:EasyAACSB:Analytical ThinkingTopic:Trade-offs and Budget Constraints15) The best alternative use of a resource is referred to as its ________.A) optimization costB) market priceC) social costD) opportunity costAnswer:DDifficulty:EasyAACSB:Analytical ThinkingTopic:Opportunity Cost16) A student has two options: she can either surf the web or work part-time. Working part-time pays her$20 per hour. What is the student's opportunity cost of surfing the web for 5 hours?A) $4B) $20C) $50D) $100Answer:DDifficulty:MediumAACSB:Application of KnowledgeTopic:Opportunity Cost

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1517) John has to choose between two jobs: one that offers him $50 per hour and one that offers him $35 perhour. The opportunity cost of choosing the job that offers him $50 per hour is ________.A) $1.5 per hourB) $15 per hourC) $35 per hourD) $85 per hourAnswer:CDifficulty:MediumAACSB:Application of KnowledgeTopic:Opportunity Cost18) Define opportunity cost. A student who has just graduated from college has three job offers: the firstjob pays $35,000 a year, the second job pays $23,000 a year, and the third one pays $15,000 a year. What isthe student's opportunity cost of taking the first job?Answer:Opportunity cost is the best alternative use of a resource. It is what an economic agent is givingup when he chooses a particular option. If the individual decides to take the first job, he will earn $35,000a year. The opportunity cost of taking this job is the next-best offer that he could have taken. Therefore,the opportunity cost of the first job is $23,000 a year.Difficulty:EasyAACSB:Application of KnowledgeTopic:Opportunity Cost

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1619) A consumer has a monthly income of $100 that he wants to spend on two goods: rugs priced at $10and chairs priced at $5. What is the consumer's opportunity cost of buying a rug? What is his opportunitycost of buying a chair? Use a table to represent the consumer's budget constraint.Answer:Opportunity cost is the best alternative use of a resource. Buying one rug costs $10, and eachchair costs $5. One rug can be purchased with the same amount of money used to buy two chairs.Therefore, the opportunity cost of buying a rug is 2 chairs. Similarly, the opportunity cost of buying achair is half a rug. The consumer's budget constraint is given by:$100 = 10 × (Quantity of rugs) + 5 × (Quantity of chairs).The following table shows the various combinations of rugs and chairs that the consumer can buy with$100:BudgetQuantity of RugsQuantity of Chairs10010010092100841007610068100510100412100314100216100118100020Difficulty:MediumAACSB:Application of KnowledgeTopic:Opportunity Cost20) Sam pays $600 for 30 days of guitar classes. He attends an hour-long class every day. If, instead ofattending class, he works at a part-time job, he would be paid $5 an hour. Alternatively, he could work ata fast-food outlet and earn $9 per hour. Once he has already paid a nonrefundable fee of $600 to enroll inthe class, what is his opportunity cost of attending each hour of class?Answer:Sam's opportunity cost will measure the next best use of an hour of his time plus the hourlycost of guitar classes. Once he pays the nonrefundable $600, there is no further cost other than the valueof his time. For an hour of time, he has two options: work for $5 per hour or work for $9 per hour.Therefore, the next best use of an hour that Sam spends on guitar classes is equal to the $9 he could haveearned per hour by working at the fast-food outlet. Sam's opportunity cost of attending his guitar classesis $9 per hour.Difficulty:MediumAACSB:Application of KnowledgeTopic:Opportunity Cost

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1721) Suppose workers decide to work more and consume less leisure when their hourly wage rateincreases. What could explain this behavior?Answer:With an increase in their hourly wage rates, workers work more and consume less leisurebecause of a change in their opportunity cost. Assuming that the initial wage of an employee is $10 perhour, the opportunity cost of one hour of rest or leisure is $10 per hour. If the wage rate increases from$10 to $20 per hour, the opportunity cost of one hour of rest or leisure also increases to $20 per hour.Therefore, taking an hour of rest becomes more expensive for employees, and so the workers tend towork more than they used to.Difficulty:MediumAACSB:Application of KnowledgeTopic:Opportunity Cost22) ________ is a calculation that adds up the costs and benefits using a common unit of measurement,like dollar values.A) Cost-benefit analysisB) Revenue-income analysisC) Budget constraint analysisD) Expenditure-income analysisAnswer:ADifficulty:EasyAACSB:Analytical ThinkingTopic:Cost-Benefit Analysis23) Cost-benefit analysis requires ________.A) choosing the alternative with the least net benefitB) that all costs and benefits be measured in the same unitC) evaluating the budget constraint before making a choiceD) that the risks associated with different alternatives be ignoredAnswer:BDifficulty:EasyAACSB:Analytical ThinkingTopic:Cost-Benefit Analysis24) Suppose that Jinelle, an engineer, has to choose between two jobs. Which of the following statementsis true?A) When deciding between jobs, she should consider both the wage and the non-wage attributes of eachjob.B) When deciding between jobs, she should focus only on the costs of each job and ignore the benefits.C) When deciding between jobs, she should only focus on the benefits of each job and ignore the costs.D) When deciding between jobs, she should consider the wage attributes and ignore the non-wageattributes of each job.Answer:ADifficulty:EasyAACSB:Analytical ThinkingTopic:Cost-Benefit Analysis

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1825) The net benefit of a particular alternative equals ________.A) the benefits received from the alternative plus the costs incurred when choosing the alternativeB) the benefits received from the alternative divided by the costs incurred when choosing the alternativeC) the costs incurred when choosing the alternative divided by the benefits received from the alternativeD) the benefits received from the alternative minus the costs incurred when choosing the alternativeAnswer:DDifficulty:EasyAACSB:Analytical ThinkingTopic:Cost-Benefit Analysis26) Out of a set of feasible alternatives, an optimizer should choose the alternative with the ________.A) highest net benefitB) highest opportunity costC) lowest total cost, regardless of benefitD) highest total benefit, regardless of costAnswer:ADifficulty:EasyAACSB:Analytical ThinkingTopic:Cost-Benefit Analysis27) If a particular choice that an individual faces gives him a benefit of $20 but costs $30, the net benefitfrom making this choice equals ________.A) $20B) $10C) −$10D) −$30Answer:CDifficulty:EasyAACSB:Application of KnowledgeTopic:Cost-Benefit Analysis28) If a job pays a wage of $50 per hour, but has a non-wage cost valued at $20 per hour, the net benefit oftaking the job equals ________.A) $2.5 per hourB) $20 per hourC) $30 per hourD) $70 per hourAnswer:CDifficulty:MediumAACSB:Application of KnowledgeTopic:Cost-Benefit Analysis

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19Maria has to choose between driving and taking a train to destination A. Traveling by train will cost her$400 and will take 4 hours. Driving to destination A takes 6 hours, and the required amount of gasolinecosts $250. Her opportunity cost of time is $15 per hour.29) Refer to the scenario above. What is the total cost involved if Maria chooses to travel by train?A) $60B) $400C) $420D) $460Answer:DDifficulty:MediumAACSB:Application of KnowledgeTopic:Cost-Benefit Analysis30) Refer to the scenario above. If Maria borrows her parents' car and pays for only the gasoline, what isher total cost of driving to destination A?A) $90B) $250C) $300D) $340Answer:DDifficulty:MediumAACSB:Application of KnowledgeTopic:Cost-Benefit Analysis31) Refer to the scenario above. Maria should choose to ________.A) drive, as it will save her $120B) travel by train, because it is quickerC) drive, as it will give her a real saving of $150D) travel by train, as it will save her $30 in travel timeAnswer:ADifficulty:MediumAACSB:Application of KnowledgeTopic:Cost-Benefit Analysis32) Refer to the scenario above. If Maria's opportunity cost of time increases to $80 per hour, the cost oftaking the train is ________.A) $320B) $720C) $800D) $970Answer:BDifficulty:MediumAACSB:Application of KnowledgeTopic:Cost-Benefit Analysis

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2033) Refer to the scenario above. If Maria's opportunity cost of time increases to $80 per hour, the cost ofdriving to destination A is ________.A) $480B) $730C) $800D) $970Answer:BDifficulty:MediumAACSB:Application of KnowledgeTopic:Cost-Benefit Analysis34) Refer to the scenario above. If the opportunity cost of time increases to $80 per hour, which of thefollowing statements is true?A) Maria should choose to drive, as it saves her $10.B) Maria should choose to drive, as it saves her $150.C) Maria should choose to travel by train, as it saves her $10.D) Maria should choose to travel by train, as it saves her $150.Answer:CDifficulty:MediumAACSB:Application of KnowledgeTopic:Cost-Benefit Analysis35) Which of the following statements is true?A) A rational economic agent is not likely to optimize.B) Cost-benefit analysis can also be used for normative economic analysis.C) Cost-benefit analysis does not yield the same result as optimization analysis.D) The net benefit of an option that costs $50 and provides a benefit of $100 is equal to $150.Answer:BDifficulty:MediumAACSB:Analytical ThinkingTopic:Cost-Benefit Analysis

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2136) Wendy has to decide between taking a flight and driving to California. Air tickets cost $800 and willget her to California in 2 hours. If she decides to drive, she would need $300 worth of gasoline and 10hours to reach her destination. Suppose Wendy's opportunity cost of time is $20 per hour.a) Assuming that there are no other costs involved, use cost-benefit analysis to decide whether she shouldfly or drive to California.b) If Wendy has an important business meeting to attend and this increases her opportunity cost of timeto $200 per hour, will her optimum decision change? Explain.Answer:a) Cost-benefit analysis is a calculation that adds up costs and benefits using a common unit ofmeasurement. It is used to identify the alternative that has the greatest net benefit, which is equivalent tobenefits minus costs. If Wendy decides to drive down instead of flying, she saves ($800 − $300) = $500. Butdriving down to California takes an additional 8 hours of travel time. Therefore, the net benefit of drivingrelative to flying is:($500 Cost saving) − (8 hours Additional travel time) × ($20/hour) = $500 − $160 = $340. Because the netbenefit of driving is positive, driving to California is the optimum choice for Wendy when theopportunity cost of time is $20 per hour.b) If the opportunity cost of time changes, the net benefit of driving relative to flying will also change: Netbenefit of driving relative to flying when the opportunity cost of time is $200 per hour = ($500 Costsaving) − (8 hours Additional travel time) × ($200/hour) = $500 − $1,600 = −$1,100.Because the net benefit of driving relative to flying is negative, flying to California is the optimum choicefor Wendy when the opportunity cost of time is $200 per hour.Difficulty:MediumAACSB:Application of KnowledgeTopic:Cost-Benefit Analysis37) What is cost-benefit analysis? What are the steps involved in using cost-benefit analysis to make theoptimal choice?Answer:Cost-benefit analysis is a calculation that adds up the costs and benefits of a particular choiceusing a common unit of measurement. It involves the conversion of all costs and benefits to a commonunit of measurement so that they can be compared. The difference between the benefits and costs ofchoosing an alternative is referred to as the net benefit of the alternative. The alternative with the highestnet benefit is the optimal choice.Difficulty:EasyAACSB:Analytical ThinkingTopic:Cost-Benefit Analysis38) Kevin has a lot of free time, and he decides to pick up a new hobby. He has two options–he can takeart classes or sign up for cooking classes. He estimates that the art classes would cost him $70 and wouldprovide him with a benefit of $100. In contrast, the cooking classes would cost him $120 but provide himbenefits worth $160. Use cost-benefit analysis to arrive at the optimum choice for Kevin.Answer:Kevin's optimal choice depends on the net benefits of both options:Net benefit of taking art classes = $100 − $70 = $30;Net benefit of taking cooking classes = $160 − $120 = $40.Therefore, given the costs and benefits involved, Kevin should sign up for the cooking classes rather thanthe art classes.Difficulty:MediumAACSB:Application of KnowledgeTopic:Cost-Benefit Analysis

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2239) Which of the following statements is true of economic reasoning?A) Economic reasoning hampers optimal decision making.B) Economic reasoning can only be used with normative choices.C) Economic reasoning implies that leisure time is free and costless.D) Economic reasoning helps people make the best use of scarce resources.Answer:DDifficulty:EasyAACSB:Analytical ThinkingTopic:Evidence-Based Economics: Is Facebook Free?40) If Tom spends 4 hours a day on Facebook, and the minimum wage in his country is $7 per hour.a) What is his opportunity cost of spending time on Facebook?b) Given that spending time on Facebook has an opportunity cost, does this analysis suggest that Tomshould work rather than spend his time on social networking?Answer:a) Opportunity cost refers to the best alternative use of a resource. In this case, the resource istime. So, if Tom decided to work instead of spending time on Facebook, he would earn $7 every hour.Therefore, Tom's opportunity cost of spending time on Facebook is equal to $7 × 4 = $28.b) No, economic analysis does not dictate choices.Economics would not tell Tom what to do; it wouldonly help him identify the trade-offs that he is making in his decisions. Whether Tom chooses to work orspend time on Facebook is a normative choice that Tom should make based on costs and benefits.Difficulty:MediumAACSB:Application of KnowledgeTopic:Evidence-Based Economics: Is Facebook Free?1.4The Second Principle of Economics: Equilibrium1) Which of the following statements is true of equilibrium?A) Economic agents have an incentive to divert from equilibrium.B) Each economic agent can reach equilibrium irrespective of the actions of others.C) In equilibrium, the opportunity cost of the choices made by each economic agent is zero.D) In equilibrium, all economic agents are choosing the best feasible option simultaneously.Answer:DDifficulty:EasyAACSB:Analytical ThinkingTopic:The Second Principle of Economics: Equilibrium2) Which of the following will hold true if the market for cameras is in equilibrium at a price of $40?A) Sellers of cameras will have an incentive to charge a price higher than $40.B) The quantity of cameras produced will equal the quantity of cameras bought in the market.C) Buyers of cameras will want to buy fewer cameras than they are purchasing at equilibrium.D) If the cost of producing cameras falls below $40 per camera, all sellers will stop supplying cameras.Answer:BDifficulty:MediumAACSB:Application of KnowledgeTopic:The Second Principle of Economics: Equilibrium

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233) When the market for a commodity is in equilibrium, ________.A) no economic agent will want to change his or her behaviorB) there will still be some unsold stock of the commodityC) all buyers of the commodity will want to change their behaviorD) all sellers of the commodity will want to change their behaviorAnswer:ADifficulty:EasyAACSB:Analytical ThinkingTopic:The Second Principle of Economics: Equilibrium4) Which of the following is true of equilibrium?A) Equilibrium refers to a situation where the government allocates resources among economic agents.B) Equilibrium refers to a situation where all economic agents simultaneously optimize after consideringone another's actions.C) Equilibrium refers to a situation where all economic agents are making suboptimal choices and havean incentive to change their behavior.D) Equilibrium refers to a situation where an economic agent can be made better off without makinganyone else worse off.Answer:BDifficulty:EasyAACSB:Analytical ThinkingTopic:The Second Principle of Economics: Equilibrium5) Suppose the market for pizza slices is in equilibrium at a price of $1 per slice. What conditions arelikely to be satisfied in the pizza slice market?Answer:The conditions that will be satisfied when the market for pizza slices is in equilibrium are thefollowing:i) The number of pizza slices made by sellers will be equal to the number of pizza slices purchased bybuyers.ii) Pizza sellers will produce pizzas at the point where the cost of production is less than or equal to themarket price of $1.iii) Buyers will consume pizza as long as the benefit that they derive from consumption is at least equal tothe market price of $1.Difficulty:MediumAACSB:Application of KnowledgeTopic:The Second Principle of Economics: Equilibrium6) When a market is in equilibrium, both buyers and sellers do not perceive a benefit from changing theirbehavior. Why?Answer:In most economic situations, an economic agent is not optimizing individually. His decision isinfluenced by the decisions taken by other economic agents. In equilibrium, each and every economicagent is doing the best that they can do, given the information they have and given the actions of othereconomic agents. Therefore, nobody perceives a benefit from changing his or her behavior.Difficulty:EasyAACSB:Analytical ThinkingTopic:The Second Principle of Economics: Equilibrium

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247) The term "free riders" refers to people who ________.A) don't contribute but still benefit from others' actionsB) make economic decisions randomly and are not rationalC) selflessly pay for others' consumption of goods and servicesD) haggle over the prices of the goods and services that they buyAnswer:ADifficulty:EasyAACSB:Analytical ThinkingTopic:The Free-Rider Problem8) Who among the following is an example of a free rider?A) An individual who sneaks into a music concertB) A consumer who buys her groceries from a nearby storeC) A taxpayer who exercises in the public park near his houseD) A club member who makes voluntary contributions to the clubAnswer:ADifficulty:MediumAACSB:Application of KnowledgeTopic:The Free-Rider Problem9) Who among the following is an example of a free rider?A) A housekeeper cleaning a houseB) A tax evader enjoying national securityC) A consumer paying for pollution controlD) An individual who buys a ticket for a baseball gameAnswer:BDifficulty:MediumAACSB:Application of KnowledgeTopic:The Free-Rider Problem10) Each member in a group might do what's best for himself or herself instead of behaving in a way thatoptimizes the well-being of the entire group. This gives rise to the problem of ________.A) Pareto inefficiencyB) free ridingC) irrational behaviorD) disequilibriumAnswer:BDifficulty:EasyAACSB:Analytical ThinkingTopic:The Free-Rider Problem11) Which of the following statements is true of free riding?A) Free riding is easy to detect and punish.B) Free riding is reduced with social pressure.C) Free riding is not affected by incentives.D) Free riding does not impose a cost on society.Answer:BDifficulty:EasyAACSB:Analytical ThinkingTopic:The Free-Rider Problem

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2512) Assume that a house is rented by four students. When it comes to keeping the house clean, each of thefour roommates has an incentive to leave the cleaning to the others. As a result, the house is never clean.Which of the following is the best solution to this problem of free riding?A) Asking every roommate to clean the house if they dirty itB) Requiring every roommate to contribute to a cleaning serviceC) Requiring each roommate to pay more toward the house rent and groceriesD) Assigning one roommate the responsibility of watching over the other studentsAnswer:BDifficulty:MediumAACSB:Application of KnowledgeTopic:The Free-Rider Problem13) Explain the term "free riders."Answer:Free riders are people who do not contribute but still benefit from the actions that othersundertake. When people pursue their own private interests and do not contribute voluntarily to thepublic interest, the problem of free riding arises. For example, a free rider may avoid paying taxes butenjoy the same benefits enjoyed by tax payers.Difficulty:EasyAACSB:Analytical ThinkingTopic:The Free-Rider Problem1.5The Third Principle of Economics: Empiricism1) Empiricism refers to the process of ________.A) measuring variablesB) testing ideas using dataC) collecting and organizing dataD) making choices using values and beliefsAnswer:BDifficulty:MediumAACSB:Analytical ThinkingTopic:The Third Principle of Economics: Empiricism2) Which of the following statements is true?A) Data help establish whether theories match reality.B) Data are not an integral part of optimization analysis.C) Empiricism is not an integral part of optimization analysis.D) Empiricism refers to the testing of ideas without using data.Answer:ADifficulty:EasyAACSB:Analytical ThinkingTopic:The Third Principle of Economics: Empiricism

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263) Which of the following statements is true of data?A) Data help verify causal relationships.B) Data are not important for evaluating theories.C) Anecdotes are good substitutes for data.D) The fewer data that are available, the better the empirical analysis will be.Answer:ADifficulty:EasyAACSB:Analytical ThinkingTopic:The Third Principle of Economics: Empiricism4) Which of the following statements is true?A) Testing with data is essential to developing a good theory.B) The knowledge of economics complicates decision making.C) Cost-benefit analysis can be applied only to limited economic decisions.D) Economics is more of a theoretical subject with limited applications in the real world.Answer:ADifficulty:EasyAACSB:Analytical ThinkingTopic:The Third Principle of Economics: Empiricism5) Which of the following is a feature of a good theory?A) A good theory does not rely on data.B) A good theory cannot be tested with data.C) A good theory is free from approximations.D) A good theory closely predicts actual behavior.Answer:DDifficulty:EasyAACSB:Analytical ThinkingTopic:The Third Principle of Economics: Empiricism6) What is the rationale behind empiricism in economic analysis?Answer:Empiricism refers to the use of data to test theoretical ideas or concepts. Empiricism isimportant, because it enables economists to determine whether economic theories are consistent withactual human behavior. This allows economists to refute faulty theories or modify them so that they are abetter fit to the real world. Empiricism also enables researchers to identify causal relationships betweendifferent sets of variables.Difficulty:EasyAACSB:Analytical ThinkingTopic:The Third Principle of Economics: Empiricism

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271.6Is Economics Good for You?1) Which of the following statements is true?A) Economics is concerned with money, not choices.B) Economics can be used to predict people's actions.C) Economics does not provide insights into human behavior.D) Economic reasoning tends to reduce the quality of decision making.Answer:BDifficulty:EasyAACSB:Analytical ThinkingTopic:Is Economics Good for You?2) Economic reasoning allows economic agents to make decisions ________.A) by random selectionB) by comparing the costs and benefits of various optionsC) by replicating the choices made by other economic agentsD) solely on the basis of tastes and preferences for various optionsAnswer:BDifficulty:EasyAACSB:Analytical ThinkingTopic:Is Economics Good for You?

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1Microeconomics&Macroeconomics,2e(Acemoglu)Chapter 2Economic Methods and Economic Questions2.1The Scientific Method1) Empiricism refers to using ________ to analyze the world.A) dataB) beliefsC) traditionsD) value judgmentsAnswer:ADifficulty:EasyAACSB:Analytical ThinkingTopic:The Scientific Method2) The scientific method refers to the process by which economists and other scientists ________.A) collect data for further use in researchB) develop models of the world and test those models with dataC) develop models to explain the past but not to predict the futureD) plot graphs to illustrate relationships between different economic variablesAnswer:BDifficulty:EasyAACSB:Analytical ThinkingTopic:The Scientific Method3) Which of the following statements is true?A) Models that economists use are perfect replicas of reality.B) The scientific method used by economists is based on idealism and not empiricism.C) Models help economists explain the past but do not help predict the future.D) Testing with data enables economists to distinguish between good models and bad models.Answer:DDifficulty:EasyAACSB:Analytical ThinkingTopic:Models and Data4) Which of the following is a feature of the scientific method?A) The scientific method is not based on data, statistics, or measurements.B) The scientific method allows improvisation and correction of inconsistent models.C) The scientific method enables the creation of perfectly accurate models of the real world.D) The scientific method is used only for studying topics related to economics.Answer:BDifficulty:EasyAACSB:Analytical ThinkingTopic:Models and Data

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25) Which of the following statements is true of the scientific method?A) The scientific method may not reveal a "true" model of the world.B) The scientific method does not require the models to be tested with data.C) The scientific method used by economists and scientists is independent of empiricism.D) The scientific method can help develop accurate models even when data are unavailable.Answer:ADifficulty:EasyAACSB:Analytical ThinkingTopic:Models and Data6) A model refers to ________.A) a perfect replica of realityB) a simplified description, or representation, of realityC) facts, measurements, or statistics that describe the worldD) a set of facts established by observation and measurementAnswer:BDifficulty:EasyAACSB:Analytical ThinkingTopic:Models and Data7) Which of the following is a feature of models?A) Models are the same as hypotheses.B) Models help in making predictions for the future.C) Models are more complicated than real life phenomena.D) Models are as complex as the phenomenon being studied.Answer:BDifficulty:EasyAACSB:Analytical ThinkingTopic:Models and Data8) Which of the following statements is true of models?A) The predictions of a model are referred to as data.B) A model is formulated after developing a hypothesis.C) Models are always based on assumptions that are known to be true.D) It is more important for a model to be simple and useful than to be precisely accurate.Answer:DDifficulty:EasyAACSB:Analytical ThinkingTopic:Models and Data9) A model ________.A) is often based on simplifying assumptions that are not necessarily trueB) can be tested without data or statisticsC) is a more complex representation of reality than a theoryD) can never be used to predict the future, but it helps explain the pastAnswer:ADifficulty:EasyAACSB:Analytical ThinkingTopic:Models and Data

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310) Facts, measurements, or statistics that describe the world are referred to as ________.A) dataB) modelsC) hypothesisD) empiricismAnswer:ADifficulty:EasyAACSB:Analytical ThinkingTopic:Models and Data11) Which of the following statements is true about data?A) Empiricism does not necessarily involve data.B) Consistency of models can be checked using data.C) Facts that describe the world are not considered data.D) Convincing data analysis in economics relies on using a small sample.Answer:BDifficulty:EasyAACSB:Analytical ThinkingTopic:Models and Data12) Empirical evidence refers to ________.A) a simplified representation of realityB) a proposed explanation for a phenomenonC) the process of developing and testing modelsD) a set of facts established by observation and measurementAnswer:DDifficulty:EasyAACSB:Analytical ThinkingTopic:Models and Data13) Which of the following statements is true?A) Theories are statistics that describe the real world.B) Hypotheses are predictions that can be tested with data.C) Data are facts established by observation and measurement.D) Empirical evidence consists of facts, measurements, or statistics that describe the world.Answer:BDifficulty:EasyAACSB:Analytical ThinkingTopic:Models and Data14) A model's predictions are referred to as ________.A) statisticsB) theoriesC) hypothesesD) empirical evidenceAnswer:CDifficulty:EasyAACSB:Analytical ThinkingTopic:Models and Data

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