Sexton 5e End of Chapter Study Guide Questions and Answers
Chapter 2: The Economic Way of Thinking
True or False
1.In economics, labor includes physical and mental effort, and land includes natural resources.T
2.Entrepreneurship is the process of combining labor, land, and capital together to produce goods and services.T
3.Even intangible goods can be subjected to economic analysis.T
4.Even the wealthy individual who decides to donate all of her money to charity faces the constraints of scarcity.T
5.Increases in production could enable us to eliminate scarcity.F
6.If we had unlimited resources, we would not have to choose among our desires.T
7.Scarcity implies that “there’s no such thing as a free lunch.”T
8.The actual result of changing behavior following the rule of rational choice will always make people better off.F
9.In terms of the rule of rational choice, zero levels of pollution, crime, and safety would be far too costly in terms ofwhat we would have to give up to achieve them.T
10.Most choices in economics are all or nothing.F
11.Good economic thinking requires thinking about average amounts rather than marginal amounts.F
12. Positive incentives are those that either increase benefits or reduce costs, resulting in an increase in the level of therelated activity or behavior; negative incentives either reduce benefits or increase costs, resulting in a decrease in thelevel of the related activity or behavior.T
13.The safety issue is generally not whether a product is safe, but rather how much safety consumers want.T
14.People can gain by specializing in the production of the good in which they have a comparative advantage.T
15.Without the ability to trade, people would not tend to specialize in those areas where they have a comparativeadvantage.T
16.Voluntary trade directly increases wealth by making both parties better off, and it is the prospect of wealth-increasingexchange that leads to productive specialization.T
17.Government price controls can short-circuit the market’s information transmission function.T
18.When the economy produces too little or too much of something, the government can potentially improve society’swell-being by intervening.T
19.Not only does the market determine what goods are going to be produced and in what quantities, but it also determinesthe distribution of output among members of society.T
Multiple Choice
1. Which of the following is part of the economic way of thinking?
a. When an option becomes less costly, individuals will become more likely to choose it.
b. Costs are incurred whenever scarce resources are used to produce goods or services.
c.The value of a good is determined by its cost of production.
d. Both a. and b. are part of the economic way of thinking.
2. Ted has decided to buy a burger and fries at a restaurant but is considering whether to buy a drink as well. If theprice of a burger is $2.00, fries are $1.00, drinks are $1.00, and a value meal with all three costs $3.40, the marginalcost to Ted of the drink is
a. $1.00.
b. $0.40.
c. $1.40.
d. $3.40.
e. impossible to determine from the information given.
3.If a country wants to maximize the value of its output, each job should be carried out by the person who
a. has the highest opportunity cost.
b. has a comparative advantage in that activity.
c. can complete the particular job most rapidly.
d. enjoys that job the least.
4. Who would be most likely to drop out of college before graduation?
a. An economics major who wishes to go to graduate school.
b. A math major with a B+ average.
c.A chemistry major who has just been reading about the terrific jobs available for those with chemistry degrees.
d. A star baseball player who has just received a multimillion-dollar major league contract offer after his junior year.
5. “If I hadn’t been set up on this blind date tonight, I would have saved $50 and spent the evening watching TV.” The opportunity cost of the date is
a. $50.
b. $50, plus the cost to you of giving up a night of TV.
c. smaller, the more you enjoy the date.
d. higher, the more you like that night’s TV shows.
e. described by both b. and d.
6. Say you had an 8 A.M. economics class, but you would still come to campus at the same time even if you skipped your economics class. The cost of coming to the economics class would include
a. the value of the time it took to drive to campus.
b. the cost of the gasoline it took to get to campus.
c. the cost of insuring the car for that day.
d.both a and b.
e. none of the above.
7. Which of the following would be likely to raise your opportunity cost of attending a big basketball game this Sunday night?
a. A friend calls you up and offers you free tickets to a concert by one of your favorite bands on Sunday night.
b. Your employer offers you double your usual wage to work this Sunday night.
c. Late Friday afternoon, your physics professor makes a surprise announcement that there will be a major exam onMonday morning.
d. All of the above.
8. Which of the following demonstrates marginal thinking?
a. deciding to never eat meat
b. deciding to spend one more hour studying economics tonight because you think the improvement on your next test will be large enough to make it worthwhile to you
c.working out an extra hour per week
d. both b. and c.
9. If resources and goods are free to move across states, and if Florida producers choose to specialize in growing grapefruit
and Georgia producers choose to specialize in growing peaches, then we could reasonably conclude that
a. Georgia has a comparative advantage in producing peaches.
b. Florida has a comparative advantage in producing peaches.
c. the opportunity cost of growing peaches is lower in Georgia than in Florida.
d. the opportunity cost of growing grapefruit is lower in Florida than in Georgia.
e. all of the above except b are true.
10. If a driver who had no change and whose cell phone battery was dead got stranded near a pay phone and chose to buy a quarter and a dime from a passerby for a dollar bill,
a. the passerby was made better off and the driver was made worse off by the transaction.
b. both the passerby and the driver were made better off by the transaction.
c. the transaction made the driver worse off by 65 cents.
d. both a and c are true.
11. Which of the following is not true?
a. Voluntary exchange is expected to be advantageous to both parties to the exchange.
b. What one trader gains from a trade, the other must lose.
c. If one party to a potential voluntary trade decides it does not advance his interests, he can veto the potential trade.
d.The expectation of gain motivates people to engage in trade.
12. Which of the following is true?
a. Scarcity and poverty are basically the same thing.
b. The absence of scarcity means that a minimal level of income is provided to all individuals.
c. Goods are scarce because of greed.
d. Even in the wealthiest of countries, the desire for material goods is greater than productive capabilities.
13. An example of a capital resource is
a. stock in a computer software company.
b. the funds in a CD account at a bank.
c. a bond issued by a company selling electric generators.
d. a dump truck.
e. an employee of a moving company.
14. Which of the following statements is true?
a. The opportunity cost of a decision is always expressed in monetary terms.
b. The opportunity cost of a decision is the value of the best forgone alternative.
c. Some economic decisions have zero opportunity cost.
d. The opportunity cost of attending college is the same for all students at the same university but may differ among students at different universities.
e. None of the above statements is true.
15. The opportunity cost of attending college is likely to include all except which of the following?
a. The cost of required textbooks.
b. Tuition fees.
c. The income you forgo in order to attend classes.
d. The cost of haircuts received during the school term.
e. The cost of paper and pencils needed to take notes.
16. The opportunity cost of an airplane flight
a. differs across passengers only to the extent that each traveler pays a different airfare.
b. is identical for all passengers and equal to the number of hours a particular flight takes.
c. differs across passengers to the extent that both the airfare paid and the highest valued use of travel time vary.
d. is equal to the cost of a bus ticket, the next best form of alternative transportation to flying.
17. Lance’s boss offers him twice his usual wage rate to work tonight instead of taking his girlfriend on a romantic date.
This offer will likely
a. not affect the opportunity cost of going on the date.
b. reduce the opportunity cost of going on the date because giving up the additional work dollars will make his girlfriend feel even more appreciated.
c. increase the opportunity cost of going on the date.
d. not be taken into consideration by Lance when deciding what to do tonight.
18. Which of the following best defines rational behavior?
a. Analyzing the total costs of a decision.
b. Analyzing the total benefits of a decision.
c. Undertaking an activity as long as the total benefit of all activities exceeds the total cost of all activities.
d. Undertaking activities whenever the marginal benefit exceeds the marginal cost.
e.Undertaking activities as long as the marginal benefit exceeds zero.
19. Gallons of milk at a local grocery store are priced at one for $4 or two for $6. The marginal cost of buying a second gallon of milk equals
a. $6.
b. $4.
c. $3.
d. $2.
e. $0.
20. Which of the following statements is most consistent with the rule of rational choice?
a. The Environmental Protection Agency should strive to eliminate virtually all air and water pollution.
b. When evaluating new prescription drugs, the Food and Drug Administration should weigh each drug’s potential health benefits against the potential health risks posed by known side effects.
c. Police forces should be enlarged until virtually all crime is eliminated.
d. Manufacturers of automobiles should seek to make cars safer, no matter the costs involved.
21. Kelly is an attorney and also an excellent typist. She can type 120 words per minute, but she is pressed for time because she has all the legal work she can handle at $75.00 per hour. Kelly’s friend Todd works as a waiter and would like some typing work (provided that he can make at least his wage as a waiter, which is $25.00 per hour). Todd can type only 60 words per minute.
a. Kelly should do all the typing because she is faster.
b. Todd should do the typing as long as his earnings are more than $25.00 and less than $37.50 per hour.
c. Unless Todd can match Kelly’s typing speed, he should remain a waiter.
d. Todd should do the typing, and Kelly should pay him $20.00 per hour.
e. Both a and c are correct.
Problems
1. Which of the following goods are scarce?
a. garbage
b. salt water in the ocean
c. clothes
d. clean air in a big city
e. dirty air in a big city
f. a public library
Answer: Scarce goods are those that we would like to have more of, but given limited resources, we must make choices. The following goods are all scarce:c. clothes; d. clean air in a big city; f. a public library. Note that garbage is not a good, but a reduction in the amount of garbage would be a good.
2. Explain the difference between poverty and scarcity.
Answer: Being poor means that you have access to few resources, which limits the goods and services you consume. Scarcity means you don’t have enough resources to do everything you want to do, so you have to make choices. Everyone experiences scarcity, because we can always think of more things that we want than we can produce with our resources.
3. The automotive revolution after World War II reduced the time involved for travel and shipping goods. This innovation allowed the U.S. economy to produce more goods and services since it freed resources involved in transportation for other uses. The transportation revolution also increased wants. Identify two ways the car and truck revealed new wants.
Answer:The car freed Americans to travel and helped to create the tourism business. New wants included motels, resorts, and theme parks. The increased importance of auto and truck transportation also created the desire for more and better roads and highways. The car also allowed people to live farther from where they worked, so that people wanted more land and newer houses.
4. The price of a one-way bus trip from Los Angeles to New York City is $150.00. Sarah, a school teacher, pays the same price in February (during the school year) as in July (during her vacation), so the cost is the same in February as in July. Do you agree?
Answer: Since Sarah’s time is probably worth more during school (it would cost part of her salary), the opportunity cost of the trip is higher in February than in July.
5. McDonald’s once ran a promotion that whenever St. Louis Cardinal’s slugger Mark McGwire hit a home run into the upper deck at Busch Stadium, McDonald’s gave anyone with a ticket to that day’s game a free Big Mac. If holders of ticket stubs have to stand in line for ten minutes, is the Big Mac really “free?”
Answer: No. First of all, McDonald’s uses scarce resources to produce the burger, so it’s not “free” to them. Secondly, if people value their time at all, ten minutes standing in line to get the burger carries an opportunity cost equal to the value to them of whatever else they could have done with the ten minutes. Also included is the opportunity cost of driving to McDonald’s to get the “free” Big Mac.
6.List some things that you need. Then ask yourself if you would still want some of those things if the price were fivetimes higher. Would you still want them if the price were 10 times higher?
Answers will vary. The main point here is to recognize that how much of something you "need" depends on what you must give up to get it. Would you be willing to pay $10 or even $20 for a hamburger? Would you be willing to pay $40 or even $80 for admission to a new blockbuster film?
7. List the opportunity costs of the following:
a. going to college
b. missing a lecture
c. withdrawing and spending $100 from your savings account, which earns 5 percent interest annually
d. going snowboarding on the weekend before final examinations
Answer: The opportunity cost of an activity is always the value of the best alternative given up.
a. The opportunity cost of going to college includes not just expenses such as tuition and books, but also the lost income that could have been earned while attending college. On the other hand, room and board expenses should not be included in the calculation of opportunity cost, if those expenses are equivalent to that which would be incurred in the best foregone alternative to attending college.
b. The opportunity cost of missing a lecture includes the potential damage to one's grade in a course from not being present while important subject material is covered, as well as the knowledge's foregone value in the "real world." The magnitude of the opportunity cost depends partly on how much essential information the instructor provides during the missed class session.
c. The opportunity cost of withdrawing and spending $100 from your savings account is the 5% interest which could have been earned annually if the funds remained in the savings account.
d. The opportunity cost of going snowboarding on the weekend before final examinations is likely to include the value of lost study time and possibly a lower course grade, as well as the explicit costs of the snowboarding trip, as well as the financial costs.
8.Which of the following activities require marginal thinking, and why?
a. studying
b. eating
c. driving
d. shopping
e.getting ready for a night out
Answer: Marginal thinking involves incremental changes to a plan of action. All of the activities listed involve marginal thinking. When studying, one chooses whether or not to study for one more hour; when eating, one chooses whether or not to consume one more portion; when driving, one chooses whether or not to travel one more mile (or one more mile per hour); when shopping, one chooses whether or not to buy one more item or visit one more store; when getting ready for a night out, one chooses whether or not to spend another minute styling one's hair.
9. Should you go to the movies this Friday? List the factors that affect the possible benefits and costs of this decision. Explain where uncertainty affects the benefits and costs.
Answer: The benefits of going to the movie include the happiness you receive from being entertained and the social interaction with friends. These are uncertain because they depend on the quality of the move and your companionship. Costs include the price of the movie ticket and the value to you of the time you give up to go to the movie. Uncertainty also affects your costs since you do not know for certain what you would get out of your alternative use of your time.