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Microeconomics Chapter 1—The Economic Approach

MULTIPLE CHOICE

1. What do economists mean when they state that a good is scarce?

a. There is a shortage or insufficient supply of the good at the existing price. b. It is impossible to expand the availability of the good beyond the current amount. c. People will want to buy more of the good regardless of the price of the good. d. The amount of the good that people would like exceeds the supply freely available from

nature.

ANS: D PTS: 1 OBJ: Suggested Quiz

2. Economic choice and competitive behavior are the result of

a. basic human greed. b. poverty. c. private ownership of resources. d. scarcity.


3. Joe and Ed go to a diner that sells hamburgers for $5 and hot dogs for $3. They agree to split

the lunch bill evenly. Ed chooses a hot dog. The marginal cost to Joe then of ordering a hamburger instead of a hot dog is a. $1. b. $2. c. $2.50. d. $3.

ANS: A PTS: 1 OBJ: Suggested Quiz

4. The expression, "There's no such thing as a free lunch," implies that

a. everyone has to pay for his own lunch. b. the person consuming a good must always pay for it. c. opportunity costs are incurred when resources are used to produce goods and services. d. no one has time for a good lunch anymore.

ANS: C PTS: 1 OBJ: Suggested Quiz

5. Which one of the following states a central element of the economic way of thinking?

a. Scarce goods are priceless. b. Incentives matter--human choice is influenced in predictable ways by changes in personal

costs and benefits. c. The realism of the assumptions is the best test of an economic theory. d. When deciding how to allocate time, the concept of opportunity cost is meaningless.

ANS: B PTS: 1 OBJ: Suggested Quiz

6. Which of the following is most clearly consistent with the basic postulate of economics

regarding the reaction of people to a change in incentives. a. Farmers produce fewer bushels of wheat in response to an increase in the price of wheat. b. People will buy more milk at a price of $2 per gallon than at $1 per gallon.

Full file at http://testbankexpress.CH/test-bank-for-microeconomics-private-and-public-choice-13th-edition-james-d-gwartney.html

2 Chapter 1/The Economic Approach

c. People will buy less gas if the price of gas increases by $.20 per gallon. d. People will consume more beef if the price increases from $1 to $2 per pound.


7. Which one of the following is a positive economic statement?

a. An increase in the minimum wage will reduce employment. b. The minimum wage should be increased. c. Social justice will be served by increasing the minimum wage. d. Thoughtful people oppose an increase in the minimum wage.


8. The basic difference between macroeconomics and microeconomics is that

a. macroeconomics is concerned with the forest (aggregate markets), while microeconomics is concerned with the individual trees (subcomponents).

b. macroeconomics is concerned with policy decisions, while microeconomics applies only to theory.

c. microeconomics is concerned with the forest (aggregate markets), while macroeconomics is concerned with the trees (subcomponents).

d. opportunity cost is applicable to macroeconomics, and the fallacy of composition relates to microeconomics.


9. Economic analysis assumes that

a. individuals act only out of selfish motives. b. although individuals are at times selfish and at times unselfish, only their selfish actions

may be predicted. c. people are basically humanitarian, and their actions are, therefore, impossible to predict. d. changes in the personal benefits and costs associated with a choice will exert a predictable

influence on human behavior.


10. While waiting in line to buy two tacos at 75 cents each, and a medium drink for 80 cents,

Jordan notices that the restaurant has a value meal containing three tacos and a medium drink all for $2.50. For Jordan, the marginal cost of purchasing the third taco would be a. zero. b. 20 cents. c. 75 cents. d. 80 cents.

ANS: B PTS: 1 OBJ: Suggested Quiz

11. Adam Smith believed that if people were free to pursue their own interests,

a. public interest would be served quite well. b. less would be produced than if altruism were the guiding principle. c. they would generally apply their talents to unproductive activities that would generate

little value to society. d. they would have little incentive to undertake productive activities.


Chapter 1/The Economic Approach 3

ANS: A PTS: 1 TOP: Outstanding Economist: The Importance of Adam Smith, the Father of Economic Science

12. Modern economics as a field of study is usually thought to have begun with

a. Adam Smith and the writing of The Wealth of Nations. b. David Ricardo and the writing of The Principles of Political Economy and Taxation. c. Aristotle and the writing of Politics and Ethics. d. Moses and the Ten Commandments.


13. According to Adam Smith, individual self-interest

a. is a powerful force for economic progress when it is directed by competitive markets. b. is a powerful force for economic progress when individuals are wisely directed by a strong

central government. c. is a major factor in retarding the economic progress of humankind. d. could be either a positive or negative force for economic progress, depending on the moral

influences of political leaders.


14. The basic ingredients in any economic decision are

a. scarcity and choice. b. surpluses and shortages. c. market prices and the use of efficient production methods. d. needs and wants.

ANS: A PTS: 1 TOP: What Is Economics About?

15. Economic choice and competitive behavior are the result of

a. scarcity. b. poverty. c. public ownership of resources. d. private ownership of resources.


16. For the typical student, taking an introductory course in economics should

a. turn the student into an economist. b. teach the student solutions to most social problems. c. teach the student how to answer complex social questions. d. help the student learn to rationally analyze social problems. e. All of the above are correct.

ANS: D PTS: 1 TOP: What Is Economics About?



17. 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.


18. By scientific method we mean

a. the use of modern electronic testing equipment to understand the world. b. the dispassionate development and testing of theories about how the world works. c. the use of controlled laboratory experiments to understand the way the world works. d. finding evidence to support preconceived theories about how the world works.

ANS: B PTS: 1 TOP: What Is Economics About?

19. Economists make assumptions in order to

a. mimic the methodologies employed by other scientists. b. minimize the number of experiments that yield no useful data. c. minimize the likelihood that some aspect of the problem at hand is being overlooked. d. focus their thinking on the essence of the problem at hand.


20. Which of the following is the best definition of economics?

a. An investigation of the quantities and prices of the various goods produced by the nations of the world.

b. A study of why inflation and unemployment periodically plague the U.S. economy. c. An analysis of how individuals and societies deal with the problem of scarcity. d. An examination of the role that money plays in the economy. e. A study of how goods and services are distributed throughout the world.

ANS: C PTS: 1 TOP: What Is Economics About?

21. Economics is primarily the study of

a. why people like to make money. b. the management of a business. c. the choices people make as the result of scarcity. d. how to make money in the stock market.



a. how individuals make choices because of scarcity. b. how to succeed in business. c. how to make money in the stock market. d. how the values and preferences of people are formed.




23. Economics is primarily the study of a. how to make money in the stock market. b. how to operate a business successfully. c. the allocation of scarce resources in an effort to satisfy wants that are virtually unlimited. d. the methods business firms use to reduce their costs of production.


24. Economics is a

a. natural science. b. social science. c. physical science. d. fine art, like music and painting.

ANS: B PTS: 1 TOP: What is Economics About?

25. Some individuals or families can become completely saturated with a service such as

television. This suggests that a. wants are limited b. desires for a single commodity can be satisfied but then the focus will switch to other

goods and services c. a highly productive economy may someday be able to satisfy all human desires d. resources are not truly fixed in supply as we generally assume e. scarcity does not exist


26. Which of the following are scarce?

a. pleasant working conditions b. low-cost housing c. free time for recreation d. all of the above


27. Which of the following are scarce?

a. time for leisure activities b. crude oil c. automobiles d. all of the above


28. Which of the following is not scarce?

a. air b. bubble gum c. compact discs d. diamonds




29. Which of the following is not scarce? a. textbooks b. computers c. seawater d. gold


30. When economists say a good is scarce, they mean

a. there are only a limited number of consumers who would be interested in purchasing the good.

b. the human desire for the good exceeds the amount freely available from nature. c. most people in poorer countries do not have enough of the good. d. the production of the good has no opportunity cost for society.


31. When economists say goods are scarce, they mean

a. consumers are too poor to afford the goods and services available. b. consumers are unwilling to buy goods unless they have very low prices. c. goods are generally freely available from nature in most countries. d. the desire for goods and services exceeds our ability to produce them with the limited

resources available.


32. To an economist, scarcity means that

a. the human desire for goods exceeds the amount freely available from nature. b. there are some things on which it is impossible to put a price, such as human life. c. many goods are worth an infinite amount and, therefore, should be supplied free to

everyone. d. people are generally too poor to afford the goods and services available.


33. Scarcity occurs when

a. the prices of goods are set too low. b. the desire for goods and services exceeds our ability to produce them with the limited

resources available. c. consumers are too poor to afford the goods and services available. d. people own too many resources.


34. Scarcity implies that

a. consumers are too poor to afford the goods and services available. b. consumers are willing to purchase more of a good at the current price than suppliers are

willing to produce. c. it is impossible to completely fulfill the desire for goods and services with the limited

resources available. d. consumers would be willing to buy the same quantity of a good at a higher price.




35. If scarcity were eliminated, a. all goods would be free. b. no one would have to make any choices. c. everyone could have all they want at no cost. d. all of the above are true.


36. Goods are scarce because

a. of greed; if human beings were not so selfish, goods would not be scarce. b. the desire for goods is far greater than their availability from nature. c. of competition; if people were not so competitive, it would be possible to satisfy people's

desire for material goods. d. of private property; if things were not owned privately, scarcity could be eliminated.


37. Which of the following is true of resources?

a. Resources are inputs used to produce goods and services. b. Human resources reflect the skills and productive knowledge of human beings. c. With the passage of time, investment activities can increase the availability of resources. d. All of the above are true.


38. Ex-London School of Economics student Mick Jagger sang, "You can't always get what you

want, but if you try sometime, you just might find you can get what you need." Another statement of the basic economic principle expressed in this lyric is that a. rational decisions are not always possible. b. you can allocate your resources to what gives you the highest value. c. you can create the supply to meet your own demand. d. you can maximize social welfare by making optimal decisions.


39. Capital is a term economists use to refer to

a. man-made resources used to produce other goods and services. b. resources that are available in nature such as mineral deposits. c. money that is used to consume goods and services, to distinguish it from money that is

saved. d. the value of the best alternative to an action.


40. The three major categories of resources are

a. human resources, physical resources, and natural resources. b. scarce resources, capital resources, and abundant resources. c. financial resources, global resources, and local resources. d. common resources, private resources, and capital resources.




41. In economics, man-made resources such as tools, equipment, and structures that are used to produce other goods and services are referred to as a. consumer goods. b. capital. c. marginal goods. d. infrastructures.


42. Which of the following best describes the difference between an objective concept and a

subjective concept? a. A subjective concept is a fact based on observation that is not subject to personal opinion,

while an objective concept is based on personal preferences and value judgments. b. An objective concept is a fact based on observation that is not subject to personal opinion,

while a subjective concept is based on personal preferences and value judgments. c. A subjective concept relates to issues in microeconomics, while an objective concept

relates to issues in macroeconomics. d. An objective concept can only be illustrated in words, while a subjective concept can

usually be illustrated with a graph.


43. A fact based on observable phenomenon that is not influenced by differences in personal

opinion is called a. an objective concept. b. a subjective concept. c. an unintended consequence. d. ceteris paribus.


44. An opinion based on personal preferences and value judgments is called

a. an objective concept. b. a subjective concept. c. an unintended consequence. d. ceteris paribus.


45. "If income were redistributed in favor of the poor, we would eliminate scarcity." The preceding

statement is a. essentially correct. b. incorrect, because shortages are always present. c. incorrect; it fails to recognize that poverty will be present as long as resources are scarce. d. incorrect; it confuses the elimination of poverty with the elimination of the constraint

imposed by scarcity.


46. In economics, the term "scarcity" refers to the fact that

a. everything really worthwhile costs money. b. even in wealthy countries like the United States, some people are poor.



c. no society can produce enough to satisfy fully the desires of people for goods and services.d. sometimes shortages of a good arise when its price is set below the market equilibrium.


47. Criteria for rationing goods and resources must be established because of

a. scarcity. b. the use of capitalism as the method of economic organization. c. the inability of politicians to develop efficient forms of economic organization. d. shortages resulting from government inefficiency.


48. If a good is scarce,

a. there will be shortages of it if the good is rationed by markets. b. the good will have a price in a market setting. c. there will be enough of the good freely available from nature to satisfy the human desire

for it. d. all of the above are true.


49. Every economy must ration goods in some way because of

a. overpopulation. b. poorly-performing markets. c. the income gap between rich and poor. d. scarcity.


50. When a good is scarce,

a. this indicates that producers are withholding output so they can raise the price of the good.b. some method must be used to allocate the good among users. c. price is one way to ration the good. d. both b and c are correct. e. all of the above are correct.


51. Criteria for rationing goods and resources must be established because of

a. the law of comparative advantage. b. the use of capitalism as a form of economic organization. c. the inability of politicians to develop efficient forms of economic organization. d. scarcity imposed by nature.


52. If people willingly give up something (such as money) for a good, then the good is

a. not an economic good. b. scarce. c. available in an unlimited supply. d. a luxury good.




53. When price is the rationing criterion, individuals have a strong incentive to a. ignore the wishes of others when making decisions about how to use their resources. b. provide services to others in exchange for income. c. avoid exchanges because in every exchange there will be one person who gains and

another who loses. d. substitute promises for the consistent delivery of a quality product.


54. To abstract from reality in an economic model means that:

a. we include only a few of the essential aspects of reality. b. the economic study surveys only a very limited period of time. c. we include only those elements which support our hypothesis. d. the model includes every aspect of the real world. e. the model examines the actions of the consumers in the absence of producers and the

government.


55. The economic way of thinking is

a. a set of historical generalizations that indicates what goods should be produced. b. a body of statistical data that indicates how an economy should be organized. c. a set of basic concepts that helps one understand human choices. d. a set of complex, highly abstract theories that provides persons skilled in statistics with the

information necessary to tell others what choices they should make.

ANS: C PTS: 1 TOP: The Economic Way of Thinking

56. Economic theory

a. is a set of definitions, postulates, and principles assembled in a manner that helps make cause-and-effect relationships clear in economics.

b. is like a guidebook in that it points out what to look for. c. provides economists with a common language and way of thinking about how the world

works. d. is all of the above.

ANS: D PTS: 1 TOP: The Economic Way of Thinking

57. It has been said that all economists share a common ground. What is this common ground?

a. the fallacy of composition b. economic theory based on the postulate that the effects of a policy will be good if the

intentions of the policy makers are good c. the use of mathematics to explain highly aggregated markets d. a theoretical framework based on the premise that incentives influence behavior in a

predictable manner


58. Which of the following is part of the economic way of thinking?

a. Opportunity costs will always be incurred when scarce resources are used to produce a good.

b. When the cost of an option increases, individuals will be less likely to choose it.



c. In addition to their immediate direct effects, economic actions often generate secondary effects that are observable only after the passage of time.

d. All of the above are part of the economic way of thinking.


59. Which of the following is part of the economic way of thinking?

a. The accuracy of the assumptions is the best test of an economic theory. b. When an option becomes more expensive, people will be less likely to choose it. c. The value of a good can be determined objectively by measuring the amount of labor

required for its production. d. All of the above.

ANS: B PTS: 1 TOP: The Economic Way of Thinking

60. The expression "There's no such thing as a free lunch" means

a. if one person gains, someone else must lose. b. each person must pay for exactly what he or she receives. c. the use of resources to produce a good has an opportunity cost because of scarcity. d. you cannot have a free lunch at the expense of someone else.


61. "There is no such thing as a free lunch." This statement best reflects the fact that

a. consumers are unwilling to pay for a good unless it provides them with value. b. an opportunity cost is always present when scarce resources are used to produce a good. c. it generally requires enormous effort to search out the best place to eat lunch. d. the value of a good to consumers will decrease as they have more of it.


62. 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.


63. Which of the following statements is correct?

a. If the buyer of a good gains, the seller must lose an equal amount. b. The value of goods is objective; it is equal to the cost of supplying the good. c. Opportunity costs will always be incurred when scarce resources are used to produce a

good. d. Changes in incentives generally have no effect on human behavior.


64. Rational choice requires that opportunity cost be

a. ignored in making a decision. b. considered for individual choices, but not for societal choices. c. computed, but not actually used in making a decision.



d. considered as part of making a decision. e. used as the sole decision criterion.


65. During a war, governments will sometimes draft people, most of whom are presently

employed, into the army. An economist, computing the real cost of the war, would be sure to include which of the following items? a. the value of the civilian goods no longer produced by the new soldiers b. the cost of feeding and clothing the new soldiers c. the dollar cost of the payroll d. the higher prices of civilian goods due to wartime shortages e. the cost of transporting the soldiers to combat

ANS: A PTS: 1 TOP: The Economic Way of Thinking

66. Harold, a delivery man, washes and irons his own shirts. Sarah, his boss, sends her clothes to a

laundry. Which is the most plausible economic explanation for this difference? a. Harold must enjoy ironing more than Sarah does. b. Harold must be better at ironing than Sarah is. c. The opportunity cost of ironing is greater for Harold. d. Sarah has a higher opportunity cost of laundering her clothes than Harold does.


67. Household production is more likely to occur when

a. it requires many specialized resources b. technology makes it more costly than market production c. tax avoidance is undesirable d. less control over the final product is desirable e. the opportunity cost of household work is relatively small

ANS: E PTS: 1 TOP: The Economic Way of Thinking

68. The opportunity cost of an action is

a. the monetary payment the action required. b. the total time spent by all parties in carrying out the action. c. the value of the best opportunity that must be sacrificed in order to take the action. d. the cost of all alternative actions that could have been taken, added together.


69. The highest valued alternative that must be given up in order to choose an option is called

a. opportunity cost. b. utility. c. scarcity. d. disutility.


70. 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. Full file at http://testbankexpress.CH/test-bank-for-microeconomics-private-and-public-choice-13th-edition-james-d-gwartney.html


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.


71. 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.


72. For a college student who wishes to calculate the true costs of going to college, the costs of

room and board 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.


73. Which of the following is true?

a. Human choice is generally not influenced by changes in incentives. b. What is true for the individual must be true for the group as a whole. c. Using scarce resources to meet one need reduces our ability to meet needs in other areas. d. The economic way of thinking stresses that good intentions usually lead to sound

economic policy.


74. "The money and resources currently being devoted to the War on Terrorism reduces the

quantity of other goods that we are able to supply." This statement most clearly illustrates which of the following? a. the fallacy of composition. b. the idea that association is not causation. c. the concept of opportunity cost. d. the difference between positive and normative economics.


75. If the government provides free schooling for all students, an economist would say education is

a. a free good, having no cost. b. scarce even though its cost is paid by taxpayers rather than by students. c. an example of a good that is no longer scarce. d. all of the above.




76. "The resources now going into the War on Terrorism and into improved airport security would save more lives if they were invested in medical research." This statement most clearly reflects which of the following? a. The best test of an economic theory is its ability to predict. b. There is no such thing as a free lunch--the use of scarce resources always has an

opportunity cost. c. selfishness; if people were not selfish, we could have more of everything. d. The value of goods can be determined objectively.


77. Which one of the following statements is most clearly inconsistent with the economic way of

thinking? a. "If you give a person a fish, you feed him for a day; if you teach him to fish, you feed him

for life." b. "If the government provides a good free to citizens, then the opportunity cost of the good

is zero." c. "If you derive the same satisfaction from a hamburger as a chicken sandwich, it makes

sense to have the cheaper alternative for lunch." d. "When it is cheaper to have someone else mow your lawn than to mow it yourself, hiring

someone to do the job is consistent with economizing behavior."


78. The benefit (or satisfaction) that an individual expects to derive from an activity is called

a. opportunity cost. b. utility. c. marginal cost. d. scarcity.


79. In economics the term utility refers to

a. the subjective benefit or satisfaction a person expects to receive from a choice or course of action.

b. the number of possible uses for a resource. c. the fact that human desire for goods is unlimited while the resources available to meet

those desires is limited. d. the highest valued alternative that must be sacrificed when a choice is made.


80. The economizing problem is essentially one of deciding how to make the best use of

a. limited resources to satisfy limited wants. b. unlimited resources to satisfy limited wants. c. limited resources to satisfy virtually unlimited wants. d. unlimited resources to satisfy unlimited wants.


81. Deciding how to make the best use of limited resources to satisfy virtually unlimited wants is

known in economics as a. economizing behavior. b. the fallacy of composition.



c. ceteris paribus. d. the fallacy that good intentions do not guarantee the desired outcome.


82. When economists say an individual displays economizing behavior, they simply mean that she

is a. making a lot of money. b. buying only those products that are cheap and of low quality. c. learning how to run a business more effectively. d. seeking the lowest cost method to accomplish her objectives.


83. Which of the following is most consistent with economizing behavior?

a. If you derive the same satisfaction from eating pizza and eating ice cream, it makes no difference which one of the two you choose.

b. Before voting, you should invest the time and energy to become fully informed on all of the issues and candidates.

c. It never makes sense to hire someone to do something for you that you could do yourself. d. If you get the same satisfaction from a chicken sandwich and a salad, you should purchase

the one that costs the least.


84. Which of the following is most consistent with economizing behavior?

a. If you get the same satisfaction from a hamburger and a fish sandwich, you should purchase the one that costs the most.

b. Even if you know how to paint, hiring someone to do the job is consistent with economizing behavior, if your opportunity cost is high enough.

c. If the government provides a good free to citizens, the opportunity cost of the good is zero.d. If you get the same satisfaction from going to the opera and going to an art museum, it

makes no difference which you choose.


85. When economists say an individual has made a rational choice, they mean the individual has

a. made the choice by weighing their own subjective costs and benefits. b. made a "good" decision, one that reasonable outside observers would have also made. c. neglected to consider the unintended consequences arising from their decision. d. ignored their own personal interests and made the choice that is best for society.


86. Jim enjoys the feeling of wind in his hair enough to ride his motorcycle without a helmet, even

though he fully realizes the potential for injury it creates by not wearing one in the unlikely event he is in an accident. To an economist, Jim is a. making an irrational choice. b. making a rational choice. c. not fully considering the personal costs and benefits of his decision. d. not responding to the incentives he faces.




87. A rational decision maker takes an action if and only if a. the marginal benefit of the action exceeds the marginal cost of the action. b. the marginal cost of the action exceeds the marginal benefit of the action. c. the marginal cost of the action is zero. d. the opportunity cost of the action is zero.


88. When economists say that people choose rationally, this means

a. they gather all relevant information before making their purchases b. once a pattern of behavior has been established, people tend to become set in their ways c. people respond in predictable ways to changes in costs and benefits d. people rarely make errors when they are permitted to make transactions e. once made, decisions are never reversed


89. Which of the following is an example of a rational decision?

a. Jim enjoys the feeling of wind in his hair enough to ride his motorcycle without a helmet, even though he fully realizes the potential for injury it creates by not wearing one in the unlikely event he is in an accident.

b. Doris, a burglar who breaks into houses, decides to break into the house at 265 Elm Street, rather than the house next door because the house next door has a sign in the yard that says "home protected by a security system."

c. Brandon, a drug user, chooses to buy his cocaine from Pablo, because Pablo's cocaine is as good as the cocaine from other dealers, but Pablo has lower prices.

d. All of the above are examples of rational choices.


90. Doris, a burglar who breaks into houses, decides to break into the house at 265 Elm Street,

rather than the house next door because the house next door has a sign in the yard that says "home protected by a security system." To an economist, Doris is a. making an irrational choice. b. making a rational choice. c. not fully considering the personal costs and benefits of her decision. d. not responding to the incentives she faces.


91. When an individual weighs her options and makes a choice that maximizes her benefit at the

minimum cost, economists refer to this as a process of a. rational decision making. b. objective decision making because the value of goods is determined objectively. c. marginal management analysis. d. random decision making.


92. Which of the following is often referred to as the basic postulate of economics?

a. Individuals act only out of selfish motives. b. Incentives matter--individuals respond in predictable ways to changes in personal costs

and benefits. Full file at http://testbankexpress.CH/test-bank-for-microeconomics-private-and-public-choice-13th-edition-james-d-gwartney.html


c. The accuracy of the assumptions is the best test of an economic theory. d. The value of a good is objective; it is equal to the cost of producing the good.


93. The economic way of thinking stresses that

a. greed is the primary motivation for human action. b. as the benefits of an option increase, people will be more likely to choose that option. c. an objective value can be attached to physical goods. d. as the cost of an option decreases, people will be less likely to choose that option.


94. The most fundamental concept in economics is that

a. changes in incentives influence behavior in a predictable way--people will be less likely to choose an option as it becomes more expensive.

b. changes in incentives generally do not influence human behavior. c. goods that are provided by government are free for society. d. individuals generally do not consider other alternatives when making a choice.



a. Changes in personal costs and benefits will exert a predictable impact on the choices of human decision makers.

b. Only direct monetary costs matter in making decisions. c. If a good is provided free to an individual, its production will not consume valuable scarce

resources. d. Secondary effects are seldom of importance in economics.



a. changes in personal costs and benefits generally fail to exert much impact on behavior. b. incentives matter--individuals respond in predictable ways to changes in personal costs

and benefits. c. if one individual gains from an economic activity, then someone else must lose and in the

same proportion. d. if a good is provided by the government, its production will not consume valuable scarce

resources.



a. greed is the primary motivation for human action. b. only material goods lead to happiness. c. an objective value can be attached to physical goods. d. as the cost of an option increases, people will be less likely to choose that option.


98. The basic postulate of economics indicates that changes in incentives influence

a. the actions of producers but not consumers. b. the actions of consumers but not producers.



c. the choices of individuals only when they buy and sell goods in the marketplace. d. the choices of individuals with regard to a wide range of activities, including those

generally perceived as social or political.



a. Changes in personal costs and benefits will exert a predictable influence on the choices of people.

b. If one individual gains from an economic activity, then someone else must lose. c. If a good is provided free to an individual by government, its production will not consume

valuable scarce resources. d. If the intentions behind a policy are good, you can be assured that the outcome will be

desirable.


100. Which of the following is not consistent with the basic postulate of economics that incentives

matter? a. Farmers produce fewer bushels of wheat in response to an increase in the price of wheat. b. A politician votes against a proposal because most of his constituents oppose it. c. People drive less because of higher gas prices. d. People buy more milk in response to a reduction in the price of milk.


101. The economic way of thinking suggests that if the government imposed a $500 tax on owners

of red automobiles, a. fewer red automobiles would be produced and sold. b. more red automobiles would be produced and sold. c. there would be no change in the number of red automobiles produced and sold. d. red automobiles would cease to exist.


102. If a college enforces a new policy where anyone caught cheating is immediately expelled, the

basic postulate of economics suggests that a. cheating will be completely eliminated. b. fewer students will attempt to cheat. c. the amount of cheating will be unaffected. d. any of the above is possible because student behavior is unpredictable.


103. Which of the following groups would most likely benefit from a law that is extremely tough on

those who drink and drive? a. truck drivers b. taxi drivers c. bartenders d. doctors and nurses




104. In Latavia, cultural pressures cause voluntary donations to orphanages to be very large; in Slobovia, people make smaller donations. If the governments of both countries suddenly grant a tax break to those donating money to orphanages, the basic postulate of economics predicts that donations a. in both nations will increase. b. will increase in Latavia but not in Slobovia. c. will increase only in Slobovia, where people care about taxes, but not in Latavia, where

compassion is more important. d. are unlikely to change in either nation, since voluntary donations are not an economic

decision.


105. Which one of the following statements most accurately indicates the basic motivation for

behavior? a. Individuals are motivated primarily by selfish desires; thus, personal costs and benefits

influence their actions. b. Individuals are motivated primarily by humanitarian concerns; therefore, personal costs

and benefits exert little influence on most of their actions. c. Individuals are motivated by a variety of forces; however, changes in personal benefits

and costs influence the choices of both selfish and humanitarian individuals. d. Individuals are motivated by a variety of forces; however, changes in personal benefits

and costs affect behavior only when individuals are motivated by selfishness.


106. Economic analysis assumes that

a. people act only out of selfish motives. b. people are motivated by a variety of forces; however, changes in personal benefits and

costs affect behavior only when individuals are motivated by selfishness. c. people are basically unselfish, and their actions are, therefore, difficult to predict. d. changes in the personal benefits and costs associated with an activity will exert a

predictable influence on the behavior of both those who are selfish and those who are unselfish.


107. In economics, the term marginal refers to

a. the change or difference between two alternatives. b. man-made resources as opposed to natural resources. c. the satisfaction a consumer receives from a good. d. holding everything else constant in the analysis.


108. When deciding whether to buy a second car, the economic way of thinking indicates that the

purchaser should compare a. the benefits expected from two cars with the cost of both. b. the additional benefits expected from a second car with the cost of the two cars. c. the dollar cost of the two cars with the potential income that the cars will generate. d. the additional benefits of the second car with the additional cost of the second car.




109. A marginal change usually 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.


110. People are willing to pay more for a diamond than for a bottle of water because

a. the marginal cost of producing an extra diamond far exceeds the marginal cost of producing an extra bottle of water.

b. the marginal benefit of an extra diamond far exceeds the marginal benefit of an extra bottle of water.

c. producers of diamonds have a much greater ability to manipulate diamond prices than producers of water have to manipulate water prices.

d. water prices are held artificially low by governments, since water is necessary for life.


111. Your professor loves her work, teaching economics. She has been offered other positions in the

corporate world that would increase her income by 25 percent, but she has decided to continue working as a professor. Her decision would not change unless a. the marginal cost of teaching increased. b. the marginal benefit of teaching increased. c. the marginal cost of teaching decreased. d. the marginal benefit of a corporate job decreased.


112. If a decision maker uses marginal analysis, then the relevant costs are the

a. full costs of a particular activity or product. b. fixed costs which do not vary with the extra activity or output. c. profits obtained on the activity or product. d. average costs for a particular activity or product. e. additional costs of a particular activity or product.

ANS: E PTS: 1 TOP: The Economic Way of Thinking

113. Standby passengers on airlines who pay low rates for seats benefit from the low price. How are

the airlines affected? a. They lose, because the standby passengers do not cover the full cost of the seats. b. They gain, because the additional revenue covers the "fixed costs" of the flight. c. They lose, because the gain of the passengers must necessarily come at the expense of the

airline. d. They benefit as long as the additional revenue from the passengers exceeds the marginal

cost.


114. If an airline company has several empty seats on a flight and the full price of an air ticket is

$500 and the marginal cost per passenger is $100, then it will be profitable for the airline to a. charge a stand-by passenger no less than the full fare of $500. b. charge a stand-by passenger less than $100.



c. charge a stand-by passenger more than $500. d. charge a stand-by passenger more than $100. e. fill the seats at the last minute for any price.


115. To say that people make marginal decisions means that

a. they usually wait until the last minute before making a decision to buy b. they weigh the additional costs and additional benefits of various activities before they

make a decision c. most people just barely get by on the incomes they earn and live from day to day on the

very edge of subsistence d. they consider the total cost and benefit of various activities before they make a purchase


116. Harry, a wheat farmer, is deciding whether or not to add fertilizer to his crops. If he adds 1

pound of fertilizer per acre, the value of the resulting crops rises from $80 to $100 per acre. According to marginal analysis, Harry should add fertilizer if it costs less than a. $12.50 per pound. b. $20 per pound. c. $80 per pound. d. $100 per pound.


117. According to marginal analysis, you should spend more time studying economics if the extra

benefit from an additional hour of study a. is positive. b. outweighs the extra cost. c. exceeds the benefits of the previous hour of study. d. will raise your exam score.


118. While waiting in line to buy two tacos at 80 cents each and a medium drink for 90 cents, Jordan

notices that the restaurant has a value meal containing three tacos and a medium drink all for $3. For Jordan, the marginal cost of the third taco would be a. zero. b. 50 cents. c. 80 cents. d. $1.


119. While waiting in line to buy one cheeseburger for $1.50 and a medium drink for $1.00, Sally

notices that she could get a value meal that contains both the cheeseburger and medium drink and also a medium order of fries for $2.75. She thinks to herself, "Is it worth the extra 25 cents to get the medium fries?" To an economist, Sally's decision is an example of a. marginal decision making. b. basing decisions on total, rather than marginal, value. c. an unintended consequence. d. the fallacy of composition.




120. Just before class, Jim tells Stuart, "Stuart, you shouldn't skip class today because you have paid tuition to enroll in the class." Stuart ignores Jim's advice, and instead makes the decision of whether to attend based on what he feels he'd be missing that day in class relative to his value of the extra time he could have to finish the video game he is playing. To an economist, Stuart is a. using marginal decision making. b. ignoring the total value of attending class. c. ignoring the concept of opportunity cost. d. committing the fallacy of composition.


121. Susan wishes to buy gasoline and have her car washed. She finds that if she buys 9 gallons of

gasoline at $1.50 per gallon, the car wash costs $1, but if she buys 10 gallons of gasoline, the car wash is free. For Susan, the marginal cost of the tenth gallon of gasoline is a. zero. b. 50 cents. c. $1. d. $1.50.


122. Ralph wants to buy some milk and a box of cereal. If Ralph buys 2 quarts of milk at $1 per

quart, the box of cereal costs 75 cents. If he buys 3 quarts of milk at $1 per quart, the box of cereal is free. For Ralph, the marginal cost of the third quart of milk is a. zero. b. 25 cents. c. 75 cents. d. $1.


123. A firm producing cans buys three tons of aluminum per day at $200 per ton. If it buys four tons

per day, it receives a quantity discount on all units and pays only $175 per ton. The marginal cost of the fourth ton per day is a. $100. b. $175. c. $700. d. $225.


124. A local restaurant offers an "all you can eat" Sunday brunch for $12. Susan eats four servings

but leaves half of a fifth helping uneaten. Why? a. Her marginal value of a serving of brunch has fallen below $12. b. Her marginal value of a serving has fallen below $2.40 ($12 divided by 5 servings). c. Her marginal value of food has fallen to zero. d. The total value she places on brunch today exactly equals $12.


125. A restaurant offers an "all you can eat" lunch buffet for $12. Jim has eaten three servings and is trying to decide whether or not to go back for a fourth. The economic way of thinking suggests that Jim should go back for the fourth serving if and only if a. his marginal benefit of the additional serving is greater than zero. b. his marginal benefit of the additional serving is at least $3.



c. his marginal benefit of the additional serving is $12 or more. d. his total value from the meal exceeds $12.


126. Because information is costly to acquire,

a. people will rationally choose not to become fully informed when making decisions. b. people will generally choose to become as fully informed as possible when making decisions. c. people will generally choose to acquire no information that would be relevant to their

decisions. d. none of the above are true.


127. People are more likely to purchase a consumer ratings magazine that reviews new automobiles

before buying a new car than they are to purchase a consumer ratings magazine that reviews pens and pencils before buying a new pen or pencil. Which of the following best explains this behavior? a. Because the consumer ratings magazine must have a higher price for the issue reviewing

pens and pencils. b. Because the value of the information, in terms of avoiding a mistake on the purchase, is

much higher for an automobile than for a pen or pencil, it is more worthwhile to gather this information.

c. Because people generally do not know which products are reviewed by these consumer magazines.

d. None of the above explain this behavior.


128. Which of the following is consistent with the implications of the economic guidepost that

information is costly to acquire? a. Most people do not know the names of their legislators in the U.S. Congress, but those

same individuals are likely to know the names of all the cast members on a popular TV show.

b. In considering purchases, people are more likely to purchase a consumer ratings magazine that reviews new automobiles before buying a car, but are unlikely to purchase a consumer ratings magazine that reviews pens and pencils before buying a pen or pencil.

c. When shopping for something like a new calculator, people will generally not spend the time to do price comparisons at all of the stores in town that sell calculators.

d. All of the above are consistent with the economic way of thinking.


129. Economic analysis is based on the premise that

a. people act only out of selfish motives. b. people are always fully informed when making choices. c. changes in the personal benefits or costs of an action influence behavior in a predictable

way. d. most human behavior is unpredictable.




130. The decision makers described by economic analysis a. economize when seeking information. b. must have essentially perfect knowledge to make choices. c. will seek as much information as they can get. d. generally ignore the cost of seeking information.


131. In economics, secondary effects refer to the

a. best alternative that must be forgone as the result of a choice. b. unintended consequences of a change that are not immediately identifiable but are felt

only with time. c. immediate and visible intended consequences of a change. d. impact of the scarcity of resources on the scarcity of the goods that are produced with

those resources.


132. The unintended consequences of an economic change that are not immediately identifiable but

are felt only with time are known in economics as a. opportunity costs. b. marginal effects. c. secondary effects. d. scarcity constraints.


133. Which of the following could be considered to be a secondary effect caused by making drugs

such as cocaine illegal? a. The higher prices that result from making them illegal results in more property theft by

users to afford the drugs. b. The usage of police and law enforcement resources to enforce drug laws leads to lower

enforcement (and thus a higher amount) of other crimes. c. Without the ability to use the legal system to enforce contracts, violence often results

when one party to a drug deal does not live up to their end of the bargain, thus the amount of violence increases by making drugs illegal.

d. All of the above would be considered secondary effects of making drugs illegal.


134. Economists are generally opposed to tariffs or other restrictions on imported goods because of

the negative secondary effects they create that more than offset the benefits to employment in the domestic industry. Which of the following could be considered a secondary effect of these trade restrictions? a. The price to consumers of the good in question will be higher as a result of the restriction,

meaning consumers will be worse off. b. As consumers must spend more money to purchase the good, there will be employment

losses in other domestic industries as consumers cut back on their spending on other things. c. Because there is a link between a country's imports and its exports, less imports from other

countries will result in lower domestic employment in export industries. d. All of the above.




135. "Mediocre economists often consider only the immediate apparent effects of a change, whereas a good economist will also consider effects that may only become observable over time." This statement most clearly emphasizes a. the fallacy of composition. b. economizing behavior. c. the importance of secondary effects. d. the fact that association is not causation.


136. The value of a good is

a. subjective. b. objective. c. determined by a government statistical agency. d. based on the cost of production.


137. Do all valuable items have price tags?

a. No, because some valuable items have no opportunity cost. b. Yes, because everything has its price. c. Yes, because price is the measure of opportunity cost. d. No, some have no explicit price on them. e. Yes, because only items that can be sold in markets have value.


138. The value of a good

a. depends on many factors, including who uses it and under what circumstances. b. is determined by the cost of producing it. c. depends on the labor necessary to supply the good. d. can be measured objectively by a survey of manufacturers of the good.


139. The fact that some people love tomatoes while others dislike them illustrates that

a. the value of a good is subjective. b. the value created by a good does not depend on who consumes it. c. the value of a tomato cannot be determined by the person consuming it. d. tomatoes have a value that is determined by their cost of production rather than by the

value to the consumer of the tomatoes.


140. All but one of the following are elements of the economic way of thinking. Which one is not

part of the economic way of thinking? a. Incentives matter. b. The value of goods can be determined objectively. c. Economic thinking is marginal thinking. d. Information is scarce.




141. What is the best test of an economic theory? a. the accuracy of the assumptions behind the theory b. the ability of the theory to predict real-world events c. the implications of the theory for current public policy d. how much mathematical detail is behind the theory


142. What is the best test of an economic theory?

a. its eloquence b. the plausibility of its assumptions c. its ability to predict real-world events, patterns, and changes d. whether it produces implications that are favored by the researcher


143. The difference between a positive economic statement and a normative statement is that

a. a positive statement must be true; a normative statement is often not true b. a normative statement must be true; a positive statement is often not true c. a positive statement can be proved; a normative statement cannot d. a normative statement can be proved; a positive statement cannot e. a positive economic statement is a moral judgment; a normative economic statement is not

a moral judgment

ANS: C PTS: 1 TOP: Positive and Normative Economics

144. The difference between positive economic statements and normative economic statements is

that a. positive statements are based on opinion while normative statements are based on fact b. positive statements are true and normative statements are often false c. positive statements are often false and normative statements are true d. positive statements are based on fact while normative statements are based on opinion e. both b and d.

ANS: D PTS: 1 TOP: Positive and Normative Economics

145. Which of the following is a positive economic statement?

a. Too much government spending is the biggest problem facing the U.S. economy. b. Creating jobs is the most serious problem facing the U.S. economy. c. Raising taxes provides additional revenue that should be used to finance health care. d. If taxes are over 50 percent of national income, job creation falls.

ANS: D PTS: 1 TOP: Positive and Normative Economics


a. Government control of rent is a fair way to help poor people afford housing. b. Government control of rent keeps landlords from charging too much rent. c. Government control of rent decreases the number of new apartments constructed. d. Government control of rent is an injustice.




147. The Secretary of Labor states that wage rates in the country have risen by 2 percent this past year. The head of a local labor union states that wage gains should have been higher. The Secretary's statement is a(n) ____ economic statement, and the labor head's statement is a(n) ____ economic statement. a. normative; normative b. normative; positive c. positive; normative d. positive; positive e. proper; improper


148. Which of the following is an example of a normative economic statement? a. The inflation rate in the United States decreased from 4 percent last year to 3 percent this

year as a result of lower energy prices. b. The economy grew at an annual rate of 5 percent during the first quarter of this year. c. If two automobile companies merge, it is likely that the price of automobiles will rise. d. An increase in international trade benefits some workers but hurts others. e. The minimum wage should be increased so that low income workers can afford to keep up

with the cost of living.

ANS: E PTS: 1 TOP: Positive and Normative Economics

149. Which of the following most clearly distinguishes between positive and normative economics? a. Positive economics is the study of what ought to be; normative economics is concerned

with the facts. b. Positive economics is the study of the facts; normative economics is concerned with what

ought to be. c. Positive economics is the study of supply and demand in narrowly defined markets such as

the market for shoes; normative economics focuses on highly aggregated markets such as the market for all consumer products.

d. Positive economics is the study of goods that are scarce; normative economics is concerned with goods that are not scarce.

ANS: B PTS: 1 TOP: Positive and Normative Economics

150. Positive economics a. postulates relationships among economic variables that are potentially refutable by real-

world events. b. is strictly quantitative and is, therefore, of little value to policy makers. c. will usually indicate which economic policy is best. d. is the same as normative economics.

ANS: A PTS: 1 TOP: Positive and Normative Economics

151. Which of the following is true? a. Positive economics deals with how people react to changes in benefits, and normative

economics deals with how people react to changes in costs. b. Positive economic statements are testable, but normative statements are not. c. Positive economic statements involve value judgments while normative economics

focuses on whether a policy will achieve its intended objectives. d. Positive economic statements focus on policy issues while normative economics focuses

on economic theory.




152. Which of the following represents a positive statement? a. A higher income tax rate will reduce the amount of time that people spend working. b. Teenage unemployment should be reduced. c. We should raise the standard of living for the elderly. d. A decrease in tax rates is needed to help the poor.



a. The federal minimum wage should be raised to $6.50 per hour. b. The United States spends too much on anti-terrorism efforts. c. An increase in investment will lead to a higher rate of economic growth. d. Economics is twice as interesting to study as philosophy.



a. Raising the federal minimum wage to $6.50 per hour will cause the rate of unemployment to increase.

b. The United States spends too much on welfare. c. Philosophy is not as interesting as economics. d. Cold weather is much more enjoyable than warm weather.


155. Which one of the following is a positive economic statement?

a. People should be more concerned with the safety of air travel. b. Areas that have enacted public school vouchers have seen an improvement in the

performance level of students. c. The sales tax on food should be repealed because it unfairly burdens those with low

incomes. d. Something must be done to halt the rapid rise in health care costs.



a. A tax on butter will reduce the quantity of butter sold. b. The rich do not pay enough in taxes. c. People in poor countries should not work for less than $5 per hour. d. All of the above are positive economic statements.



a. Americans should eat more butter. b. Butter tastes better than margarine. c. If the price of butter increases, the quantity purchased by consumers will decline. d. Producers of margarine should not be permitted to package their product in a manner that

makes it look like butter.




158. Which of the following is a positive economic statement? a. Reducing unemployment should be the highest priority of the federal government. b. An increase in unemployment benefits will increase the unemployment rate. c. Corporations should be prohibited from laying off workers during a recession. d. Congress should increase unemployment benefits during a recession.


159. Which of the following is a normative statement?

a. A decrease in price leads to an increase in quantity consumed. b. Incomes grow more rapidly in high-tax states than low-tax states. c. People would be better off if government expenditures were higher. d. People will buy less butter at $1.50 per pound than they will at $1 per pound.


160. Which of the following is a normative economic statement?

a. Congress should increase the legal minimum wage. b. An increase in the legal minimum wage would cause unemployment to increase. c. An increase in the legal minimum wage would cause unemployment to decrease. d. An increase in the legal minimum wage would lead to more equality in the distribution of

income.


161. Which of the following is a normative economic statement?

a. If we doubled the size of welfare payments, we would reduce the number of homeless persons.

b. Companies should be concerned with more than just their profits. c. An increase in spending on airport security will reduce the number of hijackings. d. If social security were to be privatized, workers would earn a higher rate of return on their

retirement contributions.


162. The statement, "Violent crime has decreased in the last five years,"

a. is obviously wrong and, therefore, cannot be a positive statement. b. is normative since it can be answered by simply looking at the facts. c. is positive because it is testable. d. is not very interesting because all normative issues are of little importance.


163. "The standard of living is too low for many individuals in the United States. The government

should implement policies designed to achieve a more equal distribution of income." The preceding statements are a. positive economic statements based on cause and effect. b. normative economic statements based on value judgments. c. based on the fallacy of composition argument. d. an empirically validated economic principle.




164. The statement, "John buys more of good X as his income increases, ceteris paribus," means: a. John's income is being held constant. b. John's purchases of good X are being held constant. c. John's income and purchases of this good are being held constant. d. John's income is the only influence that is being allowed to change. e. the price of this good is being allowed to change.

ANS: D PTS: 1 TOP: Pitfalls to Avoid in Economic Thinking

165. When economists use the term ceteris paribus, they are indicating that

a. the relationship between two economic variables cannot be determined. b. the analysis is true for the individual but not for the economy as a whole. c. all other variables except the ones specified are assumed to be constant. d. their conclusions are based on normative economics rather than positive economic

analysis.

ANS: C PTS: 1 TOP: Pitfalls to Avoid in Economic Thinking

166. The term ceteris paribus means that

a. everything is changing. b. all variables except those specified are constant. c. no one knows which variables will change and which will remain constant. d. the basic postulate of economics does not apply for the case being considered.

ANS: B PTS: 1 TOP: Pitfalls to Avoid in Economic Thinking

167. Economists use the term ceteris paribus to indicate that

a. supply and demand are in balance. b. other things are assumed to be constant. c. the analysis is true for the individual but not for the economy as a whole. d. their conclusions are based on normative economics rather than positive economic

analysis.


168. Which one of the following statements is correct?

a. Policymakers have good intentions and therefore their proposals will create good outcomes.

b. Potential secondary effects do not need to be considered when deciding whether to implement a new government program.

c. A good outcome is guaranteed from a government program if it is created with good intentions.

d. Government programs can be implemented with good intentions but can lead to undesirable outcomes because of unintended consequences.


169. Senator DuMonde favors a government program that he believes will help save endangered

species. Economic analysis indicates that a. because Senator DuMonde has good intentions, his new program will have the desired

results. b. Senator DuMonde's new program could have unintended consequences that might result in

an outcome different from what was intended. Full file at http://testbankexpress.CH/test-bank-for-microeconomics-private-and-public-choice-13th-edition-james-d-gwartney.html


c. regardless of any secondary effects, costs should not be considered when designing environmental legislation.

d. because Senator DuMonde's proposal is a government program, it will not have an opportunity cost.


170. Legislation to protect red-cockaded woodpeckers created incentives that resulted in premature

harvesting of trees the woodpeckers like to nest in. This is an example of which of the following? a. Association is not causation. b. the fallacy of composition c. the use of ceteris paribus conditions in economic analysis d. Good intentions do not always lead to desirable outcomes.


171. Your friend notices that U.S. auto production and U.S. population growth have moved together

over several decades. He reasons that one way to slow population growth is for the government to order the auto makers to cut back on production. You gently point out to him that he a. is correct only when the economy is in a recession b. has mistakenly inferred causation from observed correlation c. has ignored secondary effects d. has committed the fallacy of composition e. is correct only when the United States enjoys economic growth


172. "As soon as I announced my 'get tough on crime' policy, criminals got scared and the crime rate

went down." Suppose that the lower crime rate was actually caused by freezing cold temperatures in January--it was just too cold for anybody to be out robbing other people. Which fundamental economic mistake did the politician make? a. believing that what's good for one person is good for the whole group (the fallacy of

composition) b. failing to take into account the benefits of crime (the payoff fallacy) c. believing that association is the same as causation d. failing to understand the theory of comparative advantage


173. A student noted that the football team won by a larger margin when the third-string played

more minutes. Therefore, he recommended that the third-stringers become the first team. His conclusion was probably erroneous because he a. confused positive and normative analysis. b. committed the fallacy of composition. c. failed to recognize that association is not causation. d. confused macroeconomics with microeconomics.


174. "After every fall election, the weather starts to turn cold, therefore elections cause cold

weather." This statement a. confuses positive and normative analysis. b. commits the fallacy of composition.



c. fails to recognize that association is not causation. d. confuses macroeconomics with microeconomics.


175. Someone notices that sunspot activity is high just prior to recessions and concludes that

sunspots cause recessions. This person has a. confused association and causation. b. misunderstood the ceteris paribus assumption. c. used normative economics to answer a positive question. d. built an untestable model.

ANS: A PTS: 1 TOP: Pitfalls to Avoid in Economic Thinking

176. "Every year the football season opens and, within a few months, winter starts. The opening of

the football season causes winter." These statements reflect a. the fallacy of composition. b. a failure to recognize that association is not causation. c. a failure to consider the problem of secondary effects. d. sound logical reasoning.


177. The fallacy of composition is the fallacious view that

a. economic activity will benefit everyone. b. what is true for the individual will also be true for the group. c. it is possible for the whole to be greater than the sum of the individual parts. d. association does not necessarily indicate causation.


178. The fallacy of composition is the incorrect view that

a. everything else is always held constant when a change occurs. b. a small change in an economic variable will have unrecognizable but significant

consequences on the economy. c. when two events are associated, the one observed first must have caused the second. d. if something is true for an individual, then it must also be true for the group.


179. Which of the following best illustrates the fallacy of composition?

a. If Mr. Johnson had more money, he could afford to buy more goods. b. If Ms. Dawes stood up at a basketball game, she could get a better view of the game; if

everyone stood up at a basketball game, everyone could have a better view of the game. c. If the price of bread rose, consumers would buy less; if consumers bought less bread, the

price of bread would rise. d. High housing prices cause people to buy less housing, but an increase in income might

cause them to buy more housing.




180. Which of the following best illustrates the fallacy of composition? a. If the price of a product rises, the quantity produced will decline. b. The average wage rate tends to increase at approximately the same rate as inflation; hence,

wage increases must cause inflation. c. Resources are scarce; therefore, there is no such thing as a free lunch. d. If Susan had more money she could buy more. If everyone had more money they could

buy more.


181. "If Tom had twice as much money, he could consume twice as much. If everyone had twice as

much money, they could consume twice as much." This quote illustrates a. the difference between positive and normative economics. b. the fallacy of composition. c. that association is not causation. d. the law of unintended consequences.


182. The difference between microeconomics and macroeconomics is that

a. microeconomics involves mathematical relationships, and macroeconomics is predominantly a verbal analysis.

b. microeconomics deals with the principle of scarcity, and macroeconomics deals with the problem of poverty.

c. microeconomics deals with narrowly defined units, and macroeconomics focuses on highly aggregated markets.

d. microeconomics is normative, and macroeconomics is positive.


183. The difference between microeconomics and macroeconomics is that

a. microeconomics deals with more specifically defined units, and macroeconomics addresses highly aggregated concepts.

b. microeconomics involves mathematical relationships, and macroeconomics is predominantly a verbal analysis.

c. microeconomics deals with the principle of scarcity, and macroeconomics deals with the problem of poverty.

d. microeconomics deals with highly aggregated markets, and macroeconomics focuses on narrowly defined units.

ANS: A PTS: 1 TOP: Pitfalls to Avoid in Economic Thinking

184. The branch of economics that focuses on how behavior affects outcomes in highly aggregated

markets, such as the markets for labor or consumer products, is called a. normative economics. b. macroeconomics. c. microeconomics. d. consumer economics.




185. The branch of economics that focuses on the conduct of affairs within narrowly defined units, such as households or business firms, is called a. macroeconomics. b. socioeconomics. c. applied economics. d. microeconomics.



a. Scarcity and poverty are basically the same thing. b. Poverty implies that some basic level of need has not been attained. c. Scarcity is the result of prices being set too high. d. All of the above are true.

ANS: B PTS: 1 OBJ: Coursebook

187. Economics is the study of how

a. individuals make choices because of scarcity. b. to succeed in business. c. to make money in the stock market. d. the morals and values of people are formed.

ANS: A PTS: 1 OBJ: Coursebook

188. When an economist states a good is scarce, she means that

a. production cannot expand the availability of the good. b. it is rare. c. desire for the good exceeds the amount that is freely available from nature. d. people would want to purchase more of the good at any price.

ANS: C PTS: 1 OBJ: Coursebook

189. When economists say an individual displays economizing behavior, they simply mean that the

individual is a. making a lot of money. b. purchasing only those products that are cheap and of low quality. c. learning how to run a business more effectively. d. making choices to gain the maximum benefit at the least possible cost.

ANS: D PTS: 1 OBJ: Coursebook

190. "The national debt is too large. The government must stop spending so much money." This

statement is a. a normative statement. b. a positive statement. c. a testable hypothesis. d. both b and c.




191. Which of the following is a guidepost to economic thinking? a. The value of a good can be objectively measured. b. Individuals should never make a decision without having complete information. c. Incentives matter. d. Goods are scarce for the poor but not for the rich.


192. Competitive behavior

a. occurs as a reaction to scarcity. b. occurs only in a market system. c. occurs only when the government allocates goods and services. d. always generates waste.


193. In economics, the statement, "There is no such thing as a free lunch," refers to which of the

following? a. Individuals must always pay personally for the lunch they consume. b. Production of a good requires the use of scarce resources regardless of whether it is

supplied free to the consumers. c. Restaurant owners would never give away free lunches. d. All good theories are testable.


194. "If income were redistributed in favor of the poor, we would eliminate scarcity." The preceding

statement is a. essentially correct. b. incorrect because scarcity has already been eliminated among the poor in wealthy

countries such as the United States. c. incorrect; it fails to recognize that poverty will be present as long as resources are scarce. d. incorrect; it confuses the elimination of poverty with the elimination of the constraint

imposed by scarcity.


195. Which of the following is not scarce?

a. an individual's time b. air c. pencils d. automobiles


196. People make decisions at the margin. Thus, when deciding whether to purchase a second car,

they would compare a. the total benefits expected from two cars with the costs of the two cars. b. the additional benefits expected from a second car with the total cost of the two cars. c. the dollar cost of the two cars with the potential income that the two cars will generate. d. the additional benefits of the second car with the additional costs of the second car.




197. The basic difference between macroeconomics and microeconomics is that a. macroeconomics looks at how people make choices, and microeconomics looks at why

they make those choices. b. macroeconomics is concerned with economic policy, and microeconomics is concerned

with economic theory. c. macroeconomics focuses on the aggregate economy, and microeconomics focuses on

small components of that economy. d. macroeconomics is associated with the fallacy of composition, and microeconomics has

little to do with the fallacy of composition.


198. The highest valued alternative that must be given up in order to choose an action is called its

a. opportunity cost. b. utility. c. scarcity. d. ceteris paribus.


199. Which of the following actions is consistent with the basic economic postulate (the guidepost)

that incentives matter? a. Consumers buy fewer potatoes when the price of potatoes increases. b. A politician votes against a pay raise for himself because most of his constituents are

strongly opposed to it and would vote against him in the next election. c. Farmers produce less corn because corn prices have declined. d. All of the above.


200. If Susan bought nine gallons of gasoline at $1.50 per gallon, the car wash cost $1, but if she

bought 10 gallons of gasoline, the car wash was free. Given that Susan is going to get the car wash, the marginal cost of the tenth gallon of gasoline is a. zero. b. $.50. c. $1.00. d. $1.50.


201. Positive economics differs from normative economics in that

a. positive economics deals with how people react to changes in benefits, and normative economics deals with how people react to changes in costs.

b. positive economic statements are testable, and normative statements are not. c. positive economic statements tell us what we should be doing, and normative economics

tells us what we should have done. d. positive economic statements focus on the application of the theory, and normative

economic statements are theoretical.


202. Which of the following represents a normative statement?

a. Incentives matter. b. The temperature in this room is 120 degrees.



c. It is too hot in this room. d. People will buy less butter at $1.50 per pound than they will at $1.00 per pound.



a. changes in personal costs and benefits will exert a predictable influence on the choices of human decision makers.

b. only direct monetary costs matter in making decisions. c. if a good is provided free to an individual, its production will not consume valuable scarce

resources. d. secondary effects are not important to consider when making decisions.



a. The federal minimum wage should be raised to $6.50 per hour. b. The United States spends too much on national defense. c. Higher rates of investment lead to higher rates of economic growth. d. Economics is more interesting to study than history.


205. When economists use the term ceteris paribus, they indicate

a. the causal relationship between two economic variables cannot be determined. b. the analysis is true for the individual but not for the economy as a whole. c. all other factors are assumed to be constant. d. their conclusions are based on normative economics rather than positive economic analysis.


206. In economics, the benefit (or satisfaction) that an individual gets from an activity is called

a. scarcity. b. utility. c. opportunity cost. d. ceteris paribus.



a. how to make money in the stock market. b. how to find lower cost methods of production. c. the choices we must make among alternatives because of scarcity. d. the proper form of industrial structure for the United States.

ANS: C PTS: 1 OBJ: On-line Practice

208. Which of the following are NOT scarce?

a. time for leisure activities b. computers c. compact discs d. the air we breathe

ANS: D PTS: 1 OBJ: On-line Practice



209. The expression "There's no such thing as a free lunch" means a. in an exchange, if one person gains, someone else must lose. b. each person must pay for exactly what he or she receives. c. the use of resources to meet one need means that those resources can no longer be used to

meet another need. d. in an exchange, if one person gains, someone else must lose and equal amount.


210. The highest valued alternative option that must be given up in order to choose an action is

called its a. utility. b. opportunity cost. c. capital. d. ceteris paribus

ANS: B PTS: 1 OBJ: On-line Practice

211. Positive economics

a. postulates a relationship that is potentially refutable and then seeks to determine whether the stated relationship is correct.

b. uses value judgments to determine which policy alternatives should be chosen. c. is of no use to policy makers because it reflects the value judgments of the researcher. d. is the scientific study of "what ought to be" among economic relationships.

ANS: A PTS: 1 OBJ: On-line Practice

212. The fallacy of composition is the incorrect view that

a. decisions are always made at the margin. b. incentives matter only to those who behave selfishly. c. if something is true for an individual, then it must also be true for the group. d. the value of a good can be objectively measured by its cost of production.


213. The basic difference between macroeconomics and microeconomics is that

a. microeconomics is concerned with aggregate markets and the entire economy, while macroeconomics is concerned with specific individual markets.

b. macroeconomics is concerned with policy decisions, while microeconomics applies only to theory.

c. microeconomics is concerned with individual markets and the behavior of people and firms, while macroeconomics is concerned with aggregate markets and the entire economy.

d. macroeconomics is concerned with positive economics, while microeconomics is concerned with normative economics.


214. When the Hometown football team is winning by a lot of points after halftime, they often play

their second and third team players. One of the coaches notices that when the third team plays that Oklahoma wins by a bigger margin than when just the first team plays. He recommends that the third team see more playing time as a result. What is wrong with his way of thinking? a. association is not causation b. it is a violation of ceteris paribus



c. the fallacy of composition d. good intentions do not guarantee desirable outcomes



a. changes in personal costs and benefits generally do not influence human behavior. b. incentives matter--when an option becomes less costly, people will be more likely to

choose it. c. if one individual gains from an economic activity, then someone else must lose. d. goods provided by government do not consume valuable scarce resources since

government activity is not part of the market economy.



a. reducing unemployment should be the highest priority of the federal government. b. a reduction in the payroll tax will reduce the unemployment rate. c. corporations should be prohibited from laying off workers during a recession. d. the current unemployment rate is too high.


217. The Latin phrase "ceteris paribus" means

a. that one event causes another. b. that one event is associated with, but not caused by, another. c. that other potential causes are assumed to remain constant. d. the way things should be.


218. Which of the following was a key belief of Adam Smith?

a. he felt that human goodness would provide adequate goods and services to everyone. b. he stressed that limited exchange and command economies would prevent the exploitation

of the poor. c. he believed that individuals pursuing their own interests would direct economic activity in

the most advantageous way. d. he lectured about the importance of gold and silver in providing a stable monetary system.


219. If you win the lottery this would be great for you, but if everyone simultaneously won the

lottery this wouldn't be nearly as good, why? a. association is not causation b. it is a violation of ceteris paribus c. the fallacy of composition d. what appear to be positive outcomes in society are actually normative.


220. The consequences of an economic change that are not immediately identifiable but are felt only

with the passage of time are known in economics as a. opportunity costs. b. utility curves.



c. secondary effects. d. comparative advantages.


221. Ralph wants to buy some milk and a box of cereal. If Ralph buys 4 gallons of milk at $3.00 per

gallon, the box of cereal costs $2.00. If he buys 5 gallons of milk, the box of cereal is free. For Ralph, the marginal cost of buying a fifth gallon of milk is: a. zero. b. $1.00. c. $2.00. d. $3.00.


ESSAY

222. If economics is correct in its assumption that people are rational, why then would anyone

choose to smoke cigarettes?

ANS: Even though the harmful effects of cigarette smoking are documented, more than 20 percent of the U.S. adult population continues to smoke. The economic model of rational choice suggests that individuals weigh the marginal benefit of smoking an additional cigarette (the pleasure obtained) against the marginal costs (the pecuniary cost, the price of the cigarette, and the risk of being afflicted by smoking-related diseases, discounted by the probability). Since the likelihood of getting a smoking-related disease increases with age, it is not surprising that more people elect to give up the habit as they get older.

PTS: 1 OBJ: Critical Thinking

223. A radio station gives "free money" to those listeners whose names are drawn and announced

over the airwaves from postcards the listeners sent into the radio station. Is the money really free for the listener?

ANS: While most students can identify the monetary cost of the postcard and stamp, we also must consider the opportunity cost of listening to the radio. It is true that we can do other activities while the radio is on and listen attentively when a name is drawn and announced over the airwaves. But there's also the opportunity cost of not being able to listen to another station, one that might offer more preferred programming.


224. Why would a radio station give money to listeners? Does this violate the economic way of

thinking?

ANS: Radio stations do surveys to see what types of prizes listeners want (for example, cars, boats, vacations, etc.). Overwhelmingly, people say they want cash. A radio station that gives away money attracts listeners, and the more listeners a station has, the more it can charge advertisers.



The owners of the radio station clearly believe the revenue this activity generates, in terms of advertising dollars, exceeds the money given away.


225. Joe observes that a car in 1925 sold for an average of $500 versus $20,000 for a 2005 model.

He concludes that 2005 cars must be 40 times better than 1925 cars. What's wrong with this way of thinking?

ANS: Poor Joe has made several errors. First, a 1925 car differs substantially from a 2005 car. As the saying goes, Joe is comparing apples and oranges. Second, the value of the dollar has declined; Joe, therefore, is using as his measure a unit that has changed sizes. This is like measuring one room with a 50-inch stick and another room with a 20-inch stick. We can give both measures in terms of sticks, but they are not very comparable.


226. Evaluate this statement: "People engaged in economizing behavior will always buy the lowest

priced item they can find."

ANS: As long as price is the only factor, we would expect people to buy the lowest priced product. However, once we consider quality, ease of operation, performance, durability, looks, etc., we can see why people would not necessarily buy the lowest priced item. While people generally seek products that yield the most benefits relative to costs, a product that can provide additional benefits would lead to a willingness to pay a higher price.


227. Homeowners can deduct interest payments on their mortgages from their federal income tax. If

this deduction were removed, how would the housing market be affected?

ANS: The deductibility of these interest payments is an attractive feature of home ownership. If this deduction were removed, we would expect fewer people choosing to own their own homes. Additionally, we would expect to see more families in rental housing.


228. If people are self-interested, why does anyone give money to public radio?

ANS: Since people can listen to public radio without having to contribute, we know this can create a funding problem. However, since the economic concept of enlightened self-interest is broader than a narrow, selfish view, we would see people making this choice as contributing to their own interests. These people consider public radio good for their community. They value their community's well-being and, therefore, support public radio.




229. When Mother Theresa won the Nobel Peace Prize, the monetary award was well in excess of $100,000. Did she accept the money? If so, what did she do with it?

ANS: Mother Theresa used the money to help the poor, whom she spent a lifetime assisting. While we consider Mother Theresa to have been one of the most unselfish of people, it is clear that she could have gained more of what she valued if she had more money.


230. Who is more likely to drive carelessly, Sue in her 1980 Ford with bad brakes or Sally, who has

a 2005 BMW with all the most recent safety options?

ANS: On the surface, we might conclude that Sally will be more careful since she appears to have more to lose (a higher priced car), but insurance likely will cover any monetary loss. Most people value their life and health more than material possessions; because of this, we expect Sue to be more careful due to her unsafe car. Sally can afford to take more risks since her car is in better condition and has the latest safety features.


231. A popular video program, used to teach primary school children about economics, defines

scarcity as "when you don't have enough of something." Evaluate this definition based on your understanding of the scarcity concept.

ANS: This definition is a bit simplistic for college understanding. The video uses the example of three hats and four children to assert a scarcity of hats. We would more properly view this as a shortage of hats created because the hats, as presented, have no price. The shortage can be eliminated but scarcity cannot. Scarcity is the fundamental concept from which economics derives. Besides resources, virtually all other things, including your time, are scarce. Your textbook's definition will serve you better than the one from the video.



807

Microeconomics Special Topic 1—Government Spending and Taxation

MULTIPLE CHOICE

1. Between 1960 and 2008, the share of federal spending allocated to national defense

a. declined sharply, while the share allocated to health care increased substantially. b. rose sharply, while the share allocated to health care declined substantially. c. was relatively constant, while the share allocated to health care declined modestly. d. declined modestly, while the share allocated to health care was relatively constant.


2. How much does it cost to tax a dollar of revenue away from the private sector and transfer it to

the government to finance a government program? a. one dollar b. less than one dollar because the administration of and compliance with the tax laws creates

jobs for people c. more than a dollar because collection of the taxes requires resources that would otherwise

be available for private sector production d. more than a dollar because of the excess burden resulting from the elimination of

productive exchanges by the taxes e. Both c and d are correct.

ANS: E PTS: 1 OBJ: Suggested Quiz

3. Real (adjusted for inflation) federal spending per person in the United States

a. has increased by approximately 10 percent per decade during the last 225 years. b. increased more rapidly during the nineteenth century than during the twentieth century. c. in 2006 was approximately 70 times the level of 1916. d. increased rapidly during the first half of the twentieth century but has changed very little

since 1950.


4. Compared to the situation prior to 1980, the top marginal personal income tax rate imposed on

the rich is now substantially a. lower and so is the share of the revenue collected from them. b. higher and so is the share of the revenue collected from them. c. lower, but the share of the revenue collected from them is now higher. d. higher, but the share of the revenue collected from them is now lower.


5. Government expenditures as a share of the U.S. economy are

a. the largest in the world. b. the smallest in the world. c. smaller than most Western European countries but larger than a number of high-growth

Asian economies. d. larger than Canada, France, and the United Kingdom but slightly smaller than Germany and Italy.



808 ST01/Government Spending and Taxation

6. Total government spending (federal, state, and local) sums to approximately a. 10 percent of the U.S. economy. b. 20 percent of the U.S. economy. c. one-third of the U.S. economy. d. one-half of the U.S. economy.

ANS: C PTS: 1 TOP: Government Expenditures

7. Measured as a share of the economy, government spending

a. has been between 10 and 15 percent of the U.S. economy since 1930. b. has been between 20 and 25 percent of the U.S. economy since 1930. c. rose from less than 10 percent in 1929 to over 35 percent in 2008. d. declined from more than 50 percent in 1929 to approximately 25 percent in 2008.


8. Government expenditures for Social Security and unemployment benefits are examples of

a. government consumption. b. government investment. c. government purchases. d. transfer payments.

ANS: D PTS: 1 TOP: Government Expenditures

9. What percentage of the total government expenditures of the United States is undertaken at the

federal level? a. approximately 20 percent b. approximately 40 percent c. approximately 60 percent d. approximately 80 percent


10. In 2008, federal expenditures on income transfers, health care, national defense, and interest on

the national debt accounted for a. less than 20 percent of federal spending. b. about 40 percent of federal spending. c. approximately half of federal spending. d. more than four-fifths of federal spending.


11. During the first 125 years of the United States,

a. there were no constitutional constraints on the spending of the federal government. b. real spending per person by the federal government rose by a factor of 60. c. most of the government spending was undertaken at the state and local levels. d. most of the government spending was undertaken at the federal level.



ST01/Government Spending and Taxation 809

12. Compared to the situation during the first 125 years of the United States (1790-1915), today total government expenditures are ____ share of the economy, and a greater proportion of those expenditures take place at the ____ level(s). a. a smaller; federal b. about the same; federal c. a larger; federal d. a larger; state and local



a. In 1916, the per person real government expenditures were approximately 60 times greater than in 1800.

b. Prior to 1929, government expenditures at the state and local levels were substantially smaller than federal expenditures.

c. Real federal spending per person was approximately 70 times greater in 2008 than in 1916. d. All of the above are true.



a. Real federal spending per person was approximately 50 times higher in 1900 than 1800. b. Real federal spending per person was approximately 70 times higher in 2006 than 1916. c. Real federal spending per person grew slowly under the Reagan Administration during the

1980s, but it increased rapidly under the Clinton administration in the 1990s. d. In recent years, government expenditures at the state and local levels have been greater

than government spending at the federal level.

ANS: B PTS: 1 TOP: Government Expenditures

15. During the last four decades, the composition of federal spending has

a. been virtually unchanged, but federal spending as a share of GDP has declined substantially.

b. been virtually unchanged, but federal spending as a share of GDP has increased sharply. c. shifted away from national defense and toward spending on income transfers and health

care. d. shifted away from health care and income transfers and toward spending on national

defense.


16. Measured as a share of the economy, government expenditures on ____ have declined during

the last four decades. a. health care b. national defense c. transfer payments d. Social Security benefits

ANS: B PTS: 1 TOP: Government Expenditures

17. During the last four decades, defense expenditures have

a. accounted for approximately one-half of federal expenditures. b. accounted for less than 10 percent of federal expenditures.



c. been increasing as a share of federal expenditures. d. been declining as a share of federal expenditures.


18. In 2008, spending on four items-income transfers (including Social Security), health care,

national defense, and interest on the national debt-accounted for a. approximately 25 percent of federal spending. b. approximately 40 percent of federal spending. c. slightly more than half of federal spending. d. approximately 87 percent of federal spending.


19. In 1960, spending on income transfers and health care accounted for 21.5 percent of the federal

budget. In 2008, these two items accounted for a. less than 15 percent of the federal budget. b. approximately 25 percent of the federal budget. c. approximately 35 percent of the federal budget. d. approximately 57 percent of the federal budget.


20. As the size of government increases as a share of the economy,

a. the burden of deadweight losses of taxation generally diminishes. b. the rate of return derived from projects undertaken by the government will tend to

increase. c. the government generally becomes more heavily involved in unproductive and even

counterproductive activities. d. the activities of government are generally limited to protective functions such as public

safety , national defense, and provision of a limited set of public goods.


21. When the government borrows funds in order to pay for its current expenditures,

a. the government will have to repay the borrowed funds within five years. b. the government can spend without having to increase taxes, either now or in the future. c. future taxes will have to be higher in order to pay the interest on the borrowed funds. d. the cost imposed on the private sector is virtually eliminated because taxes can remain

constant.

ANS: C PTS: 1 TOP: Taxes and the Finance of Government

22. Which of the following most clearly distinguishes government from a private business?

a. production of goods and services-private businesses produce things; governments do not b. the power to tax c. the hiring of law enforcement employees to protect property rights d. selfishness-the owners and managers of private businesses are selfish; government

officials are not

ANS: B PTS: 1 TOP: Taxes and the Finance of Government



23. Which of the following is the largest source of revenue for the federal government? a. corporate income tax b. payroll tax c. personal income tax d. user charges


24. The administrative, enforcement, and compliance costs of collecting taxes in the United States

sum to a. between 1 and 2 percent of the revenues collected. b. between 5 and 6 percent of the revenues collected. c. between 12 and 15 percent of the revenues collected. d. more than half of the revenues collected.


25. The private sector cost of tax revenues is equal to the

a. tax revenue collected by government from individuals in the economy. b. income that could have been earned by government employees if they had worked in the

private sector. c. difference between government expenditures and tax revenues. d. tax revenue plus the cost of tax compliance and the excess burden of taxation.

ANS: D PTS: 1 TOP: Taxes and the Finance of Government

26. From the viewpoint of the entire economy, the cost of government is

a. equal to the amount of taxes collected. b. greater than the amount of taxes collected. c. less than the amount of taxes collected. d. equal to the level of government expenditures.


27. "I am in favor of increasing the corporate income tax. Businesses should shoulder a larger share

of the tax burden." This statement is a. essentially correct. b. false; businesses already shoulder most of the tax burden in the United States. c. false; economic analysis indicates that the individual should pay more taxes and

businesses less. d. misleading; all taxes, including those levied on businesses, are paid by people.


28. What percentage of personal income tax revenue was collected from the top 1 percent of

earners in 2006? a. less than 10 percent b. approximately 15 percent c. approximately 20 percent d. more than 35 percent




29. In 1980, the top 1 percent of earners paid 19.1 percent of the federal personal income tax. By 2006, the share of this tax collected from the top 1 percent of earners a. had declined to less than 15 percent. b. was still slightly less than 20 percent. c. had risen to approximately 22 percent. d. had risen to approximately 40 percent.


30. During the last 15 years, what has happened to the marginal tax rates imposed on high-income

taxpayers and the personal income tax revenues collected from them? a. Both the rates imposed and the revenues collected from the rich have increased. b. Both the rates imposed and the revenues collected from the rich have declined. c. The tax rates imposed on the rich have declined, but the revenues collected from them

have increased. d. The tax rates imposed on the rich have increased, but the revenues collected from them

have declined.


31. The share of the personal income tax paid by the bottom half of earners

a. rose to an all-time high in 2006. b. was substantially higher in 2006 than during the 1960s and 1970s. c. was substantially lower in 2006 than during the 1960s and 1970s. d. has been relatively constant during the last four decades.


32. How has the share of the personal income tax paid by the rich (the top 1 percent of earners) and

the not-so-well-off (the bottom half of earners) changed during the last four decades? a. The rich now pay a larger share and the not-so-well-off pay a smaller share of the personal

income tax. b. The rich now pay a smaller share and the not-so-well-off pay a larger share of the personal

income tax. c. The share of the personal income tax paid by the rich increased between 1960 and 1980,

but the share of the revenues collected from the rich has declined sharply since 1980. d. The relative shares paid by the rich and the not-so-well-off have been virtually unchanged

during the last four decades.

ANS: A PTS: 1 TOP: Taxes and the Finance of Government

33. The overall federal tax structure is

a. regressive because the average tax rate of those with low incomes is higher than the rate imposed on those with higher incomes.

b. progressive because the average tax rate of those with high incomes is greater than the rate imposed on those with lower incomes.

c. flat because the average tax rate is approximately constant across all income brackets. d. progressive for income levels up to approximately $100,000 but regressive for income

levels above this figure.




34. When the tax structure of a nation is progressive, as real incomes increase, the tax revenues of the government will a. decline. b. increase by the same proportion as the increase in real income. c. increase by a larger proportion than the increase in real income. d. remain unchanged unless legislative action is undertaken.


35. The Earned Income Tax Credit provides a tax credit or rebate to

a. businesses that undertake investment expenditures. b. taxpayers with incomes greater than $100,000. c. persons with low incomes who are working. d. single parent families when the parent stays home to take care of the children.


36. Which of the following countries had the highest level of government expenditures as a share

of GDP in 2007? a. France b. Ireland c. United States d. Australia

ANS: A PTS: 1 TOP: Size of Government: The U.S. versus Other Countries

37. Which of the following countries had the lowest level of government expenditures as a share of

GDP in 2007? a. Germany b. Hong Kong c. Sweden d. France e. United States

ANS: B PTS: 1 TOP: Size of Government: The U.S. versus Other Countries

38. Which of the following countries had the lowest level of government expenditures as a share of

GDP in 2007? a. United States b. Germany c. Sweden d. France

ANS: A PTS: 1 TOP: Size of Government: The U.S. versus Other Countries

39. Increased spending on which of the following items is most likely to increase the size of

government during the years following 2010? a. education b. Social Security and Medicare



c. agricultural subsidies d. transportation (roads and airports)


40. As government becomes larger and larger as a share of the economy, economic growth is likely

to decline because a. taxes are reduced to levels that are inconsistent with economic efficiency. b. governments are involved in many activities for which they are ill-suited. c. tax-transfer activities are reduced and sometimes virtually eliminated. d. governments do not spend enough on the provision of key public goods like education.


41. Economic analysis indicates that growth in the size of government as a share of the economy

will a. always reduce economic growth and reduce the living standards of the citizenry. b. enhance economic growth and lead to higher income levels as it becomes larger and

larger. c. initially promote growth as the government focuses on core functions, but deter growth as

government becomes larger and larger. d. initially reduce economic growth, but eventually government will enhance growth as it

becomes larger and larger.

ANS: C PTS: 1 TOP: Size of Government: The U.S. versus Other Countries

42. Expansion in the size of government relative to the market sector will eventually retard

economic growth because a. larger governments will be more involved in activities for which they are ill-suited. b. the higher taxes to finance a bigger government will lead to larger and larger deadweight

losses from taxation. c. the incentive to engage in innovative activities and respond to change is weaker in

government than in the market sector. d. all of the above are correct.

ANS: D PTS: 1 TOP: Size of Government: The U.S. versus Other Countries

43. Economic theory indicates that, the size of government will be

a. unrelated to economic growth. b. negatively related to economic growth at all possible sizes of government. c. positively related to economic growth at all possible sizes of government. d. positively related to economic growth at small levels of government but is negatively

related to economic growth as government becomes larger and larger.




44. Among the 23 long-standing members of the Organization for Economic Cooperation and Development (OECD), the highest rates of economic growth during recent decades have been achieved by a. Western European countries. b. the countries with the smallest government expenditures as a share of GDP. c. the countries with the largest government expenditures as a share of GDP. d. the countries with the most rapid growth of government expenditures as a share of GDP.


45. OECD data for 1960 through 1999 indicates that a 10 percent increase in government

expenditures as a percent of GDP a. increases economic growth by about 5 percent. b. increases economic growth by about 2 percent. c. has no effect on economic growth. d. reduces economic growth by about 1 percent.


46. At the federal level, which of the following accounts for almost half of all revenue?

a. corporate income taxes b. retail sales taxes c. personal income taxes d. cigarette taxes


47. (I) Sales taxes, income taxes, property taxes, and grants from higher levels of government are

the major sources of state and local revenue in the United States. (II) Including both the excess burden and administration, enforcement, and compliance costs of taxes in the United States, $1 in taxes to the government imposes a cost of somewhere between $1.20 and $1.30 on the economy. a. Both I and II are true. b. I is true; II is false. c. I is false; II is true. d. Both I and II are false.


48. Under the progressive income tax system in the United States, as real incomes rise,

a. a smaller share of income is taxed at higher rates. b. there is no change in the share of income taxed at higher rates. c. a larger share of income is taxed at higher rates. d. none of the above are true.


49. For the first time in almost a century,

a. the rapid growth of federal spending stopped during the 1990s. b. the slow growth of federal spending began to increase during the 1990s.



c. state and local governments spent more than the federal government during the 1990s. d. national defense became the largest category of federal spending in the 1990s.


50. Which of the following is true regarding U.S. federal government expenditures?

a. National defense has fallen from 52.2 percent of the federal budget in 1960 to 21 percent in 2008.

b. Federal expenditures on income transfers and health care have risen from 21.5 percent of the budget in 1960 to 57.7 percent in 2008.

c. Corrected for inflation, the average person today pays more federal taxes in one week than the average person in 1900 paid in an entire year.

d. All of the above are true.


51. One dollar of tax revenue ends up costing citizens in the economy

a. less than one dollar. b. exactly one dollar. c. more than one dollar. d. nothing.


52. In 2006, the income tax payments of the richest 1 percent of Americans accounted for

approximately what percent of all federal income tax revenue? a. 1 percent b. 17 percent c. 40 percent d. 57 percent


53. In 2006, the income tax payments of the poorest 50 percent of Americans accounted for

approximately what percent of all federal income tax revenue? a. 3 percent b. 25 percent c. 50 percent d. 76 percent


54. Estimates from the U.S. Treasury Department suggest that the typical family in the highest

income quintile pays approximately what percent of their total income in federal taxes? a. 6 percent b. 25 percent c. 50 percent d. 76 percent




55. Estimates from the U.S. Treasury Department suggest that the typical family in the lowest income quintile pays approximately what percent of their total income in federal taxes? a. 5 percent b. 25 percent c. 50 percent d. 76 percent


56. Based on estimates from the U.S. Treasury Department, the federal tax structure is

a. highly regressive. b. roughly proportional. c. highly progressive. d. regressive at lower incomes and progressive at higher incomes.


57. Because of which provision in the tax code did more than one-third of all taxpayers either have

a zero tax liability or actually receive money from the IRS in 2006? a. Earned Income Tax Credit b. Standard Deduction c. Marginal Tax Rate d. Families with Low Income Credit


58. Government expenditures as a percent of GDP in the United States

a. are very high in comparison to the rest of the world. b. are smaller than for most other high-income industrial countries. c. are much smaller today than they were a century ago. d. are none of the above.


59. Which of the following most clearly distinguishes government from a private business?

a. the power to tax b. the hiring of educated employees c. the production of goods and services d. the need to make managerial decisions


60. Which of the following correctly expresses the relationship between the size of government and

economic growth? a. Because it is the private sector in which growth occurs, the size of government is generally

unrelated to the rate of economic growth. b. When government is small, an increase in its size may increase economic growth, but beyond

some point, further increases in the size of government will reduce economic growth. c. When government is small, an increase in its size may initially lower economic growth,

but when it becomes large enough, expansions in government generally increase the rate of economic growth.

d. The rate of economic growth appears to be increasing with the size of government for the levels of government that we observe in most major industrialized countries.




61. Which of the following is an example of a transfer payment? a. wages and salaries paid to the employees of the Internal Revenue Service b. purchase of automobiles by a local police department c. agriculture subsidies paid to farmers d. salaries paid to the college professors of state-operated universities



a. Real federal spending per person was approximately 50 times higher in 1900 than 1800. b. Real federal spending per person grew more rapidly during the 19th century than during

the 20th century. c. Real federal spending per person was approximately 60 times greater in 1990 than in

1916. d. Real federal spending per person has decreased significantly since 1964.



a. In 2002, national defense accounted for more than half of federal spending. b. Federal spending on national defense has increase rapidly during the last several decades. c. Federal spending on health care programs such as Medicare and Medicaid has increased

rapidly during the last several decades. d. Federal spending in the aftermath of hurricane Katrina expanded over 50%.


64. Given the current structure of the Social Security and Medicare programs, the retirement of the

baby boom generation during the years following 2010 will be most likely to a. reduce government expenditures on health care and income transfers. b. increase government expenditures on health care and income transfers. c. result in large budget surpluses. d. result in lower tax rates.


65. Compared to 1980, the top marginal federal income tax rate today is

a. substantially lower and the rate structure is less progressive than in 1980. b. substantially lower and the rate structure is more progressive than in 1980. c. substantially higher and the rate structure is less progressive than in 1980. d. substantially higher and the rate structure is more progressive than in 1980.


66. Which of the following countries had the highest level of government expenditures as a share

of GDP in 2007? a. Ireland b. United States c. Sweden d. Australia




67. In 1960, more than half (52 percent) of federal expenditures were for national defense. In 2003, national defense accounted for approximately a. 60 percent of the federal budget. b. 44 percent of the federal budget. c. 29 percent of the federal budget. d. 21 percent of the federal budget.


68. A tax dollar collected from an individual or a business costs the private economy more than a

dollar because a. the administration and enforcement of the tax system is costly. b. record keeping and the other elements of compliance cost are sizable. c. the taxes will eliminate some productive exchanges (and cause people to undertake some

counterproductive activities). d. All of the above are correct.


69. Measured as a share of GDP, the total government expenditures of the United States are

a. larger than any country in the world. b. smaller than any country in the world. c. smaller than the comparable figure for Japan and most Western European countries. d. larger than the comparable figure for Japan and most Western European countries.


70. Which of the following provides the bulk of revenue for the federal government?

a. corporate income taxes and grants from state and local governments b. personal income and payroll taxes c. user charges and funds borrowed from the general public d. corporate income and sales taxes


ESSAY

71. How have the size and functions of government in the United States changed during the last

century?

ANS: During the last century, government has become both larger and more centralized. A century ago, the role of the federal government was limited. It provided national defense and was involved in transportation (construction of roads and canals), but not much else. As recently as 1960, national defense accounted for more than half of the federal expenditures. During the last four decades, federal expenditures for income transfers and health-care programs have grown rapidly. Expenditures on these programs now account for nearly three-fifths of the federal budget, compared to 18 percent for national defense. Therefore, in contrast with its limited function of a century ago, the federal government is now heavily involved in the taxation of some in order to provide income transfers and health care for others, particularly the elderly.




72. As real incomes grow, what happens to federal tax revenues as a share of the economy?

ANS: The tax system of the United States is progressive: taxes take a larger share of the income of those with higher earnings. Because of this progressivity, as incomes grow, more of it will be taxed at higher rates. Thus, the share of income taxed away from citizens will expand as the real incomes of individuals increase. As a result, if there are no changes in tax legislation, taxes will increase as a share of the economy as real incomes grow.


73. How has the structure of the personal income tax changed and the share of taxes paid by

various income groups changed in recent decades?

ANS: Compared to the 1960s and 1970s, the marginal tax rates imposed on those with the highest earnings are now substantially lower. However, even though they now confront lower marginal rates, the share of the personal income tax collected from high income taxpayers is now substantially greater than was true prior to 1980. Because they are now permitted to keep a larger share of their additional income, those with high incomes now have a greater incentive to earn. As they earn more, the revenue losses from the rate reductions are at least partially offset. At the same time, both the personal exemption and standard deduction have been increased. This helps low income taxpayers substantially, and in many cases, it completely eliminates their tax liability. Thus, compared to the 1960s and 1970s, a larger share of the personal income tax revenue is now collected from those with the highest incomes (for example, the top 1 percent of earners) and a smaller share from the bottom half of earners.


74. Discuss how size of government can negatively affect economic growth.

ANS: First, higher taxes and/or additional borrowing will impose an increasing burden of deadweight losses on an economy, as the size of government expands. Second, as government grows relative to the market sector, diminishing returns will reduce the rate of return derived from government activity. Third, the political process is much less dynamic than the market process. Compared to the market, there is less incentive to discover and undertake productive actions (and to refrain from counterproductive activities) in the government sector. Fourth, as government grows, it invariably becomes more heavily involved in the redistribution of income and regulatory activism. In turn, these activities will encourage wasteful rent-seeking.



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