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Test Bank for Essentials of Economics, 7th Edition

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    1 Essentials of Economics, 7e (Hubbard) Chapter 1 Economics: Foundations and Models 1.1 Three Key Economic Ideas 1) Apple assembles most iPhones in China because the lower wages earned by Chinese workers and their experience in electronics manufacturing reduce the costs of assembling iPhones. This is an example of Apple reacting to which of the three key economic ideas? A) People are rational. B) People respond to economic incentives. C) Optimal decisions are made at the margin. D) Firms attempt to maximize revenues. Answer: B Diff: 2 Page Ref: 2 Topic: Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking Special Feature: Chapter Opener: Does Apple Manufacture the iPhone in the United States? 2) In economics, choices must be made because we live in a world of A) unemployment. B) scarcity. C) greed. D) unlimited resources. Answer: B Diff: 1 Page Ref: 4 Topic: Scarcity *: Recurring Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 3) Which of the following statements about scarcity is true ? A) Scarcity refers to the situation in which unlimited wants exceed limited resources. B) Scarcity is not a problem for the wealthy. C) Scarcity is only a problem when a country has too large a population. D) Scarcity only arises when there is a wide disparity in income distribution. Answer: A Diff: 1 Page Ref: 4 Topic: Scarcity *: Recurring Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

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    2 4) The basic economic problem of ________ has always existed and will continue to exist. A) scarcity B) efficiency C) inflation D) recession Answer: A Diff: 1 Page Ref: 4 Topic: Scarcity *: Recurring Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 5) By definition, economics is the study of A) how to make money in the stock market. B) how to make money in a market economy. C) the choices people make to attain their goals, given their scarce resources. D) supply and demand. Answer: C Diff: 1 Page Ref: 4 Topic: Scarcity *: Recurring Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 6) An economic ________ is a simplified version of some aspect of economic life used to analyze an economic issue. A) market B) trade-off C) variable D) model Answer: D Diff: 1 Page Ref: 4 Topic: Economic Models *: Recurring Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

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    3 7) Where do economic agents such as individuals, firms, and nations interact with each other? A) in public locations monitored by the government B) in any arena that brings together buyers and sellers C) in any physical location where people can physically get together for selling goods, such as shopping malls D) in any location where transactions can be monitored by consumer groups and taxed by the government Answer: B Diff: 1 Page Ref: 4 Topic: Markets *: Recurring Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 8) In economics, the term ________ refers to a group of buyers and sellers of a product and the arrangement by which they come together to trade. A) collective B) cooperative C) market D) trade-off Answer: C Diff: 1 Page Ref: 4 Topic: Markets *: Recurring Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 9) Economists assume that individuals A) behave in unpredictable ways. B) will never take actions to help others. C) prefer to live in a society that values fairness above all else. D) are rational and respond to incentives. Answer: D Diff: 1 Page Ref: 5 Topic: People Are Rational *: Recurring Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

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    4 10) Economists assume that rational behavior is useful in explaining choices people make A) because irrational people do not make economic choices. B) even though people may not behave rationally all the time. C) because individuals act rationally all the time in all circumstances. D) even though people rarely, if ever, behave in a rational manner. Answer: B Diff: 2 Page Ref: 5 Topic: People Are Rational *: Recurring Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 11) Economists assume that rational people do all of the following except A) use all available information as they act to achieve their goals. B) undertake activities that benefit others and hurt themselves. C) weigh the benefits and costs of all possible alternative actions. D) respond to economic incentives. Answer: B Diff: 2 Page Ref: 5 Topic: People Are Rational *: Recurring Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 12) Economics does not study correct or incorrect behaviors but rather it assumes that economic agents behave ________, meaning they make the best decisions given their knowledge of the costs and benefits. A) equitably B) rationally C) emotionally D) selfishly Answer: B Diff: 2 Page Ref: 5 Topic: People Are Rational *: Recurring Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

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    5 13) Consider the following statements: a. Car owners purchase more gasoline from a gas station that sells gasoline at a lower price than other rival gas stations in the area. b. Banks do not take steps to increase security since they believe it is less costly to allow some bank robberies than to install expensive security monitoring equipment. c. Firms produce more of a particular DVD when its selling price rises. Which of the above statements demonstrates that economic agents respond to incentives? A) a only B) b only C) c only D) a, b, and c Answer: D Diff: 3 Page Ref: 5 Topic: People Respond to Economic Incentives *: Recurring Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 14) Suppose that some teachers have decided that economic and financial uncertainty have made the prospect of retiring more risky, and therefore carry a higher cost than not retiring. By using all available information as they act to achieve their goals, these teachers are exemplifying the economic idea that A) people are rational. B) people respond to economic incentives. C) optimal decisions are made at the margin. D) equity is more important than efficiency. Answer: A Diff: 2 Page Ref: 5 Topic: People Are Rational *: Recurring Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

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    6 15) Suppose that some investors have decided that economic and financial uncertainty have made the prospect of investing in domestic stock markets more risky than investing in foreign stock markets, and therefore choose to invest in foreign markets. By using all available information as they act to achieve their goals, these investors are exemplifying the economic idea that A) people are rational. B) people respond to economic incentives. C) optimal decisions are made at the margin. D) equity is more important than efficiency. Answer: A Diff: 2 Page Ref: 5 Topic: People Are Rational *: Recurring Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 16) Suppose the U.S. government encouraged new medical school graduates to take over existing practices from doctors wishing to retire by paying both the new and retiring doctors $100,000. These doctors would be exemplifying the economic idea that A) people are rational. B) people respond to economic incentives. C) optimal decisions are made at the margin. D) equity is more important than efficiency. Answer: B Diff: 2 Page Ref: 5 Topic: People Respond to Economic Incentives *: Recurring Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 17) Suppose the U.S. government encouraged consumers to trade in their old automobiles for more efficient, new models by paying up to $5,000 for the old automobiles. These consumers who did trade in their old automobiles to take advantage of the government offer would be exemplifying the economic idea that A) people are rational. B) people respond to economic incentives. C) optimal decisions are made at the margin. D) equity is more important than efficiency. Answer: B Diff: 2 Page Ref: 5 Topic: People Respond to Economic Incentives *: Recurring Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

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    7 18) One reason some manufacturing companies have moved production from China to other overseas locations is because of the tariffs implemented by the Trump administration on Chinese imports. Company managers using all available information, including the tariffs on Chinese imports, when making the decision to move production out of China and into other foreign nations exemplifies which key economic idea? A) People are rational. B) People respond to economic incentives. C) Optimal decisions are made at the margin. D) The market system relies on the principle of voluntary exchange. Answer: A Diff: 1 Page Ref: 5 Topic: People Are Rational Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking Special Feature: An Inside Look: Are Tariffs Bringing Manufacturing Jobs Back Home or Just Raising Prices? 19) The Trump administration promoted the tariffs on Chinese imports as a reason for firms to return manufacturing jobs to the United States from China. The administration's desire to get firms to return manufacturing to the United States through the implementation of tariffs was an attempt to get firms to follow which key economic idea? A) People are rational. B) People respond to economic incentives. C) Optimal decisions are made at the margin. D) The market system relies on the principle of voluntary exchange. Answer: B Diff: 1 Page Ref: 5 Topic: People Respond to Economic Incentives Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking Special Feature: An Inside Look: Are Tariffs Bringing Manufacturing Jobs Back Home or Just Raising Prices?

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    8 20) In 2018, two members of Congress introduced the Stop Bad Employers by Zeroing Out Subsidies Act, which would tax firms whose employees receive government assistance. These members of Congress thought this legislation would give firms a reason to raise employee wages so fewer employees would receive the government assistance. These members of Congress were counting on firms reacting to which key economic idea? A) People are allocatively efficient. B) People respond to economic incentives. C) Optimal decisions are made at the margin. D) The market system relies on the principle of voluntary exchange. Answer: B Diff: 2 Page Ref: 5-6 Topic: People Respond to Economic Incentives Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking Special Feature: Apply the Concept: Would a Congressional Bill Aimed at Increasing the Pay of Low-Wage Workers Backfire? 21) In 2018, two members of Congress introduced the Stop Bad Employers by Zeroing Out Subsidies Act, which would tax firms whose employees receive government assistance. These members of Congress thought this legislation would give firms a reason to raise employee wages so fewer employees would receive the government assistance. Economists at the Center on Budget and Policy Studies believed that the implementation of this legislation would A) result in most employers raising employee wages substantially. B) result in many employers likely seeking to reduce the number of low-wage workers they employ. C) actually reduce the wages of all workers. D) have little to no impact on the number of low-wage workers being employed. Answer: B Diff: 1 Page Ref: 5-6 Topic: People Respond to Economic Incentives Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking Special Feature: Apply the Concept: Would a Congressional Bill Aimed at Increasing the Pay of Low-Wage Workers Backfire?

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    9 22) In economics, the term ________ means "additional" or "extra." A) allocative B) marginal C) equity D) optimal Answer: B Diff: 1 Page Ref: 6 Topic: Optimal Decisions Are Made at the Margin *: Recurring Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 23) A grocery store sells a bag of potatoes at a fixed price of $2.30. Which of the following is a term used by economists to describe the money received from the sale of an additional bag of potatoes? A) marginal revenue B) gross earnings C) pure profit D) marginal costs Answer: A Diff: 1 Page Ref: 6 Topic: Optimal Decisions Are Made at the Margin *: Recurring Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 24) Economists reason that the optimal decision is to continue any activity up to the point where the A) marginal benefit is zero. B) marginal benefit is greater than the marginal cost. C) marginal cost is zero. D) marginal benefit equals the marginal cost. Answer: D Diff: 2 Page Ref: 6 Topic: Optimal Decisions Are Made at the Margin *: Recurring Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

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    10 25) Marginal analysis involves undertaking an activity A) until its marginal costs start declining. B) only when its marginal benefits are positive. C) until its marginal benefits equal marginal costs. D) only if its marginal costs are greater than its marginal benefits. Answer: C Diff: 1 Page Ref: 6 Topic: Optimal Decisions Are Made at the Margin *: Recurring Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 26) The revenue received from the sale of ________ of a product is a marginal benefit to the firm. A) an additional unit B) the total number of units C) no units D) only profitable units Answer: A Diff: 2 Page Ref: 6 Topic: Optimal Decisions Are Made at the Margin *: Recurring Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 27) Making optimal decisions "at the margin" requires A) making decisions according to one's whims and fancies. B) making consistently irrational decisions. C) weighing the costs and benefits of a decision before deciding if it should be pursued. D) making borderline decisions. Answer: C Diff: 1 Page Ref: 6 Topic: Optimal Decisions Are Made at the Margin *: Recurring Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

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    11 28) Making "how much" decisions involves A) calculating the total benefits of the activity and determining if you are satisfied with that amount. B) calculating the total costs of the activity and determining if you can afford to incur that expenditure. C) calculating the average benefit and the average cost of an activity to determine if it is worthwhile undertaking that activity. D) determining the additional benefits and the additional costs of that activity. Answer: D Diff: 2 Page Ref: 6 Topic: Optimal Decisions Are Made at the Margin *: Recurring Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 29) The extra cost associated with undertaking an activity is called A) net loss. B) marginal cost. C) opportunity cost. D) foregone cost. Answer: B Diff: 1 Page Ref: 6 Topic: Optimal Decisions Are Made at the Margin *: Recurring Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 30) DeShawn's Detailing is a service that details cars at the customers' homes or places of work. DeShawn's cost for a basic detailing package is $40, and he charges $75 for this service. For a total price of $90, DeShawn will also detail the car's engine, a service that adds an additional $20 to the total cost of the package. What is DeShawn's marginal benefit if he sells a basic detailing package? A) $35 B) $75 C) He makes a marginal loss of $15, not a marginal benefit. D) The marginal benefit cannot be determined. Answer: B Diff: 2 Page Ref: 6 Topic: Optimal Decisions Are Made at the Margin *: Recurring Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

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    12 31) DeShawn's Detailing is a service that details cars at the customers' homes or places of work. DeShawn's cost for a basic detailing package is $40, and he charges $75 for this service. For a total price of $90, DeShawn will also detail the car's engine, a service that adds an additional $20 to the total cost of the package. What is the marginal cost of adding the engine detailing to the basic detailing package? A) $20 B) $30 C) $60 D) $60 plus the value of his time Answer: A Diff: 2 Page Ref: 6 Topic: Optimal Decisions Are Made at the Margin *: Recurring Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 32) DeShawn's Detailing is a service that details cars at the customers' homes or places of work. DeShawn's cost for a basic detailing package is $40, and he charges $75 for this service. For a total price of $90, DeShawn will also detail the car's engine, a service that adds an additional $20 to the total cost of the package. Should DeShawn continue to offer the engine detailing service? A) Yes, he still makes a profit by selling the engine detailing service with the basic detailing package. B) Yes, but only if he raises the price of the basic detailing package. C) No, his marginal benefit is less than his marginal cost. D) More information is needed for DeShawn to make this decision. Answer: C Diff: 3 Page Ref: 6 Topic: Optimal Decisions Are Made at the Margin *: Recurring Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

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    13 33) Allison's Auto Art is a company that applies pinstripes to vehicles. Allison's cost for a basic 1-color pinstriping job is $35, and she charges $95 for this service. For a total price of $175, Allison will apply a fancier 3-color pinstripe application to an automobile, a service that adds an additional $40 to the total cost of the package. What is Allison's marginal benefit if she sells a basic 1-color job? A) $35 B) $60 C) $95 D) The marginal benefit cannot be determined. Answer: C Diff: 2 Page Ref: 6 Topic: Optimal Decisions Are Made at the Margin *: Recurring Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 34) Allison's Auto Art is a company that applies pinstripes to vehicles. Allison's cost for a basic 1-color pinstriping job is $35, and she charges $95 for this service. For a total price of $175, Allison will apply a fancier 3-color pinstripe application to an automobile, a service that adds an additional $40 to the total cost of the package. What is the marginal cost of moving up from the 1-color application to the 3-color application? A) $35 B) $40 C) $80 D) $175 Answer: B Diff: 2 Page Ref: 6 Topic: Optimal Decisions Are Made at the Margin *: Recurring Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

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    14 35) Allison's Auto Art is a company that applies pinstripes to vehicles. Allison's cost for a basic 1-color pinstriping job is $35, and she charges $95 for this service. For a total price of $175, Allison will apply a fancier 3-color pinstripe application to an automobile, a service that adds an additional $40 to the total cost of the package. Should Allison continue to offer the 3-color pinstripe application? A) Yes, she still makes a profit by selling the 3-color application. B) Yes, but only if she lowers the price of the 1-color application. C) No, her marginal benefit is less than her marginal cost. D) More information is needed for Allison to make this decision. Answer: A Diff: 3 Page Ref: 6 Topic: Optimal Decisions Are Made at the Margin *: Recurring Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking Scenario 1-1 Suppose a cell phone manufacturer currently sells 20,000 cell phones per week and makes a profit of $5,000 per week. A manager at the plant observes, "Although the last 3,000 cell phones we produced and sold increased our revenue by $6,000 and our costs by $6,700, we are still making an overall profit of $5,000 per week so I think we're on the right track. We are producing the optimal number of cell phones." 36) Refer to Scenario 1-1. Using marginal analysis terminology, what is another economic term for the incremental revenue received from the sale of the last 3,000 cell phones? A) gross earnings B) marginal revenue C) sales revenue D) gross profit Answer: B Diff: 1 Page Ref: 6 Topic: Optimal Decisions Are Made at the Margin *: Recurring Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

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    15 37) Refer to Scenario 1-1 . Using marginal analysis terminology, what is another economic term for the incremental cost of producing the last 3,000 cell phones? A) marginal cost B) operating cost C) explicit cost D) Any of the above terms are correct. Answer: A Diff: 1 Page Ref: 6 Topic: Optimal Decisions Are Made at the Margin *: Recurring Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 38) Refer to Scenario 1-1. Had the firm not produced and sold the last 3,000 cell phones, would its profit be higher or lower, and by how much? A) Its profit will be $6,700 higher. B) Its profit will be $700 higher. C) Its profit will be $700 lower. D) Its profit will be $6,000 lower. Answer: B Diff: 2 Page Ref: 6 Topic: Optimal Decisions Are Made at the Margin *: Recurring Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

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