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68) Macroeconomics might study which of the following?

1. A) the causes of domestic unemployment
2. B) decision making undertaken by firms
3. C) decision making undertaken by households
4. D) determinants of the prices of rare goods (e.g., diamonds)

69) Which of the following is NOT a characteristic or focus of microeconomics?

1. A) normative analysis.
2. B) analysis of aggregate economic variables.
3. C) empirical analysis.
4. D) empirical analysis

Answer:  B

Diff: 1

Topic:  1.2 Defining Economics

AACSB:  Analytic skills

Question Status:  Previous Edition

70) Which of the following is a microeconomic concern?

1. A) the rate of economic growth in the United States
2. B) the current unemployment rate in the United States
3. C) consumer behavior
4. D) national output of the United States

Answer:  C

Diff: 1

Topic:  1.2 Defining Economics

AACSB:  Analytic skills

Question Status:  Previous Edition

71) Which of the following is a macroeconomic concern?

1. A) the unemployment rate in a specific industry
2. B) the national output of the United States
3. C) wage levels in specific industries
4. D) the operation of an individual firm

Answer:  B

Diff: 1

Topic:  1.2 Defining Economics

AACSB:  Analytic skills

Question Status:  Previous Edition

72) The study of how a particular firm might choose to maximize its profits would fall into what type of analysis?

1. A) macroeconomics
2. B) microeconomics
3. C) labor economics
4. D) aggregate economics

Answer:  B

Diff: 2

Topic:  1.2 Defining Economics

AACSB:  Analytic skills

Question Status:  Previous Edition

73) What type of economics would most typically deal with aggregates?

1. A) macroeconomics
2. B) microeconomics
3. C) labor economics
4. D) environmental economics

Answer:  A

Diff: 1

Topic:  1.2 Defining Economics

AACSB:  Analytic skills

Question Status:  Previous Edition

74) Which of the following is a microeconomic topic?

1. A) the unemployment rate of the United States economy as a whole
2. B) the rate at which prices increase in Brazil
3. C) the advertising strategy of a particular company
4. D) the increase in the national income of the United States over the past three months

Answer:  C

Diff: 2

Topic:  1.2 Defining Economics

AACSB:  Analytic skills

Question Status:  Previous Edition

75) Which of the following topics is a macroeconomic subject?

1. A) a proposed merger between two companies
2. B) the level of Christmas sales at a particular department store
3. C) the unemployment rate of the United States economy as a whole
4. D) the advertising strategy of a particular automobile firm

Answer:  C

Diff: 1

Topic:  1.2 Defining Economics

AACSB:  Analytic skills

Question Status:  Previous Edition

76) Which of the following is an aggregate?

1. A) the number of shoes in one man’s closet
2. B) the bushels of apples one farmer sells
3. C) the price of a particular textbook
4. D) the total production of all goods and services

Answer:  D

Diff: 2

Topic:  1.2 Defining Economics

AACSB:  Analytic skills

Question Status:  Previous Edition

77) All of the following are aspects of microeconomics EXCEPT

1. A) monopolies.
2. B) a firm maximizing profit.
3. C) a worker choosing one job over another.
4. D) the average level of prices of all goods and services produced in a country in a year.

Answer:  D

Diff: 2

Topic:  1.2 Defining Economics

AACSB:  Analytic skills

Question Status:  Previous Edition

78) The impact of an increase in the gasoline tax on SUV sales is

1. A) a macroeconomics topic because it deals with taxes.
2. B) a microeconomics topic because it deals with one industry.
3. C) not an economic issue, but rather a political issue.
4. D) insignificant.

Answer:  B

Diff: 2

Topic:  1.2 Defining Economics

AACSB:  Analytic skills

Question Status:  Previous Edition

79) Which of the following would most likely be part of the study of microeconomics?

1. A) how General Motors makes decisions regarding its production goals
2. B) national income
3. C) the total economic output of our domestic economy
4. D) overall price stability in the United States

Answer:  A

Diff: 1

Topic:  1.2 Defining Economics

AACSB:  Analytic skills

Question Status:  Previous Edition

80) All of the following are aspects of macroeconomics EXCEPT

1. A) the S. unemployment rate.
2. B) the production decisions of a pharmaceutical firm.
3. C) the budget deficit of the United States.
4. D) foreign trade.

Answer:  B

Diff: 1

Topic:  1.2 Defining Economics

AACSB:  Analytic skills

Question Status:  Previous Edition

81) Individual decision making by consumers and producers is the focus of

1. A) macroeconomics.
2. B) microeconomics.
3. C) aggregate measures.
4. D) any economic model.

Answer:  B

Diff: 1

Topic:  1.2 Defining Economics

AACSB:  Analytic skills

Question Status:  Previous Edition

82) Aggregate measures are

1. A) anything to do with economics.
2. B) a total measure of a variable across the economy.
3. C) used only in microeconomics.
4. D) determined by the Bureau of Labor Statistics.

Answer:  B

Diff: 2

Topic:  1.2 Defining Economics

AACSB:  Analytic skills

Question Status:  Previous Edition

83) Microeconomics is the study of

1. A) aggregate measures of the economy.
2. B) foreign policy economic issues.
3. C) federal budget details.
4. D) individual decision making.

84) An example of a microeconomic decision is a situation in which

1. A) the Federal Reserve considers how much to increase the money supply during the coming month in an effort to constrain the rate of inflation.
2. B) Congress and the president seek to reach a compromise on how much to increase government spending in an effort to influence national expenditures.
3. C) a firm evaluates how much to reduce the price of its product in an effort to influence sales and boost its profits.
4. D) the U.S. Treasury contemplates buying foreign currencies in an effort to influence exchange rates with an aim to boosting demand for S. goods and services.

85) Explain the study of economics.

Answer:  Economics is the study of how people allocate their limited resources in an attempt to satisfy their unlimited wants. Because of this contrast between limited resources and unlimited wants, economics is the study of how people make choices.

86) Is inflation a macroeconomic or a microeconomic question? Why?

Answer:  Inflation is a macroeconomic question because it deals with an economy-wide phenomenon. The price increase of a specific product, such as gasoline, would be a microeconomic matter. Since inflation deals with prices in the economy as a whole, it is a macroeconomic concern.

87) Distinguish between macroeconomics and microeconomics.

Answer:  Macroeconomics is concerned with the behavior of the economy as a whole, while microeconomics is concerned with the choices of individual decision-makers, such as households and firms. Macroeconomics deals with aggregates, such as the total output of the economy or unemployment, while microeconomics deals with how many hours a person chooses to work or how many people a firm decides to hire.

1.3  The Three Basic Economic Questions and Two Opposing Answers

1) An economic system is

1. A) the universe of all resources.
2. B) a way to create new resources.
3. C) a mechanism to allocate scarce resources.
4. D) an organization that generates profits.

2) The way that a society uses to allocate resources to satisfy human wants is called

1. A) an economic system.
2. B) an assumption.
3. C) realism.
4. D) a physical science.

3) The issues that an economic system attempts to solve include:

1. A) what to produce.
2. B) how to produce items.
3. C) for whom items are produced.
4. D) all of the above.

4) Which of the following is NOT one of the basic questions that an economic system attempts to answer?

1. A) How to eliminate choices?
2. B) What to produce?
3. C) How much will goods and services be produced?
4. D) For whom will goods and services be produced?

5) What is the type of economic system that relies on one central authority to make economic decisions?

1. A) Free market
2. B) Price system
3. C) Command and control
4. D) Mixed economic system

6) What is the type of mechanism that answers the basic economic questions through a decentralized decision making process?

1. A) Market system
2. B) Dictatorship
3. C) Command and control
4. D) Mixed economic system

7) Central planning is a key characteristic of which economic system?

1. A) Free market
2. B) Price system
3. C) Command and control
4. D) Mixed economic system

8) Under a pure price system, the decision of resource allocation is made by

1. A) the head of the government.
2. B) a queen or king.
3. C) individuals who own the resources.
4. D) no one.

9) In a market system, the what, how and for whom questions in economics are determined by

1. A) those who are not in the market.
2. B) buyers and sellers together.
3. C) the central authority.
4. D) no one.

10) In a market system, ________ provide signals about whether resources are relatively scarce or abundant.

1. A) prices
2. B) economists
3. C) government officials
4. D) scientists and engineers

Answer:  A

Diff: 1

Topic:  1.3 The Three Basic Economic Questions and Two Opposing Answers

AACSB:  Analytic skills

Question Status:  New

11) The United States is best known as a

1. A) pure price system.
2. B) dictatorship.
3. C) command and control system.
4. D) mixed economic system.

12) A mixed economic system is best described an economy with a mix of

1. A) state and federal governments.
2. B) domestic and foreign buyers.
3. C) free markets and government control.
4. D) for-profit organizations and not-for-profit organizations.

13) Distinguish between a command-and-control economic system and a price system.

Answer:  In a command-and-control economic system, economic decisions about resource allocation are made by a central authority, such as a central government or a king or queen.  Under command and control, this central authority decides what items will be produced, how will the items be produced, and who will obtain those items.  In a price or market system, the what, how and for whom issues are determined via decentralized decision making among buyers and sellers in the market.

1.4  The Economic Approach: Systematic Decisions

1) In his book, An Inquiry into the Nature and Causes of the Wealth of Nations, economist Adam Smith argued that individuals

1. A) always tend to act in an altruistic manner.
2. B) always consider the impact of their actions on the welfare of others.
3. C) are motivated by self-interest.
4. D) are generally not concerned with economic questions.

2) Economists assume that people are motivated by

1. A) benevolence.
2. B) altruism.
3. C) greed.
4. D) rational self-interest.

3) One major assumption of economics is that people

1. A) act as if they systematically pursue self-interest.
2. B) behave randomly without any predictable pattern.
3. C) are sometimes rational and sometimes irrational.
4. D) always pursue the interests of others.

4) If people act as if they systematically pursue their own self-interest, then they will most likely

1. A) respond irrationally to any incentive.
2. B) respond to a given incentive in a random manner.
3. C) respond predictably to a given incentive.
4. D) not respond to any incentive.

Question Status:  New

5) When studying individuals’ economic behavior, economists assume that

1. A) individuals understand the rationale for all their actions.
2. B) individuals act as if they were rational.
3. C) only educated people act as if they were rational.
4. D) self-interest is of limited relevance in predicting an individual’s actions.

6) The assumption that people do not intentionally make decisions that would leave them worse off is known as

1. A) the rationality assumption.
2. B) the microeconomic assumption.
3. C) the ceteris paribus assumption.
4. D) the normative assumption.

7) When the text refers to rational self-interest, it means

1. A) your looking out for what is best for you as an individual.
2. B) your focus on your own contributions to society.
3. C) behavior that makes society better off.
4. D) behavior that helps your employer earn higher profits.

8) In economics, the concept that individuals are motivated by self-interest and respond predictably to opportunities for gain is known as

1. A) rational self-interest.
2. B) altruism.
3. C) sufficiency.
4. D) empiricism.

9) Economists assume people behave rationally, which means that people

1. A) never make a mistake.
2. B) do not intentionally make decisions that make themselves worse off.
3. C) have the necessary information to always make correct decisions.
4. D) always understand the consequences of their decisions.

10) Sara looks into her closet and discovers a pair of like-new shoes she no longer wears because they give her blisters. From the economist’s perspective, was Sara behaving rationally when she bought those shoes?

1. A) No. If any of a person’s decisions have poor results, that person is irrational.
2. B) Yes, as long as Sara didn’t intentionally purchase blister-causing shoes.
3. C) No. The rationality assumption states that rational people never make mistakes.
4. D) It’s not clear because psychology, not economics, deals with the rationality assumption.

11) Do economists analyze people’s thought processes or do they look at what people actually do?

1. A) Economists focus only on people’s thought processes.
2. B) Economists focus on what people do, not their thought processes.
3. C) An economist’s focus is about half-and-half between actions and thought processes.
4. D) Macroeconomists focus on thought processes while microeconomists focus on actions.

12) When people donate money to a charity, they behave

1. A) rationally if the act gives them satisfaction.
2. B) irrationally because the act does not benefit anyone.
3. C) in an unpredictable manner because the act involves no incentive.
4. D) in a way that only makes themselves worse off.

13) The potential rewards that are available to an individual if a particular activity is undertaken are known as

1. A) premiums.
2. B) gifts.
3. C) incentives.
4. D) intrinsic values.

14) Father says, “Earn a B-average on your next report card and I’ll help you buy a car.” An economist would say that this parent is providing his child a(n)

1. A) study disincentive.
2. B) reason to slack off and not worry about her grades.
3. C) bribe.
4. D) incentive.

15) Some pet owners are using an “invisible fence” to keep their animals from straying. Every time the animal steps over the edge of the property, it gets a mild shock. A social scientist would call the shock

1. A) a bribe.
2. B) a reward.
3. C) a disincentive.
4. D) a normative incentive.

16) Which of the following is true of incentives?

1. A) Different people are motivated by different incentives.
2. B) Money is the only measure of incentives.
3. C) All of the people in a particular nation are motivated by the same incentives.
4. D) In economics, people are assumed to respond to disincentives instead of incentives.

17) Economists assume people are motivated by

1. A) unlimited resources.
2. B) pride.
3. C) self-interest.
4. D) social justice.

18) Self-interest relates to

1. A) only monetary objectives.
2. B) both monetary and nonmonetary objectives.
3. C) the ceteris paribus
4. D) normative economic analysis and not positive economic analysis.

19) Economists assume people behave

1. A) instinctively.
2. B) rationally.
3. C) irrationally.
4. D) greedily.

20) Which of the following is always true of rational behavior?

1. A) It always entails pursuing one’s own best interest.
2. B) It always yields the best possible outcome for all individuals.
3. C) It never involves the pursuit of greedy self-interest.
4. D) It never involves taking into account the interests of others.

Question Status:  Revised

21) John has an economics test tomorrow.  He must study and has planned the rest of his day so that he can fit some study time in.  He has decided to go to the gym and then study for several hours.  Which of the following statements is true?

1. A) John did not use the economic way of thinking because his decision on how to allocate his time did not involve money.
2. B) John’s decision on how to allocate his time is inconsistent with the rationality assumption since he has decided to go to the gym.
3. C) John’s decision on how to allocate his time is consistent with the rationality assumption since the decision is intended to make him better off.
4. D) John’s decision does not involve his pursuit of self-interest.

22) People behave rationally when they

1. A) follow the advice of government leaders.
2. B) never have regrets about their decisions.
3. C) make decisions they think will make themselves better off.
4. D) make decisions solely based on financial outcomes.

23) Which of the following is a true statement about the economic assumption of rationality?

1. A) Individuals who are rational necessarily ignore the interests of others.
2. B) Individuals generally act as though they are rational.
3. C) Individual behavior may be irrational but group behavior is always rational.
4. D) People make decisions as if they are omniscient.

24) A decision made by a rational person

1. A) is intended to make the person worse off.
2. B) would always make the person wealthier.
3. C) is identical to a decision that would be made by any other person facing the same choices.
4. D) is intended to make the person better off.

25) The assumption that individuals will not intentionally make decisions that will leave them worse off is known as

1. A) microeconomic analysis.
2. B) macroeconomic analysis.
3. C) a model or theory.
4. D) the rationality assumption.

26) The rationality assumption says that

1. A) people do not intentionally make decisions that would leave them worse off.
2. B) people never make decisions that would leave them worse off.
3. C) people do not respond to incentives since incentives require scarce resources.
4. D) all economic analysis must be normative.

27) Jose is rational if he

1. A) does not intentionally make decisions that would leave him worse off.
2. B) never makes a mistake in his life.
3. C) only responds to rewards that involve money.
4. D) always uses a model or mathematical formula to help him make a decision.

28) A possible rational reason why older people, on average, show less interest in learning how to use new technologies is because

1. A) older people are not as smart as (today’s) young people.
2. B) they are acting irrationally.
3. C) they have fewer years to gain a return from learning how to use new technologies.
4. D) the financial cost for older people is greater than the cost to younger people.

29) Incentives are

1. A) potential rewards available if a particular activity is undertaken.
2. B) ineffective as a device to get people to behave in a certain fashion.
3. C) inappropriate ways to obtain a certain kind of behavior.
4. D) useless when people behave rationally.

30) Which of the following would NOT provide an incentive to reduce the amount of beef consumed?

1. A) An increase in the price of beef
2. B) A subsidy to buyers of beef
3. C) A decrease in the price of chicken
4. D) A ban on beef sales by the Food and Drug Administration

31) People respond to incentives

1. A) by ignoring negative incentives and responding to positive incentives only.
2. B) only when they are irrational.
3. C) by calculating their individual costs and benefits and determining which is greater.
4. D) when they have low incomes.

32) The threat of a large fine for failure to pay income taxes is an example of

1. A) the excessive power of the Internal Revenue Service.
2. B) the ineffectiveness of incentives to get people to pay their taxes.
3. C) a negative incentive to get all people to pay taxes.
4. D) people failing to consider all the benefits the government provides them.

33) A politician says that the government should tax behavior they want less of and subsidize behavior they want more of. This is an example of

1. A) cynical behavior in modern democracies.
2. B) failing to consider the alternatives available to the government.
3. C) a concern that people are not rational when they make decisions.
4. D) using incentives to alter behavior.

34) Which of the following ways to recruit soldiers utilizes incentives?

1. A) a draft
2. B) universal service
3. C) higher salaries
4. D) longer lengths of service

35) Self-interest

1. A) implies that a person must try to increase wealth at all times.
2. B) implies that people will not give away wealth.
3. C) is consistent with many goals that people pursue, including betterment of others.
4. D) applies only to people in market settings.

36) Self-interest

1. A) relates strictly to material well-being, such as a person’s stock of wealth at a point in time.
2. B) is measured entirely based on an individual’s income, whether earned from labor or inherited.
3. C) is inconsistent with economic analysis, which suggests that self-interest is irrational.
4. D) can involve any action that makes a person feel better off, such as charitable contributions.

37) Shelley’s grandmother gave her a sweater for her birthday, but Shelley wanted a DVD. This implies that

1. A) Shelley’s grandmother is not acting out of self-interest because she knows that Shelley really wanted a DVD.
2. B) Shelley’s grandmother is acting out of self-interest because she wanted to give Shelley something useful.
3. C) it is in Shelley’s self-interest to refuse to wear the sweater.
4. D) Shelley should exchange the sweater for a DVD.

38) Charitable donations to the Red Cross

1. A) can be explained by the rational ignorance theory.
2. B) can be explained by the rational self-interest theory.
3. C) cannot be explained by the rational self-interest theory.
4. D) prove that there is no scarcity in the United States.

39) A five-cent deposit on beer bottles

1. A) provides a positive incentive because it rewards people for recycling.
2. B) provides a negative incentive because it punishes people who do not recycle.
3. C) is an irrational policy, because it fails to take into account incentives.
4. D) is an irrational policy, because it fails to take into account self-interest.

40) If a teacher tells a student that those who attend the study session typically score higher on the final exam,

1. A) the student has a positive incentive to attend the study session because she may get a higher grade.
2. B) the student has a negative incentive to attend the study session because she will be punished if she does not go.
3. C) the student has no greater incentive to attend because there is no guarantee she will get a higher grade on the exam.
4. D) a “C” student will be making an irrational decision if she decides to skip the study session since she has plenty of time to go.

41) Consider the case of a teacher who tells students that those who miss more than three classes for any reason will automatically receive a lower grade.

1. A) This is an example of a positive incentive for students to attend class.
2. B) This is an example of a negative incentive for students to attend class.
3. C) The teacher is assuming that students are irrational, and she must force them to attend class.
4. D) Students who miss more than three classes are irrational.

42) If the government offers to reduce your property taxes by 10 percent if you install solar heating for your home, this would be an example of

1. A) police power.
2. B) incentives.
3. C) disincentives.
4. D) ceteris paribus.

43) Economists assume that people are motivated by

1. A) a desire to please others.
2. B) the interests of the community at large.
3. C) self-interest.
4. D) morally correct behavior.

44) When we say that an individual behaves according to “rational self-interest,” we mean that this individual

1. A) is motivated by greed.
2. B) will always buy the most fashionable items available.
3. C) will always buy the cheapest products available on the market.
4. D) is making choices that he or she believes will leave him or her better off.

45) Rational behavior for an economist means that individuals

1. A) are motivated by self-interest.
2. B) never change their minds.
3. C) always make positive choices.
4. D) are self-sacrificing.

46) According to economists, when two people make exactly the opposite decision,

1. A) one of them is acting irrationally.
2. B) each person evaluates the situation according to his/her individual self-interest.
3. C) one of them is acting out of spite.
4. D) one of them should compromise.

47) It is assumed in economics that people make decisions based upon

1. A) altruism.
2. B) rational self-interest.
3. C) tradition.
4. D) governmental persuasion.

48) An incentive is a

1. A) need.
2. B) want.
3. C) reward for desired behavior.
4. D) resource.

Answer:  C

Diff: 1

Topic:  1.4 The Economic Approach: Systematic Decisions

Question Status:  Previous Edition

49) The assumption that individuals do NOT intentionally make decisions that would leave them worse off is referred to as

1. A) the premium assumption.
2. B) the law of comparative advantage.
3. C) the rationality assumption.
4. D) the law of demand.

50) The author of the book An Inquiry into the Nature and Causes of the Wealth of Nations is

1. A) Thorstein Veblen.
2. B) Adam Smith.
3. C) Milton Friedman.
4. D) Alan Greenspan.

Answer:  B

Diff: 1

Topic:  1.4 The Economic Approach: Systematic Decisions

Question Status:  Previous Edition

51) Rational self-interest means

1. A) always increasing your wealth.
2. B) pursuing what makes you better off.
3. C) pursuing activities that maximize income.
4. D) always pursuing activities that are consistent with your faith.

Answer:  B

Diff: 1

Topic:  1.4 The Economic Approach: Systematic Decisions

Question Status:  Previous Edition

52) The rationality assumption states that

1. A) all actions taken by consumers are based on what is good for society.
2. B) people make decisions regardless of how the outcome will affect them.
3. C) people make decisions to buy only those goods that they need rather than goods that they want.
4. D) people do not intentionally make decisions that would leave them worse off.

Answer:  D

Diff: 1

Topic:  1.4 The Economic Approach: Systematic Decisions

Question Status:  Previous Edition

53) Economic theory predicts that people make choices in a manner that

1. A) makes them well liked by others.
2. B) makes them better off.
3. C) reflects the fact that resources are unlimited.
4. D) shows that they do not respond to monetary incentives.

54) How could Adam Smith’s comment about the butcher, the brewer, and the baker be accurately rephrased in modern terms?

1. A) The butcher, the brewer, and the baker give us our dinner because they want to be well liked in the community.
2. B) The butcher, the brewer, and the baker give us our dinner because they will be sued if they don’t do so.
3. C) The butcher, the brewer, and the baker give us our dinner because they each earn a living by doing so.
4. D) The butcher, the brewer, and the baker give us our dinner because they view doing so as a public service.

55) According to economic theory, how do people make decisions?

1. A) They make decisions in the same manner as their parents did.
2. B) They make decisions by looking at what others have done in the same situation and then doing the opposite.
3. C) They make decisions by looking at what others have done in the same situation and then doing the same.
4. D) They make decisions based on their own self-interest.

56) Underlying economic theory is the idea that

1. A) people respond only to negative incentives, not to positive ones.
2. B) choices are affected by both positive and negative incentives.
3. C) value judgments do not play a role in the economic decisions people make.
4. D) money is the only incentive that matters.

57) High gasoline prices give people all of the following incentives EXCEPT

1. A) to drive less.
2. B) to car pool.
3. C) to buy a hybrid car.
4. D) to take vacations that require driving more miles.

58) The idea that people will not consciously make decisions that make them worse off is known as

1. A) rationality assumption.
2. B) the decision duality.
3. C) Adam Smith’s doctrine.
4. D) incentive assumption.

59) Explain what economists mean when they apply the rationality assumption.

Answer:  The rationality assumption means that people do not intentionally make themselves worse off. It does not deal with the interior reasoning of a person or the psychology of a person. Instead, rationality applies to the way people actually behave in a world of scarcity.

60) “Economists assume people are selfish.” Do you agree with this statement or not? Explain.

Answer:  Economists do not assume people are selfish, although clearly some people are. Self-interest does not necessarily mean selfishness. People have many goals, some of which may be self-centered and some of which may be more altruistic. Charity is consistent with self-interested behavior.

61) “Rational, self-interested people would never end up worse off by any decision they make. Obviously, people often make mistakes or have regrets. Therefore, people do not act rationally or out of self-interest.” Do you agree with these statements? Why or why not?

Answer:  No. People may make mistakes because they often do not have enough information to make the best decision or because they are wrong about the effect of their actions. When they make a decision, given their circumstances and the information they have, they make the best choice for themselves.

62) What assumption about human motivation is made in economics? Explain.

Answer:  Economists assume that people act as if motivated by self-interest. People respond predictably to opportunities for gain. That is, people look out for their own self-interest and do so in a rational manner.

63) What is meant by the term “incentives,” and why are they important?

Answer:  Incentives are rewards for engaging in particular activities. Much of human behavior can be explained in terms of incentives. For example, grades in school are an incentive, as are paychecks for work. Incentives are important because rational human beings seeking to promote their own welfare will respond to incentives in predictable ways.

Diff: 1

Topic:  1.4 The Economic Approach: Systematic Decisions

AACSB:  Analytic skills

Question Status:  Previous Edition

64) During the Middle Ages, heretics were often burned at the stake. Were the heretics violating the assumption of rational self-interest? Explain.

Answer:  For someone today, or even many people living at that time, it would seem the heretics’ behavior was irrational and not in their own self interest. But, in their own eyes, they may have been acting rationally and with self-interest. Given their goals, dying rather than recanting their views was in their self-interest, especially if they believed such a death guaranteed them eternal life. They believed they would have been worse off had they recanted their views. The benefit of dying for their cause was greater to them than the cost of dying.

1) Another term for “economic models” is

1. A) economic designs.
2. B) economic theories.
3. C) economic science.
4. D) economic maps.

2) A simplified representation of the real world that is used to explain economic phenomena is a(n)

1. A) map.
2. B) model.
3. C) assumption.
4. D) implication.

3) Economics is an empirical science, which means that economists

1. A) must use laboratory experiments to test their theories.
2. B) evaluate a model or theory by whether its assumptions are consistent with the real world.
3. C) try to prove their models are true by referring to logic.
4. D) look for evidence to determine whether the model is useful or not.

4) Both the social sciences and the natural sciences employ ________ to help them understand the world around them.

1. A) models
2. B) designs
3. C) traditional thinking
4. D) implications

5) Which is NOT true about the use of economic models?

1. A) Economic models are simplified representations of the real world.
2. B) Economists sometimes use laboratory experiments to test their theories.
3. C) Economists use what has already happened in the real world to test their theories.
4. D) Economists are employed to explain economic phenomena but are never used to predict what might happen next.

6) Which of the following statements is FALSE?

1. A) Economists empirically test their models.
2. B) Economic models are not used to forecast.
3. C) An economic model should capture only the essential relationships that are sufficient to analyze the particular problem being studied.
4. D) Economic models relate to behavior rather than to individual thought processes.

7) Economists develop models to

1. A) capture every detail of the real world.
2. B) make their arguments more realistic.
3. C) justify the assumptions they make about people’s behavior.
4. D) help us understand economic phenomena in the real world.

8) Which of the following statements concerning economic models is FALSE?

1. A) Economic models must provide usable predictions.
2. B) Economic models are based on pure fact and no assumptions.
3. C) Economic models are tested empirically.
4. D) Economic models relate to how people behave.

9) Which of the following statements about economic models is true?

1. A) Economic models are not empirically testable.
2. B) The predictive power of models is not important.
3. C) Economic models are designed so that every detail of the real world can be analyzed.
4. D) Every economic model is based on a set of assumptions.

10) Economic models

1. A) are used to explain how people think.
2. B) are used to explain how people behave.
3. C) are essential representations of the real world.
4. D) are never used for making economic projections or predictions.

11) One reason why economists often use models in their analysis is that

1. A) a model helps us to understand, explain, and predict economic phenomena in the real world.
2. B) a model accurately pictures every detail of the real world economy.
3. C) a model relates to individual thought processes rather than behavior.
4. D) it is relatively easy to perfectly specify a model.

12) An economic model should capture

1. A) the essential relationships that help to analyze the problem.
2. B) all possible variables that apply to the problem.
3. C) only social value related variables.
4. D) all of the above.

13) One problem with constructing a perfectly complete realistic economic model is that

1. A) it would be too simplistic to have any value.
2. B) it would be far too complicated to analyze.
3. C) politicians see little value in such a model.
4. D) None of the above is true.

14) Which of the following statements is true?

1. A) No economic model captures every detail that affects a problem.
2. B) Economic models always make accurate predictions about behaviors.
3. C) Economic models must fully reflect reality.
4. D) Economic models use economists’ opinions with no use of data.

15) A map is an example of a model because a map

1. A) realistically describes an area.
2. B) is always as complex as space will permit.
3. C) is two-dimensional.
4. D) is a simplified representation of reality.

16) Holding all variables constant but one and assessing the impact of the one variable that has changed is an example of using

1. A) the ceteris paribus
2. B) an economic model based on unrealistic assumptions.
3. C) a flawed economic model.
4. D) an untestable proposition.

17) The term ceteris paribus means

1. A) the greatest good for all.
2. B) the study of scarcity and choice.
3. C) all other things remaining constant or equal.
4. D) value-free and testable.

18) In order to study how changing price affects consumer decisions, we must assume all other factors, such as income and the prices of other goods are constant.  This assumption is best know as

1. A) rationality.
2. B) ceteris paribus.
3. C) normative economics.
4. D) behavioral economics.

19) Which of the following is an example of an application of the ceteris paribus assumption?

1. A) An analysis of how price changes affect how much of a good people will purchase when all other factors are held constant
2. B) An analysis of how people purchase more goods when prices decline and income increases
3. C) After reading an article on the dangers of high-fat diets, an individual buys less red meat when prices increase
4. D) An analysis of how worker productivity increases when a firm invests in new machines and training programs

20) Ceteris paribus means

1. A) making all the necessary changes.
2. B) other things constant.
3. C) for certain parameters.
4. D) let the buyer beware.

21) The ceteris paribus assumption is important in economics because

1. A) all empirical data are equal.
2. B) it would be impossible to relate the effects of changes in one variable on another without holding some variables constant.
3. C) economic data move very slowly over time and so they can always be considered constant.
4. D) models are always complex and require as many variables as possible.

22) The assumption that “other things are constant” is also known as the

1. A) ceteris paribus
2. B) rational self-interest assumption.
3. C) distinguishing characteristic of economics as a science.
4. D) relationships assumption.

Question Status:  Previous Edition

23) Mary says she plans to return to college next semester assuming her car keeps running, tuition fees don’t go up, and her daycare provider continues to be dependable. An economist would say that Mary plans to return to college next semester, ________.

1. A) caveat emptor
2. B) ceteris paribus
3. C) laissez faire
4. D) ipso facto

24) Professor’s economics students are constructing models for how gasoline prices change. Maria’s model has very realistic assumptions and is quite complex. Anna’s model is less complicated and less realistic. Maria’s model correctly predicts gas price increases 5% of the time. Anna’s model predicts correctly 15% of the time. On the basis of usefulness or “goodness,” Professor will give which student’s model the higher grade and why?

1. A) Maria’s model gets the higher grade because it is more complex.
2. B) Anna’s model gets the higher grade because it is simpler.
3. C) Maria’s model gets the higher grade because it is more realistic.
4. D) Anna’s model gets the higher grade because it predicts accurately more often.

25) Why is economics called an empirical science?

1. A) because economics has been used to both create and destroy empires
2. B) because economics uses impressions to evaluate the usefulness of its models
3. C) because economics relies on real-world data to determine the usefulness of a model
4. D) because economics utilizes intuition rather than data to evaluate a model’s worth

26) An appropriate test of the effectiveness of an economic model is

1. A) the number of variables contained within the model.
2. B) the model’s ability to predict future economic activity.
3. C) the number of economists who have worked on the model.
4. D) the number of assumptions which the economist has made.

27) A good economic model

1. A) utilizes only the two most important factors to analyze the problem under consideration.
2. B) generates statements that are incapable of refutation.
3. C) represents every detail of the real world.
4. D) yields usable predictions and implications for the real world.

28) The usefulness of a model is determined by

1. A) whether it helps to explain or predict real world phenomena.
2. B) whether it possesses realistic assumptions.
3. C) how well it uses the ceteris paribus
4. D) how many of the possible relationships that exist are included in the model.

29) The use of data in economic models is important because

1. A) the model’s predictive value rests on supportive evidence from real-world data.
2. B) the models are always complex in nature.
3. C) models must analyze every possible angle of the problem.
4. D) social problems analyzed by economists require long streams of data.

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