Review(1-7)

Exercises
Individual Choice
• Individual choice is the decision by an individual of what to do, which necessarily involves a decision of what not to do. 1. Resources are scarce. 2. The real cost of something is what you must give up to get it. 3. “How much?” is a decision at the margin. 4. People usually take advantage of opportunities to make themselves better off.
If the United States decides to trade with Mexico, we know that a. Mexico will benefit, but trade with a less developed country could not benefit the United States. b.it will not benefit Mexico because workers in the United States are more productive. c. Mexico and the United States can both benefit. d.it will not benefit either country because their cultural differences are too vast.
In the circular-flow diagram, a. firms are buyers in the markets for goods and services. b. households are sellers in the markets for the factors of production. c. firms are sellers in the markets for factors of production and in the markets for goods and services. d. dollars that are spent on goods and services flow directly from firms to households.
ANS: B
Rational people make decisions at the margin by a. following marginal traditions. b. behaving in a random fashion. c. thinking in black-and-white terms. d. comparing marginal costs and marginal benefits.
•An individual has a comparative advantage in producing a good or service if the opportunity cost of producing the good is lower for that individual than for other people. •An individual has an absolute advantage in an activity if he or she can do it better than other people. Having an absolute advantage is not the same thing as having a comparative advantage.
ANS: C
In building economic models, economists often omit a. assumptions. b. theories. c. details. d. equations.
ANS: C
If labor in Mexico is less productive than labor in the United States in all areas of production, a.neither nation can benefit from trade. b.Mexico can benefit from trade but the United States cannot. c.the United States will have a comparative advantage relative to Mexico in the production of all goods. d.both Mexico and the United States still can benefit from trade.
CHAPTER 1 First Principles
A set of principles for understanding the economics of how individuals make choices.
A set of principles for understanding the economics of how individual choices interact.
ANS: D
CHAPTER 2 Economic Models: Trade-offs and Trade
•Why models? • Simplified representations of reality play a crucial role in economics. •Three simple but important models:
ANS: B
Any point on a country's production possibilities frontier represents a combination of two goods that an economy a.will never be able to produce. b.can produce using all available resources and technology. c.can produce using some portion, but not all, of its resources and technology. d.may be able to produce in the future with more resources and/or superior technology.
ANS: C
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.
• Interaction of choices
1. There are gains from trade. 2. Markets move toward equilibrium. 3. Resources should be used as efficiently as possible to achieve society’s goals. 4. Markets usually lead to efficiency. 5. When markets don’t achieve efficiency, government intervention can improve society’s welfare.
For society, a good is not scarce if a. at least one individual in society can obtain all he or she wants of the good. b. firms are producing the good at full capacity. c. all members of society can have all they want of the good. d. those who have enough income can buy all they want of the good.
ANS: D
For Ben, the opportunity cost of 1 pound of ice cream is ? 4 pound of cones
For Jerry, the opportunity cost of 1 pound of ice cream is 3/2 pounds of cones
– Production possibility frontier – Comparative advantage – Circular-flow diagram
•The difference between positive economics and normative economics. •When economists agree and why they sometimes disagree.