ECON1010-Introductory Microeconomics

Practice 1- Economics and principles of economics

1. In the broadest sense, economics is the study of

a. production methods.
b. how society manages its scarce resources.
c. how households decide who performs which tasks.
d. the interaction of business and government.

2. The adage, "There is no such thing as a free lunch," means

a. even people on welfare have to pay for food.
b. the cost of living is always increasing.
c. people face tradeoffs.
d. all costs are included in the price of a product.

3. Long is an athlete. He has $120 to spend and wants to buy either a heart rate monitor or new running
shoes. Both the heart rate monitor and running shoes cost $120, so he can only buy one. This illustrates
the principle that
a. trade can make everyone better off.
b. people face trade-offs.
c. rational people think at the margin.
d. people respond to incentives.

4. When society requires that firms reduce pollution, there is

a. a tradeoff because of reduced incomes to the firms' owners and workers.
b. a tradeoff only if some firms are forced to close.
c. no tradeoff, since the cost of reducing pollution falls only on the firms affected by the
requirements.
d. no tradeoff, since everyone benefits from reduced pollution.
5. Which of the following is true?
a. Efficiency refers to the size of the economic pie; equality refers to how the pie is divided.
b. Government policies usually improve upon both equality and efficiency.
c. As long as the economic pie continually gets larger, no one will have to go hungry.
d. Efficiency and equality can both be achieved if the economic pie is cut into equal pieces.

6. Minister Tran Tuan Anh wants to increase taxes on people with high incomes and use the money to
help the poor. Minister Tien Dung argues that such a tax will discourage successful people from
working and will therefore make society worse off. An economist would say that
a. we should agree with Mr. Tuan Anh.
b. we should agree with Mr. Tien Dung.
c. a good decision requires that we recognize both viewpoints.
d. there are no tradeoffs between equity and efficiency.

7. Suppose that you have received $300 as a birthday gift. You can spend it today or you can put the
money in a bank account for a year and earn 5 percent interest. The opportunity cost of spending the
money today, in terms of what you could have after one year, is
a. $0.
b. $15.
c. $305.
d. $315.

8. Which of the following statements exemplifies a principle of individual decision-making?

a. Trade can make everyone better off.
b. Governments can sometimes improve market outcomes.
c. The cost of something is what you give up to get it.
d. All of the above are correct.

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9. Long spends an hour studying instead of watching TV with his friends. The opportunity cost to him
of studying is
a. the improvement in his grades from studying for the hour.
b. the improvement in his grades from studying minus the enjoyment of watching TV.
c. the enjoyment he would have received if he had watched TV with his friends.
d. zero. Since Hamid chose to study rather than to watch TV, the value of studying must have
been greater to him than the value of watching TV.

10. 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.

11. Suppose the cost of flying a 200-seat plane for Vietjet Air is $100,000 and there are 10 empty seats
on a flight. If the marginal cost of flying a passenger is $200 and a standby passenger is willing to pay
$300, the airline should
a. sell the ticket because the marginal benefit exceeds the marginal cost.
b. sell the ticket because the marginal benefit exceeds the average cost.
c. not sell the ticket because the marginal benefit is less than the marginal cost.
d. not sell the ticket because the marginal benefit is less than the average cost.

12. Huong is planning to sell her house, and she is considering making two upgrades to the house
before listing it for sale. Replacing the carpeting will cost her $2,500 and replacing the roof will cost
her $9,000. Huong expects the new carpeting to increase the value of her house by $3,000 and the new
roof to increase the value of her house by $7,000.
a. She should make both improvements to her house.
b. She should replace the carpeting but not replace the roof.

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 c. She should replace the roof but not replace the carpeting.
d. She should not make either improvement to her house.

13. Suppose the cost of operating a 100-room hotel for a night is $10,000 and there are 5 empty rooms
for tonight. If the marginal cost of operating one room for one night is $30 and a customer is willing
to pay $60 for the night, the hotel manager should
a. rent the room because the marginal benefit exceeds the marginal cost.
b. rent the room because the marginal benefit exceeds the average cost.
c. not rent the room because the marginal benefit is less than the marginal cost.
d. not rent the room because the marginal benefit is less than the average cost.

14. As a student, Hương spends 40 hours per week writing term papers and completing homework
assignments. On one axis of her production possibilities frontier is measured the number of term papers
written per week. On the other axis is measured the number of homework assignments completed per
week. Hương’s production possibilities frontier is a straight-line if
a. she faces no trade-off between writing term papers and completing homework assignments.
b. she can switch between writing term papers and completing homework assignments at a
constant rate.
c. the rate at which she can switch between homework assignments and term papers depends
on the number of homework assignments she is completing and on the number of term
papers she is writing.
d. she is required by her professors to spend half of her time on term papers and the other half
of her time on homework assignments.

15. When society requires that firms reduce pollution, there is

a. a tradeoff because of reduced incomes to the firms' owners and workers.
b. a tradeoff only if some firms are forced to close.
c. no tradeoff, since the cost of reducing pollution falls only on the firms affected by the
requirements.
d. no tradeoff, since everyone benefits from reduced pollution.

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16. Which of the following is true?
a. Efficiency refers to the size of the economic pie; equality refers to how the pie is divided.
b. Government policies usually improve upon both equality and efficiency.
c. As long as the economic pie continually gets larger, no one will have to go hungry.
d. Efficiency and equality can both be achieved if the economic pie is cut into equal pieces.

17. Debbie quits her job, which pays $30,000 a year, to finish her college degree. Her annual college
expenses are $10,000 for tuition, $2,000 for books, and $700 for food. What is her opportunity cost of
attending college for the year?

18. Rational people make decisions “at the margin” by comparing ______.

19. What are the two possible causes of market failure?

20. Under what conditions might government intervention in a market economy improve the
economy’s performance?