ECON 1100 – Global Economics (Section 06) Exam #1 Answer Key – Spring 2011 (Version A) 1. The Incentive Principle states that B. a person is more likely to take an action if its benefits rise, and less likely to take an action if its costs rise. 2. Brenda manages a fast food Mexican restaurant. While working the register, Paul sometimes doesn’t charge his friends for tacos when they come to the restaurant. This situation is an example of B. a Principal/Agent Problem. 3. A.C. and Zack produce surfboards and hair gel. A.C.’s opportunity cost of producing a surfboard is lower than Zack’s opportunity cost of producing a surfboard. The _________________ suggests that they can increase their total output of these two goods if A.C. focuses his production on surfboards while Zack focuses his production on hair gel. B. Principle of Comparative Advantage 4. Economics is A. the social science that studies decision making in the face of scarcity, and the implications of such decisions on individuals and societies. 5. “Habitat for Humanity” is a good example of which of the following type of Economic Institution? C. A Non-Governmental Organization. 6. One of the principle functions of money is that it serves as a “medium of exchange.” This role could be described by recognizing that money B. is an asset used as payment when purchasing goods and services. 7. Which of the following statements regarding the interpretation of a Production Possibilities Curve is true? A. “A combination of goods is Attainable so long as it can possibly be produced with the currently available resources and technology.” 8. “Voluntary Trade” generally D. makes both parties to the trade better off. 9. Armen Alchain and Gordon Tullock B. argued that automobile accident rates could be decreased by installing a sharp, irremovable, foot long, iron spike to the steering wheel of every car.10. A “Rational Decision Maker” should B. take an action if and only if the Marginal Benefit of the action is at least as great as the Marginal Cost of the action. 11. John recently saw the comedian Ron White perform at the Topeka Performing Arts Center in Topeka, KS. His Total Benefits from seeing this show were $30, while his Total Costs were $55. From this information alone, it follows that his Economic Surplus B. from attending the show was ($30)–($55) = ($–25) (i.e., negative $25). 12. Which of the following type of Economic Institution is NOT a “decision making” institution? D. None of the above answers are correct (since each type of institution listed is a “decision making” institution). 13. Consider the following two statements. Statement 1: “If the federal budget is to be balanced, it should be done so over the business cycle rather than yearly.” Statement 2: “Trade Restrictions reduce general economic welfare.” Most economists would B. agree with both Statement 1 and Statement 2. 14. Kenny has $95 to spend and wants to purchase either a new amplifier for his guitar or a new MP3 player. Each good costs exactly $95, so he can only purchase one of the two items. This scenario illustrates the basic concept that B. people face tradeoffs. 15. LeBron James chose to skip college and enter the NBA draft in 2003 straight out of high school. The fact that he made this choice suggests that he C. properly understood that his opportunity cost of attending college was very high. 16. __________________ is the study of the performance of national economies as a whole, and the policies that governments use to try to improve their performance. D. Macroeconomics 17. Paula enjoys going to the movies. In January she saw 6 movies in the theatre. Her Marginal Benefit of the 6th movie was $15, while her Marginal Cost of the 6th movie was $12. Based upon this information alone, her Economic Surplus A. would have been smaller if she had instead gone to the movies 5 times. 18. Consider a society consisting of only three people: Amanda, Bob, and Chloe. Amanda and Bob spend all day producing bicycles and clocks. At the start of each work day Chloe decides exactly how many units of each good Amanda and Bob will produce (when doing so, she chooses output levels that are feasible). The “basic economic question” that Chloe is answering for this society is the D. Production Decision.19. Privately owned enterprises in a free market economy have a primary goal of B. earning as large of a profit as possible. 20. Which markets are represented in the simple “Circular Flow Diagram”? D. More than one (perhaps all) of the above answers is correct. 21. With regards to “Union Membership in the United States,” currently B. about 19% of the workforce is unionized (a rate which is lower than the rate in most other industrialized countries). 22. A “Self-Interested” person C. cares about their own well-being more than the well-being of others. 23. Which of the following output combinations is “attainable” (or equivalently “feasible”)? D. More than one (perhaps all) of the above answers is correct. 24. If this society was producing 2,000 Guns and 1,400 Roses, then they could A. increase their production of both Guns and Roses. 25. Supposing this society is producing efficiently, it follows that the Opportunity Cost of producing the 2,250th Gun is ____________ the Opportunity cost of producing the 3,120th Gun. C. less than 26. Which of the following is one of the “Three Basic Economic Questions” that every society must address? C. “What mix of goods and services should we create?” 27. _________ has an Absolute Advantage in the production of Cars; ________ has an Absolute Advantage in the production of Dresses. A. Ben; Ben. 28. Ben’s Opportunity Cost for producing a Car is B. 15 Dresses. 29. ________ has a Comparative Advantage in the production of Cars; ________ has a Comparative Advantage in the production of Dresses. B. Ben; Antonio. 30. Suppose that Antonio and Ben wanted to maximize their combined production by way of “specialization.” Which of the following combinations of output is Feasible and Efficient? C. 2 Cars and 80 Dresses.31. Which of the following statements is a “Positive Statement”? D. In the 2008 Presidential Election, Barack Obama defeated John McCain by a total of 365 electoral votes to 173 electoral votes. 32. Last February Brenda won $300
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