Question 1

The face value of money or income is called its _______ value.
A) real
B) nominal
C) marginal
D) external

Accepted Answer

The correct term for the face value of money or income is its nominal value. Nominal value refers to the stated value of an amount of money or income without considering inflation or other factors that could affect its purchasing power. Real value, on the other hand, takes into account the effects of inflation and other economic factors to determine the actual purchasing power of money or income. Marginal value refers to the additional benefit or cost of consuming or producing one more unit of a good or service. External value is not a commonly used term in economics.

Question 2

The real- nominal principle states that:
A) what matters to people is the face value of money or income.
B) people respond more to implicit costs than to explicit costs.
C) what matters to people is the purchasing power of money or income.
D) people respond more to explicit, or real, costs than to implicit costs.

Accepted Answer

The real-nominal principle states that what matters to people is the purchasing power of money or income, not just its face value. This means that people care about how much goods and services they can buy with their money, not just how much money they have. Therefore, option C is the best choice.

Question 3

The value of money or income in terms of the quantity of goods the money can buy is called its:
A) nominal value.
B) real value.
C) marginal value.
D) implicit value.

Accepted Answer

The real value of money or income takes into account the effect of inflation or deflation on purchasing power. It is measured by the quantity of goods and services that can be purchased with a given amount of money. Nominal value refers to the face value of money or income, without considering inflation or deflation. Marginal value refers to the additional utility gained from consuming one more unit of a good or service. Implicit value refers to the value of a good or service that is not directly paid for, such as the value of clean air or public parks.

Question 4

Five years ago Tammy always took a big envelope full of coupons to the grocery store. Now she has a child in pre- school, she rarely brings coupons. Which of the following is not a possible explanation of this change in her behavior?
A) Fewer coupons appear in the newspapers than five years ago.
B) The opportunity cost of grocery shopping has decreased.
C) The opportunity cost of clipping coupons has risen above their monetary value.
D) Grocery prices have decreased.

Accepted Answer

The opportunity cost of grocery shopping decreasing would not explain why Tammy stopped using coupons, as it would make shopping less costly in terms of time or other resources, potentially encouraging more coupon use.

Question 5

Recall Application 1, "Don't Forget the Costs of Time and Invested Funds," to answer the following questions.
-According to the application, if the interest rate rises, then the opportunity costs of running a business:
A) is unchanged.
B) falls.
C) rises.
D) cannot be determined with the information given.

Accepted Answer

The opportunity costs of running a business would rise if the interest rate increases. This is because the cost of investing funds in the business would increase, making it more expensive to forgo other investment opportunities.

Question 6

Figure 2.2
-Figure 2.2 presents a production possibilities curve for a country that can either produce highways or provide people with medical care in a given year. The opportunity cost of the fourth new highway built in a year is:
A) the sum of the opportunity costs of the first three highways built.
B) less than the opportunity cost of the third new highway.
C) the same as the opportunity cost of the third new highway.
D) greater than the opportunity cost of the third new highway.

Accepted Answer

As we move along the production possibilities curve and produce more highways, the opportunity cost of producing each additional highway increases. Therefore, the opportunity cost of the fourth new highway built in a year will be greater than the opportunity cost of the third new highway.

Question 7

A firm produces its product using both capital and labor. When it does not change its capital usage, but doubles its labor input, its output increases by less than 50%. Which of the following is the most likely explanation of this finding?
A) the principle of opportunity cost
B) the spillover principle
C) the principle of diminishing returns
D) the marginal principle

Accepted Answer

The principle of diminishing returns occurs when increasing one input while holding all other inputs constant will eventually result in smaller increases in output. This is the most likely explanation for the finding that doubling labor input did not result in a 50% increase in output, indicating that the production function exhibits diminishing marginal returns to labor.

Question 8

The principle that what matters to people is the real value or purchasing power of money is the:
A) marginal principle.
B) spillover principle.
C) principle of diminishing returns.
D) real- nominal principle.

Accepted Answer

The real-nominal principle states that what matters to people is the real value or purchasing power of money, rather than its nominal value or face value. This principle is important in understanding how inflation affects individuals and the economy as a whole.

Question 9

A major league baseball player signs a contract that pays $50 million over five years. The $50 million is its _______value.
A) external
B) implicit
C) nominal
D) real

Accepted Answer

The nominal value refers to the face value of money or a financial instrument, without adjusting for inflation or other factors. In this case, the $50 million is the nominal value of the contract.

Question 10

-Refer to Table 2.3. The marginal product of the 2nd worker is:
A) 40 units of output.
B) 80 units of output.
C) 60 units of output.
D) 100 units of output.

Accepted Answer

The answer of 
-Refer to Table 2.3. The marginal product...

Question 11

Suppose that you lend $1,000 to a friend and he or she pays you back one year later. What is the opportunity cost of lending the money?
A) the real interest rate that would have been earned on the money
B) There is no cost.
C) the nominal interest rate that would have been earned on the money
D) the implicit cost of the money

Accepted Answer

The opportunity cost of lending the money is the real interest rate that could have been earned if the money had been invested in another opportunity. This represents the cost of foregone alternatives. The nominal interest rate does not account for inflation, which can erode the value of the money lent. The implicit cost of the money is a broader concept that includes both monetary and non-monetary costs, such as the time and effort spent managing the loan. However, in this context, the most relevant cost is the real interest rate that could have been earned if the money had not been lent to the friend.

Question 12

You borrow money to buy a house in 2006 at a fixed interest rate of 6.5%. By 2009, the inflation rate has risen to 8.5%. Considering only your mortgage, is inflation good news or bad news for you?
A) good news, because it makes the real value of your mortgage payments decrease
B) bad news, because it makes the nominal value of your mortgage payments increase
C) bad news, because it makes the real value of your mortgage payments increase
D) bad news, because inflation hurts everyone

Accepted Answer

Inflation erodes the real value of money, so with a fixed interest rate, the real value of your mortgage payments decreases, making it easier to pay off the loan.

Question 13

An unemployed individual decides to spend the day fishing. The opportunity cost of fishing is equal to:
A) zero, because the person doesn't have a job.
B) the cost of bait, any other monetary expenses, and the value of the best alternative use of the individual's time.
C) the cost of bait and any other monetary expenses.
D) the value of the individual's wages while he was working.

Accepted Answer

The opportunity cost of fishing includes not just the monetary expenses such as the cost of bait, but also the value of the next best alternative use of the individual's time, which could include looking for work or other activities that could potentially earn income. Therefore, option B is the correct answer. Option A is incorrect because even though the person is unemployed, their time still has value. Option C is incorrect because it only includes the monetary expenses and not the value of the individual's time. Option D is incorrect because the individual is currently unemployed, so there are no wages being earned to factor into the opportunity cost calculation.

Question 14

According to the marginal principle, a rational individual should not undertake an economic activity if the:
A) total benefit equals total cost.
B) marginal benefit is less than marginal cost.
C) marginal benefit equals marginal cost.
D) marginal benefit exceeds marginal cost.

Accepted Answer

The marginal principle states that an individual should undertake an economic activity as long as the marginal benefit is greater than or equal to the marginal cost. Therefore, if the marginal benefit is less than the marginal cost, the rational individual should not undertake the activity. Choices A and C are not necessarily true since the total benefit or cost may not reflect the marginal analysis. Choice D may lead to overproduction, which is not efficient.

Question 15

Recall Application 5, "The Declining Real Minimum Wage," to answer the following questions:
-According to the application, the weekly income earned in 1974 at that time could buy _______ standard baskets of goods and services in 2007.
A) 1.16
B) 1.70
C) 2.81
D) 1.54

Accepted Answer

According to the application, the weekly income earned in 1974 could buy 1.70 standard baskets of goods and services in 2007.

Question 16

Suppose a ticket to a concert costs $39, and parking costs $5. Further, in order to watch the concert, you must miss 2 hours of work where your hourly wage is $15 per hour. The total opportunity cost of watching a concert is:
A) $30.
B) $39.
C) $74.
D) $44.

Accepted Answer

Opportunity cost = value of the next best alternative foregone. In this case, the next best alternative is working. By watching the concert, you are giving up 2 hours of work where your hourly wage is $15 per hour, so the cost of that is:

2 hours x $15/hour = $30

In addition, you have to pay for the ticket and parking:

Ticket = $39
Parking = $5

Total cost = $39 + $5 +$30 = $74

Therefore, the best choice is to pay $74 to watch the concert.

Question 17

Figure 2.4
-Joe runs a business and needs to decide how many hours to stay open. Figure 2.4 illustrates his marginal benefit of staying open for each additional hour. Suppose that Joe's marginal cost of staying open per hour is $24. How many hours should Joe stay open?
A) 5 hours
B) 6 hours
C) 3 hours
D) 4 hours

Accepted Answer

The answer of  Figure 2.4
-Joe runs a business and...

Question 18

Table 2.2
-Julianne runs a business and needs to decide how many hours to stay open. Table 2.2 illustrates her marginal costs of staying open for each additional hour. Suppose that Julianne's marginal benefit of staying open per hour is $16. If she is following the marginal principle, how many hours should Julianne stay open?
A) 3 hours
B) 5 hours
C) 4 hours
D) 7 hours

Accepted Answer

According to the marginal principle, Julianne should stay open for as many hours as her marginal benefit equals her marginal cost. In this case, since her marginal benefit is $16 per hour, she should stay open for as many hours as her marginal cost is also $16 per hour. Looking at Table 2.2, we can see that Julianne's marginal cost is $12 for the first hour, $10 for the second hour, $8 for the third hour, $10 for the fourth hour, and $12 for the fifth hour. Therefore, she should stay open for four hours, when her marginal cost is equal to her marginal benefit of $16.

Question 19

The principle that states that the cost of something is equal to what is sacrificed to get it is known as the:
A) reality principle.
B) principle of opportunity cost.
C) principle of diminishing returns.
D) marginal principle.

Accepted Answer

The principle of opportunity cost states that the cost of something is equal to what is sacrificed to get it. This means that whenever you make a decision, there is an opportunity cost. You have to give up something in order to get something else. By understanding the principle of opportunity cost, you can make better decisions that maximize your benefits and minimize your costs.

Question 20

Figure 2.3
-In Figure 2.3, an efficient production point on production possibility curve XV is
A) point A.
B) point B.
C) point C.
D) none of the above.

Accepted Answer

The answer of  Figure 2.3
-In Figure 2.3, an efficient...

Quiz 2: The Key Principles of Economics

The face value of money or income is called its _______ value.

The real- nominal principle states that:

The value of money or income in terms of the quantity of goods the money can buy is called its:

Five years ago Tammy always took a big envelope full of coupons to the grocery store. Now she has a child in pre- school, she rarely brings coupons. Which of the following is not a possible explanation of this change in her behavior?

Recall Application 1, "Don't Forget the Costs of Time and Invested Funds," to answer the following questions. -According to the application, if the interest rate rises, then the opportunity costs of running a business:

Figure 2.2 -Figure 2.2 presents a production possibilities curve for a country that can either produce highways or provide people with medical care in a given year. The opportunity cost of the fourth new highway built in a year is:

A firm produces its product using both capital and labor. When it does not change its capital usage, but doubles its labor input, its output increases by less than 50%. Which of the following is the most likely explanation of this finding?

The principle that what matters to people is the real value or purchasing power of money is the:

A major league baseball player signs a contract that pays $50 million over five years. The $50 million is its _______value.

-Refer to Table 2.3. The marginal product of the 2nd worker is:

Suppose that you lend $1,000 to a friend and he or she pays you back one year later. What is the opportunity cost of lending the money?

You borrow money to buy a house in 2006 at a fixed interest rate of 6.5%. By 2009, the inflation rate has risen to 8.5%. Considering only your mortgage, is inflation good news or bad news for you?

An unemployed individual decides to spend the day fishing. The opportunity cost of fishing is equal to:

According to the marginal principle, a rational individual should not undertake an economic activity if the:

Recall Application 5, "The Declining Real Minimum Wage," to answer the following questions: -According to the application, the weekly income earned in 1974 at that time could buy _______ standard baskets of goods and services in 2007.

Suppose a ticket to a concert costs $39, and parking costs $5. Further, in order to watch the concert, you must miss 2 hours of work where your hourly wage is $15 per hour. The total opportunity cost of watching a concert is:

Figure 2.4 -Joe runs a business and needs to decide how many hours to stay open. Figure 2.4 illustrates his marginal benefit of staying open for each additional hour. Suppose that Joe's marginal cost of staying open per hour is $24. How many hours should Joe stay open?

The principle that states that the cost of something is equal to what is sacrificed to get it is known as the:

Figure 2.3 -In Figure 2.3, an efficient production point on production possibility curve XV is