TUTORIAL 0

CHAPTER 1 (Four Lessons from Economics)

True/False Questions and Multiple Choice Questions

1. In order for scarcity to exist, it must be that:
A. there is a finite amount of a resource
B. more people want the resource than there is available of it
C. the resource is non-renewable
D. nobody wants to purchase the resource
ANS: B

2.

Opportunity costs arise because of resource scarcity.

ANS: T

3.

TOP: Lesson 2: The cost of something is what you give up to get it

The opportunity cost of consuming a unit of good X is the amount of resources that must be
devoted to its production. (True or False?)
ANS: F

5.

TOP: The cost of something is what you give up to get it

In economics, the cost of something is:

A. the out-of-pocket expense of obtaining it
B. what you give up to get it
C. always measured in units of time
D. always higher than people think
ANS: B

4.

TOP: Introduction

TOP: Lesson 2: The cost of something is what you give up to get it

Daniel decides to spend an hour playing cricket rather than working at $16 per hour. His
opportunity cost is:
A. nothing, because he enjoys playing cricket more than working
B. the increase in skill he obtains from playing cricket for that hour
C. the $16 he could have earned
D. nothing, because he spent $16 for admission into the sports complex to play cricket
ANS: C

TOP: Lesson 1: People face trade-offs

6. Ryan spends an hour studying instead of going for a bike ride. The opportunity cost to him of
studying is:
A. the improvement in his grades from studying for the hour
B. the difference between the improvement in his grades from studying minus the
enjoyment of a bike ride
C. the enjoyment and exercise he would have received had he gone for a bike ride
D. zero, since Ryan chose to study rather than to ride his bike, the value of studying
must have been greater than the value of the bike ride
ANS: C

TOP: Lesson 2: The cost of something is what you give up to get it

7. What does the phrase There is no such thing as a free lunch mean?
A. the government taxes firms that sell lunches
B. food prices have risen as a consequence of increased taxes
C. lunches are not free
D. we usually have to give up something, in order to get something else we like
ANS: D

TOP: Lesson 1: People face trade-offs

8. A marginal change is a large and significant change to an existing plan of action.

ANS: F

TOP: Lesson 3: Rational people think at the margin

9. Which of the following is most likely to be a marginal change?

A. doubling the number of fishing boats in a fishery
B. increasing the length of all fishing boats by 50 per cent
C. comparing fishing technology now, to that used 50 years ago
D. increasing a six-month fishing season by one week
ANS: D

TOP:

Lesson 3: Rational people think at the margin

10. A rational decision maker takes an action only if the marginal cost exceeds the marginal
benefit. (True or False?)
ANS: F

TOP: Lesson 3: Rational people think at the margin

11. The opportunity cost of going to university is:

A. the total spent on food, clothing, books, transportation, tuition, lodging and other
expenses
B. zero for students who are fortunate enough to have all of their university expenses
paid by someone else
C. the value of the best opportunity a student gives up to attend university
D. zero, since a university education will allow a student to earn a larger income after
graduation
ANS:

TOP: Lesson 2: The cost of something is what you give up to get it

Open Question
Stan buys a 1966 Mustang with the intention of repairing, restoring and selling it. He
anticipates that it will cost him $10 000 to purchase, repair and restore the car, and that he can
sell the finished car for $13 000. When he has spent a total of $10 000 on the project, he
discovers that he needs to replace the engine. It will cost Stan $4000 to buy a new engine.
Furthermore, Stan will have to spend 5 hours to replace the engine. Stan values the time
needed to replace the engine $500. Alternatively, he can sell the car without the new engine
for $9000. What should he do?

ANS:
Stan should sell the car now. Explanation: The marginal cost of finishing the project is $4500
and the marginal benefit of finishing the project is $13000, for a net marginal benefit of
$8500. The marginal cost of stopping the project is zero and the marginal benefit is the $9000
he can obtain from selling the car as it is (i.e. unfinished). Hence, the net marginal benefit
from stopping the project is $9000.
Finish the project
Marginal Cost
Marginal Benefit
New engine 4000
Revenue from finished car 13000
Value of time 500
Net marginal benefit 8500

Marginal Cost
Zero

Stop the project

Marginal Benefit
Revenue from unfinished car 9000
Net marginal benefit 9000

ADDITIONAL PRACTICE QUESTIONS

Note: For the following questions, correct answers are provided at the end of this section. If you
provide an incorrect answer, you have to truly understand why your answer is incorrect and why the
provided one is correct. Otherwise, no learning takes place. Keep in mind that simply memorizing
answers will not help pass the exams.

1.

Scarcity means that society has less to offer than people wish to have.

2. Which of the following resources is least likely to meet the definition of scarcity?
A. whales
B. air
C. ice-cream
D. computers

3. From an economic point of view for most students, the largest single cost of a university
education is:
A. transportation, parking and entertainment
B. tuition fees and books
C. the wages given up to attend university
D. room and board

4. From an accounting point of view, the largest single cost of a university education for most
students is:
A. transportation, parking and entertainment
B. tuition fees and books
C. the wages given up to attend university
D. room and board

5. According to economists, people make decisions by:

A. following tradition
B. comparing costs and benefits
C. experience
D. calculating dollar costs

6.

A rational decision maker takes an action only if the:

A. marginal benefit is greater than the marginal cost
B. marginal benefit is less than the marginal cost
C. average benefit is greater than the average cost
D. marginal benefit is greater than both the average cost and the marginal cost

7.

In one hour, George can fix 4 flat tires or type 200 words. His opportunity cost of fixing a flat
tire is:

A. 50 words
B. 4 flat tires
C. 1 word
D. 800 words
8.

The central concept of economics is:

A. finance
B. scarcity
C. energy
D. employment

9. The study of economics is concerned with:

A. keeping private businesses from losing money
B. demonstrating that capitalistic economies are superior to socialistic economies
C. how society manages its scarce resources
D. determining the most equitable distribution of society's output

Solutions
In what follows TOP stays for Topic and indicates the section of a chapter where you
can find an explanation to a given answer
1.

ANS: T

TOP: Introduction

2. ANS: B

TOP: Introduction

3.

ANS: C

TOP: Lesson 2: The cost of something is what you give up to get it

4.

ANS: B

TOP: Lesson 2: The cost of something is what you give up to get it

5. ANS: B

TOP: Lesson 3: Rational people think at the margin

6.

ANS: A

TOP: Lesson 3: Rational people think at the margin

7.

ANS: A

TOP: Lesson 3: Rational people think at the margin

8.

ANS: B

TOP: Introduction

9.

ANS: C

TOP: Introduction