Chapter 1
1 The potential rewards that a person receives for taking a
particular action are called:
• altruism. Incorrect. Incentives are potential rewards that
motivate people. Please see the introductory section for an
explanation of incentives.
• opportunity costs. Incorrect. Incentives are potential rewards
that motivate people. Please see the introductory section for an
explanation of incentives.
• incentives. (True Answer )Correct. Incentives are potential
rewards that motivate people.
• trade-offs. Incorrect. Incentives are potential rewards that
motivate people. Please see the introductory section for an
explanation of incentives.
2 Economists assume that people are motivated by:
• incentives. (True Answer )Correct. In economics, people
respond to incentives.
• social justice. Incorrect. In economics, people respond to
incentives. Please see the section “Big Idea One: Incentives
Matter” for an explanation of how people respond to incentives.
• benevolence. Incorrect. In economics, people respond to
incentives. Please see the section “Big Idea One: Incentives
Matter” for an explanation of how people respond to incentives.
• altruism. Incorrect. In economics, people respond to
incentives. Please see the section “Big Idea One: Incentives
Matter” for an explanation of how people respond to incentives.
3 In Adam Smith’s book The Wealth of Nations, he observed that
people often promote the social interest by their:
• benevolence. Incorrect. People often promote the social
interest through their own self-interest. Please see the section
“Big Idea Two: Good Institutions Align Self-Interest with the
Social Interest” for an explanation of the relationship between
self-interest and the social interest.
• own self-interest. (True Answer )Correct. People often
promote the social interest through their own self-interest.
• trust in the government. Incorrect. People often promote the
social interest through their own self-interest. Please see the
section “Big Idea Two: Good Institutions Align Self-Interest
, with the Social Interest” for an explanation of the relationship
between self-interest and the social interest.
• lack of trust in other people. Incorrect. People often promote
the social interest through their own self-interest. Please see the
section “Big Idea Two: Good Institutions Align Self-Interest
with the Social Interest” for an explanation of the relationship
between self-interest and the social interest.
4 Adam Smith argued that if people pursue their own interests:
• their actions will have no impact on the economy. Incorrect.
Adam Smith’s view was that people’s pursuit of their own self-
interest often produced outcomes that promote the social-
interest. Please see the section “Big Idea Two: Good Institutions
Align Self-Interest with the Social Interest” for an explanation
of Adam Smith’s view.
• their actions will be in conflict with the social
interest. Incorrect. Adam Smith’s view was that people’s
pursuit of their own self-interest often produced outcomes that
promote the social-interest. Please see the section “Big Idea
Two: Good Institutions Align Self-Interest with the Social
Interest” for an explanation of Adam Smith’s view.
• their actions will often end up promoting the social
interest. (True Answer )Correct. Adam Smith’s view was that
people’s pursuit of their own self-interest often produced
outcomes that promote the social-interest.
• they will always fail. Incorrect. Adam Smith’s view was that
people’s pursuit of their own self-interest often produced
outcomes that promote the social-interest. Please see the section
“Big Idea Two: Good Institutions Align Self-Interest with the
Social Interest” for an explanation of Adam Smith’s view.
5 Which of the following is TRUE about markets?
• Markets always align self-interest with the social
interest. Incorrect. Markets reflect outcomes of self-interest.
Please see the section “Big Idea Two: Good Institutions Align
Self-Interest with the Social Interest” for an explanation market
incentives.
• Markets always produce outcomes in line with self-interest
but not necessarily the social interest. (True Answer )Correct.
Markets reflect outcomes of self-interest.
• Markets always produce outcomes in line with the social
interest but not necessarily self-interest. Incorrect. Markets
, reflect outcomes of self-interest. Please see the section “Big Idea
Two: Good Institutions Align Self-Interest with the Social
Interest” for an explanation market incentives.
• None of the answers are correct. Incorrect. Markets reflect
outcomes of self-interest. Please see the section “Big Idea Two:
Good Institutions Align Self-Interest with the Social Interest”
for an explanation market incentives.
6 Opportunity cost is:
• the value of the opportunities lost when a choice is
made. (True Answer )Correct. The opportunity cost of a choice
is the value of the opportunities lost.
• the rewards of making a choice. Incorrect. The opportunity
cost of a choice is the value of the opportunities lost. Please see
the section “Big Idea Three: Trade-offs Are Everywhere” for an
explanation of opportunity cost.
• the money cost that a person has to incur when making a
choice. Incorrect. The opportunity cost of a choice is the value
of the opportunities lost. Please see the section “Big Idea Three:
Trade-offs Are Everywhere” for an explanation of opportunity
cost.
• the incentive for a person to do anything. Incorrect. The
opportunity cost of a choice is the value of the opportunities lost.
Please see the section “Big Idea Three: Trade-offs Are
Everywhere” for an explanation of opportunity cost.
7 Which of the following is NOT an opportunity cost of going to
college?
• the tuition cost Incorrect. You would pay for food and shelter
anyway, so it is not part of the opportunity cost of going to
college. Please see the section “Big Idea Three: Trade-offs Are
Everywhere” for an explanation of opportunity cost.
• the cost of textbooks Incorrect. You would pay for food and
shelter anyway, so it is not part of the opportunity cost of going
to college. Please see the section “Big Idea Three: Trade-offs
Are Everywhere” for an explanation of opportunity cost.
• the costs of food and shelter (True Answer )Correct. You
would pay for food and shelter anyway, so it is not part of the
opportunity cost of going to college.
• the lost employment opportunities while in college Incorrect.
You would pay for food and shelter anyway, so it is not part of
the opportunity cost of going to college. Please see the section
, “Big Idea Three: Trade-offs Are Everywhere” for an
explanation of opportunity cost.
8 People make decisions by comparing:
• marginal benefits with marginal costs. (True Answer
)Correct. People think on the margin.
• total benefits with total costs. Incorrect. People think on the
margin. Please see the section “Big Idea Four: Thinking on the
Margin” for an explanation of the concept of “thinking on the
margin.”
• total benefits to them personally with the marginal cost to
other people. Incorrect. People think on the margin. Please see
the section “Big Idea Four: Thinking on the Margin” for an
explanation of the concept of “thinking on the margin.”
• marginal benefits to them personally with the total cost to
other people. Incorrect. People think on the margin. Please see
the section “Big Idea Four: Thinking on the Margin” for an
explanation of the concept of “thinking on the margin.”
9 A new college graduate decides to go to graduate school instead
of accepting a job offer. Which of the following would be a
major factor for that decision?
• The amount of additional income he or she will earn after
completing the graduate degree as compared with the income
from the job offer. (True Answer )Correct. The decision is
based on the marginal income from earning the graduate
degree.
• Only the total income from getting the graduate
degree. Incorrect. The decision is based on the marginal income
from earning the graduate degree. Please see the section “Big
Idea Four: Thinking on the Margin” for an explanation of
“thinking on the margin.”
• Only the total income from that job offer. Incorrect. The
decision is based on the marginal income from earning the
graduate degree. Please see the section “Big Idea Four:
Thinking on the Margin” for an explanation of “thinking on the
margin.”
• None of the answers are correct. Incorrect. The decision is
based on the marginal income from earning the graduate
degree. Please see the section “Big Idea Four: Thinking on the
Margin” for an explanation of “thinking on the margin.”
1 The potential rewards that a person receives for taking a
particular action are called:
• altruism. Incorrect. Incentives are potential rewards that
motivate people. Please see the introductory section for an
explanation of incentives.
• opportunity costs. Incorrect. Incentives are potential rewards
that motivate people. Please see the introductory section for an
explanation of incentives.
• incentives. (True Answer )Correct. Incentives are potential
rewards that motivate people.
• trade-offs. Incorrect. Incentives are potential rewards that
motivate people. Please see the introductory section for an
explanation of incentives.
2 Economists assume that people are motivated by:
• incentives. (True Answer )Correct. In economics, people
respond to incentives.
• social justice. Incorrect. In economics, people respond to
incentives. Please see the section “Big Idea One: Incentives
Matter” for an explanation of how people respond to incentives.
• benevolence. Incorrect. In economics, people respond to
incentives. Please see the section “Big Idea One: Incentives
Matter” for an explanation of how people respond to incentives.
• altruism. Incorrect. In economics, people respond to
incentives. Please see the section “Big Idea One: Incentives
Matter” for an explanation of how people respond to incentives.
3 In Adam Smith’s book The Wealth of Nations, he observed that
people often promote the social interest by their:
• benevolence. Incorrect. People often promote the social
interest through their own self-interest. Please see the section
“Big Idea Two: Good Institutions Align Self-Interest with the
Social Interest” for an explanation of the relationship between
self-interest and the social interest.
• own self-interest. (True Answer )Correct. People often
promote the social interest through their own self-interest.
• trust in the government. Incorrect. People often promote the
social interest through their own self-interest. Please see the
section “Big Idea Two: Good Institutions Align Self-Interest
, with the Social Interest” for an explanation of the relationship
between self-interest and the social interest.
• lack of trust in other people. Incorrect. People often promote
the social interest through their own self-interest. Please see the
section “Big Idea Two: Good Institutions Align Self-Interest
with the Social Interest” for an explanation of the relationship
between self-interest and the social interest.
4 Adam Smith argued that if people pursue their own interests:
• their actions will have no impact on the economy. Incorrect.
Adam Smith’s view was that people’s pursuit of their own self-
interest often produced outcomes that promote the social-
interest. Please see the section “Big Idea Two: Good Institutions
Align Self-Interest with the Social Interest” for an explanation
of Adam Smith’s view.
• their actions will be in conflict with the social
interest. Incorrect. Adam Smith’s view was that people’s
pursuit of their own self-interest often produced outcomes that
promote the social-interest. Please see the section “Big Idea
Two: Good Institutions Align Self-Interest with the Social
Interest” for an explanation of Adam Smith’s view.
• their actions will often end up promoting the social
interest. (True Answer )Correct. Adam Smith’s view was that
people’s pursuit of their own self-interest often produced
outcomes that promote the social-interest.
• they will always fail. Incorrect. Adam Smith’s view was that
people’s pursuit of their own self-interest often produced
outcomes that promote the social-interest. Please see the section
“Big Idea Two: Good Institutions Align Self-Interest with the
Social Interest” for an explanation of Adam Smith’s view.
5 Which of the following is TRUE about markets?
• Markets always align self-interest with the social
interest. Incorrect. Markets reflect outcomes of self-interest.
Please see the section “Big Idea Two: Good Institutions Align
Self-Interest with the Social Interest” for an explanation market
incentives.
• Markets always produce outcomes in line with self-interest
but not necessarily the social interest. (True Answer )Correct.
Markets reflect outcomes of self-interest.
• Markets always produce outcomes in line with the social
interest but not necessarily self-interest. Incorrect. Markets
, reflect outcomes of self-interest. Please see the section “Big Idea
Two: Good Institutions Align Self-Interest with the Social
Interest” for an explanation market incentives.
• None of the answers are correct. Incorrect. Markets reflect
outcomes of self-interest. Please see the section “Big Idea Two:
Good Institutions Align Self-Interest with the Social Interest”
for an explanation market incentives.
6 Opportunity cost is:
• the value of the opportunities lost when a choice is
made. (True Answer )Correct. The opportunity cost of a choice
is the value of the opportunities lost.
• the rewards of making a choice. Incorrect. The opportunity
cost of a choice is the value of the opportunities lost. Please see
the section “Big Idea Three: Trade-offs Are Everywhere” for an
explanation of opportunity cost.
• the money cost that a person has to incur when making a
choice. Incorrect. The opportunity cost of a choice is the value
of the opportunities lost. Please see the section “Big Idea Three:
Trade-offs Are Everywhere” for an explanation of opportunity
cost.
• the incentive for a person to do anything. Incorrect. The
opportunity cost of a choice is the value of the opportunities lost.
Please see the section “Big Idea Three: Trade-offs Are
Everywhere” for an explanation of opportunity cost.
7 Which of the following is NOT an opportunity cost of going to
college?
• the tuition cost Incorrect. You would pay for food and shelter
anyway, so it is not part of the opportunity cost of going to
college. Please see the section “Big Idea Three: Trade-offs Are
Everywhere” for an explanation of opportunity cost.
• the cost of textbooks Incorrect. You would pay for food and
shelter anyway, so it is not part of the opportunity cost of going
to college. Please see the section “Big Idea Three: Trade-offs
Are Everywhere” for an explanation of opportunity cost.
• the costs of food and shelter (True Answer )Correct. You
would pay for food and shelter anyway, so it is not part of the
opportunity cost of going to college.
• the lost employment opportunities while in college Incorrect.
You would pay for food and shelter anyway, so it is not part of
the opportunity cost of going to college. Please see the section
, “Big Idea Three: Trade-offs Are Everywhere” for an
explanation of opportunity cost.
8 People make decisions by comparing:
• marginal benefits with marginal costs. (True Answer
)Correct. People think on the margin.
• total benefits with total costs. Incorrect. People think on the
margin. Please see the section “Big Idea Four: Thinking on the
Margin” for an explanation of the concept of “thinking on the
margin.”
• total benefits to them personally with the marginal cost to
other people. Incorrect. People think on the margin. Please see
the section “Big Idea Four: Thinking on the Margin” for an
explanation of the concept of “thinking on the margin.”
• marginal benefits to them personally with the total cost to
other people. Incorrect. People think on the margin. Please see
the section “Big Idea Four: Thinking on the Margin” for an
explanation of the concept of “thinking on the margin.”
9 A new college graduate decides to go to graduate school instead
of accepting a job offer. Which of the following would be a
major factor for that decision?
• The amount of additional income he or she will earn after
completing the graduate degree as compared with the income
from the job offer. (True Answer )Correct. The decision is
based on the marginal income from earning the graduate
degree.
• Only the total income from getting the graduate
degree. Incorrect. The decision is based on the marginal income
from earning the graduate degree. Please see the section “Big
Idea Four: Thinking on the Margin” for an explanation of
“thinking on the margin.”
• Only the total income from that job offer. Incorrect. The
decision is based on the marginal income from earning the
graduate degree. Please see the section “Big Idea Four:
Thinking on the Margin” for an explanation of “thinking on the
margin.”
• None of the answers are correct. Incorrect. The decision is
based on the marginal income from earning the graduate
degree. Please see the section “Big Idea Four: Thinking on the
Margin” for an explanation of “thinking on the margin.”
