Test Questions with Answers
Chapter 1. The Paradigm of Economics
Chapter 1 ― Question 1
The opportunity costs of attending college are highest for a student
- who could work in his father's factory for a high salary
- who chooses an expensive college
- who comes from a poor family
- who must find himself a job to finance his studies
*A. Remember that opportunity costs are the rewards of what you give up. Answers B, C and D relate to the real costs, not to opportunity costs.
Chapter 1― Question 2
Installing a traffic light at a dangerous cross-roads costs $10,000. The opportunity costs of this action are
- $10,000
- the value of the lives saved
- the benefits of other investments that could be made with $10,000
- the costs of other investments that could be made instead
*C.
Chapter 1― Question 3
Define marginal utility and explain why it tends to diminish.
* Marginal utility is the utility of an additional unit. It can also be defined as the utility of the last unit for the time being. Marginal utility diminishes because utility declines as you have more units of a commodity. It eventually approaches zero as saturation is approached.
Chapter 1― Question 4
Are there commodities whose marginal utility does not diminish?
* Money perhaps. There seems to be no saturation point. On the other hand, an additional $10 are, of course, much more valuable for a poor person than for a wealthy one.
Collectibles are another example. Collectors seem to be happy about every additional item they acquire. But as opposed to money, collectibles are normally only similar, not homogeneous. The law of diminishing utility applies to homogeneous goods only.
Chapter 1― Question 5
Can you give an example of a free lunch?
* Money or gifts received as charity from an anonymous donor. Economists would say there are two examples: (1) a free ride, for instance, the benefit the entire neighbourhood receives from your beautiful new house paint, (2) transfer payments such as subsidies, welfare benefits or scholarships, which are, by definition, payments for which the recipient gives nothing in return. But sometimes transfer payments are accompanied by expectations and pressure to enforce them.
Chapter 1― Question 6
Explain why trade-offs are due to scarcity.
* There is nothing in the world that is unlimited. Nobody has more than 24 hours a day and even a very rich man has a limited budget.
Chapter 1 ― Question 7
An economist plans to go on a vacation. He knows the costs like airfares, hotel accommodation, etc. He also knows the benefits as he made the same trip last year. How can he make a cost-benefit analysis, when the costs are expressed in money and the benefits in pleasure?
* He looks at the opportunity costs of the costs and the benefits. The opportunity costs of the costs consist in the things he could buy if he did not spend his money on the vacation. The opportunity costs of the benefits are the benefits of his alternatives to travelling, for instance, the remuneration for a summer course or the knowledge he could acquire through reading during the summer vacation.
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