Chapter 2

Thinking Like an Economist

MULTIPLE CHOICE

1
. Which is the best statement about the way economists study the economy?
a. They study the past, but do not try to predict the future.
b. They devise theories, collect data, then analyze the data to test the theories.
c. They use a probabilistic approach based on correlations between economic events.
d. They use controlled experiments in much the same way a biologist or physicist does.
ANSWER: b. They devise theories, collect data, then analyze the data to test the theories.
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2
. The scientific method can best be defined as
a. the use of modern electronic testing equipment in understanding the world.
b. the use of controlled experiments in understanding the way the world works.
c. the dispassionate development and testing of theories about how the world works.
d. finding evidence to support preconceived theories about how the world works.
ANSWER: c. the dispassionate development and testing of theories about how the world works.
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3
. Albert Einstein once made the following observation about science:
a. “In order to understand science, one must rely solely on abstraction.”
b. “The whole of science is nothing more than an interesting intellectual exercise.”
c. “The whole of science is nothing more than the refinement of everyday thinking.”
d. “In order to understand science, one must transcend everyday thinking.”
ANSWER: c. “The whole of science is nothing more than the refinement of everyday thinking.”
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1
ANSWER: b. They devise theories, collect data, then analyze the data to test the theories.
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2
ANSWER: c. the dispassionate development and testing of theories about how the world
works.
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3
ANSWER: c. “The whole of science is nothing more than the refinement of everyday
thinking.”
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2 Chapter 2/Thinking Like an Economist

4
. Sir Isaac Newton’s development of the theory of gravity after observing an apple fall from a tree is an
example of:
a. controlled experiments used to develop scientific theories.
b. being in the right place at the right time.
c. an idea whose time had come.
d. the interplay between observation and theory in science.
ANSWER: d. the interplay between observation and theory in science.
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5
. The use of theory and observation is more difficult in economics than in sciences such as physics due
to
a. the difficulty in actually performing an experiment in an economic system.
b. the difficulty in devising an economic experiment.
c. the difficulty in evaluating an economic experiment.
d. all of the above.
ANSWER: a. the difficulty in actually performing an experiment in an economic system.
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6
. Because it is difficult for economists to use experiments to generate economic data,
a. they do without.
b. they use whatever data the world gives them.
c. they make up the data.
d. they ask policymakers to conduct experiments for them.
ANSWER: b. they use whatever data the world gives them.
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7
. The most common data for testing economic theories come from
a. carefully controlled and conducted laboratory experiments.
b. centrally planned economies.
c. traditional economies.
d. historical episodes of economic change.
ANSWER: d. historical episodes of economic change.
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4
ANSWER: d. the interplay between observation and theory in science.
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5
ANSWER: a. the difficulty in actually performing an experiment in an economic system.
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6
ANSWER: b. they use whatever data the world gives them.
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7
ANSWER: d. historical episodes of economic change.
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8
. Economists make assumptions
a. to diminish the chance of wrong answers.
b. to make certain that all necessary variables are included.
c. because all scientists make assumptions.
d. to make the world easier to understand.
ANSWER: d. to make the world easier to understand.
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9
. The art of scientific thinking involves
a. deciding which assumptions to make.
b. understanding every scientific field - physics, biology and economics.
c. knowing how the major organs of the human body work.
d. being able to mathematically express natural forces.
ANSWER: a. deciding which assumptions to make.
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10
. If an economist develops a theory about international trade based on the assumption that there are
only two countries and two goods,
a. the theory can be useful only in situations involving two countries and two goods.
b. it is a total waste of time, since the actual world has many countries trading many goods.
c. the theory can be useful in helping economists understand the complex world of international
trade involving many countries and many goods.
d. the theory can be useful in the classroom, but has no use in the real world.
ANSWER: c. the theory can be useful in helping economists understand the complex world of
international trade involving many countries and many goods.
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11
. What would be the best statement about a theory based on assumptions which are not true?
a. If the assumptions underlying the theory are not true, the theory must be false.
b. The ideas may be good in theory, but not in practice.
c. The theory is a good one if no logical mistakes were made in developing it.
d. The theory is a good one if it helps us to understand how the world works.
ANSWER: d. The theory is a good one if it helps us to understand how the world works.
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12
. What is the goal of theories?
a. to provide an interesting, but not useful, framework of analysis
b. to help scientists understand how the world works
c. to demonstrate that the developer of the theory is capable of logical thinking
d. to provoke stimulating debate in scientific journals
ANSWER: b. to help scientists understand how the world works
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13
. For a scientist, the decision of which assumption to make

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4 Chapter 2/Thinking Like an Economist

a. is part art.
b. is the flip of a coin.
c. is almost impossible.
d. is the easiest part of the scientific method.
ANSWER: a. is part art.
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14
. Economists use models in order to
a. learn how the economy works.
b. make their profession appear more precise.
c. make economics difficult for students.
d. make sure that all of the details of the economy are included in their analysis.
ANSWER: a. learn how the economy works.
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15
. A model
a. simplifies reality.
b. can explain how the economy is organized.
c. assumes away irrelevant details.
d. all of the above
ANSWER: d. all of the above
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16
. Economic models are usually composed of
a. plastic.
b. beautiful people.
c. assumptions only.
d. diagrams and equations.
ANSWER: d. diagrams and equations.
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17
. Which of the following is the most accurate statement about economic models?
a. Economic models attempt to mirror reality exactly.
b. Economic models are useful, but should not be used for policy-making.
c. Economic models cannot be used in the real world because they omit details.
d. Economic models omit many details to allow us to see what is truly important.
ANSWER: d. Economic models omit many details to allow us to see what is truly important.
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18
. The foundation stones from which economic models are built are
a. economic policies.
b. the legal system.
c. assumptions.
d. statistical forecasts.
ANSWER: c. assumptions.
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19
. A circular-flow diagram is

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 Chapter 2/Thinking Like an Economist 5

a. a model that illustrates cost-benefit analysis.

b. a model that explains how the economy is organized.
c. a model that shows the flow of traffic in an economic region.
d. a model that explains how banks circulate money in the economy.
ANSWER: b. a model that explains how the economy is organized.
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20
. Factors of production are
a. inputs into the production process.
b. weather, social, and political conditions that affect production.
c. the physical relationships between economic inputs and outputs.
d. the mathematical calculations firms make to determine production.
ANSWER: a. inputs into the production process.
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21
. The two loops in the circular-flow diagram represent
a. the flow of goods and the flow of services.
b. the flow of goods and services and the flow of dollars.
c. the flow of dollars and the flow of financial assets.
d. the flow of capital goods and the flow of consumer goods.
ANSWER: b. the flow of goods and services and the flow of dollars.
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22
. In a circular-flow diagram,
a. taxes flow from households to firms, and transfer payments flow from firms to households.
b. income payments flow from firms to households, and sales revenue flows from households to
firms.
c. resources flow from households to firms, and goods and services flow from firms to households.
d. b and c
ANSWER: d. b and c
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23
. In the circular-flow diagram,
a. firms are sellers in the resource market and the product market.
b. households are sellers in the resource market.
c. firms are buyers in the product market.
d. spending on goods and services flow from firms to households.
ANSWER: b. households are sellers in the resource market.
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24
. In the circular-flow diagram,
a. spending on goods and services flow from firms to households.
b. goods and services flow from households to firms.
c. factors of production flow from firms to households.
d. income from factors of production flows from firms to households.
ANSWER: d. income from factors of production flows from firms to households.
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25
. The revenue from sales that firms have left after paying for the factors of production is
a. rent.
b. wages.
c. interest.
d. profit.
ANSWER: d. profit.
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26
. In the circular-flow diagram shown, which arrow shows the flow of goods and services?
a. A
b. B
c. C
d. D
ANSWER: b. B
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27
. In the circular-flow diagram shown, which arrow shows the flow of spending by households?
a. A
b. B
c. C
d. D
ANSWER: a. A
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28
. In the circular-flow diagram shown, which arrow shows the flow of the factors of production?
a. A
b. B
c. C
d. D
ANSWER: c. C
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29
. In the circular-flow diagram shown, which arrow shows the flow of income payments?
a. A
b. B
c. C
d. D
ANSWER: d. D
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30
. The production possibilities frontier is
a. a map which shows the frontier beyond which agriculture is unprofitable.
b. a map which shows areas of the world in which capitalist production is now possible.
c. a graph that shows the various combinations of output the economy can possibly produce given
the available resources and technology.
d. a graph which shows the various combinations of resources that can be used to produce a given
level of output.
ANSWER: c. a graph that shows the various combinations of output the economy can possibly
produce given the available resources and technology.
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31
. Which of the following is the most accurate statement about production possibilities?
a. An economy can produce only on the production possibilities frontier.
b. An economy can produce at any point inside or outside a production possibilities frontier.
c. An economy can produce at any point on or inside the production possibilities frontier, but not
outside the frontier.
d. An economy can produce at any point inside the production possibilities frontier, but not on or
outside the frontier.
ANSWER: c. An economy can produce at any point on or inside the production possibilities frontier,
but not outside the frontier.
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32
. An economic outcome is said to be efficient if
a. the economy is using all of the resources it has available.
b. the economy is conserving on resources and not using all it has.
c. the economy is getting all it can from the scarce resources it has available.
d. the economy is producing only the goods and services consumers need the most.
ANSWER: c. the economy is getting all it can from the scarce resources it has available.
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33
. On a production possibilities frontier, production is efficient if
a. the production point is inside the frontier.
b. the production point is outside the frontier.
c. the production point is on or inside the frontier.
d. the production point is on the frontier.
ANSWER: d. the production point is on the frontier.
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34
. An economy is said to be efficient if

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8 Chapter 2/Thinking Like an Economist

a. it is possible to produce more of all goods.

b. it is possible to produce more of one good without producing less of another.
c. it is not possible to produce more of one good without producing less of another.
d. it is not possible to produce more of one good at any cost.
ANSWER: c. it is not possible to produce more of one good without producing less of another.
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35
. Which of the following concepts is NOT illustrated by the production possibilities frontier?
a. efficiency
b. opportunity cost
c. equity
d. tradeoffs
ANSWER: c. equity
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36
. On the production possibilities frontier shown, which point or points are possible for this economy to
produce?
a. A, B, C, D
b. A, B, C, F
c. A, B, C, D, E, F
d. D
ANSWER: a. A, B, C, D
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35
ANSWER: c. equity
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ANSWER: a. A, B, C, D
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37
. On the production possibilities frontier shown, which point represents the maximum possible
production of CD s?
a. A
b. B
c. C
d. D
ANSWER: a. A
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38
. On the production possibilities frontier shown, which point or points are NOT possible for this
economy to produce?
a. D
b. E, F
c. A, B, C
d. D, E, F
ANSWER: b. E, F
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39
. On the production possibilities frontier shown, which point or points are efficient?
a. A, B, C
b. A, C, F
c. E
d. D
ANSWER: a. A, B, C
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40
. On the production possibilities frontier shown, which point or points are inefficient?
a. A, B, C
b. E, F
c. B
d. D
ANSWER: d. D
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41
. The opportunity cost of obtaining more of one good is shown on the production possibilities frontier
as
a. the amount of the other good which must be given up.
b. the market price of the additional amount produced.
c. the amount of resources which must be devoted to its production.
d. the number of dollars which must be spent to produce it.
ANSWER: a. the amount of the other good which must be given up.
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42
. On the production possibilities frontier shown, the opportunity cost to the economy of getting 10
additional roller blades by moving from point A to point B is
a. 15 bikes.
b. 10 bikes.
c. 5 bikes.
d. It is impossible to know the opportunity cost without knowing the cost of the resources used to
produce the additional roller blades.
ANSWER: c. 5 bikes.
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43
. On the production possibilities frontier shown, the opportunity cost of getting 5 additional bikes by
moving from point A to point C is
a. 15 roller blades.
b. 10 roller blades.
c. 5 roller blades.
d. It is impossible for the economy to move from point A to point C.
ANSWER: d. It is impossible for the economy to move from point A to point C.
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ANSWER: c. 5 bikes.
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43
ANSWER: d. It is impossible for the economy to move from point A to point C.
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44
. On the production possibilities frontier shown, the opportunity cost of getting 20 additional roller
blades by moving from point D to point A is
a. 15 bikes.
b. 10 bikes.
c. 5 bikes.
d. 0.
ANSWER: d. 0.
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45
. In the production possibilities frontier shown, the shift of the frontier from A to B was most likely
caused by which of the following?
a. more capital available in the economy
b. more labor available in the economy
c. a general technological breakthrough
d. technological improvement in the production of clothing
ANSWER: d. technological improvement in the production of clothing
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46
. According to the graph, the shift of the production possibilities frontier from frontier A to frontier B
was most likely caused by which of the following?

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a. an improvement in the technology of producing capital goods.

b. an improvement in the technology of producing consumer goods.
c. a general improvement in technology.
d. a reduction in the availability of resources.
ANSWER: c. a general improvement in technology.
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47
. In the graph shown, the movement from frontier A to B can best be described as
a. economic growth.
b. a disaster for society.
c. an improvement in income distribution.
d. an improvement in the allocation of resources.
ANSWER: a. economic growth.
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48
. In the production possibilities frontier shown, what is the opportunity cost to society of the
movement from point D to point B?
a. 750 pretzels
b. 500 pretzels
c. 250 pretzels
d. 150 pretzels
ANSWER: c. 250 pretzels
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49
. In the production possibilities frontier shown, what is the opportunity cost to society of moving from
point C to point E?
a. 150 pretzels
b. 300 potato chips
c. a and b
d. zero
ANSWER: c. a and b
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50
. In the production possibilities frontier shown, the movement from point C to point E was most likely
caused by
a. an increase in society’s preference for pretzels.
b. a decrease in society’s preference for potato chips.
c. unemployment.
d. a and b
ANSWER: c. unemployment.
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Production Possibilities for Tuneland

Cars Toys
50 0
40 250
30 450
20 600
10 700
0 750

51
. The reference table shows the production possibilities for Tuneland. What is the opportunity cost to
Tuneland of increasing the production of cars from 30 to 40?
a. 200 toys
b. 250 toys
c. 450 toys
d. It is impossible to tell what the opportunity cost is without knowing production costs for cars and
toys.
ANSWER: a. 200 toys
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52
. In the table showing the production possibilities for Tuneland, what is the opportunity cost of
increasing the production of toys from 450 to 600?
a. 30 cars
b. 20 cars
c. 10 cars
d. It is impossible to tell what the opportunity cost is without knowing production costs for cars and
toys.
ANSWER: c. 10 cars
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53
. Based on the table showing the production possibilities for Tuneland, what is the most accurate
statement about the opportunity cost of producing an additional 10 cars in Tuneland?
a. The opportunity cost of an additional 10 cars is 100 toys.
b. The opportunity cost of an additional 10 cars is 200 toys.
c. It is impossible to determine the opportunity cost of an additional 10 cars.
d. The opportunity cost of an additional 10 cars increases as more cars are produced.
ANSWER: d. The opportunity cost of an additional 10 cars increases as more cars are produced.
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14 Chapter 2/Thinking Like an Economist

54
. Which of the following would be considered a topic of study in macroeconomics?
a. the impact of agricultural price support programs in the cotton industry
b. the effect on U.S. steel producers of an import quota imposed on foreign steel
c. the effect of an increase in the price of imported oil on the U.S. inflation rate
d. the effect of an increase in the price of imported coffee beans on the U.S. coffee industry
ANSWER: c. the effect of an increase in the price of imported oil on the U.S. inflation rate
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55
. Which of the following would be considered a topic of study in microeconomics?
a. the effect of changes in saving rates on GDP
b. the impact of minimum-wage laws on employment in the fast-food industry
c. the impact of monetary policy on the rate of inflation
d. the effect of tax policy on the rate of economic growth
ANSWER: b. the impact of minimum-wage laws on employment in the fast-food industry
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56
. Which is the best statement about the roles of economists?
a. Economists are best viewed as policymakers.
b. Economists are best viewed as scientists.
c. In trying to explain the world, economists are scientists; in trying to improve the world, they are
policymakers.
d. In trying to explain the world, economists are policymakers; in trying to improve the world, they
are scientists.
ANSWER: c. In trying to explain the world, economists are scientists; in trying to improve the world,
they are policymakers.
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57
. For economists, statements about the world are of two types:
a. assumptions and theories.
b. true statements and false statements.
c. specific statements and general statements.
d. positive statements and normative statements.
ANSWER: d. positive statements and normative statements.
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58
. For economists, positive statements are
a. descriptive, making a claim about how the world is.
b. optimistic, putting the best possible interpretation on things.
c. affirmative, justifying existing economic policy.
d. prescriptive, making a claim about how the world ought to be.
ANSWER: a. descriptive, making a claim about how the world is.
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59
. Normative statements are

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a. descriptive, making a claim about how the world is.

b. statements about the normal condition of the world.
c. prescriptive, making a claim about how the world ought to be.
d. statements which establish production goals for the economy.
ANSWER: c. prescriptive, making a claim about how the world ought to be.
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60
. Which of the following is an example of a positive statement?
a. If welfare payments increase, the world will be a better place.
b. Prices rise when the government prints too much money.
c. Inflation is more harmful to the economy than unemployment.
d. The benefits to the economy of improved equity are greater than the costs of reduced efficiency.
ANSWER: b. Prices rise when the government prints too much money.
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61
. Which of the following is an example of a normative statement?
a. If the price of a product decreases, quantity demanded increases.
b. Reducing tax rates on the wealthy would be good for the country.
c. If the national saving rate were to increase, so would the rate of economic growth.
d. All of the above are normative statements.
ANSWER: b. Reducing tax rates on the wealthy would be good for the country.
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62
. When President Harry Truman said that he wanted to find a one-armed economist he recognized that
economists’ advice is often equivocal. This is because
a. economists cannot make up their minds on policy matters.
b. economists always disagree with each other on policy issues.
c. economists are aware that tradeoffs are involved in most policy questions.
d. economists are often not able to identify the real questions involved in policy issues.
ANSWER: c. economists are aware that tradeoffs are involved in most policy questions.
TYPE: M KEY1: C SECTION: 2 OBJECTIVE: 6 RANDOM: Y

63
. In addition to advising the president, one duty of the Council of Economic Advisors is to

60
ANSWER: b. Prices rise when the government prints too much money.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 5 RANDOM: Y

61
ANSWER: b. Reducing tax rates on the wealthy would be good for the country.
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62
ANSWER: c. economists are aware that tradeoffs are involved in most policy questions.
TYPE: M KEY1: C SECTION: 2 OBJECTIVE: 6 RANDOM: Y

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16 Chapter 2/Thinking Like an Economist

a. prepare the federal budget.

b. write government regulations.
c. advise Congress on economic matters.
d. write the annual Economic Report of the President.
ANSWER: d. write the annual Economic Report of the President.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 6 RANDOM: Y

64
. The Council of Economic Advisors consists of
a. three members and a staff of several dozen economists.
b. six members and a staff of several dozen economists.
c. twelve members and a staff of about a hundred economists.
d. several dozen members and a staff of several hundred economists.
ANSWER: a. three members and a staff of several dozen economists.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 6 RANDOM: Y

65
. The President of the United States receives tax policy advice from economists in
a. the Federal Reserve.
b. the Department of Treasury.
c. the Department of Justice.
d. the Congressional Budget Office.
ANSWER: b. the Department of Treasury.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 6 RANDOM: Y

66
. Economists in which department help enforce antitrust laws?
a. Department of Labor
b. Department of Justice
c. Department of Treasury
d. Department of Commerce
ANSWER: b. Department of Justice
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 6 RANDOM: Y

67
. Economists who are primarily responsible for advising Congress on economic matters work in which
agency?
a. the Federal Reserve
b. the Department of Treasury
c. the Congressional Budget Office
d. the Department of Commerce
ANSWER: c. the Congressional Budget Office
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 6 RANDOM: Y

68
. A survey which asked the opinion of academic, business, and government economists on ten
propositions about economic policy found that
a. the respondents were almost equally divided on the propositions.
b. the respondents favored the propositions by a slight margin.
c. the respondents disagreed with the propositions by a slight margin.
d. there was overwhelming endorsement of the propositions among the respondents.
ANSWER: d. there was overwhelming endorsement of the propositions among the respondents.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 7 RANDOM: Y

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 Chapter 2/Thinking Like an Economist 17

69
. Almost all economists agree that rent control
a. improves the availability and quality of housing.
b. adversely affects the availability and quality of housing.
c. allows the market for housing to work more efficiently.
d. is a very inexpensive way to help the most needy members of society.
ANSWER: b. adversely affects the availability and quality of housing.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 7 RANDOM: Y

70
. The 1993 North American Free Trade Agreement (NAFTA)
a. had overwhelming support from economists, and passed Congress by an overwhelming margin.
b. had overwhelming support from economists, but passed Congress by a narrow margin.
c. had little support from economists, but passed Congress by an overwhelming margin.
d. had little support from economists, and passed Congress by a narrow margin.
ANSWER: b. had overwhelming support from economists, but passed Congress by a narrow margin.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 7 RANDOM: Y

71
. Which of the following is the best explanation for why policies such as rent control and import quotas
persist in spite of the fact that experts are united in their opposition to such policies?
a. Economists have not yet convinced the general public that the policies are undesirable.
b. Economists are simply wrong about the economic impact of these policies.
c. Economists have different values than do most people.
d. Economists are usually of a different political party than are lawmakers.
ANSWER: a. Economists have not yet convinced the general public that the policies are undesirable.
TYPE: M KEY1: C SECTION: 3 OBJECTIVE: 7 RANDOM: Y

72
. How did the great economist John Maynard Keynes explain his comment that although economics is
an easy subject compared with the higher branches of philosophy or pure science; it is a subject at
which few excel?
a. Most people who study economics are not very bright.
b. Good economists must possess a rare combination of gifts.
c. Economics is actually quite boring; hence, people tend to lose interest in it.
d. Good thinkers become frustrated with economics because it is not logical or relevant.
ANSWER: b. Good economists must possess a rare combination of gifts.
TYPE: M KEY1: C SECTION: 4 OBJECTIVE: 7 RANDOM: Y

73
. Why are graphs used in economics?
a. Graphs can provide a way of finding how variables are related in the real world.
b. Graphs are used because it is impossible to express most economic ideas with equations or
words.
c. Graphs can visually express ideas more clearly than might be the case if they are expressed with
equations or words.
d. a and c
ANSWER: d. a and c
TYPE: M KEY1: D SECTION: 2A OBJECTIVE: 1 RANDOM: Y

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18 Chapter 2/Thinking Like an Economist

74
. Which of the graphs shown is a time series graph?
a. A
b. B
c. C
d. A and B
ANSWER: b. B
TYPE: M KEY1: G GRAPH FORMAT: M QUESTION INSTRUCTION: 9 RANDOM: N

75
. Which of the graphs shown is a bar graph?
a. A
b. B
c. C
d. A and B
ANSWER: a. A
TYPE: M KEY1: G GRAPH FORMAT: M QUESTION INSTRUCTION: 9 RANDOM: N

76
. A coordinate system is used

74
ANSWER: b. B
TYPE: M KEY1: G KEY2: A GRAPH FORMAT: M QUESTION INSTRUCTION: 9 RANDOM: N

75
ANSWER: a. A
TYPE: M KEY1: G KEY2: A GRAPH FORMAT: M QUESTION INSTRUCTION: 9 RANDOM: N

76
ANSWER: c. to allow economists to show two variables on a single graph.
TYPE: M KEY1: D KEY2: A RANDOM: Y

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 Chapter 2/Thinking Like an Economist 19

a. to show the flow of income and products in an economic system.

b. to organize labor and other resources in the production process.
c. to allow economists to show two variables on a single graph.
d. to teach economists how to draw graphs consistently.
ANSWER: c. to allow economists to show two variables on a single graph.
TYPE: M KEY1: D RANDOM: Y

77
. An ordered pair is
a. the process of checking calculations twice before placing them on a graph.
b. the inventory system used to keep track of right and left shoes, etc.
c. two numbers which can be represented by a point on a graph.
d. two halves of a whole.
ANSWER: c. two numbers which can be represented by a point on a graph.
TYPE: M KEY1: D RANDOM: Y

78
. Which of the following statements is correct?
a. The x-coordinate tells us the horizontal location of a point on a graph, and the y-coordinate tells
us the vertical location of the point.
b. The origin of a graph is the point with both a maximum x-coordinate and a maximum y-
coordinate.
c. The x-coordinate tells us the vertical location of a point on a graph, and the y-coordinate tells us
the horizontal location of the point.
d. The origin of a graph is represented by an x-coordinate equal to 1 and a y-coordinate equal to 1.
ANSWER: a. The x-coordinate tells us the horizontal location of a point on a graph, and the y-
coordinate tells us the vertical location of the point.
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79
. The graph shown is known as a
a. time series.
b. bar graph.
c. scatterplot.
d. pie chart.
ANSWER: c. scatterplot.
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80
. In the graph shown, the correct designation of point A is:

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20 Chapter 2/Thinking Like an Economist

a. (0, 20)
b. (0, 150)
c. (20, 150)
d. (150, 20)
ANSWER: d. (150, 20)
TYPE: M KEY1: G GRAPH FORMAT: M QUESTION INSTRUCTION: 1 RANDOM: N

81
. What is the most accurate statement about the relationship shown in the graph?
a. Age and weight have a positive correlation.
b. Age and weight have a negative correlation.
c. Age and weight have a random correlation.
d. Age and weight have no correlation.
ANSWER: a. Age and weight have a positive correlation.
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82
. Based on the graph shown, what would you say about the relationship between age and weight?
a. As people age from 10 to 30, their weight tends to increase.
b. As people age from 10 to 30, their weight tends to decrease.
c. As people age from 10 to 30, their weight seems to remain constant.
d. As people age from 10 to 30, their weight changes in an unpredictable way.
ANSWER: a. As people age from 10 to 30, their weight tends to increase.
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83
. In the graph, the curves shown are
a. supply curves.
b. demand curves.
c. preference curves.
d. income-consumption curves.
ANSWER: b. demand curves.
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84
. In the graph shown, the movement from point A to point B is

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 Chapter 2/Thinking Like an Economist 21

a. a shift of the curve.

b. a change in preferences.
c. a movement along the curve.
d. all of the above
ANSWER: c. a movement along the curve.
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85
. In the graph shown, the movement from point A to point C is
a. a change in price.
b. a shift of the curve.
c. a movement along the curve.
d. a change in costs to the firm.
ANSWER: b. a shift of the curve.
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86
. In the graph shown, the slope of the curve between points A and B is
a. -2
b. -1/2
c. 1/2
d. 2
ANSWER: b. -1/2
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87
. In the graph shown, the movement from point A to point C could have been caused by
a. inflation.
b. a change in income.
c. a change in the price of CDs.
d. a change in the cost of producing CDs.
ANSWER: b. a change in income.
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88
. The slope of a line is defined as
a. the rise divided by run.
b. the ratio of the horizontal distance covered to the vertical distance covered as we move along the
line.
c. the ratio of the vertical distance covered to the horizontal distance covered as we move along the
line.
d. a and c
ANSWER: d. a and c
TYPE: M KEY1: D RANDOM: Y

89
. The slope of a line is calculated by
a. change in y/change in x.
b. change in x/change in y.
c. x/y.
d. x + y.
ANSWER: a. change in y/change in x.
TYPE: M KEY1: D RANDOM: Y

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22 Chapter 2/Thinking Like an Economist

90
. Which of the following is a correct statement about slopes?
a. A horizontal line has an infinite slope, and a vertical line has a zero slope.
b. A horizontal line has a slope of 1, and a vertical line has a slope of -1.
c. A horizontal line has a zero slope, and a vertical line has an infinite slope.
d. None of the above statements is correct.
ANSWER: c. A horizontal line has a zero slope, and a vertical line has an infinite slope.
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91
. Making the argument that empty alcohol containers are found at many accidents, therefore
containers cause accidents, is an example of
a. omitted variables.
b. reverse causality.
c. sound logic.
d. slope.
ANSWER: a. omitted variables.
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92
. In the early 19th century, the Russian government sent doctors to southern Russian villages to provide
assistance during a cholera epidemic. The villagers noticed that wherever doctors appeared, people
died. Therefore, many doctors were chased away from villages, and some were even killed. This
reaction to the correlation between doctors and deaths is most likely a problem of
a. omitted variables.
b. reverse causality.
c. government propaganda.
d. medical incompetence.
ANSWER: b. reverse causality.
TYPE: M KEY1: C RANDOM: Y

TRUE/FALSE

93
. The single most important purpose of an economics principles text and course is to help students
learn the economist’s way of thinking.
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

94
. While the scientific method is applicable to studying natural sciences, it is not useful in studying an
economic system.
ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

95
. Economists are usually able to conduct carefully controlled experiments to test their theories.
ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

96
.Since natural experiments offered by history can’t be used in economics, carefully constructed
laboratory experiments must be used.
ANSWER: F

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 Chapter 2/Thinking Like an Economist 23

TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

97
. The use of assumptions which are not true may, nevertheless, make the world easier to understand.
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

98
. The art in scientific thinking is in deciding which assumptions to make.
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

99
. An economic model can accurately explain how the economy is organized because it is designed to
include every feature of the real world.
ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

100
.
Scientific models are designed to simplify reality because they are built with simplifying
assumptions.
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

101
.
All scientific models, including economic models, simplify reality in order to improve our
understanding of it.
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

102
. A circular-flow diagram is a visual model of how an economy is organized.
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

103
.
In a circular-flow diagram, the relationships shown are only those which involve the flow of real
goods and services.
ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

104
.
In a simple circular-flow diagram, firms own the factors of production and use them to produce
goods and services.
ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

105
.
In a simple circular-flow diagram, the two types of markets in which households and firms interact
are the markets for goods and services and the markets for factors of production.
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

106
.
In the markets for goods and services, as in the markets for the factors of production, households
are buyers and firms are sellers.
ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

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24 Chapter 2/Thinking Like an Economist

107
. In a circular-flow diagram, one loop shows the flow of real goods and services, and the other loop
shows the corresponding flow of dollars.
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

108
. In a circular-flow diagram, spending on goods and services flows from households to firms, and
income flows from firms to households.
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

109
. In the circular flow diagram, the return to households for supplying factors of production include
wages, rent and profit.
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

110
. A production possibilities frontier is a graph which shows the various combinations of outputs the
economy can possibly produce given its factors of production and technology.
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

111
. An economy can produce at any point on or outside the production possibilities frontier, but it
cannot produce at points inside the frontier.
ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

112
. An efficient outcome in economics is one in which the economy is conserving the largest possible
amount of resources, while still meeting the needs of society.
ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

113
. Points on the production possibilities frontier are the only efficient production points.
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

114
. An economy is being efficient if it is impossible to produce more of one good without producing
less of another.
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

115
. Points inside the production possibilities frontier represent inefficient outcomes for the economy.
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

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 Chapter 2/Thinking Like an Economist 25

116
. In the graph shown, points A, B, and C represent feasible or attainable outcomes for society.
ANSWER: F
TYPE: T KEY1: G SECTION: 1 OBJECTIVE: 3 GRAPH FORMAT: M QUESTION INSTRUCTION: 4
RANDOM: Y

117
. In the graph shown, points A, B and D represent efficient outcomes for society.
ANSWER: F
TYPE: T KEY1: G SECTION: 1 OBJECTIVE: 3 GRAPH FORMAT: M QUESTION INSTRUCTION: 4
RANDOM: Y

118
. In the graph shown, the opportunity cost to the economy of moving from point A to point B is 10
units of concrete.
ANSWER: T
TYPE: T KEY1: G SECTION: 1 OBJECTIVE: 3 GRAPH FORMAT: M QUESTION INSTRUCTION: 4
RANDOM: Y

119
. In the graph shown, the opportunity cost of moving from point D to point B is 20 pieces of art.
ANSWER: F
TYPE: T KEY1: G SECTION: 1 OBJECTIVE: 3 GRAPH FORMAT: M QUESTION INSTRUCTION: 4
RANDOM: Y

120
. In the graph shown, the opportunity cost of more art increases as more art is produced.
ANSWER: T
TYPE: T KEY1: G SECTION: 1 OBJECTIVE: 3 GRAPH FORMAT: M QUESTION INSTRUCTION: 4
RANDOM: Y

121
. The tradeoff between the production of different goods can change because of technological
improvement over time.

116
ANSWER: F
TYPE: T KEY1: G SECTION: 1 OBJECTIVE: 3 GRAPH FORMAT: M QUESTION INSTRUCTION: 4
RANDOM: Y

117
ANSWER: F
TYPE: T KEY1: G SECTION: 1 OBJECTIVE: 3 GRAPH FORMAT: M QUESTION INSTRUCTION: 4
RANDOM: Y

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26 Chapter 2/Thinking Like an Economist

ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

122
. Economic growth causes a production possibilities frontier to shift outward.
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

123
. Microeconomics is the study of decision-making at the level of the individual household and firm,
while macroeconomics is the study of the economy as a whole.
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 4 RANDOM: Y

124
. The circular-flow diagram and the production possibilities frontier both illustrate such concepts as
opportunity cost, economic growth and efficiency.
ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 4 RANDOM: Y

125
. The effect of agricultural price supports on the incomes of farmers would be a logical topic of study
for a macroeconomist.
ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 4 RANDOM: Y

126
. Normative statements describe how the world is, while positive statements prescribe how the
world should be.
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 5 RANDOM: Y

127
. “Society would be better if the welfare system were abolished” is a normative statement, not a
positive statement.
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 5 RANDOM: Y

128
. “If the interest rate were to increase, business investment would decline” is a normative statement,
not a positive one.
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 5 RANDOM: Y

129
. When economists are trying to explain the world they are acting as scientists, and when they are
trying to improve it, they are policy makers.
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 5 RANDOM: Y

130
. The Council of Economic Advisors has as its duties both advising the President of the United States
and formulating monetary policy.
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 6 RANDOM: Y

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 Chapter 2/Thinking Like an Economist 27

131
. Whereas the President of the United States receives advice on economic matters from the Council of
Economic Advisors, the Congress of the United States does not have a group of economists on
which it can rely for advice.
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 6 RANDOM: Y

132
. An economist who says that all policy decisions are easy is an economist not to be trusted.
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 6 RANDOM: Y

133
. The degree of agreement among economists on policy matters is usually greater than it appears to
the public.
ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 7 RANDOM: Y

134
. Sometimes economists who have the same positive views about how the economy works give
conflicting advice on policy because they have different values.
ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 7 RANDOM: Y

135
. A survey of business, government, and academic economists revealed widespread disagreement on
ten propositions about economic policy.
ANSWER: F
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 7 RANDOM: Y

136
. Nearly all economists supported the North American Free Trade Agreement (NAFTA), yet it passed
Congress by only a narrow margin.
ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 7 RANDOM: Y

137
. Nearly all economists believe that rent control is a cost-effective way of helping the most needy
members of society, yet many city governments have been reluctant to impose the controls.
ANSWER: F
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 7 RANDOM: Y

138
. In a survey, over 80 percent of economists opposed such ideas as rent control, tariffs and quotas and
large federal budget deficits.
ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 7 RANDOM: Y

139
. The great economist John Maynard Keynes believed that very few excel at economics because it is
such a difficult subject compared with the higher branches of philosophy and pure science.
ANSWER: F
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 7 RANDOM: Y

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28 Chapter 2/Thinking Like an Economist

SHORT ANSWER
APPLICATION/SCENARIO

140
. In what way are economists at a disadvantage relative to, say, physicists in applying the scientific
method? How do economists deal with this problem?
ANSWER: Unlike scientists in many other fields, economists usually cannot conduct controlled
experiments to generate data. They deal with this problem by making do with whatever data the
world gives them, paying particular attention to the natural experiments offered by history.
TYPE: S KEY1: C SECTION: 1 OBJECTIVE: 1 RANDOM: Y

141
. Why do economists use assumptions which are not true?
ANSWER: By definition, assumptions are not true statements about the world, but simplifications and
generalizations. Nevertheless, the use of assumptions greatly simplifies the complex world, and in
doing so, makes it easier for economists to understand how the economy works.
TYPE: S KEY1: C SECTION: 1 OBJECTIVE: 1 RANDOM: Y

142
. What is the purpose of models in economics? What are the two economic models presented in
Chapter 2?
ANSWER: Economic models are designed to illustrate the important features of an economy. They are
built from assumptions, and are most often composed of diagrams and equations. Like all useful
models, economic models simplify reality in order to improve our understanding of it. The two
economic models presented in chapter two are the circular-flow diagram and the production
possibilities frontier.
TYPE: S KEY1: C SECTION: 1 OBJECTIVE: 2 RANDOM: Y

143
. Using this outline, draw a circular-flow diagram representing the interactions between households
and firms in a simple economy. Explain briefly the various parts of the diagram.

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 Chapter 2/Thinking Like an Economist 29

ANSWER:

This diagram should duplicate the essential characteristics of the diagram in the text, with an
explanation of the meaning of each flow and each market. It is important that the student
understands that the inner loop represents the flow of real goods and services and that the outer
loop represents the corresponding flow of payments.
TYPE: S KEY1: G SECTION: 1 OBJECTIVE: 3 RANDOM: Y

144
. Draw a production possibilities frontier for the production of hamburgers and pizzas. On the graph,
identify the area of feasible outcomes and the area of infeasible outcomes. Now find an efficient
point “A” and an inefficient point “B.”
ANSWER:

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30 Chapter 2/Thinking Like an Economist

This graph should duplicate the essential features of the graph in the text. The production
possibilities frontier should be bowed-outward. The feasible area is the frontier and the area inside
the frontier, while the infeasible area is the area outside the frontier. Point “A” should be on the
frontier, and point “B” should be inside the frontier.
TYPE: S KEY1: G SECTION: 1 OBJECTIVE: 3 RANDOM: Y

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 Chapter 2/Thinking Like an Economist 31

145
.Show how each of the following concepts can be illustrated using a production possibilities frontier:
a. efficiency
b. opportunity cost
c. economic growth.
ANSWER:
a. Efficiency - any point on the production possibilities frontier

b.

145
ANSWER:
a. Efficiency - any point on the production possibilities frontier

b.

c.

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32 Chapter 2/Thinking Like an Economist

TYPE: S KEY1: G SECTION: 1 OBJECTIVE: 3 RANDOM: Y

8
ANSWER: d. to make the world easier to understand.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

9
ANSWER: a. deciding which assumptions to make.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

10
ANSWER: c. the theory can be useful in helping economists to understand the complex world
of international trade involving many countries and many goods.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

11
ANSWER: d. The theory is a good one if it helps us to understand how the world works.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

12
ANSWER: b. to help scientists understand how the world works
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

13
ANSWER: a. is part art.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

14
ANSWER: a. learn how the economy works.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

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 Chapter 2/Thinking Like an Economist 33

c.

15
ANSWER: d. all of the above
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

16
ANSWER: d. diagrams and equations.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

17
ANSWER: d. Economic models omit many details to allow us to see what is truly important.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

18
ANSWER: c. assumptions
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

19
ANSWER: b. a model that explains how the economy is organized.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

20
ANSWER: a. inputs into the production process.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

21
ANSWER: b. the flow of goods and services and the flow of dollars.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

22
ANSWER: d. b and c
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

23
ANSWER: b. households are sellers in the resource market.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

24
ANSWER: d. income from factors of production flows from firms to households.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

25
ANSWER: d. profit.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

26
ANSWER: b. B
TYPE: M KEY1: G SECTION: 1 OBJECTIVE: 3 GRAPH FORMAT: M QUESTION INSTRUCTION: 1
RANDOM: N

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34 Chapter 2/Thinking Like an Economist

TYPE: S KEY1: G SECTION: 1 OBJECTIVE: 3 RANDOM: Y

27
ANSWER: a. A
TYPE: M KEY1: G SECTION: 1 OBJECTIVE: 3 GRAPH FORMAT: M QUESTION INSTRUCTION: 1
RANDOM: N

28
ANSWER: c. C
TYPE: M KEY1: G SECTION: 1 OBJECTIVE: 3 GRAPH FORMAT: M QUESTION INSTRUCTION: 1
RANDOM: N

29
ANSWER: d. D
TYPE: M KEY1: G SECTION: 1 OBJECTIVE: 3 GRAPH FORMAT: M QUESTION INSTRUCTION: 1
RANDOM: N

30
ANSWER: c. a graph that shows the various combinations of output the economy can possibly
produce given the available resources and technology.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

31
ANSWER: c. An economy can produce at any point on or inside the production possibilities
frontier, but not outside the frontier.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

32
ANSWER: c. the economy is getting all it can from the scarce resources it has available.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

33
ANSWER: d. the production point is on the frontier.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

34
ANSWER: c. it is not possible to produce more of one good without producing less of another.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

37
ANSWER: a. A
TYPE: M KEY1: G SECTION: 1 OBJECTIVE: 3 GRAPH FORMAT: M QUESTION INSTRUCTION: 2
RANDOM: Y

38
ANSWER: b. E, F

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 Chapter 2/Thinking Like an Economist 35

146
.
What changes must occur in an economy for its production possibilities frontier to shift outward?
Is it possible for an economy’s production possibilities frontier to shift inward? Explain.
ANSWER: For an economy’s production possibilities frontier to shift outward, available resources and/or
technology must increase. This would be considered economic growth. It is possible for a
production possibilities frontier to shift inward. For this to occur, there would have to be fewer
available resources or a loss of technology.
TYPE: S KEY1: G SECTION: 1 OBJECTIVE: 3 RANDOM: Y

147
. For the production possibilities frontier illustrated in the graph shown:

TYPE: M KEY1: G SECTION: 1 OBJECTIVE: 3 GRAPH FORMAT: M QUESTION INSTRUCTION: 2

RANDOM: Y

39
ANSWER: a. A, B, C
TYPE: M KEY1: G SECTION: 1 OBJECTIVE: 3 GRAPH FORMAT: M QUESTION INSTRUCTION: 2
RANDOM: Y

40
ANSWER: d. D
TYPE: M KEY1: G SECTION: 1 OBJECTIVE: 3 GRAPH FORMAT: M QUESTION INSTRUCTION: 2
RANDOM: Y

41
ANSWER: a. the amount of the other good which must be given up.
TYPE: M KEY1: C SECTION: 1 OBJECTIVE: 3 RANDOM: Y

44
ANSWER: d. 0.
TYPE: M KEY1: G SECTION: 1 OBJECTIVE: 3 GRAPH FORMAT: M QUESTION INSTRUCTION: 3
RANDOM: Y

45
ANSWER: d. technological improvement in the production of clothing
TYPE: M KEY1: G SECTION: 1 OBJECTIVE: 3 GRAPH FORMAT: M QUESTION INSTRUCTION: 4
RANDOM: N

47
ANSWER: a. economic growth.
TYPE: M KEY1: G SECTION: 1 OBJECTIVE: 3 GRAPH FORMAT: M QUESTION INSTRUCTION: 5
RANDOM: Y

48
ANSWER: c. 250 pretzels
TYPE: M KEY1: G SECTION: 1 OBJECTIVE: 3 GRAPH FORMAT: M QUESTION INSTRUCTION: 6
RANDOM: N

49
ANSWER: c. a and b

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TYPE: M KEY1: G SECTION: 1 OBJECTIVE: 3 GRAPH FORMAT: M QUESTION INSTRUCTION: 6

RANDOM: N

50
ANSWER: c. unemployment.
TYPE: M KEY1: G SECTION: 1 OBJECTIVE: 3 GRAPH FORMAT: M QUESTION INSTRUCTION: 6
RANDOM: N

51
ANSWER: a. 200 toys
TYPE: M KEY1: T SECTION: 1 OBJECTIVE: 3 INSTRUCTION: 8 RANDOM: N

52
ANSWER: c. 10 cars
TYPE: M KEY1: T SECTION: 1 OBJECTIVE: 3 INSTRUCTION: 8 RANDOM: N

53
ANSWER: d. The opportunity cost of an additional 10 cars increases as more cars are
produced.
TYPE: M KEY1: T SECTION: 1 OBJECTIVE: 3 INSTRUCTION: 8 RANDOM: N

54
ANSWER: c. the effect of an increase in the price of imported oil on the U.S. inflation rate
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 4 RANDOM: Y

55
ANSWER: b. the impact of minimum-wage laws on employment in the fast-food industry
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 4 RANDOM: Y

56
ANSWER: c. In trying to explain the world, economists are scientists; in trying to improve the
world, they are policymakers.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y

57
ANSWER: d. positive statements and normative statements.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 5 RANDOM: Y

58
ANSWER: a. descriptive, making a claim about how the world is.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 5 RANDOM: Y

59
ANSWER: c. prescriptive, making a claim about how the world ought to be.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 5 RANDOM: Y

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63
ANSWER: d. write the annual Economic Report of the President.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 6 RANDOM: Y

64
ANSWER: a. three members and a staff of several dozen economists.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 6 RANDOM: Y

65
ANSWER: b. the Department of Treasury.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 6 RANDOM: Y

66
ANSWER: b. Department of Justice
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 6 RANDOM: Y

67
ANSWER: c. the Congressional Budget Office
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 6 RANDOM: Y

68
ANSWER: d. there was overwhelming endorsement of the propositions among the
respondents.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 7 RANDOM: Y

69
ANSWER: b. adversely affects the availability and quality of housing.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 7 RANDOM: Y

70
ANSWER: b. had overwhelming support from economists, but passed Congress by a narrow
margin.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 7 RANDOM: Y

71
ANSWER: a. Economists have not yet convinced the general public that the policies are
undesirable.
TYPE: M KEY1: C SECTION: 3 OBJECTIVE: 7 RANDOM: Y

72
ANSWER: b. Good economists must possess a rare combination of gifts.
TYPE: M KEY1: C SECTION: 4 OBJECTIVE: 7 RANDOM: Y

73
ANSWER: d. a and c
TYPE: M KEY1: D SECTION: 2A OBJECTIVE: 1 RANDOM: Y

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38 Chapter 2/Thinking Like an Economist

a. How would you measure the opportunity cost of obtaining more computers?
b. How does that opportunity cost change as society chooses to produce and consume more
computers?
c. Why does the opportunity cost change that way?
ANSWER: a. The opportunity cost of obtaining more computers is the number of snowboards that
have to be given up to get more computers.
b. As the production and consumption of computers increases, the opportunity cost of each new
computer (the number of snowboards which must be given up) also increases.
c. As the economy produces more and more computers, the resources best suited to making
computers are used up, and resources better suited to producing snowboards must be used. When
this happens, the production of snowboards is reduced a lot for each new computer produced.
77
ANSWER: c. two numbers which can be represented by a point on a graph.
TYPE: M KEY1: D KEY2: A RANDOM: Y

78
ANSWER: a. The x-coordinate tells us the horizontal location of a point on a graph, and the y-
coordinate tells us the vertical location of the point.
TYPE: M KEY1: D KEY2: A RANDOM: Y

79
ANSWER: c. scatterplot.
TYPE: M KEY1: G KEY2: A GRAPH FORMAT: M QUESTION INSTRUCTION: 1 RANDOM: N

80
ANSWER: d. (150, 20)
TYPE: M KEY1: G KEY2: A GRAPH FORMAT: M QUESTION INSTRUCTION: 1 RANDOM: N

81
ANSWER: a. Age and weight have a positive correlation.
TYPE: M KEY1: G KEY2: A GRAPH FORMAT: M QUESTION INSTRUCTION: 1 RANDOM: N

82
ANSWER: a. As people age from 10 to 30, their weight tends to increase.
TYPE: M KEY1: G KEY2: A GRAPH FORMAT: M QUESTION INSTRUCTION: 1 RANDOM: N

83
ANSWER: b. demand curves.
TYPE: M KEY1: G KEY2: A GRAPH FORMAT: M QUESTION INSTRUCTION: 3 RANDOM: N

84
ANSWER: c. a movement along the curve.
TYPE: M KEY1: G KEY2: A GRAPH FORMAT: M QUESTION INSTRUCTION: 3 RANDOM: N

85
ANSWER: b. a shift of the curve.
TYPE: M KEY1: G KEY2: A GRAPH FORMAT: M QUESTION INSTRUCTION: 3 RANDOM: N

86
ANSWER: b. -1/2
TYPE: M KEY1: G KEY2: A GRAPH FORMAT: M QUESTION INSTRUCTION: 3 RANDOM: N

87
ANSWER: b. a change in income.
TYPE: M KEY1: G KEY2: A GRAPH FORMAT: M QUESTION INSTRUCTION: 3 RANDOM: N

88
ANSWER: d. a and c
TYPE: M KEY1: D KEY2: A RANDOM: Y

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TYPE: S KEY1: G SECTION: 1 OBJECTIVE: 3 GRAPH FORMAT: M RANDOM: Y

89
ANSWER: a. change in y/change in x.
TYPE: M KEY1: D KEY2: A RANDOM: Y

90
ANSWER: c. A horizontal line has a zero slope, and a vertical line has an infinite slope.
TYPE: M KEY1: D KEY2: A RANDOM: Y

91
ANSWER: a. omitted variables.
TYPE: M KEY1: D KEY2: A RANDOM: Y

92
ANSWER: b. reverse causality.
TYPE: M KEY1: C KEY2: A RANDOM: Y

93
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

94
ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

95
ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

96
ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

97
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

98
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

99
ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

100
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

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148
. Draw a production possibilities frontier representing the economy’s possible production of milk and
eggs. Now, show what will happen to the frontier or the production point under each of the
following circumstances. Use a separate graph to illustrate each situation.

a. The outcome for the economy is efficient, with society choosing approximately equal amounts of
milk and eggs.
b. A recession causes a significant percentage of the labor force to become unemployed.
c. Some cows are found to be infected with Mad Cow Disease, and many of the cows must be
destroyed.
d. Chickens are infected with a rare disease and egg-laying is reduced.
e. Improvements in animal nutrition raise the general productivity of cows and chickens.

101
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

102
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

103
ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

104
ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

105
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

106
ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

107
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

108
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

109
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

110
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

111
ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

112
ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

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 Chapter 2/Thinking Like an Economist 41

f. The cow and chicken populations increase.

g. The Surgeon General announces that drinking milk prolongs life.

113
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

114
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

115
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

118
ANSWER: T
TYPE: T KEY1: G SECTION: 1 OBJECTIVE: 3 GRAPH FORMAT: M QUESTION INSTRUCTION: 4
RANDOM: Y

119
ANSWER: F
TYPE: T KEY1: G SECTION: 1 OBJECTIVE: 3 GRAPH FORMAT: M QUESTION INSTRUCTION: 4
RANDOM: Y

120
ANSWER: T
TYPE: T KEY1: G SECTION: 1 OBJECTIVE: 3 GRAPH FORMAT: M QUESTION INSTRUCTION: 4
RANDOM: Y

121
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

122
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 3 RANDOM: Y

123
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 4 RANDOM: Y

124
ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 4 RANDOM: Y

125
ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 4 RANDOM: Y

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ANSWER:

126
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 5 RANDOM: Y

127
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 5 RANDOM: Y

128
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 5 RANDOM: Y

129
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 5 RANDOM: Y

130
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 6 RANDOM: Y

131
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 6 RANDOM: Y

132
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 6 RANDOM: Y

133
ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 7 RANDOM: Y

134
ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 7 RANDOM: Y

135
ANSWER: F
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 7 RANDOM: Y

136
ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 7 RANDOM: Y

137
ANSWER: F
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 7 RANDOM: Y

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138
ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 7 RANDOM: Y

139
ANSWER: F
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 7 RANDOM: Y

140
ANSWER: Unlike scientists in many other fields, economists usually cannot conduct controlled
experiments to generate data. They deal with this problem by making do with whatever data the world
gives them, paying particular attention to the natural experiments offered by history.
TYPE: S KEY1: C SECTION: 1 OBJECTIVE: 1 RANDOM: Y

141
ANSWER: By definition, assumptions are not true statements about the world, but simplifications
and generalizations. Nevertheless, the use of assumptions greatly simplifies the complex world, and in
doing so, makes it easier for economists to understand how the economy works.
TYPE: S KEY1: C SECTION: 1 OBJECTIVE: 1 RANDOM: Y

142
ANSWER: Economic models are designed to illustrate the important features of an economy.
They are built from assumptions, and are most often composed of diagrams and equations. Like all useful
models, economic models simplify reality in order to improve our understanding of it. The two economic
models presented in chapter two are the circular-flow diagram and the production possibilities frontier.
TYPE: S KEY1: C SECTION: 1 OBJECTIVE: 2 RANDOM: Y

143
ANSWER:

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TYPE: S KEY1: G SECTION: 1 OBJECTIVE: 3 RANDOM: Y

149
. Identify each of the following topics as being part of microeconomics or macroeconomics:
a. the impact of a change in consumer income on the purchase of luxury automobiles
b. the effect of a change in the price of Coke on the purchase of Pepsi
c. the impact of a war in the Middle East on the rate of inflation in the U.S.
d. factors influencing the rate of economic growth
e. factors influencing the demand for tractors
f. the impact of tax policy on national saving
g. the effect of pollution taxes on the U.S. copper industry
h. the degree of competition in the cable television industry
i. the effect of a balanced-budget amendment on economic stability
j. the impact of deregulation on the savings and loan industry
ANSWER: a, b, e, g, h, and j are microeconomic topics. c, d, f, and i are macroeconomic topics.
TYPE: S KEY1: D SECTION: 1 OBJECTIVE: 4 RANDOM: Y

150
. Which of the following statements are positive, and which are normative?

This diagram should duplicate the essential characteristics of the diagram in the text, with an
explanation of the meaning of each flow and each market. It is important that the student understands
that the inner loop represents the flow of real goods and services and that the outer loop represents the
corresponding flow of payments.
TYPE: S KEY1: G SECTION: 1 OBJECTIVE: 3 RANDOM: Y

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 Chapter 2/Thinking Like an Economist 45

a. The minimum wage creates unemployment among young and unskilled workers.
b. The minimum wage ought to be abolished.
c. If the price of a product in a market decreases, other things equal, quantity demanded will
increase.
d. A little bit of inflation is worse for society than a little bit of unemployment.
e. There is a tradeoff between inflation and unemployment in the short run.
f. If consumer income increases, other things equal, the demand for automobiles will increase.
g. The U.S. income distribution is not equitable.
h. U.S. workers deserve more liberal unemployment benefits.
i. If interest rates increase, investment will decrease.
j. If welfare benefits were reduced, the country would be better off.
ANSWER: a, c, e, f, and i are positive statements. b, d, g, h, and j are normative statements.
TYPE: S KEY1: D SECTION: 2 OBJECTIVE: 5 RANDOM: Y

144
ANSWER:
This graph should duplicate the essential features of the graph in the text. The production possibilities
frontier should be bowed-outward. The feasible area is the frontier and the area inside the frontier, while
the infeasible area is the area outside the frontier. Point “A” should be on the frontier, and point “B”
should be inside the frontier.

146
ANSWER: For an economy s production possibilities frontier to shift outward, available resource
and/or technology must increase. This would be considered economic growth. It is possible for a
production possibilities frontier to shift inward. For this to occur, there would have to be fewer available
resources or a loss of technology.
TYPE: S KEY1: G SECTION: 1 OBJECTIVE: 3 RANDOM: Y

147
ANSWER:
a. The opportunity cost of obtaining more computers is the number of snowboards that have to
be given up to get more computers.
b. As the production and consumption of computers increases, the opportunity cost of each new
computer (the number of snowboards which must be given up) also increases.
c. As the economy produces more and more computers, the resources best suited to making
computers are used up, and resources better suited to producing snowboards must be used. When this
happens, the production of snowboards is reduced a lot for each new computer produced.
TYPE: S KEY1: G SECTION: 1 OBJECTIVE: 3 GRAPH FORMAT: M RANDOM: Y
148
ANSWER:

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151
. While running for the presidency of the United States, Robert Kennedy made a famous statement:
“Some men see the world the way it is and ask, ‘Why?’ I see the world the way it ought to be and
ask, 'Why not?'" Explain how Kennedy’s statement identifies the distinction between normative
and positive inquiry.
ANSWER: To see the world the way it is and ask “Why?” is to conduct positive analysis. To see the world
the way you think it ought to be is to make a normative judgment. The answer to the question,
“Why not?” requires additional positive analysis.
TYPE: S KEY1: C SECTION: 2 OBJECTIVE: 5 RANDOM: Y

152
. Economists are involved in several areas of the Federal government. List two government
departments, divisions, or branches which use economists and explain what duties these
economists are assigned.
ANSWER: Examples of departments, divisions, and branches of government which use economists
include: President of the United States, Congress, Department of Treasury, Department of Labor,
Department of Justice, Department of Commerce, Department of the Interior, Department of
Agriculture, etc. Economists advise the president, write the annual Economic Report of the
President, design tax policy, analyze data on workers and those looking for work, enforce the
nation's antitrust laws, analyze economic developments in the U.S. and the world, etc.
TYPE: S KEY1: D SECTION: 2 OBJECTIVE: 6 RANDOM: Y

153
. Economists are often viewed as giving conflicting policy advice. However, in many cases, economists
do offer a united view. Give three topics on which most economists agree.
ANSWER: (Possible responses) 1. A ceiling on rents reduces the quantity and quality of housing
available.
2. Tariffs and quotas usually reduce general economic welfare.
3. Flexible and floating exchange rates offer an effective international monetary arrangement.
4. Fiscal policy has a significant stimulative impact on a less than fully employed economy.
5. If the federal budget is to be balanced, it should be done over the business cycle rather than
yearly.
6. Cash payments increase the welfare of recipients to a greater degree than do transfers-in-kind of
equal cash value.
7. A large federal budget deficit has an adverse effect on the economy.
8. A minimum wage increases unemployment among young and unskilled workers.
9. The government should restructure the welfare system along the lines of a negative income tax.
10. Effluent taxes and marketable pollution permits represent a better approach to pollution control
than imposition of pollution ceilings.
TYPE: S KEY1: C SECTION: 2 OBJECTIVE: 6 RANDOM: Y

154
. John Maynard Keynes has suggested that the study of economics is not very difficult, yet few excel at
it. A survey of the population might lead you to the same conclusion. In your opinion, why are so
few students really good at economics?
ANSWER: Keynes suggested that the key to the answer lies in the combination of talents that an
individual must possess in order to be a good economist: mathematics, history, statesmanship,
philosophy, etc. Mankiw suggests that the key to being a successful student of economics is in
learning to think like an economist.
TYPE: S KEY1: C SECTION: 3 OBJECTIVE: 7 RANDOM: Y

155
. Why do economists use graphs?

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 Chapter 2/Thinking Like an Economist 47

ANSWER: Graphs serve two purposes. You’ve heard the old saying, “A picture is worth a thousand
words.” Graphs offer a way to express ideas visually that might be less clear if described with
equations or words. Also, graphs provide a way of finding how variables are in fact related in the
world. Graphs provide one way of expressing the relationship among variables.
TYPE: S KEY1: C

156
. Construct a pie chart to show how a typical household divides its income among the following
categories:

Housing 40%

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48 Chapter 2/Thinking Like an Economist

Food 20%
Transportation 15%
Clothing 10%
Miscellaneous 15%
ANSWER:

TYPE: S KEY1: C

157
. What is the difference between a movement along a curve and a shift of a curve? What is the
simplest way to tell when it is necessary to shift a curve?
ANSWER: When there is a change from one point to another point on the same curve, that is a movement
along the curve. This was caused by a change in a variable represented on either the x-axis or the y-
axis. A shift of a curve occurs when the entire curve moves (either to the right or to the left for a
demand curve). This would have occurred because a variable which affects the curve but is not
represented on either the x-axis or y-axis has changed. The simplest way to tell is to look at the
variables represented on the x-axis and y-axis.
TYPE: S KEY1: C

158
. Use the following demand curve to answer the following questions.

TYPE: S KEY1: G SECTION: 1 OBJECTIVE: 3 RANDOM: Y

149
ANSWER:
a, b, e, g, h, and j are microeconomic topics. c, d, f, and i are macroeconomic topics.
TYPE: S KEY1: D SECTION: 1 OBJECTIVE: 4 RANDOM: Y

150
ANSWER:
a, c, e, f, and i are positive statements. b, d, g, h, and j are normative statements.
TYPE: S KEY1: D SECTION: 2 OBJECTIVE: 5 RANDOM: Y

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 Chapter 2/Thinking Like an Economist 49

151
ANSWER: To see the world the way it is and ask “Why?” is to conduct positive analysis. To see
the world the way you think it ought to be is to make a normative judgment. The answer to the question,
“Why not?” requires additional positive analysis.
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152
ANSWER: Examples of departments, divisions, and branches of government which use
economists include: President of the United States, Congress, Department of Treasury, Department of
Labor, Department of Justice, Department of Commerce, Department of the Interior, Department of
Agriculture, etc. Economists advise the president, write the annual Economic Report of the President,
design tax policy, analyze data on workers and those looking for work, enforce the nation's antitrust
laws, analyze economic developments in the U.S. and the world, etc.
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153
ANSWER: (Possible responses) 1. A ceiling on rents reduces the quantity and quality of housing
available.
2. Tariffs and quotas usually reduce general economic welfare.
3. Flexible and floating exchange rates offer an effective international monetary arrangement.
4. Fiscal policy has a significant stimulative impact on a less than fully employed economy.
5. If the federal budget is to be balanced, it should be done over the business cycle rather than
yearly.
6. Cash payments increase the welfare of recipients to a greater degree than do transfers-in-kind of
equal cash value.
7. A large federal budget deficit has an adverse effect on the economy.
8. A minimum wage increases unemployment among young and unskilled workers.
9. The government should restructure the welfare system along the lines of a negative income tax.
10. Effluent taxes and marketable pollution permits represent a better approach to pollution control
than imposition of pollution ceilings.

154
ANSWER: Keynes suggested that the key to the answer lies in the combination of talents that an
individual must possess in order to be a good economist: mathematics, history, statesmanship,
philosophy, etc. Mankiw suggests that the key to being a successful student of economics is in learning to
think like an economist.
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155
ANSWER: Graphs serve two purposes. You ve heard the old saying, A picture is worth a
thousand words. Graphs offer a way to express ideas visually that might be less clear if described with

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50 Chapter 2/Thinking Like an Economist

a. How would point A be represented as an ordered pair?

b. What type of curve is this?
c. Does this curve show a positive or negative correlation between price and quantity?
d. Compute the slope of the curve between points A and B.
ANSWER: a. (15,8)
b. a demand curve
c. a negative correlation between price and quantity
d. –4/20 = –1/5
TYPE: S KEY1: C

159
. Give two problems that economists should consider when dealing with graphs.
ANSWER: 1. Omitted Variables - It is difficult to hold everything else constant when measuring how
one variable affects another. It is possible that a person seeing the graph might decide that one

equations or words. Also, graphs provide a way of finding how variables are in fact related in the world.
Graphs provide one way of expressing the relationship among variables.
TYPE: S KEY1: C

156
ANSWER:

TYPE: S KEY1: C
157
ANSWER: When there is a change from one point to another point on the same curve, that is a
movement along the curve. This was caused by a change in a variable represented on either the x-axis or
the y-axis. A shift of a curve occurs when the entire curve moves (either to the right or to the left for a
demand curve). This would have occurred because a variable which affects the curve but is not
represented on either the x-axis or y-axis has changed. The simplest way to tell is to look at the variables
represented on the x-axis and y-axis.
TYPE: S KEY1: C

158
ANSWER:
a. (15,8)
b. A demand curve
c. A negative correlation between price and quantity.
d. 4/-20 = -1/5
TYPE: S KEY1: C

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 Chapter 2/Thinking Like an Economist 51

variable on the graph is causing changes in the other variable when actually those changes are
caused by a third variable not pictured on the graph. This could lead to a wrong conclusion.

2. Reverse Causality - This occurs when a person decides that event A causes event B to occur when in
fact event B causes event A to occur. An example given in the text is the correlation between police
and crime.

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46
ANSWER: c. a general improvement in technology.
TYPE: M KEY1: G SECTION: 1 OBJECTIVE: 3 GRAPH FORMAT: M QUESTION INSTRUCTION: 5
RANDOM: Y

159
ANSWER: 1. Omitted Variables - It is difficult to hold everything else constant when measuring
how one variable affects another. It is possible that a person seeing the graph might decide that one
variable on the graph is causing changes in the other variable when actually those changes are caused by
a third variable not pictured on the graph. This could lead to a wrong conclusion.

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