TUTORIAL 1

CHAPTER 1 (Ten Lessons from Economics)

True/False Questions and Multiple Choice Questions

1. Scarcity exists if:

A. there is a finite amount of a resource
B. more people want the resource than there is available of it
C. the resource is non-renewable
D. nobody wants to purchase the resource

2. Trade-offs arise because of resource scarcity. True or false?

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

4. In economics, the cost of something is:

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

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

6. Daniel decides to spend an hour playing cricket. He has to pay $10 for admission into the
sport complex where he plays cricket. His next-best alternative is to work at a café and earn
$16 per hour. Based on the above information, what is Daniel’s opportunity cost of playing
cricket?
A. $10
B. $16
C. $26
D. $6
7. You won a free ticket to see an Ed Sheeran concert (which has no resale value). Rihanna is
performing on the same night and is your next-best alternative activity. Tickets to see
Rihanna cost $40. You estimate the value for you to go and see Rihanna to be $50. Based on
this information, what is the opportunity cost of seeing Ed Sheeran?
A. $0
B. $10
C. $40
D. $50

8. Sophia’s friends have invited her to see a movie the following weekend. The movie ticket
costs $15. Alternatively, during the time she would be at the movies, she could choose
between one of the following two options:
i. Work at a café and earn $40.
ii. Go to a concert. The ticket to the concert is $20, and she values this experience at $50.
Based on the above information, what is Sophia’s opportunity cost of going to the movie?

A. $15
B. $55
C. $40
D. $65

Open Question

Stan is thinking of buying a 1966 Mustang with the intention of repairing, restoring and
selling it. He anticipates that it will cost him $8000 to purchase the car and the necessary
spare parts, and that he can sell the finished car for $13000. He also anticipates that he will be
able to work on the car only on weekends, and that he will need a full weekend to work on
the car.

a) Considering that he is a tennis coach and that in a typical weekend he can earn $3000,
what is Stan’s opportunity cost of buying the Mustang?

b) Is it rational for him to buy the Mustang?

c) Suppose Stan has decided to buy the Mustang. When he has spent a total of $10 000 on
the project, he discovers that he needs to replace the engine. It will cost Stan $4000 to
buy a new engine. Furthermore, Stan will have to spend 5 hours to replace the engine.
Stan values the time needed to replace the engine $500. Alternatively, he can sell the
car without the new engine for $8500. What should he do?
 ADDITIONAL PRACTICE QUESTIONS

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

1. Scarcity means that society has less to offer than people wish to have. True or false?

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

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

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

5. According to economists, people make decisions by:

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

6. A rational decision maker takes an action only if the:

A. marginal benefit is greater than the marginal cost
B. marginal benefit is less than the marginal cost
C. average benefit is greater than the average cost
D. marginal benefit is greater than both the average cost and the marginal cost
 7. In one hour, George can fix 4 flat tires or type 200 words. His opportunity cost of fixing a flat
tire is:
A. 50 words
B. 4 flat tires
C. 1 word
D. 800 words

8. The central concept of economics is:

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

9. The study of economics is concerned with:

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

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

1. ANS: T TOP: Introduction

2. ANS: B TOP: Introduction

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

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

5. ANS: B TOP: Lesson 3: Rational people think at the margin

6. ANS: A TOP: Lesson 3: Rational people think at the margin

7. ANS: A TOP: Lesson 3: Rational people think at the margin

8. ANS: B TOP: Introduction

9. ANS: C TOP: Introduction