Adam Smith’s “Invisible hand”

A Vietnamese farmer grows rice, an exporter exports it to the United States, and a buyer buys it from a grocer in New York.

One of the following is an expression of self-interest that seeks to further the greater good?

An entrepreneur puts his life savings at risk in order to open a grocery store in an underserved town.

Susan quits her $40,000-a-year managerial work to complete her four-year college degree. Her tuition is $8,000 a year, her books are $900, and her food is $2,500.

The opportunity cost of attending college for the year is: A) $11,400.

$51,400.

On June 13, 2011, writer Sebastian Anthony at Extreme Tech wrote, “During the two days that the Les Paul [Google] doodle was online, those 740 million visitors spent 26 seconds more on the Google home page than normal. That’s a total of almost 10.7 million man-hours spent playing with the Les Paul Google Doodle. Assuming the average Google user earns $25/hour, the doodle cost companies around the world $268 million in lost productivity.” Mr. Anthony’s mistake is overestimating opportunity costs.

He is doing this by assuming that:

all those man-hours would have been spent working if not for the doodle.

Many companies pay their sales employees based on commissions—the more they sell, the more they get paid. This practice highlights the role of: A) marginal thinking.

incentives.

In the 1800s, the federal government paid railroad companies for each mile of track built. This payment scheme created incentives for railroad companies to lay track:

between points A and B using the most indirect route.

Why is it less costly to attend college during a recession?

The opportunity cost is lower during a recession because there are fewer labor market opportunities.

The better Martha Stewart is at running her business:

the higher her opportunity cost of ironing her own shirts.

As the United States becomes more productive at manufacturing chemicals and pharmaceutical drugs, the opportunity cost of producing other items such as textiles ________, leading to _____ demand for foreign textiles.

increases; increased

The historical rise in living standards of American workers is primarily a result of: A) the influence of labor unions in America.

the rise in American productivity.

Which option best explains why firms develop new ideas for production techniques and product features?

because they are interested in making a profit

If North Korea and South Korea were both equally poor in 1950, why has South Korea developed so much faster since then?

South Korea has maintained a more market-based economic system.

In an episode of DuckTales (a Disney cartoon starring Scrooge McDuck) entitled ”Dough Ray Me,” one of the characters invented a duplicating machine. Other characters used the machine to start duplicating money at a phenomenal rate. What would you expect to happen? (And indeed, the episode does show this happening.)

It would create massive inflation.

Entrepreneurial activity is encouraged by:

economic growth.

Institutions that promote economic growth include:

policies that provide incentives for people to produce and trade.

Economics is the study of:

how to make the world most productive.

The idea that markets work efficiently:

suggests that there is never any need for government regulation, taxes, or subsidies.

Which of the following statements reflects Adam Smith’s important insight into marketplace behavior?

Society benefits when people and firms pursue their own self-interests.

Recall Chapter 1’s opening story about the British sea captains and the convicted felons. In what way were incentives used to solve the problem of the high mortality rate on board the ships?

Payment (to ship captains) was made dependent on the survival rate of prisoners.

One of the effects of economic growth is: A) a higher rate of infant mortality.

better sanitation and health outcomes.