1. 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?
A) Payment (to ship captains) was to be offered for each prisoner that was taken
aboard the ships.
B) Payment (to ship captains) was made independent of the regulations passed for
prisoner welfare.
C) Regulations were passed so that prisoners could get better food, water, and medical
care.
D) Payment (to ship captains) was made dependent on the survival rate of prisoners.
2. Recall Chapter 1's opening story about the British sea captains and the convicted
felons. Instead of paying the sea captains for each prisoner placed on board the ships
in Great Britain, an economist suggested:
A) paying for each prisoner who walked off the ship in Australia.
B) paying for food and water to reduce costs of caring for prisoners during the transit.
C) doing nothing, since the suggested change would not matter.
D) that new regulations be passed to require prisoner safety and health.
3. In his book The Wealth of Nations, Adam Smith claimed that individuals:
A) always act in an altruistic way.
B) always consider the effect of their actions on others.
C) are motivated by self-interest.
D) are not concerned with resources.
4. In the opening story, the payment to captains of prisoner transport ships for each
convict who arrived in Australia instead of for each convict who boarded the ship:
A) made no difference.
B) saved the lives of hundreds of convicts.
C) increased the volume of slave trafficking.
D) shows that people care more about morality than about their self-interest.
5. In several cities around the country, schools are paying cash awards to students who
do well on English and Math tests. This practice highlights the idea of:
A) pedagogical economics—the continuous assessment of student performance in an
effort to maximize student efficiency.
B) hidden costs—the costs borne by taxpayers in the form of wasteful school
spending.
C) incentives—the rewards and penalties that motivate behavior.
D) screening theory—the identification of individuals or groups based on various
performance measures.
Page 1
, 6. Every day people rely on the work of others to provide us with food, clothing, and
shelter. These people work for our benefit because:
A) people think at the margin.
B) trade-offs are everywhere.
C) they benefit by doing so.
D) institutions require them to do so.
7. Economists think that people are self-interested:
A) only when monetary incentives are present.
B) because they respond to incentives in predictable ways.
C) only rarely in response to incentives.
D) unless they are being altruistic.
8. The basic postulate of economics indicates that changes in incentives influence the:
A) actions of producers but not consumers.
B) actions of consumers but not producers.
C) choices of individuals only when they buy and sell goods in the marketplace.
D) choices of individuals with regard to a wide range of activities, including those
generally perceived as social or political.
9. Economists assume that people respond to:
A) other people.
B) social interest.
C) benevolence.
D) incentives.
10. Adam Smith wrote, “It is not from the benevolence of the butcher, the brewer, or the
baker, that we expect our dinner, but from their regard to their own interest.” He meant
that:
A) most of us no longer get our dinner directly from the butcher, the brewer, and the
baker.
B) butchers, brewers, and bakers are not productive members of society.
C) high-interest payments mean that no one has to work anymore.
D) people work for the benefit of others because it benefits them to do so.
Page 2
,11. Which financing method for transporting prisoners from point A to B will result in the
greatest number of prisoners surviving the trip? Assume there are 50 prisoners being
transported.
A) The ship's captain is paid $100 by the government for every live prisoner that is
loaded on board at Point A.
B) The ship's captain is paid $100 by the government for every live prisoner that is
unloaded at Point B.
C) The ship's captain is paid $400 by the government for every live prisoner that is
loaded on board at Point A.
D) The ship's captain is paid a flat rate of $3,000 for the trip, rather than being paid
per prisoner.
12. The main incentive for business activity is:
A) government subsidies.
B) technological advancement.
C) profit.
D) employment.
13. Suppose the United States government wants to encourage individuals to save more of
their income. The easiest way for the government to realize this goal is to:
A) pass a law requiring people to save a larger percentage of their income.
B) decrease government spending in order to set an example for individuals.
C) increase the tax rate on savings in order to encourage more savings.
D) develop incentives such as tax breaks on savings in order to encourage more
savings.
14. 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.
B) incentives.
C) trade-offs.
D) sunk costs.
15. If there was no ______, the “invisible hand” would not function as Adam Smith
describes.
A) money
B) self-interest
C) trade
D) inflation
Page 3
, 16. Based on the ideas of Adam Smith, it is ______ dentists clean and repair teeth, but
______.
A) not out of benevolence that; from their regard for their own self-interest
B) out of benevolence that; sometimes from their regard for their own self-interest
C) not out of self-interest that; out of their benevolence
D) from charity and good will that; only if they can charge high prices
17. 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:
A) between points A and B using the most direct route.
B) between points A and B using the most indirect route.
C) as slowly as possible.
D) using the best materials possible.
18. Adam Smith's “invisible hand” refers to:
A) people's pursuit of their own self-interest.
B) people's pursuit of the social interest.
C) social justice.
D) government control.
19. Adam Smith coined the term “invisible hand” to mean:
A) a physical hand that leads individuals to promote social interest by pursuing self-
interest.
B) a metaphorical hand that leads individuals to promote social interest by pursuing
self-interest.
C) a physical hand that leads individuals to promote self-interest by pursuing social
interest.
D) a metaphorical hand that leads individuals to promote self-interest by pursuing
social interest.
20. What is the “invisible hand”?
A) The idea that government economic planning tends to benefit not only the
individual but also all of society.
B) The principle that most people avoid economic transactions with so-called
“outsiders.”
C) The idea that people pursuing their own self-interest actually benefit the public at
large.
D) The notion that the pursuit of profit leads to the exploitation of consumers.
Page 4
felons. In what way were incentives used to solve the problem of the high mortality
rate on board the ships?
A) Payment (to ship captains) was to be offered for each prisoner that was taken
aboard the ships.
B) Payment (to ship captains) was made independent of the regulations passed for
prisoner welfare.
C) Regulations were passed so that prisoners could get better food, water, and medical
care.
D) Payment (to ship captains) was made dependent on the survival rate of prisoners.
2. Recall Chapter 1's opening story about the British sea captains and the convicted
felons. Instead of paying the sea captains for each prisoner placed on board the ships
in Great Britain, an economist suggested:
A) paying for each prisoner who walked off the ship in Australia.
B) paying for food and water to reduce costs of caring for prisoners during the transit.
C) doing nothing, since the suggested change would not matter.
D) that new regulations be passed to require prisoner safety and health.
3. In his book The Wealth of Nations, Adam Smith claimed that individuals:
A) always act in an altruistic way.
B) always consider the effect of their actions on others.
C) are motivated by self-interest.
D) are not concerned with resources.
4. In the opening story, the payment to captains of prisoner transport ships for each
convict who arrived in Australia instead of for each convict who boarded the ship:
A) made no difference.
B) saved the lives of hundreds of convicts.
C) increased the volume of slave trafficking.
D) shows that people care more about morality than about their self-interest.
5. In several cities around the country, schools are paying cash awards to students who
do well on English and Math tests. This practice highlights the idea of:
A) pedagogical economics—the continuous assessment of student performance in an
effort to maximize student efficiency.
B) hidden costs—the costs borne by taxpayers in the form of wasteful school
spending.
C) incentives—the rewards and penalties that motivate behavior.
D) screening theory—the identification of individuals or groups based on various
performance measures.
Page 1
, 6. Every day people rely on the work of others to provide us with food, clothing, and
shelter. These people work for our benefit because:
A) people think at the margin.
B) trade-offs are everywhere.
C) they benefit by doing so.
D) institutions require them to do so.
7. Economists think that people are self-interested:
A) only when monetary incentives are present.
B) because they respond to incentives in predictable ways.
C) only rarely in response to incentives.
D) unless they are being altruistic.
8. The basic postulate of economics indicates that changes in incentives influence the:
A) actions of producers but not consumers.
B) actions of consumers but not producers.
C) choices of individuals only when they buy and sell goods in the marketplace.
D) choices of individuals with regard to a wide range of activities, including those
generally perceived as social or political.
9. Economists assume that people respond to:
A) other people.
B) social interest.
C) benevolence.
D) incentives.
10. Adam Smith wrote, “It is not from the benevolence of the butcher, the brewer, or the
baker, that we expect our dinner, but from their regard to their own interest.” He meant
that:
A) most of us no longer get our dinner directly from the butcher, the brewer, and the
baker.
B) butchers, brewers, and bakers are not productive members of society.
C) high-interest payments mean that no one has to work anymore.
D) people work for the benefit of others because it benefits them to do so.
Page 2
,11. Which financing method for transporting prisoners from point A to B will result in the
greatest number of prisoners surviving the trip? Assume there are 50 prisoners being
transported.
A) The ship's captain is paid $100 by the government for every live prisoner that is
loaded on board at Point A.
B) The ship's captain is paid $100 by the government for every live prisoner that is
unloaded at Point B.
C) The ship's captain is paid $400 by the government for every live prisoner that is
loaded on board at Point A.
D) The ship's captain is paid a flat rate of $3,000 for the trip, rather than being paid
per prisoner.
12. The main incentive for business activity is:
A) government subsidies.
B) technological advancement.
C) profit.
D) employment.
13. Suppose the United States government wants to encourage individuals to save more of
their income. The easiest way for the government to realize this goal is to:
A) pass a law requiring people to save a larger percentage of their income.
B) decrease government spending in order to set an example for individuals.
C) increase the tax rate on savings in order to encourage more savings.
D) develop incentives such as tax breaks on savings in order to encourage more
savings.
14. 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.
B) incentives.
C) trade-offs.
D) sunk costs.
15. If there was no ______, the “invisible hand” would not function as Adam Smith
describes.
A) money
B) self-interest
C) trade
D) inflation
Page 3
, 16. Based on the ideas of Adam Smith, it is ______ dentists clean and repair teeth, but
______.
A) not out of benevolence that; from their regard for their own self-interest
B) out of benevolence that; sometimes from their regard for their own self-interest
C) not out of self-interest that; out of their benevolence
D) from charity and good will that; only if they can charge high prices
17. 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:
A) between points A and B using the most direct route.
B) between points A and B using the most indirect route.
C) as slowly as possible.
D) using the best materials possible.
18. Adam Smith's “invisible hand” refers to:
A) people's pursuit of their own self-interest.
B) people's pursuit of the social interest.
C) social justice.
D) government control.
19. Adam Smith coined the term “invisible hand” to mean:
A) a physical hand that leads individuals to promote social interest by pursuing self-
interest.
B) a metaphorical hand that leads individuals to promote social interest by pursuing
self-interest.
C) a physical hand that leads individuals to promote self-interest by pursuing social
interest.
D) a metaphorical hand that leads individuals to promote self-interest by pursuing
social interest.
20. What is the “invisible hand”?
A) The idea that government economic planning tends to benefit not only the
individual but also all of society.
B) The principle that most people avoid economic transactions with so-called
“outsiders.”
C) The idea that people pursuing their own self-interest actually benefit the public at
large.
D) The notion that the pursuit of profit leads to the exploitation of consumers.
Page 4
