Principles of Economics
Unit 1 Examination
Multiple Choice Questions (Enter your answers on the enclosed answer sheet)
1) The study of economics arises due to
a. greed.
b. scarcity.
c. resources.
d. money.
2) Economists assume that individuals
a. are rational and respond to incentives.
b. prefer to live in a society that values fairness above all else.
c. will never take actions to help others.
d. behave in unpredictable ways.
3) Your roommate, Serafina, a psychology major, said, “The problem with economics is that it assumes that consumers and firms always make the correct decision. But we know that everyone’s human, and we all make mistakes.” Is Serafina’s criticism accurate?
a. No. If we cannot assume that decisions are correct, then we will not be able to examine the moral implications of these decisions.
b. Yes. One cannot make predictions about economic behavior because in reality people make incorrect choices in many situations.
c. No. Economics assumes that economic agents behave rationally, meaning they make the best decisions given their knowledge of the costs and benefits of these decisions.
d. Yes. Economic theory should allow for irrational behavior so that we can have more reliable predictions.
4) In Austria a woman can get up to 48 months of pension benefits and is guaranteed a maternity allowance two months before and after she gives birth. Further, the Austrian government gives monthly payouts ranging from $132 to $547, depending on the age of offspring and offers generous tax benefits for families with children. How will these benefits affect a woman’s decision to have children?
a. These incentives will encourage women to have children and increase the birth rate.
b. These incentives will encourage only less educated women to have more children.
c. These incentives will encourage only women with high opportunity costs to have more children.
d. These incentives will have no effect on having children; the decision to have children is a social and psychological decision, not an economic decision.

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