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• 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 to be offered for each prisoner that was taken aboard the ships.
• Payment (to ship captains) was made independent of the regulations passed for prisoner welfare.
• Regulations were passed so that prisoners could get better food, water, and medical care.
• Payment (to ship captains) was made dependent on the survival rate of prisoners.

ANSWER: d

• 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:

• paying for each prisoner who walked off the ship in Australia.
• paying for food and water to reduce the costs of caring for prisoners during the transit.
• doing nothing, since the suggested change would not matter.
• that new regulations be passed to require prisoner safety and health.

ANSWER: a

3. In his book The Wealth of Nations, Adam Smith claimed that individuals:

• always act in an altruistic way.
• always consider the effect of their actions on others.
• are motivated by self-interest.
• are not concerned with resources.

ANSWER: c

• 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:

• made no difference.
• saved the lives of hundreds of convicts.
• increased the volume of slave trafficking.
• shows that people care more about morality than about their self-interest.

ANSWER: b

• Several states offer rebates on the purchase of electric vehicles. This practice highlights the idea of:
• self-interest.
• trade-offs.
• incentives.
• thinking on the margin.

ANSWER: c

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• Every day, people work at serving people meals at restaurants all around the world. These people work for

our benefit because:

• people think on the margin.
• trade-offs are everywhere.
• they benefit by doing so.
• institutions require them to do so.

ANSWER: c

7. Economists think that people are self-interested:

• only when monetary incentives are present.
• because they respond to incentives in predictable ways.
• only rarely in response to incentives.
• unless they are being altruistic.

ANSWER: b

• The basic postulate of economics indicates that changes in incentives influence the:
• actions of producers but not consumers.
• actions of consumers but not producers.
• choices of individuals only when they buy and sell goods in the marketplace.
• choices of individuals with regard to a wide range of activities, including those generally perceived

as social or political.

ANSWER: d

9. According to economists, people respond to:

• other people.
• social interest.
• money.
• incentives.

ANSWER: d

• 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:

• most of us no longer get our dinner directly from the butcher, the brewer, and the baker.
• butchers, brewers, and bakers are not productive members of society.
• high-interest payments mean that no one has to work anymore.
• people work for the benefit of others because it benefits them to do so.
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ANSWER: d

• 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.

• The ship's captain is paid $100 by the government for every live prisoner that is loaded on board at

point A.

• The ship's captain is paid $100 by the government for every live prisoner that is unloaded at point B.
• The ship's captain is paid $400 by the government for every live prisoner that is loaded on board at

point A.

• The ship's captain is paid a flat rate of $3,000 for the trip, rather than being paid per prisoner.

ANSWER: b

12. The main incentive for business activity is:

• government subsidies.
• technological advancement.
• profit.
• employment.

ANSWER: c

• Suppose a certain business wants to encourage its employees to live healthier lives. The easiest way for the

business to realize this goal is to:

• give each employee $100 a month for a gym membership.
• install a gym in the office building.
• reduce health insurance benefits.
• pay a monthly bonus to employees who log an hour of exercise a week on a fitness tracker.

ANSWER: d

• Many companies pay their factory employees based on piece rates—the more they produce, the more they

get paid. This practice highlights the role of:

• marginal thinking.
• incentives.
• trade-offs.
• sunk costs.

ANSWER: b

• If there were no _____, the “invisible hand” would not function as Adam Smith describes.
• money
• self-interest 3 / 4

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• trade
• inflation

ANSWER: b

• Based on the ideas of Adam Smith, it is _____ barbers wash, cut, and style hair, but _____.
• not out of benevolence that; from their regard for their own self-interest
• out of benevolence that; sometimes from their regard for their own self-interest
• not out of self-interest that; out of their benevolence
• from charity and good will that; only if they can charge high prices

ANSWER: a

• 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 direct route.
• between points A and B using the most indirect route.
• as slowly as possible.
• using the best materials possible.

ANSWER: b

18. Adam Smith's “invisible hand” refers to:

• people's pursuit of their own self-interest.
• people's pursuit of the social interest.
• social justice.
• government control.

ANSWER: a

19. Adam Smith coined the term “invisible hand” to mean:

• a physical hand that leads individuals to promote social interest by pursuing self-interest.
• a metaphorical hand that leads individuals to promote social interest by pursuing self-interest.
• a physical hand that leads individuals to promote self-interest by pursuing social interest.
• a metaphorical hand that leads individuals to promote self-interest by pursuing social interest.

ANSWER: b

• What is the “invisible hand”?
• the idea that government economic planning tends to benefit not only the individual but also all of

society

• the principle that most people avoid economic transactions with so-called “outsiders”
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