1. To increase income by $120 when the slope of the curve showing the relationship among your income and work hours is 8, how many extra hours will you need to work?

A) 8 B) 960 C) 112 D) 15 E) 28

2.  Trade results from:

A) Absolute advantage.

B) Comparative advantage.

C) Self-sufficiency.

D) Diminishing returns.

E) All of the above except D).

3. In a market economy, what encourages firms to develop new products and production processes?

A) Patents

B) Contracts

C) Insurance

D) Accounting rules

E) Governmental mandates

4. When people act in their own self-interest, it is described as the:

A) Laws of each state.

B) Principle of scarcity.

C) Principle of supply and demand.

D) Principle of voluntary exchange.

E) Principle of denunciation.

5. Presume that you lend $10,500 to a friend who pays you back $11,340 the next year. Suppose that prices that year rose by 7 percent and the real rate of return in the stock market was 3 percent. Your friend said that she was being more than fair by giving you more than the rate of inflation as a return. Her statement: ______ (3 points)

A) Was accurate because your nominal return on the loan was 10%.

B) Was accurate because your real return on the loan was 1% (or 8% - 7%).

C) Was flawed because you could have earned a 12% nominal return in the stock market, and she only paid you a 10% return.

D) Was flawed since your real return on the loan was less than what you could have earned in the stock market.

E) Was accurate since you would have earned a nominal return of 3% in the stock market, and she paid you a return of 8%.