First Midterm Study

Dr. Reza Fazeli Econ.20A

1. The phenomenon of scarcity stems from the fact that a. most economies’ production methods are not very good.b. in most economies, wealthy people consume disproportionate quantities of goods and services.c. governments restrict production of too many goods and services.d. resources are limited.

2. Approximately what percentage of the world's economies experience scarcity?a. 10%b. 40%c. 85%d. 100%

3. The adage, "There is no such thing as a free lunch," is used to illustrate the principle thata. goods are scarce.b. income must be earned.c. households face many decisions.d. people face tradeoffs.

4. Efficiencya. and equality both refer to how much a society can produce with its resources.b. and equality both refer to how fairly the benefits from using resources are distributed between members of a society.c. refers to how evenly the benefits from using resources are distributed between members of society. Equality refers to how much a society can produce with its resourcesd. refers to how much a society can produce with its resources. Equality refers to how evenly the benefits from using resources are distributed among members of society.

5. Which of the following phrases best captures the notion of efficiency?a. absolute fairnessb. equal distributionc. equitable outcomed. minimum waste

6. Government policies designed to equalize the distribution of economic well-being include(i) the welfare system(ii) unemployment insurance(iii) progressive income taxa. (i) onlyb. (ii) onlyc. (i) and (ii) onlyd. (i), (ii), and (iii)

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7. The opportunity cost of an item isa. the number of hours needed to earn money to buy the item.b. usually less than the dollar value of the item.c. the dollar value of the item.d. what you give up to get that item.

8. When computing the opportunity cost of attending a concert you should includea the price you pay for the ticket, but not the value of your time.b. the value of your time, but not the price you pay for the ticket.c. neither the price of the ticket nor the value of your time.d. the price you pay for the ticket and the value of your time.

9. Ellie decides to spend two hours taking a nap rather than attending her classes. Her opportunity cost of napping isa. the value of the knowledge she would have received had she attended class.b. the $24 she could have earned if she had worked at her job for those two hours.c. the value of her nap less the value of attending class.d. nothing, since she valued sleep more than attendance at class.

10. For which of the following individuals would the opportunity cost of going to college be highest?a. a promising young mathematician who will command a high salary once she earns her college degreeb. a student with average grades who has never held a jobc. a student who is the best player on his college basketball team, but who lacks the skills necessary to play professional basketballd. a famous, highly-paid actor who wants to take time away from show business to finish college and earn a degree

11. Maureen’s college raises the cost of room and board per semester. This increase raises Maureen’s opportunity cost of attending collegea. even if the amount she would have to pay for room and board if she didn’t attend college rose by the same amount. An increase in opportunity cost reduces Maureen’s incentive to attend college.b. even if the amount she would have to pay for room and board if she didn’t attend college rose by the same amount. An increase in opportunity cost increases Maureen’s incentive to attend college.c. only if the amount she would have to pay for room and board if she didn’t attend college rose by less than the increase in the amount her college charges. An increase in opportunity cost increases Maureen’s incentive to attend college.d. only if the amount she would have to pay for room and board if she didn’t attend college rose by less than the increase in the amount her college charges. An increase in opportunity cost reduces Maureen’s incentive to attend college.

12. Suppose your college institutes a new policy requiring you to pay for a permit to park your car in a campus parking lot.a. The cost of the parking permit is not part of the opportunity cost of attending college if you would not have to pay for parking otherwise.b. The cost of the parking permit is part of the opportunity cost of attending college if you would not have to pay for parking otherwise.

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c. Only half of the cost of the parking permit is part of the opportunity cost of attending college.d. The cost of the parking permit is not part of the opportunity cost of attending college under any circumstances.

13. Suppose your college institutes a new policy requiring you to pay for a permit to park your car in a campus parking lot.a. The cost of the parking permit is not part of the opportunity cost of attending college if you would not have to pay for parking otherwise.b. Only half of the cost of the parking permit is part of the opportunity cost of attending college.c. The cost of the parking permit is not part of the opportunity cost of attending college under any circumstances.d. The cost of the parking permit is part of the opportunity cost of attending college if you would not have to pay for parking otherwise.

14. A rational decision maker takes an action only if thea. marginal benefit is less than the marginal cost.b. average benefit is greater than the average cost.c. marginal benefit is greater than both the average cost and the marginal cost.d. marginal benefit is greater than the marginal cost.

15. A marginal change is aa. change that involves little, if anything, that is important.b. large, significant adjustment.c. change for the worse, and so it is usually a short-term change.d. small, incremental adjustment.

16. People are willing to pay more for a diamond than for a bottle of water becausea. the marginal cost of producing an extra diamond far exceeds the marginal cost of producing an extra bottle of water.b. producers of diamonds have a much greater ability to manipulate diamond prices than producers of water have to manipulate water prices.c. water prices are held artificially low by governments, since water is necessary for life.d. the marginal benefit of an extra diamond far exceeds the marginal benefit of an extra bottle of water.

17. A barber currently cuts hair for 50 clients per week and earns a profit. He is considering expanding his operation in order to serve more clients. Should he expand?a. Yes, because cutting hair is profitable.b. No, because he may not be able to sell more services.c. It depends on the average cost of serving more clients and the average revenue he will earn from serving more clients.d. It depends on the marginal cost of serving more clients and the marginal revenue he will earn from serving more clients.

18. Bill is restoring a car and has already spent $4000 on the restoration. He expects to be able to sell the car for $5800. Bill discovers that he needs to do an additional $2400 of work to make the car worth $5800 to potential buyers. He could also sell the car now, without completing the additional work, for $3800. What should he do?a. He should keep the car since it wouldn’t be rational to spend $6400 restoring a car

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and then sell it for only $5800.b. He should complete the additional work and sell the car for $5800.c. It does not matter which action he takes since the outcome will be the same either way.d. He should sell the car now for $3800.

19. Mark is refinishing an antique china cabinet and has already spent $180 on the restoration. He expects to be able to sell the cabinet for $360. Mark discovers that he needs to do an additional $200 of work to make the cabinet worth $360 to potential buyers. He could also sell the cabinet now, without completing the additional work, for $100. What should he do?a. He should sell the cabinet now for $100.b. He should keep the cabinet since it wouldn’t be rational to spend $380 restoring a cabinet and then sell it for only $360.c. It does not matter which action he takes since the outcome will be the same either way.d. He should complete the additional work and sell the cabinet for $360.

20. Bridget drinks three sodas during a particular day. The marginal benefit she enjoys from drinking the third sodaa. can be thought of as the total benefit Bridget enjoys by drinking three sodas minus the total benefit she would have enjoyed by drinking just two sodas.b. determines Bridget’s willingness to pay for the third soda.c. is likely different from the marginal benefit provided to Bridget by the second soda.d. All of the above are correct.

21. Suppose the cost of operating a 75 room hotel for a night is $6,000 and there are 5 empty rooms for tonight. If the marginal cost of operating one room for one night is $40, the hotel manager should rent one of the empty rooms only if a customer is willing to paya. more than $40, as the average benefit will exceed the marginal cost.b. more than $80, as the average benefit will exceed the marginal cost.c. more than $80, as the marginal benefit will exceed the marginal cost.d. more than $40, as the marginal benefit will exceed the marginal cost.

22. A bagel shop sells fresh baked bagels from 5 a.m. until 7 p.m. every day. The shop does not sell day-old bagels, so all unsold bagels are thrown away at 7 p.m. each day. The cost of making and selling a dozen bagels is $1.00; there are no costs associated with throwing bagels away. If the manager has 8 dozen bagels left at 6:30 p.m. on a particular day, which of the following alternatives is most attractive?a. Lower the price of the remaining bagels, but under no circumstances should the price fall below $1.00 per dozen.b. Throw the bagels away and produce 8 fewer dozen bagels tomorrow.c. Starting tomorrow, lower the price on all bagels so they will all be sold earlier in the day.d Lower the price of the remaining bagels, even if the price falls below $1.00 per dozen.

23. You go to the movieplex where movies ordinarily cost $10. You are intending to see a movie for which you have a $3 off coupon good for only that movie at that time.

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However, when you get there you see a friend who asks if you would rather see a new release. Both movies start and end at the same time. If you decide to see the new re-lease with your friend, what is your opportunity cost?a. the amount you value the first movie + $10b. $3c. $10d. the amount you value the first movie + $3

24. U.S. laws requiring that drivers wear seat belts have resulted ina. a reduction in both driver deaths and pedestrian deaths.b. fewer accidents and fewer deaths per accident.c. fewer driver deaths, fewer accidents and fewer pedestrian deaths.d. little change in the number of driver deaths, but more accidents and more pedestrian deaths.

25. Suppose the state of Massachusetts passes a law that increases the tax on alcoholic beverages. As a result, resi-dents in Massachusetts start purchasing their alcohol in surrounding states. Which of the following principles does this best illustrate?a. Rational people think at the marginb. Trade can make everyone better offc. Markets are usually a good way to organize economic activityd. People respond to incentives

26. According to a recent study of Chilean bus drivers, drivers who are paid by the number of passengers they transport have higher productivity than drivers who are paid by the hour. This result is an example of which prin-ciple of economics?a. People face tradeoffs.b. The cost of something is what you give up to get it.c. Rational people think at the margin.d. People respond to incentives.

27. Which of the following statements about trade is false?a. Trade increases competition.b. With trade, one country wins and one country loses.c. Bulgaria can benefit, potentially, from trade with any other country.d. Trade allows people to buy a greater variety of goods and services at lower cost.

28. Kevin is the CEO of a large firm and a homeowner who pays a landscaper to maintain his lawn rather than do it himself. Kevin has determined that he can earn more in the hour it would take him to work on his lawn than he must pay his landscaper. This scenario is an example of which principle of economics? a. Markets are usually a good way to organize economic activity.b. Governments can sometimes improve market outcomes.c. Prices rise when the government prints too much money.d. Trade can make everyone better off.

29. Suppose that a country that has a high average wage level agrees to trade with a country that has a low average wage level. Which country can benefit?a. only the one with a low level of output per person.b. only the one with a high level of output per person.c. neitherd. both

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30. When the France trades with Russia,a. only Russia benefits since France can produce all goods at a higher level of quality than Russia.b. only France benefits since Russia’s low wages guarantee profitable firms in Russia regardless of trade.c. neither country will benefit since France is more efficient than Russia at producing all goods.d. both countries are likely made better off.

31. The basic principles of economics suggest thatgovernment should become involved in markets when those markets fail to produce efficient or fair outcomes.

32. Communist countries worked under the premise thatcentral planners were in the best position to determine the allocation of scarce resources in the economy.

33. The term "invisible hand" was coined byAdam Smith.

34. The invisible hand refers to how the decisions of households and firms lead to desirable market outcomes.

35. The invisible hand refers to how the decisions of households and firms lead to desirable market outcomes.

36. Which of the following statements does not apply to a market economy?a. Firms decide whom to hire and what to produce.b. The “invisible hand” usually maximizes the well-being of society as a whole.c. Households decide which firms to work for and what to buy with their incomes.d. Government policies are the primary forces that guide the decisions of firms and households.

37. A friend of yours asks you why market prices are better than government-determined prices. Because you under-stand economic principles, you say that market-determined prices are better because they generally reflectboth the value of a good to society and the cost of making it.

38. When the government prevents prices from adjusting naturally to supply and demand,it adversely affects the allocation of resources.

39. Public policies may be able to improve either economic efficiency or equality.

40. The term market failure refers toa situation in which the market on its own fails to allocate resources efficiently.

41. Thousands of people develop lung cancer from second-hand exposure to cigarette smoke. This is an example ofa market failure caused by an externality.

42. Which of these activities will most likely impose an external cost?a. Betty plants flowers in her garden.b. Bonnie gets a flu vaccine.c. Becky buys a new flat screen television.d. Bridget drives her car after having too much alcohol to drink.

43. In 2008, the average American earned about $47,000 while the average Nigerian earned about $1,400. Which of the following statements is likely?

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a. The average American purchases more televisions than the average Nigerian.b. The average American has better nutrition and healthcare than the average Nigerian.c. The average American has a longer life expectancy than the average Nigerian.d. All of the above are correct.

44. The income of a typical worker in a country is most closely linked to which of the following?a. populationb. market powerc. government policiesd. productivity

45. According to a recent study of Chilean bus drivers, drivers who are paid by the number of passengers they transport have higher productivity than drivers who are paid by the hour. If Chilean bus drivers are paid by the number of passengers they transport and Colombian bus drivers are paid by the hour, we can conclude thata. Colombian bus drivers likely have a higher standard of living than Chilean bus drivers.b. Chilean and Colombian bus drivers likely have the same standard of living.c. Chilean and Colombian bus drivers likely have a higher standard of living than US bus drivers.d. Chilean bus drivers likely have a higher standard of living than Colombian bus drivers.

46. The increase in living standards of American workers over the past century is primarily due toimprovements in productivity.

47. President Gerald Ford referred to inflation aspublic enemy number one.

48. Suppose that the Federal Reserve Bank announces that it will be making a change to a key interest rate to increase the money supply. This is likely becausethe Federal Reserve Bank is worried about unemployment.

49. During the 1990s, the United Kingdom experienced low levels of inflation while Turkey experienced high levels of inflation. A likely explanation of these facts is thatthe rate of growth of the quantity of money was slower in the United Kingdom than in Turkey.

50. Which of the following is not correct?a. Economists use some familiar words in specialized ways.b. Supply, demand, elasticity, comparative advantage, consumer surplus, and deadweight loss are all terms that are part of the economist’s language.c. The value of the economist’s language lies in its ability to provide you with a new and useful way of thinking about the world in which you live.d. Economics has its own language and its own way of thinking, but few other fields of study do.

51. Which of the following is not correct?a. Economists use some familiar words in specialized ways.b. Economics has its own language and its own way of thinking, but few other fields

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of study do.c. The value of the economist’s language lies in its ability to provide you with a new and useful way of thinking about the world in which you live.d. Supply, demand, elasticity, comparative advantage, consumer surplus, and deadweight loss are all terms that are part of the economist’s language.

52. In conducting their research, economists often substitute historical events and historical episodes forlaboratory experiments.

53. In conducting their research, economists often substitute historical events and historical episodes fora. theories and observations.b. laboratory experiments.c. assumptions.d. models.

54. In building economic models, economists often omit a. assumptions.b. theories.c. equations.d. details.

55. A model that shows how dollars flow through markets among households and firms is called thea. production possibilities frontier.b. demand and supply diagram.c. comparative advantage model.d. circular-flow diagram.

56. A model that shows how dollars flow through markets among households and firms is called thedemand and supply diagram.

57. In the circular-flow diagram,income payments flow from firms to households, and sales revenue flows from households to firms.

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Figure 2-1

58. Refer to Figure 2-1. Which arrow represents the flow of goods and services?a. Ab. Cc. Dd. B

59. Refer to Figure 2-1. Which arrow represents the flow of spending by households?a. Ab. Bc. Cd. D

60. Refer to Figure 2-1. Which arrow represents the flow of land, labor, and capital?a. Ab. Bc. Dd. C

61. Refer to Figure 2-1. Which arrow represents the flow of income payments?a. Ab. Bc. Cd. D

62. Refer to Figure 2-1. Sonia completes her first week of employment working as a hairdresser at a salon. On Friday of that week, she receives her first paycheck. To which of the arrows does this transaction directly contribute?a. B onlyb. A and Bc. C onlyd. C and D

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Figure 2-2

63. Refer to Figure 2-2. Boxes A and B of this circular-flow diagram representa. households and government.b. the markets for goods and services and the markets for financial assets.c. the markets for goods and the markets for services.d. firms and households.

64. Refer to Figure 2-2. Boxes C and D of this circular-flow diagram representthe markets for goods and services and the markets for factors of production.

65. Refer to Figure 2-2. If Box A of this circular-flow diagram represents firms, then which box represents households?Box BbRefer to Figure 2-2. If households are sellers in the markets represented by Box D of this circular-flow dia-gram, thena. Box D must represent the markets for factors of production.b. Box C must represent the markets for goods and services.c. firms are buyers in the markets represented by Box D.d. All of the above are correct.

66. Refer to Figure 2-2. If households are buyers in the markets represented by Box C of this circular-flow diagram, thenfirms are sellers in the markets represented by Box C.

67. . If the outer loop of this circular-flow diagram represents flows of dollars, then the inner loop includesflows of inputs from households to firms.

68. Refer to Figure 2-2. If the flow of goods and services is part of what is represented by the inner loop of this circular-flow diagram, thenthe flow of factors of production is also part of what is represented by the inner loop.

69. Refer to Figure 2-2. Devin works as an attorney for a corporation and is paid a salary in exchange for the legal services he performs. Juan owns office buildings and rents his buildings to companies in exchange for rent payments. If Devin’s income is represented by a flow of dollars from Box D to Box B of this circular-flow diagram, then Juan’s income is represented by a flow of dollars a. from Box A to Box C.b. from Box C to Box A.c. from Box B to Box D.d. from Box D to Box B.

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70. Refer to Figure 2-2. Carla regularly buys fruits and vegetables at a grocery store. Roberto regularly pays a lawn-care company to mow his lawn. If the flow of fruits and vegetables from the grocery store to Carla is represented by an arrow from Box C to Box B of this circular-flow diagram, then the money paid by Roberto to the lawn-care company is represented by an arrow from Box B to Box C.

71. When an economy is operating inside its production possibilities frontier, we know thata. there are unused resources or inefficiencies in the economy.b. all of the economy’s resources are fully employed.c. economic growth would have to occur in order for the economy to move to a point on the frontier.d. in order to produce more of one good, the economy would have to give up some of the other good.

Table 2-3Production Possibilities for LibrarylandBooks Magazines

400 0300 200200 350100 450 0 500

72. Refer to Table 2-3. What is the opportunity cost to Libraryland of increasing the production of books from 200 to 300?150 magazines

73. Refer to Table 2-3. Which of the following statements is correct?a. The opportunity cost of an additional 100 books is constant at 50 magazines.b. The opportunity cost of an additional 100 books is constant at 100 magazines.c. Libraryland’s production possibilities frontier is a straight, downward-sloping line.d. The opportunity cost of an additional 100 books increases as more books are produced.

Table 2-4Production Possibilities for BatterlandPancakes Waffles

600 0450 150300 250150 325 0 375

74. Refer to Table 2-4. What is the opportunity cost to Batterland of increasing the production of pancakes from 150 to 300?75 waffles

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Figure 2-3

J

K

L

M

N

pans

ovens

75. Refer to Figure 2-3. At which point is this economy producing its maximum possible quantity of pans?N

76. Refer to Figure 2-3. At which point is this economy producing its maximum possible quantity of pans?L

77. Refer to Figure 2-3. Efficient production is represented by which point(s)?a. J, K, Nb. K, M, Nc. L, Md. K, N

78. Refer to Figure 2-3. Inefficient production is represented by which point(s)?a. J, Lb. J, L, Mc. K, Nd. M

79. Refer to Figure 2-3. Unemployment could cause this economy to produce at which point(s)?a. J, Lb. J, L, Mc. K, Nd. M

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Figure 2-8Panel (a) Panel (b)

J

KL

M

N

cups of coffee

1 2 3 4 5 6 donuts

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

5.5

6

6.5

7cups of coffee

1 2 3 4 5 6 donuts

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

5.5

6

6.5

7

80. Refer to Figure 2-8, Panel (a). Production at point K is.possible but inefficient.

81. Refer to Figure 2-8, Panel (a). Production ispossible at points J, K, L, and M, but efficient only at points J, L, and M.

82. Refer to Figure 2-8, Panel (a). The movement from point M to point K could be caused bya. an advance in production technology.b. an improvement in efficiency.c. economic growth.d. unemployment.

83. Refer to Figure 2-8, Panel (a). The opportunity cost of moving from point J to point L is2 cups of coffee.

84. Refer to Figure 2-8, Panel (a). The opportunity cost of moving from point M to point L isa. 2 donuts.b. 2 donuts and 4 cups of coffee.c. 4 donuts.d. 4 cups of coffee.

85. Refer to Figure 2-8, Panel (a). The opportunity cost of moving from point K to point L is0 cups of coffee.

86. Refer to Figure 2-8, Panel (a). The opportunity cost of one cup of coffee is highest when the economy producesa. 0 cups of coffee.b. 2 cups of coffee.c. 4 cups of coffee.d. 6 cups of coffee.

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87. Refer to Figure 2-8, Panel (a). In order to gain 2 donuts by moving from point L to point M, society must sacrifice4 cups of coffee.

88. Refer to Figure 2-8, Panel (a) and Panel (b). A shift of the economy’s production possibilities frontier from Panel (a) to Panel (b) could be caused byan improvement in donut production technology.

89. Refer to Figure 2-8, Panel (a) and Panel (b). Which of the following is not a result of the shift of the econ-omy’s production possibilities frontier from Panel (a) to Panel (b)?a. the tradeoff between the production of donuts and coffee changesb. the opportunity cost of a cup of coffee is higher at all levels of coffee productionc. production of 4 donuts and 2 cups of coffee becomes possibled. production of 1 donut and 4 cups of coffee becomes efficient

Figure 2-10books

A

B

DVDs

90. Refer to Figure 2-10. Which of the following events would explain the shift of the production possibilities frontier from A to B?a. The economy’s citizens developed an enhanced taste for books.b. More capital became available in the economy.c. More labor became available in the economy.d. The economy experienced a technological advance in the production of books.

91. Refer to Figure 2-10. The shift of the production possibilities frontier from A to B illustrateseconomic growth.

92. A macroeconomist - as opposed to a microeconomist - would studythe effects of borrowing by the federal government.

93. Which of the following is an example of a normative, as opposed to positive, statement?a. If the price of a product decreases, people’s willingness to buy that product will increase.b. If the national saving rate were to increase, so would the rate of economic growth.c. The elimination of trade restrictions would increase an economy’s standard of living.d. Reducing tax rates on the wealthy would benefit the nation.

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94. The President receives economic policy advice from economists at each of the following excepta. the Council of Economic Advisors.b. the Department of the Treasury.c. the Department of Labor.d. the Congressional Budget office.

95. John Maynard Keynes referred to economics as an easy subject,a. at which very few excel.b. but not as easy as philosophy or the pure sciences.c. which very few can enjoy.d. which deals primarily with common sense.

96. As a student, Anne spends 40 hours per week writing term papers and completing homework assignments. On one axis of her production possibilities frontier is measured the number of term papers written per week. On the other axis is measured the number of homework assignments completed per week. Anne’s production possibilities frontier is a straight line if she can switch between writing term papers and completing homework assignments at a constant rate.

Table 3-1Assume that Andia and Zardia can switch between producing wheat and producing beef at a constant rate.

Minutes Needed to Make 1Bushel of

WheatPound of

BeefAndia 20 12Zardia 15 10

97. Refer to Table 3-1. Assume that Andia and Zardia each has 360 minutes available. If each person divides his time equally between the production of wheat and beef, then total production is 21 bushels of wheat and 33 pounds of beef.

98. Refer to Table 3-1. Which of the following combinations of wheat and beef could Andia produce in one 8-hour day?9 bushels of wheat and 25 pounds of beef

99. Refer to Table 3-1. Which of the following combinations of wheat and beef could Zardia not produce in one 10-hour day?25 bushels of wheat and 25 pounds of beef

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Table 3-2Assume that Aruba and Iceland can switch between producing coolers and producing radios at a constant rate.

Labor HoursNeeded to Make 1Cooler Radio

Aruba 2 5Iceland 1 4

100.Refer to Table 3-2. Which of the following represents Aruba's production possibilities frontier when 100

labor hours are available?a.

1 2 3 4 5 coolers

1

2

3

4

5

radios c.

10 20 30 40 50 coolers

10

20

30

40

50

radios

b.

1 2 3 4 5 coolers

1

2

3

4

5

radios d.

100 200 300 400 500 coolers

100

200

300

400

500

radios

101.Refer to Table 3-2. Assume that Aruba and Iceland each has 80 labor hours available. If each country di-vides its time equally between the production of coolers and radios, then total production is 60 coolers and 18 radios.

102.Refer to Table 3-2. Which of the following combinations of coolers and radios could Aruba produce in one 40-hour week?a. 3 coolers and 7 radiosb. 5 coolers and 6 radiosc. 11 coolers and 4 radiosd. 13 coolers and 3 radios

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Table 3-5Assume that England and Spain can switch between producing cheese and producing bread at a constant rate.

Labor Hours Neededto Make 1 Unit of

Number of UnitsProduced in 40

HoursCheese Bread Cheese Bread

England 1 4 40 10Spain 4 8 10 5

103.Refer to Table 3-5. Assume that England and Spain each has 40 labor hours available. If each country divides its time equally between the production of cheese and bread, then total production is25 units of cheese and 7.5 units of bread.

104. Refer to Table 3-5. Which of the following combinations of cheese and bread could Spain produce in 40 hours?7 units of cheese and 1.5 units of bread.

105.Refer to Table 3-5. Which of the following combinations of cheese and bread could England not produce in 40 hours?a. 5 units of cheese and 9 units of bread.b. 10 units of cheese and 7.5 units of bread.c. 20 units of cheese and 5 units of bread.d. 30 units of cheese and 2.5 units of bread.

106.Refer to Table 3-5. We could use the information in the table to draw a production possibilities frontier for England and a second production possibilities frontier for Spain. If we were to do this, measuring cheese along the horizontal axis, thenthe slope of England’s production possibilities frontier would be -0.25 and the slope of Spain’s production possibilities frontier would be -0.5.

107.Refer to Table 3-5. We could use the information in the table to draw a production possibilities frontier for England and a second production possibilities frontier for Spain. If we were to do this, measuring bread along the horizontal axis, thenthe slope of England’s production possibilities frontier would be -4 and the slope of Spain’s production possibilities frontier would be -2.

108. Mike and Sandy are two woodworkers who both make tables and chairs. In one month, Mike can make 4 tables or 20 chairs, where Sandy can make 6 tables or 18 chairs. Given this, we know that the opportunity cost of 1 table isa. 1/5 chair for Mike and 1/3 chair for Sandy.b. 1/5 chair for Mike and 3 chairs for Sandy.c. 5 chairs for Mike and 1/3 chair for Sandy.d. 5 chairs for Mike and 3 chairs for Sandy.

109.The principle of comparative advantage does not provide answers to certain questions. One of those questions is a. Do specialization and trade benefit more than one party to a trade?b. Is it absolute advantage or comparative advantage that really matters?c. Is it possible for specialization and trade to increase total output of traded goods?d. How are the gains from trade shared among the parties to a trade?

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110.Trade can make everybody better off because itallows people to specialize according to comparative advantage.

Table 3-4Assume that the farmer and the rancher can switch between producing meat and producing potatoes at a constant rate.

Labor Hours Neededto Make 1 Pound of

Pounds Producedin 24 Hours

Meat Potatoes Meat PotatoesFarmer 8 2 3 12Rancher 3 6 8 4

111.Refer to Table 3-4. The opportunity cost of 1 pound of meat for the farmer is4 pounds of potatoes.

112.Refer to Table 3-4. The opportunity cost of 1 pound of meat for the rancher is1/2 pound of potatoes.

113.77. Refer to Table 3-4. The opportunity cost of 1 pound of potatoes for the farmer is1/4 pound of meat.

114.Refer to Table 3-4. The opportunity cost of 1 pound of potatoes for the rancher isa. 1/2 pound of meat.2 pounds of meat.

115.Refer to Table 3-4. The farmer has an absolute advantage in the production of potatoes.

116.Refer to Table 3-4. The rancher has an absolute advantage in the production of meat.

117.Refer to Table 3-4. The farmer has a comparative advantage in the production of potatoes.

118.Refer to Table 3-4. The rancher has a comparative advantage in the production of a. meat.

119.Refer to Table 3-4. The farmer should specialize in the production ofpotatoes and the rancher should specialize in the production of meat.

120. Refer to Table 3-4. Assume that the farmer and the rancher each has 24 labor hours available. If each person spends all his time producing the good in which he has a comparative advantage, then total production is 8 pounds of meat and 12 pounds of potatoes.

121.Refer to Table 3-4. Assume that the farmer and the rancher each has 24 labor hours available. If each per-son spends all his time producing the good in which he has a comparative advantage and trade takes place at a price of 1 pound of meat for 2 pounds of potatoes, thenthe farmer and the rancher will both gain from this trade.

122.Refer to Table 3-4. Without trade, the farmer produced and consumed 2 pounds of meat and 4 pounds of potatoes and the rancher produced and consumed 4 pounds of meat and 2 pounds of potatoes. Then, each person agreed to specialize in the production of the good in which they have a comparative advantage and trade 3 pounds of meat for 6 pounds of potatoes. As a result, the farmer gained1 pound of meat and 2 pounds of potatoes and the rancher gained 1 pound of meat and 4

18

pounds of potatoes.123.Economists generally support

a. trade restrictions.b. government management of trade.c. export subsidies.d. free international trade.

124.Suppose the United States has a comparative advantage over Mexico in producing pork. The principle of comparative advantage asserts thatthe United States should produce more pork than what it requires and export some of it to Mexico.

125. In a market economy,a. supply determines demand and demand, in turn, determines prices.b. demand determines supply and supply, in turn, determines prices.c. the allocation of scarce resources determines prices and prices, in turn, determine supply and demand.d. supply and demand determine prices and prices, in turn, allocate the economy’s scarce resources.

126.Which of the following is not an example of a market?a. A small town has only one seller of electricity.b. In the United States, a sick person cannot legally purchase a kidney.c. In Florida, there are many buyers and sellers of key lime pie.d. The availability of Internet shopping has expanded the clothing choices for buyers who do not live near large cities.

127.When all market participants are price takers who have no influence over prices, the markets have a. only a few buyers and sellers.b. numerous sellers but only a few buyers.c. numerous buyers but only a few sellers.d. numerous buyers and sellers.

Figure 4-1

D

P

P'

Q Q'

A

B

quantity

price

128.Refer to Figure 4-1. The movement from point A to point B on the graph showsa. a decrease in demand.

19

b. an increase in demand.c. a decrease in quantity demanded.d. an increase in quantity demanded.

129.Refer to Figure 4-1. The movement from point A to point B on the graph is caused bya. an increase in price.b. a decrease in the price of a substitute good.c. an increase in income.d. a decrease in price.

130.Refer to Figure 4-1. It is apparent from the figure that the demand for the good conforms to the law of demand.

131. “Other things equal, when the price of a good rises, the quantity demanded of the good falls, and when the price falls, the quantity demanded rises.” This relationship between price and quantity demandeda. applies to most goods in the economy.b. is represented by a downward-sloping demand curve.c. is referred to as the law of demand.d. All of the above are correct.

132.Once the demand curve for a product or service is drawn, ita. remains stable over time.b. can shift either rightward or leftward.c. is possible to move along the curve, but the curve will not shift.d. tends to become steeper over time.

Table 4-1Price Quantity Demanded

by MichelleQuantity Demanded

by LauraQuantity Demanded

by Hillary$5 5 4 11$4 6 6 13$3 7 8 15$2 8 10 17$1 9 12 19$0 10 14 21

133.Refer to Table 4-1. If the market consists of Michelle, Laura, and Hillary and the price falls by $1, the quan-tity demanded in the market increases by a. 2 units.b. 3 units.c. 4 units.d. 5 units.

134. Refer to Table 4-1. If the market consists of Michelle and Laura only and the price falls by $1, the quantity demanded in the market increases by 3 units.

135.Refer to Table 4-1. If the market consists of Michelle and Hillary only and the price falls by $1, the quantity demanded in the market increases by 3 units.

20

136.Refer to Table 4-1. If the market consists of Laura and Hillary only and the price falls by $1, the quantity demanded in the market increases by 4 units.

137. Refer to Table 4-1. Which of the following illustrates the market demand curve?a.

Demand A

2 4 6 8 10 12 Quantity

1

2

3

4

5

Price c.

Demand C

5 10 15 20 25 30 35 40 45 Quantity

1

2

3

4

5Price

b.

Demand B

4 8 12 16 20 24 28 Quantity

1

2

3

4

5Price d.

Demand D

5 10 15 20 25 30 Quantity

1

2

3

4

5Price

Figure 4-5

Demand 1Demand 2

AB

Panel 1

1 2 3 4 5 6 7 8 Quantity

1

2

3

4

5

6

7

8

9

10Price

Demand 1

A

C

Panel 2

1 2 3 4 5 6 7 8 Quantity

1

2

3

4

5

6

7

8

9

10Price

138. Refer to Figure 4-5. Suppose that the federal government is concerned about obesity in the United States. Congress is considering two plans. One would require “junk food” producers to include warning labels on all junk food. The other would impose a tax on all products considered to be junk food. If the warning labels are successful, we could illustrate the plan as producing a movement from Point A to Point B in Panel 1.

139.Refer to Figure 4-5. Suppose that the federal government is concerned about obesity in the United States. Congress is considering two plans. One would require “junk food” producers to include warning labels on all junk food. The other would impose a tax on all products considered to be junk food. We could illustrate the tax as producing a

21

movement from a. Point A to Point B in Panel 1.b. Point B to Point A in Panel 1.c. Point C to Point A in Panel 2.d. Point A to Point C in Panel 2.

140.Suppose that Amanda receives a pay increase. We would expecta. to observe Amanda moving down and to the right along her given demand curve.b. Amanda's demand for inferior goods to decrease.c. Amanda's demand for each of two goods that are complements to increase.d. Amanda's demand for normal goods to decrease.

141.Suppose the American Medical Association announces that men who shave their heads are less likely to die of heart failure. We could expect the current demand fora. hair gel to increase.b. razors to increase.c. combs to increase.d. shampoo to increase.

Figure 4-7Panel (a) Panel (b)

D

P'

P

Q' Q quantity

price

D' D

quantity

price

142.Refer to Figure 4-7. The graphs show the demand for cigarettes. In Panel (a), the arrows are consistent with which of the following events?a. The price of marijuana, a complement to cigarettes, increased.b. Mandatory health warnings were placed on cigarette packages.c. Several foreign countries banned U.S. cigarettes in their countries.d. A tax was placed on cigarettes.

143.Refer to Figure 4-7. The graphs show the demand for cigarettes. In Panel (a), the arrows are consistent with which of the following events?a. Tobacco and marijuana are complements, and the price of marijuana decreased.b. Tobacco is a “gateway drug,” and the price of marijuana increased.c. The price of cigarettes increased.d. The arrows are consistent with all of these events.

22

144.Refer to Figure 4-7. The graphs show the demand for cigarettes. In Panel (b), the arrows are consistent with which of the following events?a. an increase in the price of cigarettesb. placing a tax on cigarettesc. decreasing the price of marijuana, given that tobacco and marijuana are complementsd. the prohibition of cigarette advertisements on television

145. The following table contains a supply schedule for a good.Price Quantity Supplied$10 100$20 Q1

146. If the law of supply applies to this good, then Q1 could bea. 0.b. 50.c. 100.d. 150.

Figure 4-10

Supply A Supply B Supply C

Quantity

Price

147.Refer to Figure 4-10. Which of the following would cause the supply curve to shift from Supply A to Supply C in the market for tennis racquets?a. an increase in the price of tennis ballsb. an expectation by firms that the price of tennis racquets will increase in the very near futurec. a decrease in the number of firms selling tennis racquetsd. a decrease in the price of tennis racquet strings

148.Refer to Figure 4-10. Which of the following would cause the supply curve to shift from Supply A to Supply C in the market for winter coats?a. an increase in the price of winter coatsb. a decrease in the number of firms selling winter coatsc. a decrease in the price of winter hats and glovesd. a decrease in the price of zippers and snaps

149.Refer to Figure 4-10. Which of the following would cause the supply curve to shift

23

from Supply B to Supply A in the market for tennis racquets?a. a decrease in the price of tennis ballsb. an expectation by firms that the price of tennis racquets will increase in the very near futurec. a decrease in the price of tennis racquet stringsd. an improvement in technology that allows firms to use less labor in the production of tennis racquets

150.Refer to Figure 4-10. Which of the following would cause the supply curve to shift from Supply B to Supply A in the market for disposable ballpoint pens?a. a decrease in the price of disposable ballpoint pensb. an increase in the price of fountain pensc. an increase in the price of inkd. an improvement in technology that allows firms to use less labor in the production of disposable ballpoint pens

151.The market supply curvea. is found by vertically adding the individual supply curves.b. slopes downward.c. represents the sum of the prices that all the sellers are willing to accept for a given quantity of the good.d. represents the sum of the quantities supplied by all the sellers at each price of the good.

Table 4-5Price Firm A’s

QuantitySupplied

Firm B’sQuantitySupplied

Firm C’sQuantitySupplied

Firm D’sQuantitySupplied

$0 0 0 0 0$2 3 4 2 1$4 6 8 4 2$6 9 12 6 3$8 12 16 8 4$10 15 20 10 5

152.Refer to Table 4-5. If these are the only four sellers in the market, then the market quantity supplied at a price of $4 is20 units.

153.Refer to Table 4-5. If these are the only four sellers in the market, then the market quantity supplied at a price of $8 isa. 10 units.b. 20 units.c. 32 units.d. 40 units.

154.Refer to Table 4-5. If these are the only four sellers in the market, then when the price decreases from $10 to $8, the market quantity supplied decreases by 10 units.

24

155.Refer to Table 4-5. If these are the only four sellers in the market, then when the price increases from $4 to $6, the market quantity supplied increases by 10 units.

Figure 4-12

S1Producer A

2 4 6 8 10 12 14 16 Quantity

2

4

6

8

10

12

14

16

18

20Price

S2

Producer B

2 4 6 8 10 12 14 16 Quantity

2

4

6

8

10

12

14

16

18

20Price

156.Refer to Figure 4-12. If Producer A and Producer B are the only producers in the market, then the market quantity supplied when the price is $4 is 12 units.

157.The supply curve for portable charcoal grills shiftsa. only when production technology changes.b. when a determinant of the supply of portable charcoal grills other than the price of portable charcoal grills changes.c. when any determinant of the supply of portable charcoal grills changes.d. only when the number of sellers of portable charcoal grills changes.

158. If the number of sellers in a market increases, then thesupply in that market will increase.

159.Which of the following events must cause equilibrium price to fall?a. demand increases and supply decreasesb. demand and supply both decreasec. demand and supply both increased. demand decreases and supply increases

25

Figure 4-14

D

S

1 2 3 4 5 6 7 8 9 10 Quantity

1

2

3

4

5

6

7

8

9

10

Price

160.Refer to Figure 4-14. At a price of a. $2, there is a surplus of 6 units.b. $5, there is a surplus of 25 units.c. $5, there is a shortage of $25.d. $7, there is a surplus of 4 units.

161.Refer to Figure 4-14. At a price of $2, there is a shortage of 6 units.

162.Refer to Figure 4-14. At a price of a. $8, there is a surplus of 6 units.b. $5, there is neither a shortage nor a surplus.c. $2, there is a shortage of 6 units.d. All of the above are correct.

163.Which of the following events would cause the price of oranges to fall?a. There is a shortage of oranges.b. The FDA announces that bananas cause strokes, and oranges and bananas are substitutes.c. The price of land throughout Florida decreases, and Florida produces a significant proportion of the nation’s oranges.

164.Saddle shoes are not popular right now, so very few are being produced. If saddle shoes become popular, then how will this affect the market for saddle shoes?a. The supply curve for saddle shoes will shift right, which will create a shortage at the current price. Price will increase, which will decrease quantity demanded and increase quantity supplied. The new market equilibrium will be at a higher price and higher quantity.b. The supply curve for saddle shoes will shift right, which will create a surplus at the current price. Price will decrease, which will increase quantity demanded and decrease quantity supplied. The new market equilibrium will be at a lower price and higher quantity.c. The demand curve for saddle shoes will shift right, which will create a surplus at the current price. Price will decrease, which will increase quantity demanded and

26

decrease quantity supplied. The new market equilibrium will be at a lower price and higher quantity.d. The demand curve for saddle shoes will shift right, which will create a shortage at

the current price. Price will increase, which will decrease quantity demanded and increase quantity supplied. The new market equilibrium will be at a higher price and higher quantity.

165.Consider the market for new DVDs. If DVD players became cheaper, buyers expected DVD prices to fall next year, used DVDs became more expensive, and DVD production technology improved, then the equilibrium price of a new DVD woulda. rise.b. fall.c. stay the same.d. could rise, fall, or remain unchanged.

Figure 4-21

Demand 1 Demand 2

Supply 1 Supply 2

A

B

C

D

Quantity

Price

166.Refer to Figure 4-21. Which of the following movements would illustrate the effect in the market for golf balls of an increase in green fees?a. Point A to Point Bb. Point C to Point Dc. Point A to Point Dd. Point C to Point B

167.Refer to Figure 4-21. Which of the following movements would illustrate the effect in the market for paper napkins as a result of a “Go Green” advertising campaign encouraging people to use cloth napkins?a. Point A to Point Bb. Point C to Point Dc. Point A to Point Dd. Point C to Point B

168. Refer to Figure 4-21. Which of the following movements would illustrate the effect in the market for orange juice of an announcement by the American Dental Association that orange juice erodes tooth enamel?a. Point A to Point B

27

b. Point C to Point Dc. Point A to Point Dd. Point C to Point B

169.Refer to Figure 4-21. Which of the following movements would illustrate the effect in the market for swim-ming lessons of an increase in the incomes of parents with school-aged children?a. Point A to Point Bb. Point C to Point Bc. Point C to Point Dd. Point A to Point D

170.Refer to Figure 4-21. Which of the following movements would illustrate the effect in the market for Ramen noodles of a decrease in the incomes of young adults, assuming that Ramen noodles are an inferior good?a. Point A to Point Bb. Point C to Point Bc. Point C to Point Dd. Point A to Point D

171.Refer to Figure 4-21. Which of the following movements would illustrate the effect in the market for ball-room dancing lessons resulting from the introduction of a popular new television show called “Dancing with the Stars”?a. Point A to Point Bb. Point C to Point Bc. Point C to Point Dd. Point A to Point D

172.Refer to Figure 4-21. Which of the following movements would illustrate the effect in the market for bread of an increase in the price of flour?a. Point A to Point Bb. Point C to Point Bc. Point A to Point Dd. Point C to Point D

173. Refer to Figure 4-21. Which of the following movements would illustrate the effect in the market for kitchen cabinets of an increase in the price of wood?a. Point A to Point Bb. Point C to Point Bc. Point C to Point Dd. Point A to Point D

174.Refer to Figure 4-21. Which of the following movements would illustrate the effect in the market for wedding cakes resulting from a decrease in the price number of pastry chefs?a. Point A to Point Bb. Point C to Point Bc. Point A to Point Dd. Point C to Point D

175.Refer to Figure 4-21. Which of the following movements would illustrate the effect in the market for choco-late chip cookies of an improved high-speed mixer that allows bakers to produce cookies in less time?

28

a. Point C to Point B b. Point C to Point Dc. Point A to Point Dd. Point A to Point B

176.Refer to Figure 4-21. Which of the following movements would illustrate the effect in the market for choco-late chip cookies of a decrease in the price of flour?a. Point A to Point Bb. Point C to Point Bc. Point C to Point Dd. Point A to Point D

177.Refer to Figure 4-21. Which of the following movements would illustrate the effect in the market for doctor’s visits of an increase in the number of medical students graduating from medical school and successfully completing their residency programs?a. Point C to Point Bb. Point C to Point Dc. Point A to Point Dd. Point A to Point B

178.Which of the following statements about the consumers’ responses to rising gasoline prices is correct?a. About 10 percent of the long-run reduction in quantity demanded arises because people drive less and about 90 percent arises because they switch to more fuel-efficient cars.b. About 90 percent of the long-run reduction in quantity demanded arises because people drive less and about 10 percent arises because they switch to more fuel-efficient cars.c. Because gasoline is a necessity, consumers do not decrease their quantity demanded in either the short run or the long run.d. About half of the long-run reduction in quantity demanded arises because people drive less and about half arises because they switch to more fuel-efficient cars.

179.The greater the price elasticity of demand, thea. more likely the product is a necessity.b. smaller the responsiveness of quantity demanded to a change in price.c. greater the percentage change in price over the percentage change in quantity demanded.d. greater the responsiveness of quantity demanded to a change in price.

180. If the price elasticity of demand for a good is 1, then a 3 percent decrease in price results in aa. 0.1 percent increase in the quantity demanded.b. 1 percent increase in the quantity demanded.c. 4 percent increase in the quantity demanded.d. 3 percent increase in the quantity demanded.

181.The demand for Godiva pumpkin truffles is likely quite elastic becausea. truffles melt easily.b. this particular type of chocolate is viewed as a necessity by many chocolate lovers.

29

c. the market is broadly defined.d. other types of chocolate are good substitutes for this particular flavor.

182.Other things equal, the demand for a good tends to be more inelastic, thea. fewer the available substitutes.b. longer the time period considered.c. more the good is considered a luxury good.d. more narrowly defined is the market for the good.

183. Which of the following expressions is valid for the price elasticity of demand?a.

Price elasticity of demand = .b.

Price elasticity of demand = .c.

Price elasticity of demand = .d.

Price elasticity of demand = .184.The midpoint method for calculating elasticities is convenient in that it allows us to

a. ignore the percentage change in quantity demanded and instead focus entirely on the percentage change in price.b. calculate the same value for the elasticity, regardless of whether the price increases or decreases.c. assume that sellers' total revenue stays constant when the price changes.d. restrict all elasticity values to between 0 and 1.

Figure 5-1

A

B

Demand

2 4 6 8 10 12 14 16 18 20 22 24 26 Quantity

1

2

3

4

5

6

7

8

9

10Price

185.Refer to Figure 5-1. Between point A and point B, price elasticity of demand is equal to1.5

186.Refer to Figure 5-1. Between point A and point B, the slope is equal to -1/4, and the price elasticity of demand is equal to 3/2.

30

187.Refer to Figure 5-1. Between point A and point B on the graph, demand isa. perfectly elastic.b. inelastic.c. unit elastic.d. elastic, but not perfectly elastic.

188.Demand is said to have unit elasticity if the price elasticity of demand isa. less than 1.b. greater than 1.c. equal to 1.d. equal to 0.

Figure 5-2

Pa

Pb

D1

D2D3

Quantity

Price

189.Refer to Figure 5-2. As price falls from Pa to Pb, which demand curve represents the most elastic demand?a. D1b. D2c. D3d. All of the above are equally elastic.

190.Refer to Figure 5-2. As price falls from Pa to Pb, we could use the three demand curves to calculate three different values of the price elasticity of demand. Which of the three demand curves would produce the smallest elasticity?a. D1b. D2c. D3d. All of the above are equally elastic.

191.How does total revenue change as one moves downward and to the right along a linear demand curve?a. It always increases.b. It always decreases.c. It is unaffected by a movement along the demand curve.d. It first increases, then decreases.

31

192. In which of the following situations will total revenue increase?a. Price elasticity of demand is 1.2, and the price of the good decreases.b. Price elasticity of demand is 0.5, and the price of the good increases.c. Price elasticity of demand is 3.0, and the price of the good decreases.d. All of the above are correct.

Figure 5-4

Demand

A

B

C Quantity

Price

193. Refer to Figure 5-4. Suppose the point labeled B is the “halfway point” on the demand curve and it corre-sponds to a price of $5.00. Then, between prices of $4.99 and $5.01, the price elasticity of demand is equal to 1.

194.Refer to Figure 5-4. The section of the demand curve from A to B represents theelastic section of the demand curve.

195.Refer to Figure 5-4. The section of the demand curve from B to C represents theinelastic section of the demand curve.

196.Refer to Figure 5-4. The section of the demand curve at point B represents theunit elastic section of the demand curve.

197.Refer to Figure 5-4. Assume the section of the demand curve from A to B corresponds to prices between $8 and $16. Then, when the price changes between $9 and $10, a. quantity demanded changes proportionately less than the price.b. quantity demanded changes the same amount proportionately as price.c. the price elasticity of demand equals 1.d. quantity demanded changes proportionately more than the price.

198.Refer to Figure 5-4. Assume the section of the demand curve from A to B corresponds to prices between $6 and $12. Then, when the price increases from $8 to $10,a. the percent decrease in the quantity demanded exceeds the percent increase in the price.b. the percent increase in the price exceeds the percent decrease in the quantity demanded.c. sellers’ total revenue increases as a result.d. it is possible that the quantity demanded fell from 550 to 500 as a result.

32

199.Refer to Figure 5-4. Assume, for the good in question, two specific points on the demand curve are (Q = 1,000, P = $40) and (Q = 1,500, P = $30). Then which of the following scenarios is possible?a. Both of these points lie on the section of the demand curve from B to C.b. The vertical intercept of the demand curve is the point (Q = 0, P = $60).c. The horizontal intercept of the demand curve is the point (Q = 1,800, P = $0).d. Any of these scenarios is possible.

200.Refer to Figure 5-4. The section of the demand curve from B to C represents thea. elastic section of the demand curve.b. perfectly elastic section of the demand curve.c. unit elastic section of the demand curve.d. inelastic section of the demand curve.

201.Refer to Figure 5-4. Assume the section of the demand curve from B to C corresponds to prices between $0 and $15. Then, when the price changes between $7 and $9, quantity demanded changes proportionately less than the price.

202.Refer to Figure 5-4. Assume, for the good in question, two specific points on the demand curve are (Q = 2,000, P = $15) and (Q = 2,400, P = $12). Then which of the following scenarios is possible?a. The vertical intercept of the demand curve is the point (Q = 0, P = $22).b. The horizontal intercept of the demand curve is the point (Q = 5,000, P = $0).c. Any of these scenarios is possible.d. Both of these points lie on section BC of the demand curve.

203.Refer to Figure 5-4. If the price decreases in the region of the demand curve between points A and B, we can expect total revenue to increase.

204.Refer to Figure 5-4. If the price increases in the region of the demand curve between points A and B, we can expect total revenue to a. increase.b. stay the same.c. first increase, then decrease until total revenue is maximized.d. decrease.

205.Refer to Figure 5-4. If the price decreases in the region of the demand curve between points B and C, we can expect total revenue to a. increase.b. stay the same.c. decrease.d. first increase, then decrease until total revenue is maximized.

206.Refer to Figure 5-4. If the price increases in the region of the demand curve between points B and C, we can expect total revenue to increase.

Scenario 5-3Milk has an inelastic demand, and beef has an elastic demand. Suppose that a mysterious increase in bovine infertility decreases both the population of dairy cows and the population of beef cattle by 50 percent.

33

207.Refer to Scenario 5-3. The equilibrium price willincrease in both the milk and beef markets.

208.Refer to Scenario 5-3. The equilibrium quantity willa. increase in both the milk and beef markets.b. increase in the milk market and decrease in the beef market.c. decrease in the milk market and increase in the beef market.d. decrease in both the milk and beef markets.

209.Refer to Scenario 5-3. The change in equilibrium price will bea. greater in the milk market than in the beef market.b. greater in the beef market than in the milk market.c. the same in the milk and beef markets.d. Any of the above could be correct.

210. Refer to Scenario 5-3. The change in equilibrium quantity will bea. greater in the milk market than in the beef market.b. the same in the milk and beef markets.c. Any of the above could be correct.d. greater in the beef market than in the milk market.

211.Refer to Scenario 5-3. Total consumer spending on milk willa. increase, and total consumer spending on beef will increase.b. decrease, and total consumer spending on beef will increase.c. decrease, and total consumer spending on beef will decrease.d. increase, and total consumer spending on beef will decrease.

Table 5-6Supply is Demand is

Scenario A

elastic elastic

Scenario B

elastic inelastic

Scenario C

inelastic elastic

Scenario D

inelastic inelastic

212.Refer to Table 5-6. Which scenario describes the market for oil in the short run in comparison to the long run?a. Scenario A describes both the short run and the long run.b. Scenario D describes both the short run and the long run.c. Scenario C describes the short run, whereas scenario B describes the long run.d. Scenario D describes the short run, whereas scenario A describes the long run.

213.Refer to Table 5-6. Which scenario describes the market for oil in the short run?a. Ab. Bc. Cd. D

34

214.Refer to Table 5-6. Which scenario describes the market for oil in the long run?a. Ab. Bc. Cd. D

215.Which of the following was not a reason OPEC failed to keep the price of oil high?a. Over the long run, producers of oil outside of OPEC responded to higher prices by increasing oil exploration and by building new extraction capacity.b. Consumers responded to higher prices with greater conservation.c. Consumers replaced old inefficient cars with newer efficient ones.d. The agreement OPEC members signed allowed each country to produce as much oil as each wanted.

216.Which of the following statements does not help to explain why government drug interdiction increases drug-related crime?a. The demand for illegal drugs is inelastic.b. Interdiction results in drug addicts having a greater need for quick cash.c. Interdiction results in an increase in the amount of money needed to buy the same amount of drugs.d. Government drug programs are more lenient now with drug offenders than they were in the 1980s.

218.Which of the following is not correct?a. Economists have two roles: scientist and policy adviser.b. As scientists, economists develop and test theories to explain the world around

them.c. Economic policies rarely have effects that their architects did not intend or

anticipate.

d. As policy advisers, economists use their theories to help change the world for the better.

35

219. Which of the following is not correct?a. Economists have two roles: scientist and policy adviser.b. As scientists, economists develop and test theories to explain the world around

them.c. Economic policies rarely have effects that their architects did not intend or

anticipate.

d. As policy advisers, economists use their theories to help change the world for the better.

220. Price controls are usually enacted a. as a means of raising revenue for public purposes.b. when policymakers believe that the market price of a good or service is unfair to

buyers or sellers.c. when policymakers detect inefficiencies in a market.d. All of the above are correct.

221. In a competitive market free of government regulation, a. price adjusts until quantity demanded is greater than quantity supplied.b. price adjusts until quantity demanded is less than quantity supplied.c. price adjusts until quantity demanded equals quantity supplied.d. supply adjusts to meet demand at every price.

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222. A price ceiling will be binding only if it is seta. equal to the equilibrium price.b. above the equilibrium price.c. below the equilibrium price.d. either above or below the equilibrium price.

223. If the government removes a binding price ceiling from a market, then the price received by sellers willa. decrease, and the quantity sold in the market will decrease.b. decrease, and the quantity sold in the market will increase.c. increase, and the quantity sold in the market will decrease.d. increase, and the quantity sold in the market will increase

224. A price ceiling is binding when it is set a. above the equilibrium price, causing a shortage.b. above the equilibrium price, causing a surplus.c. below the equilibrium price, causing a shortage.d. below the equilibrium price, causing a surplus.

225. A shortage results when a a. nonbinding price ceiling is imposed on a market.b. nonbinding price ceiling is removed from a market.c. binding price ceiling is imposed on a market.d. binding price ceiling is removed from a market.

226. Suppose the equilibrium price of a physical examination ("physical") by a doctor is $200, and the government imposes a price ceiling of $150 per physical. As a result of the price ceiling, the a. demand curve for physicals shifts to the right.b. supply curve for physicals shifts to the left.c. quantity demanded of physicals increases, and the quantity supplied of physicals

decreases.d. number of physicals performed stays the same.

37

Figure 6-1

38

Panel (a) Panel (b)

D

S

price ceiling

quantity

price

D

S

price ceiling

quantity

price

39

227. Refer to Figure 6-1. A binding price ceiling is shown ina. panel (a) only.b. panel (b) only.c. both panel (a) and panel (b).d. neither panel (a) nor panel (b).

40

228. Refer to Figure 6-1. In which panel(s) of the figure would there be a shortage of the good at the price ceiling?a. panel (a) onlyb. panel (b) onlyc. both panel (a) and panel (b)d. neither panel (a) nor panel (b)

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229. Refer to Figure 6-1. The price ceiling shown in panel (a) a. is not binding.b. creates a surplus.c. creates a shortage.d. Both a) and b) are correct.

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230. Refer to Figure 6-1. The price ceiling shown in panel (b) a. is not binding.b. creates a surplus.c. creates a shortage.d. Both a) and b) are correct.

43

Figure 6-2

Price ceiling

Demand

Supply

80 16560 120 180 Quantity

1

2

3

4

5

6

Price

231. Refer to Figure 6-2. The price ceilinga. is binding.b. causes a shortage.c. causes the quantity demanded to exceed the quantity supplied.d. All of the above are correct.

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232 Refer to Figure 6-2. The price ceilinga. causes a shortage of 45 units of the good.b. makes it necessary for sellers to ration the good.c. is not binding because it is set below the equilibrium price.d. Both a) and b) are correct.

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233. Refer to Figure 6-2. The price ceiling causes quantity a. supplied to exceed quantity demanded by 45 units.b. supplied to exceed quantity demanded by 85 units.c. demanded to exceed quantity supplied by 45 units.d. demanded to exceed quantity supplied by 85 units.

46

Figure 6-3

Panel (a)

D

S

price floor

price of wheat

quantity

Panel (b)

D

S

price floor

price of wheat

quantity

47

234. Refer to Figure 6-3. A binding price floor is shown ina. both panel (a) and panel (b).b. panel (a) only.c. panel (b) only.d. neither panel (a) nor panel (b).

48

235. Refer to Figure 6-3. In panel (b), there will bea. a shortage of wheat.b. equilibrium in the market.c. a surplus of wheat.d. lines of people waiting to buy wheat.

49

Figure 6-12

D

S1

price ceiling

S2price of gasoline

quantity of gasoline

P1

P2

P3

Q1Q3

236. Refer to Figure 6-12. When the price ceiling applies in this market, and the supply curve for gasoline shifts from S1 to S2, a. the market price will increase to P3.b. a surplus will occur at the new market price of P2.c. the market price will stay at P1.d. a shortage will occur at the new market price of P2.

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237. Refer to Figure 6-12. When the price ceiling applies in this market, and the supply curve for gasoline shifts from S1 to S2, the resulting quantity of gasoline that is bought and sold isa. less than Q3.b. Q3.

c. between Q1 and Q3.

d. at least Q1.

238. Refer to Figure 6-12. Which of the following statements best relates the figure to the events that occurred in the United States in the 1970s?a. Buyers of gasoline paid a price of P1 before 1973; they paid a price of P2 after

OPEC increased the price of crude oil in 1973, and there was a shortage of gasoline at that price.

b. Buyers of gasoline paid a price of P1 before 1973; they paid a price of P3 after OPEC increased the price of crude oil in 1973, and there was a shortage of gasoline at that price.

c. Buyers of gasoline paid a price of P2 before 1973; they paid a price of P3 after OPEC increased the price of crude oil in 1973, with no shortage of gasoline at that price.

d. The price ceiling was binding before 1973; the price ceiling was no longer binding after OPEC increased the price of crude oil in 1973.

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239 A tax imposed on the sellers of a good will raise the a. price paid by buyers and lower the equilibrium quantity.b. price paid by buyers and raise the equilibrium quantity.c. effective price received by sellers and lower the equilibrium quantity.d. effective price received by sellers and raise the equilibrium quantity.

240. If the government levies a $500 tax per car on sellers of cars, then the price received by sellers of cars woulda. decrease by less than $500.b. decrease by exactly $500.c. decrease by more than $500.d. increase by an indeterminate amount.

241 A $0.10 tax levied on the sellers of chocolate bars will cause thea. supply curve for chocolate bars to shift down by $0.10.b. supply curve for chocolate bars to shift up by $0.10.c. demand curve for chocolate bars to shift down by $0.10.d. demand curve for chocolate bars to shift up by $0.10.

242. When a payroll tax is enacted, the wage received by workers a. falls, and the wage paid by firms rises.b. falls, and the wage paid by firms falls.c. rises, and the wage paid by firms falls.d. rises, and the wage paid by firms rises.

243. The mayor of Workerville proposes a local payroll tax to fund a new water park for the city. The mayor proposes to collect half the tax from workers and half the tax from firms. The mayor will be able to successfully divide the burden of the tax equally if the a. demand for labor is more elastic than the supply of labor.b. supply of labor is more elastic than the demand for labor.c. demand for labor and supply of labor are equally elastic.d. It is not possible for the tax burden to fall equally on firms and workers.

244. The incidence of a tax falls more heavily on a. consumers than producers if demand is more inelastic than supply.b. producers than consumers if supply is more inelastic than demand.c. consumers than producers if supply is more elastic than demand.d. All of the above are correct.

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245. If a tax is imposed on a market with inelastic demand and elastic supply, thena. buyers will bear most of the burden of the tax.b. sellers will bear most of the burden of the tax.c. the burden of the tax will be shared equally between buyers and sellers.d. it is impossible to determine how the burden of the tax will be shared.

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246. Suppose that a tax is placed on books. If the buyers pay the majority of the tax, then we know that thea. demand is more inelastic than the supply.b. supply is more inelastic than the demand.c. government has required that buyers remit the tax payments.d. government has required that sellers remit the tax payments.

54

Figure 6-25

Panel (a) Panel (b)

D

S

quantity

price

D

S

quantity

price

Panel (c)

D

S

quantity

price

55

247. Refer to Figure 6-25. In which market will the majority of the tax burden fall on buyers?a. market (a)b. market (b)c. market (c)d. All of the above are correct.

248. Refer to Figure 6-25. In which market will the majority of the tax burden fall on sellers?a. market (a)b. market (b)c. market (c)d. All of the above are correct.

249. Refer to Figure 6-25. In which market will the tax burden be most equally divided between buyers and sellers?a. market (a)b. market (b)c. market (c)d. All of the above are correct.

250 Using the graph shown, in which the vertical distance between points A and B represents the tax in the market, answer the following questions.a. What was the equilibrium price and quantity in this market before the tax?b. What is the amount of the tax?c. How much of the tax will the buyers pay?d. How much of the tax will the sellers pay?e. How much will the buyer pay for the product after the tax is imposed?f. How much will the seller receive after the tax is imposed?g. As a result of the tax, what has happened to the level of market activity?

D

S

B

A

6000 8000

6

8

11

quantity

price

56

ANS:a. $8; 8,000 unitsb. $5c. $3d. $2e. $11f. $6g. As a result of the tax, instead of 8,000 units bought and sold, only 6,000 will be

bought and sold.

251. How does elasticity affect the burden of a tax? Justify your answer using supply and demand diagrams.

ANS:

The tax burden falls more heavily on the side of the market that is more inelastic.

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