Chapter 1 Ten Principles of Economics - … · Chapter 1 Ten Principles of Economics ... people respond to incentives, outline the possible outcome for teachers if the K-12 school

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Chapter 1

Ten Principles of Economics TRUE/FALSE

1. Scarcity means that there is less of a good or resource available than people wish to have.

ANS: T DIF: 1 REF: 1-0 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Scarcity MSC: Definitional

2. Economics is the study of how evenly goods and services are distributed within society.

ANS: F DIF: 1 REF: 1-0 NAT: Analytic LOC: The Study of economics, and definitions in economics TOP: Economics MSC: Definitional

3. Economics is the study of how society allocates its unlimited resources.

ANS: F DIF: 1 REF: 1-0 NAT: Analytic LOC: The Study of economics, and definitions in economics TOP: Economics MSC: Definitional

4. With careful planning, we can usually get something that we like without having to give up

something else that we like.

ANS: F DIF: 2 REF: 1-1 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Tradeoffs MSC: Interpretive

5. Choosing not to attend a concert so that you can study for your exam is an example of a tradeoff.

ANS: T DIF: 2 REF: 1-1 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Tradeoffs MSC: Applicative

6. Efficiency means everyone in the economy should receive an equal share of the goods and services

produced.

ANS: F DIF: 2 REF: 1-1 NAT: Analytic LOC: Efficiency and Equity TOP: Equality MSC: Definitional

7. Equality refers to how the pie is divided, and efficiency refers to the size of the economic pie.

ANS: T DIF: 2 REF: 1-1 NAT: Analytic LOC: Efficiency and Equity TOP: Equality | Efficiency MSC: Definitional

2 Chapter 1/Ten Principles of Economics

8. Government policies that improve equality usually increase efficiency at the same time.

ANS: F DIF: 1 REF: 1-1 NAT: Analytic LOC: Efficiency and Equity TOP: Efficiency | Equality MSC: Interpretive

9. An individual deciding how to allocate her limited time is dealing with both scarcity and trade-offs.

ANS: T DIF: 1 REF: 1-1 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Opportunity cost MSC: Interpretative

10. The cost of an action is measured in terms of foregone opportunities.

ANS: T DIF: 1 REF: 1-1 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Opportunity cost MSC: Interpretive

11. Tuition is the single-largest cost of attending college for most students.

ANS: F DIF: 1 REF: 1-1 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Opportunity cost MSC: Interpretive

12. If wages for accountants rose, then accountants’ leisure time would have a lower opportunity cost.

ANS: F DIF: 1 REF: 1-1 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Opportunity cost MSC: Applicative

13. A marginal change is a small incremental adjustment to an existing plan of action.

ANS: T DIF: 1 REF: 1-1 NAT: Analytic LOC: Marginal costs & benefits TOP: Marginal changes MSC: Definitional

14. An increase in the marginal cost of an activity necessarily means that people will no longer engage

in any of that activity.

ANS: F DIF: 2 REF: 1-1 NAT: Analytic LOC: Marginal costs & benefits TOP: Marginal changes MSC: Applicative

15. If the average cost of transporting a passenger on the train from Chicago to St. Louis is $75, it would

be irrational for the railroad to allow any passenger to ride for less than $75.

ANS: F DIF: 2 REF: 1-1 NAT: Analytic LOC: Marginal costs & benefits TOP: Marginal changes MSC: Applicative

Chapter 1/Ten Principles of Economics 3

16. The fact that people are willing to pay much more for a diamond, which is not needed for survival,

than they are willing to pay for a cup of water, which is needed for survival, is an example of irrational behavior.

ANS: F DIF: 2 REF: 1-1 NAT: Analytic LOC: Marginal costs & benefits TOP: Marginal changes MSC: Interpretive

17. A rational decisionmaker takes an action if and only if the marginal cost exceeds the marginal

benefit.

ANS: F DIF: 2 REF: 1-1 NAT: Analytic LOC: Marginal costs & benefits TOP: Marginal changes MSC: Interpretive

18. Suppose one county in Missouri decides it wants to reduce alcohol consumption, so the county

passes a law that raises the price of a bottle of beer by $1. As a result, people drive to other counties to drink alcohol, which results in an increase in drunk driving. This illustrates the principle that people respond to incentives.

ANS: T DIF: 2 REF: 1-1 NAT: Analytic LOC: The role of incentives TOP: Incentives MSC: Applicative

19. A tax on gasoline is an incentive that encourages people to drive smaller more fuel-efficient cars.

ANS: T DIF: 1 REF: 1-1 NAT: Analytic LOC: The role of incentives TOP: Incentives MSC: Applicative

20. Trade allows each person to specialize in the activities he or she does best, thus increasing each

individual's productivity.

ANS: T DIF: 2 REF: 1-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Trade | Productivity MSC: Interpretive

21. Trade with any nation can be mutually beneficial.

ANS: T DIF: 2 REF: 1-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Trade MSC: Interpretive

22. Trade can make everyone better off except in the case where one person is better at doing

everything.

ANS: F DIF: 1 REF: 1-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Trade MSC: Interpretive


23. The invisible hand ensures that economic prosperity is distributed equally.

ANS: F DIF: 2 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: The invisible hand MSC: Definitional

24. A market economy cannot produce a socially desirable outcome because individuals are motivated

by their own selfish interests.

ANS: F DIF: 2 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Market economy MSC: Interpretive

25. The government can potentially improve market outcomes if market inequalities or market failure

exists.

ANS: T DIF: 2 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities | The role of government TOP: Government | Market economy MSC: Interpretive

26. One way that governments can improve market outcomes is to ensure that individuals are able to

own and exercise control over their scarce resources.

ANS: T DIF: 2 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities | The role of government TOP: Property rights MSC: Interpretive

27. Market failure refers to a situation in which the market does not allocate resources efficiently.

ANS: T DIF: 1 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Market failure MSC: Definitional

28. Market power and externalities are two possible causes of market failure.

ANS: T DIF: 1 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Market failure MSC: Definitional

29. Productivity is defined as the quantity of goods and services produced from each unit of labor input.

ANS: T DIF: 1 REF: 1-3 NAT: Analytic LOC: Productivity and growth TOP: Productivity MSC: Definitional

30. Inflation is the primary determinant of a country's living standards.

ANS: F DIF: 2 REF: 1-3 NAT: Analytic LOC: Productivity and growth TOP: Productivity | Standard of living MSC: Interpretive


31. Inflation increases the value of money.

ANS: F DIF: 2 REF: 1-3 NAT: Analytic LOC: Unemployment and Inflation TOP: Inflation MSC: Interpretive

32. Inflation measures the increase in the quantity of goods and services produced from each hour of a

worker’s time.

ANS: F DIF: 1 REF: 1-3 NAT: Analytic LOC: Unemployment and Inflation TOP: Inflation | Productivity MSC: Definitional

33. In the long run the primary effect of increasing the quantity of money is higher prices.

ANS: T DIF: 2 REF: 1-3 NAT: Analytic LOC: Unemployment and Inflation TOP: Inflation MSC: Interpretative

34. The business cycle refers to fluctuations in economic activity such as employment and production.

ANS: T DIF: 1 REF: 1-3 NAT: Analytic LOC: Unemployment and Inflation TOP: The business cycle MSC: Definitional

SHORT ANSWER

1. How does the study of economics depend upon the phenomenon of scarcity?

ANS: Because economics is the study of how society allocates its scarce resources, if there were no scarcity, there would be no need for economics. Everyone could have all the goods and services they wanted. No one would have to make decisions based on tradeoffs, because there would be no opportunity cost associated with the decision. (It is difficult to conceive of a situation where time is not scarce, however).

PTS: 1 DIF: 2 REF: 1-1 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Economics | Scarcity MSC: Applicative


2. One tradeoff society faces is between efficiency and equality. Define each term. If the U.S.

government redistributes income from the rich to the poor, explain how this action affects equality as well as efficiency in the economy.

ANS: Efficiency is the property of society getting the most it can from its scarce resources. Equality is defined as the property of distributing economic prosperity fairly among the members of society. Often, these two goals conflict. When the government redistributes income from the rich to the poor, it reduces the reward for working hard. Fewer goods and services are produced and the economic pie gets smaller. When the government tries to cut the economic pie into more equal slices, the pie gets smaller. Policies aimed at achieving a more equal distribution of economic well-being, such as the welfare system, try to help those members of society who are most in need. The individual income tax asks the financially successful to contribute more than others to support the government.

PTS: 1 DIF: 2 REF: 1-1 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost | Efficiency and Equity TOP: Tradeoffs | Efficiency | Equality MSC: Interpretive

3. Define opportunity cost. What is the opportunity cost to you of attending college? What was your

opportunity cost of coming to class today?

ANS: Whatever must be given up to obtain some item it its opportunity cost. Basically, this would be a person's second choice. The opportunity cost of a person attending college is the value of the best alternative use of that person's time, as well as the additional costs the person incurs by making the choice to attend college. For most students this would be the income the student gives up by not working plus the cost of tuition and books, and any other costs they incur by attending college that they would not incur if they chose not to attend college. A student's opportunity cost of coming to class was the value of the best opportunity the student gave up. (For most students, that seems to be sleep.)

PTS: 1 DIF: 2 REF: 1-1 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Opportunity cost MSC: Interpretive

4. With the understanding that people respond to incentives, outline the possible outcome for teachers

if the K-12 school year is extended to 11 months per year instead of the existing 9 months per year.

ANS: The concept of working longer per year would be perceived by many teachers as a definite increase in the cost of teaching. Even with additional compensation, many teachers look at summers off as a major benefit of the education profession. If this benefit were eliminated or diminished, some teachers may perceive that the marginal cost of teaching would now be greater than the marginal benefit and would choose to leave teaching.

PTS: 1 DIF: 3 REF: 1-1 NAT: Analytic LOC: The role of incentives TOP: Incentives MSC: Analytical


5. Under what conditions might government intervention in a market economy improve the economy’s

performance?

ANS: If there is a market failure, such as an externality or monopoly, government regulation might improve the well-being of society by promoting efficiency. If the distribution of income or wealth is considered to be unfair by society, government intervention might achieve a more equal distribution of economic well-being.

PTS: 1 DIF: 2 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities | The role of government TOP: Market economy | Government MSC: Applicative

6. Explain how an attempt by the government to lower inflation could cause unemployment to increase

in the short-run.

ANS: To lower inflation, the government may choose to reduce the money supply in the economy. When the money supply is reduced, prices don't adjust immediately. Lower spending, combined with prices that are too high, reduces sales and causes workers to be laid off. Hence, the lower price level is associated with higher unemployment.

PTS: 1 DIF: 2 REF: 1-3 NAT: Analytic LOC: Unemployment and Inflation | Efficiency and Equity TOP: Inflation | Unemployment | Tradeoffs MSC: Applicative

Multiple Choice-Sec00

MULTIPLE CHOICE

1. The word that comes from the Greek word for "one who manages a household" is

a. market. b. consumer. c. producer. d. economy.

ANS: D DIF: 1 REF: 1-0 NAT: Analytic LOC: The Study of economics, and definitions in economics TOP: Economy MSC: Definitional

2. The word “economy” comes from the Greek word oikonomos, which means

a. “environment.” b. “production.” c. “one who manages a household.” d. “one who makes decisions.”

ANS: C DIF: 1 REF: 1-0 NAT: Analytic LOC: The Study of economics, and definitions in economics TOP: Economy MSC: Definitional


3. Resources are

a. scarce for households but plentiful for economies. b. plentiful for households but scarce for economies. c. scarce for households and scarce for economies. d. plentiful for households and plentiful for economies.

ANS: C DIF: 1 REF: 1-0 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Resources | Scarcity MSC: Interpretive

4. In considering how to allocate its scarce resources among its various members, a household

considers a. each member’s abilities. b. each member’s efforts. c. each member’s desires. d. all of the above

ANS: D DIF: 1 REF: 1-0 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Scarcity MSC: Interpretive

5. Economics deals primarily with the concept of

a. scarcity. b. money. c. poverty. d. banking.

ANS: A DIF: 1 REF: 1-0 NAT: Analytic LOC: The Study of economics, and definitions in economics TOP: Scarcity MSC: Definitional

6. Which of the following is correct?

a. The word economy comes from the Greek word for “rational thinker.” b. Economists study the management of scarce resources. c. Because economists believe that people pursue their best interests, they are not interested

in how people interact. d. All of the above are correct.

ANS: B DIF: 1 REF: 1-0 NAT: Analytic LOC: The Study of economics, and definitions in economics TOP: Economics MSC: Definitional

7. The overriding reason as to why households and societies face many decisions is that

a. resources are scarce. b. goods and services are not scarce. c. incomes fluctuate with business cycles. d. people, by nature, tend to disagree.

ANS: A DIF: 2 REF: 1-0 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Scarcity MSC: Interpretive


8. 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.


9. Approximately what percentage of the world's economies experience scarcity?

a. 25% b. 50% c. 75% d. 100%


10. When a society cannot produce all the goods and services people wish to have, it is said that the

economy is experiencing a. scarcity. b. surpluses. c. inefficiencies. d. inequalities.

ANS: A DIF: 2 REF: 1-0 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Scarcity MSC: Interpretive

11. Which of the following products would be considered scarce?

a. golf clubs b. Picasso paintings c. apples d. All of the above are correct.


12. Economics is the study of

a. production methods. b. how society manages its scarce resources. c. how households decide who performs which tasks. d. the interaction of business and government.

ANS: B DIF: 1 REF: 1-0 NAT: Analytic LOC: The Study of economics, and definitions in economics TOP: Economies | Scarcity MSC: Definitional


13. In most societies, resources are allocated by

a. a single central planner. b. a small number of central planners. c. those firms that use resources to provide goods and services. d. the combined actions of millions of households and firms.

ANS: D DIF: 1 REF: 1-0 NAT: Analytic LOC: The Study of economics, and definitions in economics TOP: Resource allocation MSC: Interpretive

Multiple Choice-Sec01-How People Make Decisions

MULTIPLE CHOICE

1. The adage, "There is no such thing as a free lunch," means

a. even people on welfare have to pay for food. b. the cost of living is always increasing. c. people face tradeoffs. d. all costs are included in the price of a product.

ANS: C DIF: 1 REF: 1-1 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Tradeoffs MSC: Definitional

2. The adage, "There is no such thing as a free lunch," is used to illustrate the principle that

a. goods are scarce. b. people face tradeoffs. c. income must be earned. d. households face many decisions.

ANS: B DIF: 2 REF: 1-1 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Tradeoffs MSC: Interpretive

3. Which of the following statements best represents the principle represented by the adage, "There is

no such thing as a free lunch"? a. Melissa can attend the concert only if she takes her sister with her. b. Greg is hungry and homeless. c. Brian must repair the tire on his bike before he can ride it to class. d. Kendra must decide between going to Colorado or Cancun for spring break.

ANS: D DIF: 3 REF: 1-1 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Tradeoffs MSC: Applicative


4. The principle that "people face tradeoffs" applies to

a. individuals. b. families. c. societies. d. All of the above are correct.

ANS: D DIF: 1 REF: 1-1 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Tradeoffs MSC: Applicative

5. Sophia is planning her activities for a hot summer day. She would like to go to the local swimming

pool and see the latest blockbuster movie, but because she can only get tickets to the movie for the same time that the pool is open she can only choose one activity. This illustrates the basic principle that a. people respond to incentives. b. rational people think at the margin. c. people face tradeoffs. d. improvements in efficiency sometimes come at the expense of equality.

ANS: C DIF: 1 REF: 1-1 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Tradeoffs MSC: Interpretive

6. Mitch has $100 to spend and wants to buy either a new amplifier for his guitar or a new mp3 player

to listen to music while working out. Both the amplifier and the mp3 player cost $100, so he can only buy one. This illustrates the basic concept that a. trade can make everyone better off. b. people face trade-offs c. rational people think at the margin. d. people respond to incentives.

ANS: B DIF: 1 REF: 1-1 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Tradeoffs MSC: Interpretive

7. Guns and butter are used to represent the classic societal tradeoff between spending on

a. durable and nondurable goods. b. imports and exports. c. national defense and consumer goods. d. law enforcement and agriculture.

ANS: C DIF: 1 REF: 1-1 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Tradeoffs MSC: Interpretive


8. A tradeoff exists between a clean environment and a higher level of income in that

a. studies show that individuals with higher levels of income pollute less than low-income individuals.

b. efforts to reduce pollution typically are not completely successful. c. laws that reduce pollution raise costs of production and reduce incomes. d. employing individuals to clean up pollution causes increases in employment and income.

ANS: C DIF: 2 REF: 1-1 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Tradeoffs MSC: Applicative

9. When society requires that firms reduce pollution, there is

a. a tradeoff because of reduced incomes to the firms' owners and workers. b. a tradeoff only if some firms are forced to close. c. no tradeoff, since the cost of reducing pollution falls only on the firms affected by the

requirements. d. no tradeoff, since everyone benefits from reduced pollution.

ANS: A DIF: 3 REF: 1-1 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Tradeoffs MSC: Applicative

10. Economists use the word equality to describe a situation in which

a. each member of society has the same income. b. each member of society has access to abundant quantities of goods and services,

regardless of his or her income. c. society is getting the maximum benefits from its scarce resources. d. society's resources are used efficiently.

ANS: A DIF: 2 REF: 1-1 NAT: Analytic LOC: Efficiency and equity TOP: Equality MSC: Interpretive

11. Efficiency means that

a. society is conserving resources in order to save them for the future. b. society's goods and services are distributed equally among society's members. c. society's goods and services are distributed fairly, though not necessarily equally, among

society's members. d. society is getting the maximum benefits from its scarce resources.

ANS: D DIF: 1 REF: 1-1 NAT: Analytic LOC: Efficiency and equity TOP: Efficiency MSC: Definitional


12. The terms equality and efficiency are similar in that they both refer to benefits to society. However

they are different in that a. equality refers to uniform distribution of those benefits and efficiency refers to

maximizing benefits from scarce resources. b. equality refers to maximizing benefits from scarce resources and efficiency refers to

uniform distribution of those benefits. c. equality refers to everyone facing identical tradeoffs and efficiency refers to the

opportunity cost of the benefits. d. equality refers to the opportunity cost of the benefits and efficiency refers to everyone

facing identical tradeoffs.

ANS: A DIF: 2 REF: 1-1 NAT: Analytic LOC: Efficiency and equity TOP: Efficiency | Equality MSC: Definitional

13. Which of the following phrases best captures the notion of efficiency?

a. absolute fairness b. equal distribution c. minimum waste d. equitable outcome

ANS: C DIF: 1 REF: 1-1 NAT: Analytic LOC: Efficiency and equity TOP: Efficiency MSC: Interpretive

14. Which of the following words and phrases best captures the notion of equality?

a. minimum waste b. maximum benefit c. sameness d. efficiency

ANS: C DIF: 1 REF: 1-1 NAT: Analytic LOC: Efficiency and equity TOP: Equality MSC: Definitional

15. A typical society strives to get the most it can from its scarce resources. At the same time, the

society attempts to distribute the benefits of those resources to the members of the society in a fair manner. In other words, the society faces a tradeoff between a. guns and butter. b. efficiency and equality. c. inflation and unemployment. d. work and leisure.

ANS: B DIF: 1 REF: 1-1 NAT: Analytic LOC: Efficiency and equity TOP: Efficiency | Equality MSC: Interpretive


16. Which of the following is true?

a. Efficiency refers to the size of the economic pie; equality refers to how the pie is divided. b. Government policies usually improve upon both equality and efficiency. c. As long as the economic pie continually gets larger, no one will have to go hungry. d. Efficiency and equality can both be achieved if the economic pie is cut into equal pieces.

ANS: A DIF: 2 REF: 1-1 NAT: Analytic LOC: Efficiency and equity TOP: Efficiency | Equality MSC: Interpretive

17. As a result of a successful attempt by government to cut the economic pie into more equal slices,

a. it is easier to cut the pie, and therefore the economy can produce a larger pie. b. those who earn more income pay less in taxes. c. the pie gets smaller, and there will be less pie overall. d. government will spend too much time cutting and it causes the economy to lose the ability

to produce enough pie for everyone.

ANS: C DIF: 3 REF: 1-1 NAT: Analytic LOC: Efficiency and equity TOP: Efficiency | Equality MSC: Analytical

18. When the government redistributes income from the wealthy to the poor,

a. efficiency is improved, but equality is not. b. both wealthy people and poor people benefit directly. c. people work less and produce fewer goods and services. d. the government collects less revenue in total.

ANS: C DIF: 2 REF: 1-1 NAT: Analytic LOC: Efficiency and equity TOP: Efficiency | Equality MSC: Interpretive

19. When the government attempts to improve equality in an economy the result is often

a. an increase in overall output in the economy. b. additional government revenue since overall income will increase. c. a reduction in equality. d. a reduction in efficiency.

ANS: D DIF: 2 REF: 1-1 NAT: Analytic LOC: Efficiency and equity TOP: Efficiency | Equality MSC: Interpretive

20. When the government implements programs such as progressive income tax rates, which of the

following is likely to occur? a. equality is increased and efficiency is increased. b. equality is increased and efficiency is decreased. c. equality is decreased and efficiency is increased. d. equality is decreased and efficiency is decreased.

ANS: B DIF: 2 REF: 1-1 NAT: Analytic LOC: Efficiency and equity TOP: Efficiency | Equality MSC: Interpretive


21. A likely effect of government policies that redistribute income and wealth from the wealthy to the

poor is that those policies a. enhance equality. b. reduce efficiency. c. reduce the reward for working hard. d. All of the above are correct.

ANS: D DIF: 2 REF: 1-1 NAT: Analytic LOC: Efficiency and equity TOP: Efficiency | Equality MSC: Interpretive

22. When government policies are enacted,

a. equality can usually be enhanced without an efficiency loss, but efficiency can never be enhanced without a reduction in equality.

b. efficiency can usually be enhanced without a reduction in equality, but equality can never be enhanced without an efficiency loss.

c. it is always the case that either efficiency and equality are both enhanced, or efficiency and equality are both diminished.

d. None of the above are correct.

ANS: D DIF: 2 REF: 1-1 NAT: Analytic LOC: Efficiency and equity TOP: Efficiency | Equality MSC: Applicative

23. Senator Smith wants to increase taxes on people with high incomes and use the money to help the

poor. Senator Jones argues that such a tax will discourage successful people from working and will therefore make society worse off. An economist would say that a. we should agree with Senator Smith. b. we should agree with Senator Jones. c. a good decision requires that we recognize both viewpoints. d. there are no tradeoffs between equity and efficiency.

ANS: C DIF: 2 REF: 1-1 NAT: Analytic LOC: Efficiency and equity TOP: Efficiency | Equality MSC: Applicative

24. Senator Smith argues that replacing the income tax with a national sales tax would increase the level

of output. Senator Wells objects that this policy would benefit the rich at the expense of the poor. a. Both Senators’ arguments are primarily about equality. b. Both Senators’ arguments are primarily about efficiency. c. Senator Smith’s argument is primarily about equality, while Senator Well’s argument is

primarily about efficiency. d. Senator Smith’s argument is primarily about efficiency, while Senator Well’s argument is

primarily about equality.

ANS: D DIF: 1 REF: 1-1 NAT: Analytic LOC: Efficiency and equity TOP: Equality | Efficiency MSC: Interpretative


25. Suppose the government taxes the wealthy at a higher rate than it taxes the poor and then develops

programs to redistribute the tax revenue from the wealthy to the poor. This redistribution of wealth a. is more efficient and more equal for society. b. is more efficient but less equal for society. c. is more equal but less efficient for society. d. is less equal and less efficient for society.


26. The government has just passed a law requiring that all residents earn the same annual income

regardless of work effort. This law is likely to a. increase efficiency and increase equality. b. increase efficiency but decrease equality. c. decrease efficiency but increase equality. d. decrease efficiency and decrease equality.


27. The opportunity cost of an item is

a. the number of hours needed to earn money to buy the item. b. what you give up to get that item. c. usually less than the dollar value of the item. d. the dollar value of the item.

ANS: B DIF: 1 REF: 1-1 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Opportunity cost MSC: Definitional

28. In economics, the cost of something is

a. the dollar amount of obtaining it. b. always measured in units of time given up to get it. c. what you give up to get it. d. often impossible to quantify, even in principle.

ANS: C DIF: 1 REF: 1-1 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Opportunity cost MSC: Definitional

29. What you give up to obtain an item is called your

a. opportunity cost. b. explicit cost. c. true cost. d. direct cost.

ANS: A DIF: 1 REF: 1-1 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Opportunity cost MSC: Definitional


30. Which of the following is correct concerning opportunity cost?

a. Except to the extent that you pay more for them, opportunity costs should not include the cost of things you would have purchased anyway.

b. To compute opportunity costs, you should subtract benefits from costs. c. Opportunity costs and the idea of trade-offs are not closely related. d. Rational people should compare various options without considering opportunity costs.

ANS: A DIF: 1 REF: 1-1 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Opportunity cost MSC: Interpretive

31. High-school athletes who skip college to become professional athletes

a. obviously do not understand the value of a college education. b. usually do so because they cannot get into college. c. understand that the opportunity cost of attending college is very high. d. are not making a rational decision since the marginal benefits of college outweigh the

marginal costs of college for high-school athletes.

ANS: C DIF: 1 REF: 1-1 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Opportunity cost MSC: Applicative

32. When computing the opportunity cost of attending a concert you should include

a. the price you pay for the ticket and the value of your time. b. the price you pay for the ticket, but not the value of your time. c. the value of your time, but not the price you pay for the ticket. d. neither the price of the ticket nor the value of your time.

ANS: A DIF: 2 REF: 1-1 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Opportunity cost MSC: Applicative

33. Mallory decides to spend three hours working overtime rather than watching a video with her

friends. She earns $8 an hour. Her opportunity cost of working is a. the $24 she earns working. b. the $24 minus the enjoyment she would have received from watching the video. c. the enjoyment she would have received had she watched the video. d. nothing, since she would have received less than $24 of enjoyment from the video.



34. Moira decides to spend two hours taking a nap rather than attending her classes. Her opportunity

cost of napping is a. the value of the knowledge she would have received had she attended class. b. the $30 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 would valued sleep more than attendance at class.


35. Russell spends an hour studying instead of playing tennis. The opportunity cost to him of studying is

a. the improvement in his grades from studying for the hour. b. the improvement in his grades from studying minus the enjoyment of playing tennis. c. the enjoyment and exercise he would have received had he played tennis. d. zero. Since Russell chose to study rather than to play tennis, the value of studying must

have been greater than the value of playing tennis.


36. For most students, the largest single cost of a college education is

a. the wages given up to attend school. b. tuition, fees, and books. c. room and board. d. transportation, parking, and entertainment.

ANS: A DIF: 2 REF: 1-1 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Opportunity cost MSC: Interpretive

37. The opportunity cost of going to college is

a. the total spent on food, clothing, books, transportation, tuition, lodging, and other expenses.

b. the value of the best opportunity a student gives up to attend college. c. zero for students who are fortunate enough to have all of their college expenses paid by

someone else. d. zero, since a college education will allow a student to earn a larger income after

graduation.

ANS: B DIF: 2 REF: 1-1 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Opportunity cost MSC: Interpretive


38. For a college student who wishes to calculate the true costs of going to college, the costs of room

and board a. should be counted in full, regardless of the costs of eating and sleeping elsewhere. b. should be counted only to the extent that they are more expensive at college than

elsewhere. c. usually exceed the opportunity cost of going to college. d. plus the cost of tuition, equals the opportunity cost of going to college.

ANS: B DIF: 2 REF: 1-1 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Opportunity cost MSC: Applicative

39. Suppose after graduating from college you get a job working at a bank earning $30,000 per year.

After two years of working at the bank earning the same salary, you have an opportunity to enroll in a one-year graduate program that would require you to quit your job at the bank. Which of the following should not be included in a calculation of your opportunity cost? a. the cost of tuition and books to attend the graduate program b. the $30,000 salary that you could have earned if you retained your job at the bank c. the $45,000 salary that you will be able to earn after having completed your graduate

program d. the value of insurance coverage and other employee benefits you would have received if

you retained your job at the bank.


40. 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 degree

b. a student with average grades who has never held a job c. a famous, highly-paid actor who wants to take time away from show business to finish

college and earn a degree d. a student who is the best player on his college basketball team, but who lacks the skills

necessary to play professional basketball



41. When you calculate your true costs of going to college, what portion of your room-and-board

expenses should be included? a. Your full room-and-board expenses should always be included. b. None of your room-and-board expenses should ever be included. c. You should include only the amount by which your room-and-board expenses exceed the

income you earn while attending college. d. You should include only the amount by which your room-and-board expenses exceed the

expenses for rent and food if you were not in college.

ANS: D DIF: 2 REF: 1-1 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Opportunity cost MSC: Applicative

42. Samantha’s college raises the cost of room and board per semester. This increase raises Samantha’s

opportunity cost of attending college a. 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 Samantha’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 Samantha’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 reduces Samantha’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 increases Samantha’s incentive to attend college.

ANS: C DIF: 2 REF: 1-1 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Opportunity cost MSC: Interpretive

43. When calculating the cost of college, which of the following should you probably not include?

a. The cost of tuition b. The cost of books required for college classes c. The income you would have earned had you not gone to college d. The cost of rent for your off-campus apartment.

ANS: D DIF: 2 REF: 1-1 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Opportunity cost MSC: Interpretive

44. When calculating the cost of college, which of the following should you probably include?

a. The cost of your meal plan for the cafeteria. b. The cost of books required for college classes c. The income you earn at your part-time job. d. The cost of living in the dormitory.



45. 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. 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.


46. You have driven 1,000 miles on a vacation and then you notice that you are only 50 miles from an

attraction you hadn’t known about, but would really like to see. In computing the opportunity cost of visiting this attraction you had not planned to visit, you should include a. both the cost of driving the first 1,000 and the next 50 miles. b. the cost of driving the first 1,000 miles, but not the cost of driving the next 50. c. the cost of driving the next 50 miles, but not the cost of driving the first 1,000. d. neither the cost of driving the first 1,000 miles nor the cost of driving the next 50 miles.

ANS: C DIF: 1 REF: 1-1 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Opportunity cost MSC: Analytical

47. Pete receives $50 as a birthday gift. In deciding how to spend the money, he narrows his options

down to four choices: Option A, Option B, Option C, and Option D. Each option costs $50. Finally he decides on Option B. The opportunity cost of this decision is a. the value to Pete of the option he would have chosen had Option B not been available. b. the value to Pete of Options A, C and D combined. c. $50. d. $100.


48. College-age athletes who drop out of college to play professional sports

a. are not rational decision makers. b. are well aware that their opportunity cost of attending college is very high. c. are concerned more about present circumstances than their future. d. underestimate the value of a college education.



49. A rational decisionmaker

a. ignores marginal changes and focuses instead on “the big picture.” b. ignores the likely effects of government policies when he or she makes choices. c. takes an action only if the marginal benefit of that action exceeds the marginal cost of that

action. d. takes an action only if the combined benefits of that action and previous actions exceed the

combined costs of that action and previous actions.

ANS: C DIF: 2 REF: 1-1 NAT: Analytic LOC: Marginal costs & benefits TOP: Marginal changes MSC: Interpretive

50. A rational decision maker takes an action only if the

a. marginal benefit is less than the marginal cost. b. marginal benefit is greater than the marginal cost. c. average benefit is greater than the average cost. d. marginal benefit is greater than both the average cost and the marginal cost.

ANS: B DIF: 2 REF: 1-1 NAT: Analytic LOC: Marginal costs & benefits TOP: Marginal changes MSC: Interpretive

51. A rational decisionmaker takes an action if and only if

a. the marginal benefit of the action exceeds the marginal cost of the action. b. the marginal cost of the action exceeds the marginal benefit of the action. c. the marginal cost of the action is zero. d. the opportunity cost of the action is zero.

ANS: A DIF: 1 REF: 1-1 NAT: Analytic LOC: Marginal costs & benefits TOP: Marginal changes MSC: Interpretive

52. Rational people make decisions at the margin by

a. following marginal traditions. b. behaving in a random fashion. c. thinking in black-and-white terms. d. comparing marginal costs and marginal benefits.

ANS: D DIF: 1 REF: 1-1 NAT: Analytic LOC: Marginal costs & benefits TOP: Marginal changes MSC: Interpretive

53. Making rational decisions "at the margin" means that people

a. make those decisions that do not impose a marginal cost. b. evaluate how easily a decision can be reversed if problems arise. c. compare the marginal costs and marginal benefits of each decision. d. always calculate the marginal dollar costs for each decision.

ANS: C DIF: 2 REF: 1-1 NAT: Analytic LOC: Marginal costs & benefits TOP: Marginal changes MSC: Interpretive


54. A marginal change is a

a. 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.

ANS: D DIF: 1 REF: 1-1 NAT: Analytic LOC: Marginal costs & benefits TOP: Marginal changes MSC: Definitional

55. People are willing to pay more for a diamond than for a bottle of water because

a. the marginal cost of producing an extra diamond far exceeds the marginal cost of producing an extra bottle of water.

b. the marginal benefit of an extra diamond far exceeds the marginal benefit of an extra bottle of water.

c. producers of diamonds have a much greater ability to manipulate diamond prices than producers of water have to manipulate water prices.

d. water prices are held artificially low by governments, since water is necessary for life.


56. It costs a company $40,000 to produce 4000 basketballs. The company’s cost will be $40,009 if it

produces an additional basketball. If the company produces 4,000 basketballs then a. its average cost is greater than its marginal cost. b. its average cost and its marginal cost are equal. c. its average cost is less than its marginal cost. d. there is insufficient information to compute average and marginal costs..

ANS: A DIF: 2 REF: 1-1 NAT: Analytic LOC: Marginal costs & benefits TOP: Marginal cost MSC: Analytical

57. The marginal benefit John gets from eating a fourth cheeseburger at a picnic is

a. the total benefit John gets from eating four cheeseburgers minus the total benefit John gets from eating three cheeseburgers.

b. the same as the total benefit of eating four cheeseburgers. c. less than the marginal cost of eating the fourth cheeseburger since he chose to eat the

fourth cheeseburger. d. the total benefit John gets from eating five cheeseburgers minus the total benefit John gets

from eating four cheeseburgers.

ANS: A DIF: 1 REF: 1-1 NAT: Analytic LOC: Marginal costs & benefits TOP: Marginal changes MSC: Applicative


58. Teresa eats three oranges during a particular day. The marginal benefit she enjoys from eating the

third orange a. can be thought of as the total benefit Teresa enjoys by eating three oranges minus the total

benefit she would have enjoyed by eating just the first two oranges. b. determines Teresa’s willingness to pay for the first, second, and third oranges. c. does not depend on how many oranges Teresa has already eaten. d. All of the above are correct.

ANS: A DIF: 3 REF: 1-1 NAT: Analytic LOC: Marginal costs & benefits TOP: Marginal changes MSC: Applicative

59. After much consideration, you have chosen Cancun over Ft. Lauderdale as your Spring Break

destination this year. However, Spring Break is still months away, and you may reverse this decision. Which of the following events would prompt you to reverse this decision? a. The marginal benefit of going to Cancun increases. b. The marginal cost of going to Cancun decreases. c. The marginal benefit of going to Ft. Lauderdale decreases. d. The marginal cost of going to Ft. Lauderdale decreases.

ANS: D DIF: 3 REF: 1-1 NAT: Analytic LOC: Marginal costs & benefits TOP: Marginal changes MSC: Applicative

60. A furniture maker currently produces 100 tables per week and sells them for a profit. She is

considering expanding her operation in order to make more tables. Should she expand? a. Yes, because making tables is profitable. b. No, because she may not be able to sell the additional tables. c. It depends on the marginal cost of producing more tables and the marginal revenue she

will earn from selling more tables. d. It depends on the average cost of producing more tables and the average revenue she will

earn from selling more tables.

ANS: C DIF: 2 REF: 1-1 NAT: Analytic LOC: Marginal costs & benefits TOP: Marginal changes MSC: Applicative

61. The average cost per seat on the 50-passenger Floating-On-Air Bus company's trip from Kansas

City to St. Louis, on which no refreshments are served, is $45. In advance of a particular trip, three seats remain unsold. The bus company could increase its profit only if it a. charged any ticket price above $0 for the three remaining seats. b. charged at least $15 for each of the three remaining seats. c. charged at least $45 for each of the three remaining seats. d. paid three people to occupy the three remaining seats.

ANS: A DIF: 2 REF: 1-1 NAT: Analytic LOC: Marginal costs & benefits TOP: Marginal cost MSC: Applicative


62. Tom is restoring a car and has already spent $3500 on the restoration. He expects to be able to sell

the car for $5000. Tom discovers that he needs to do an additional $2000 of work to make the table worth $5000 to potential buyers. He could also sell the car now, without completing the additional work, for $2800. What should he do? a. He should sell the car now for $2800. b. He should keep the car since it wouldn’t be rational to spend $5500 restoring a car and

then sell it for only $5000. c. He should complete the additional work and sell the car for $5000. d. It does not matter which action he takes since the outcome will be the same either way.

ANS: C DIF: 3 REF: 1-1 NAT: Analytic LOC: Marginal costs & benefits TOP: Marginal changes MSC: Analytical

63. Traci is planning to sell her house, and she is considering making two upgrades to the house before

listing it for sale. Replacing the carpeting will cost her $3,000 and replacing the roof will cost her $6,000. Traci expects the new carpeting to increase the value of her house by $2,500 and the new roof to increase the value of her house by $7,500. a. Traci should make both improvements to her house. b. Traci should replace the carpeting but not replace the roof. c. Traci should replace the roof but not replace the carpeting. d. Traci should not make either improvement to her house.

ANS: C DIF: 1 REF: 1-1 NAT: Analytic LOC: Marginal costs & benefits TOP: Marginal changes MSC: Applicative

64. Sue drinks three sodas during a particular day. The marginal benefit she enjoys from drinking the

third soda a. can be thought of as the total benefit Sue enjoys by drinking three sodas minus the total

benefit she would have enjoyed by drinking just two sodas. b. determines Sue’s willingness to pay for the third soda. c. is likely different from the marginal benefit provided to Sue by the second soda. d. All of the above are correct.

ANS: D DIF: 3 REF: 1-1 NAT: Analytic LOC: Marginal costs & benefits TOP: Marginal changes MSC: Applicative

65. A construction company has built 50 houses so far this year at a total cost to the company of $8

million. If the company builds a 51st house, its total cost will increase to $8.18 million. Which of the following statements is correct? a. For the first 50 houses, the average cost per house was $160,000. b. The marginal cost of the 51st house, if it is built, will be $180,000. c. If the company can experience a marginal benefit of $190,000 by building the 51st house,

then the company should build it. d. All of the above are correct.

ANS: D DIF: 3 REF: 1-1 NAT: Analytic LOC: Marginal costs & benefits TOP: Marginal cost | Marginal benefit MSC: Applicative


66. Mike has spent $500 purchasing and repairing an old fishing boat, which he expects to sell for $800

once the repairs are complete. Mike discovers that, in addition to the $500 he has already spent, he needs to make an additional repair, which will cost another $400, in order to make the boat worth $800 to potential buyers. He can sell the boat as it is now for $300. What should he do? a. He should sell the boat as it is now for $300. b. He should keep the boat since it would not be rational to spend $900 on repairs and then

sell the boat for $800. c. He should complete the repairs and sell the boat for $800. d. It does not matter which action he takes; the outcome is the same either way.

ANS: C DIF: 3 REF: 1-1 NAT: Analytic LOC: Marginal costs & benefits TOP: Marginal cost MSC: Analytical

67. Bill’s Bakery bakes fresh bread every morning. Any bread not sold by the end of the day is thrown

away. A loaf of bread costs Bill $1.50 to produce, and he prices loaves of bread at $4 per loaf. Suppose near the end of one day Bill still has 12 loaves of bread on hand. Which of the following is correct? a. Bill should only sell the remaining bread for $4 per loaf since that is the regular price. b. Bill should only sell the remaining bread for $1.50 per loaf or more since that is what the

bread costs to make. c. Bill should be willing to sell the remaining bread for any price above $0 per loaf since he

will have to throw it away if he does not sell it for something. d. Bill should just throw the bread away and change the price of his bread starting tomorrow

to make sure he sells all of his bread each day.

ANS: C DIF: 2 REF: 1-1 NAT: Analytic LOC: Marginal costs & benefits TOP: Marginal changes MSC: Analytical

68. 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, even if the price falls below $1.00 per dozen. b. Lower the price of the remaining bagels, but under no circumstances should the price fall

below $1.00 per dozen. c. Throw the bagels away and produce 8 fewer dozen bagels tomorrow. d. Starting tomorrow, lower the price on all bagels so they will all be sold earlier in the day.

ANS: A DIF: 3 REF: 1-1 NAT: Analytic LOC: Marginal costs & benefits TOP: Marginal changes MSC: Analytical


69. Stan buys a 1966 Mustang for $2,000, planning to restore and sell the car. He goes on to spend

$8,000 restoring the car. At this point he can sell the car for $9,000. As an alternative, he can spend an additional $3,000 replacing the engine. With a new engine the car would sell for $12,000. Stan should a. complete the repairs and sell the car for $12,000. b. sell the car now for $9, 000. c. never try such an expensive project again. d. be indifferent between (i) selling the car now and (ii) replacing the engine and then selling

it.

ANS: D DIF: 3 REF: 1-1 NAT: Analytic LOC: Marginal costs & benefits TOP: Marginal cost MSC: Analytical

70. Sarah buys and sells real estate. Two weeks ago, she paid $280,000 for a house on Pine Street,

intending to spend $40,000 on repairs sell the house for $350,000. Last week, the city government announced a plan to build a new landfill on Pine Street just down the street from the house Sarah purchased. As a result of the city’s announced plan, Sarah is weighing two alternatives: She can go ahead with the $40,000 in repairs and then sell the house for $270,000, or she can forgo the repairs and sell the house as it is for $240,000. Sarah should a. keep the house and live in it. b. go ahead with the $40,000 in repairs and sell the house for $270,000. c. forgo the repairs and sell the house as it is for $240,000. d. move the house from Pine Street to a more desirable location, regardless of the cost of

doing so.

ANS: C DIF: 3 REF: 1-1 NAT: Analytic LOC: Marginal costs & benefits TOP: Marginal cost MSC: Analytical

71. You are considering staying in college another semester so that you can complete a major in

economics. In deciding whether or not to stay you should a. compare the total cost of your education to the total benefits of your education. b. compare the total cost of your education to the benefits of staying one more semester. c. compare the cost of staying one more semester to the benefits of staying one more

semester. d. compare the total benefits of your education to the cost of staying one more semester.

ANS: C DIF: 1 REF: 1-1 NAT: Analytic LOC: Marginal costs & benefits TOP: Marginal cost MSC: Applicative


72. Sam and Sadie charge people to park on their lawn while attending a nearby craft fair. At the

current price of $10, eight people park on their lawn. If they raise the price to $15, they know that only six people will want to park on their lawn. Whether they have eight or six cars parked on their lawn does not affect their costs. From this information it follows that a. they should leave the price at $10. b. it does not matter if they charge $10 or $15. c. they would do better charging $15 than $10. d. they should raise the price even more.

ANS: C DIF: 2 REF: 1-1 NAT: Analytic LOC: Marginal costs & benefits TOP: Marginal costs and benefits MSC: Analytical

73. Your professor loves her work, teaching economics. She has been offered other positions in the

corporate world that would increase her income by 25 percent, but she has decided to continue working as a professor. Her decision would not change unless the marginal a. cost of teaching increased. b. benefit of teaching increased. c. cost of teaching decreased. d. cost of a corporate job increased.

ANS: A DIF: 2 REF: 1-1 NAT: Analytic LOC: Marginal costs & benefits TOP: Marginal changes MSC: Interpretive

74. Suppose your management professor has been offered a corporate job with a 30 percent pay

increase. He has decided to take the job. For him, the marginal a. cost of leaving was greater than the marginal benefit. b. benefit of leaving was greater than the marginal cost. c. benefit of teaching was greater than the marginal cost. d. All of the above are correct.


75. Economists are particularly adept at understanding that people respond to

a. laws. b. incentives. c. punishments more than rewards. d. rewards more than punishments.

ANS: B DIF: 1 REF: 1-1 NAT: Analytic LOC: The role of incentives TOP: Incentives MSC: Interpretive


76. People are likely to respond to a policy change

a. only if they think the policy is a good one. b. only if the policy change changes the costs of their behavior. c. only if the policy change changes the benefits of their behavior. d. if the policy changes either the costs or benefits of their behavior.

ANS: D DIF: 1 REF: 1-1 NAT: Analytic LOC: The role of incentives TOP: Incentives MSC: Interpretive

77. Government policies can change the costs and benefits that people face. Those policies have the

potential to a. alter people’s behavior. b. alter people’s decisions at the margin. c. produce results that policymakers did not intend. d. All of the above are correct.


78. Ralph Nader's book Unsafe at Any Speed caused Congress to require

a. safety glass in all new cars. b. seat belts in all new cars. c. air bags in all new cars. d. stricter drunk driving laws in all states.

ANS: B DIF: 1 REF: 1-1 NAT: Analytic LOC: The role of incentives TOP: Incentives MSC: Interpretive

79. Following the implementation of laws requiring automobiles to have seat belts, which of the

following occurred? a. An individual’s probability of surviving an auto accident rose.. b. There was an increase in pedestrian deaths. c. There was an increase in automobile accidents. d. All of the above are correct.


80. U.S. laws requiring that drivers wear seat belts have resulted in

a. 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.



81. Evidence indicates that seat belt laws have led to

a. fewer pedestrian deaths. b. fewer automobile accidents. c. fewer deaths per automobile accident. d. All of the above are correct.

ANS: C DIF: 1 REF: 1-1 NAT: Analytic LOC: The role of incentives TOP: Incentives MSC: Definitional

82. One effect of the government-imposed seat belt law in the U.S. has been

a. a dramatic decrease in the number of pedestrian deaths. b. safer driving. c. an increase in the number of accidents. d. a dramatic decrease in the number of driver deaths.

ANS: C DIF: 2 REF: 1-1 NAT: Analytic LOC: The role of incentives TOP: Incentives MSC: Interpretive

83. Based on the available evidence, which of the following groups benefits most from mandatory seat

belt laws? a. automakers b. pedestrians c. drivers d. owners of collision-repair shops

ANS: D DIF: 3 REF: 1-1 NAT: Analytic LOC: The role of incentives TOP: Incentives MSC: Analytical

84. Which of the following can policy do?

a. alter incentives b. alter trade-offs c. change opportunity costs d. All of the above are correct.

ANS: D DIF: 1 REF: 1-1 NAT: Analytic LOC: The role of incentives | Scarcity, tradeoffs, and opportunity cost TOP: Opportunity costs, trade-offs, incentives MSC: Interpretative

85. Suppose the state of Iowa passes a law that increases the price of cigarettes by $1 per pack. As a

result, residents in Iowa start purchasing their cigarettes in surrounding states. Which of the following principles does this best illustrate? a. People respond to incentives b. Rational people think at the margin c. Trade can make everyone better off d. Markets are usually a good way to organize economic activity

ANS: A DIF: 1 REF: 1-1 NAT: Analytic LOC: The role of incentives TOP: Incentives MSC: Applicative


86. Suppose the state of Massachusetts passes a law that bans smoking in restaurants. As a result,

residents of Rhode Island who do not like breathing second-hand smoke begin driving across the border to Massachusetts to eat at restaurants there. Which of the following principles does this best illustrate? a. People respond to incentives b. Rational people think at the margin c. Trade can make everyone better off d. Markets are usually a good way to organize economic activity

ANS: A DIF: 1 REF: 1-1 NAT: Analytic LOC: The role of incentives TOP: Incentives MSC: Applicative

87. In the former Soviet Union, producers were paid for meeting output targets, not for selling products.

Under those circumstances, what were the economic incentives for producers? a. to produce good quality products so that society would benefit from the resources used b. to conserve on costs, so as to maintain efficiency in the economy c. to produce enough to meet the output target, without regard for quality or cost d. to produce those products that society desires most

ANS: C DIF: 2 REF: 1-1 NAT: Analytic LOC: The role of incentives TOP: Incentives MSC: Interpretive

88. Which of the following principles is not one of the four principles of individual decisionmaking?

a. People face tradeoffs. b. Trade can make everyone better off. c. People respond to incentives. d. Rational people think at the margin.

ANS: B DIF: 1 REF: 1-1 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost | Marginal costs & benefits | The role of incentives TOP: Tradeoffs | Trade | Marginal changes MSC: Definitional

89. Which of the following statements exemplifies a principle of individual decisionmaking?

a. Trade can make everyone better off. b. Governments can sometimes improve market outcomes. c. The cost of something is what you give up to get it. d. All of the above are correct.



Multiple Choice-Sec02-How People Interact

MULTIPLE CHOICE

1. Which of the following is a principle concerning how people interact?

a. Markets are usually a good way to organize economic activity. b. Rational people think at the margin. c. People respond to incentives. d. All of the above are correct.

ANS: A DIF: 2 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Markets MSC: Interpretive

2. Which is the most accurate statement about trade?

a. Trade can make every nation better off. b. Trade makes some nations better off and others worse off. c. Trading for a good can make a nation better off only if the nation cannot produce that

good itself. d. Trade helps rich nations and hurts poor nations.

ANS: A DIF: 2 REF: 1-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Trade MSC: Interpretive

3. The principle that "trade can make everyone better off" applies to interactions and trade between

a. families. b. states within the United States. c. nations. d. All of the above are correct.

ANS: D DIF: 1 REF: 1-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Trade MSC: Applicative

4. The principle that trade can make everyone better off applies to

a. individuals. b. families. c. countries. d. All of the above

ANS: D DIF: 1 REF: 1-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Gains from trade MSC: Interpretive


5. 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.

ANS: B DIF: 2 REF: 1-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Trade MSC: Interpretive

6. Trade between the United States and India

a. benefits both the United States and India. b. is a losing proposition for the United States because India has cheaper labor. c. is a losing proposition for India because capital is much more abundant in the U.S. than in

India. d. is a losing proposition for India because U.S. workers are more productive.


7. Canada can benefit from trade

a. only with nations that can produce goods Canada cannot produce. b. only with less developed nations. c. only with nations outside of North America. d. with any nation.

ANS: D DIF: 2 REF: 1-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Trade MSC: Interpretive

8. If Japan chooses to engage in trade, it

a. will only benefit if it trades with countries that produce goods Japan cannot produce. b. cannot benefit if it trades with less developed countries. c. should first attempt to produce the good itself. d. can benefit by trading with any other country.


9. If the United States decides to trade with Mexico, we know that

a. Mexico will benefit, but trade with a less developed country could not benefit the United States.

b. it will not benefit Mexico because workers in the United States are more productive. c. Mexico and the United States can both benefit. d. it will not benefit either country because their cultural differences are too vast.

ANS: C DIF: 2 REF: 1-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Trade MSC: Interpretive


10. Senator Smart, who understands economic principles, is trying to convince workers in her district

that trade with other countries is beneficial. Senator Smart should argue that trade can be beneficial a. only if it allows us to obtain things that we couldn't make for ourselves. b. because it allows specialization, which increases total output. c. to us if we can gain and the others involved in the trade lose. d. in only a limited number of circumstances because others are typically self-interested.

ANS: B DIF: 2 REF: 1-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Trade MSC: Interpretive

11. Suppose that a country that has a high level of output per person agrees to trade with a country that

has a low level of output per person. 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. both d. neither

ANS: C DIF: 1 REF: 1-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Trade MSC: Interpretative

12. 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. both d. neither

ANS: C DIF: 1 REF: 1-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Trade MSC: Interpretative

13. Trade between countries tends to

a. reduce both competition and specialization. b. reduce competition and increase specialization. c. increase competition and reduce specialization. d. increase both competition and specialization.

ANS: D DIF: 2 REF: 1-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Trade MSC: Definitional


14. When the United States trades with Singapore,

a. both countries are likely made better off. b. only Singapore benefits since the United States can produce all goods at a higher level of

quality than Singapore. c. only the United States benefits since Singapore’s low wages guarantee profitable firms in

Singapore regardless of trade. d. niether country will benefit since the United States is more efficient than Singapore at

producing all goods.

ANS: A DIF: 2 REF: 1-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Gains from trade MSC: Applicative

15. Benefits from trade would not include

a. the ability of people and nations to specialize. b. a greater variety of goods and services becoming available. c. less competition. d. lower prices.

ANS: C DIF: 2 REF: 1-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Trade MSC: Interpretive

16. Central planning refers to

a. markets guiding economic activity. Today many countries that had this system have abandoned it.

b. markets guiding economic activity. Today many countries that did not have this system have implemented it.

c. government guiding economic activity. Today many countries that had this system have abandoned it.

d. government guiding economic activity. Today many countries that did not have this system have implemented it.

ANS: C DIF: 1 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Markets MSC: Definitional

17. One advantage market economies have over centrally-planned economies is that market economies

a. provide an equal distribution of goods and services to households. b. establish a significant role for government in the allocation of resources. c. solve the problem of scarcity. d. are more efficient.

ANS: D DIF: 2 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Market economy MSC: Interpretive


18. The basic principles of economics suggest that

a. markets are seldom, if ever, a good way to organize economic activity. b. government should become involved in markets when trade between countries is involved. c. government should become involved in markets when those markets fail to produce

efficient or fair outcomes. d. All of the above are correct.

ANS: C DIF: 1 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities | The role of government TOP: Markets | Government | Trade MSC: Interpretive

19. Which of the following statements best characterizes a basic difference between market economies

and centrally-planned economies? a. Society relies more upon prices to allocate resources when the economy is centrally-

planned than when it is market-based. b. The self-interest of households is reflected more fully in the outcome of a centrally-

planned economy than in the outcome of a market economy. c. Government plays a larger role in the economic affairs of a market economy than in the

economic affairs of a centrally-planned economy. d. None of the above are correct.


20. Market economies are distinguished from other types of economies largely on the basis of

a. the political affiliations of government officials. b. the process by which government officials are elected or appointed. c. the ways in which scarce resources are allocated. d. the number of retail outlets available to consumers.

ANS: C DIF: 2 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Market economy MSC: Interpretive

21. The collapse of communism in the Soviet Union and Eastern Europe took place mainly in the

a. 1960s. b. 1970s. c. 1980s. d. 1990s.

ANS: C DIF: 1 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Communism MSC: Definitional


22. The economy of the former Soviet Union is best described as a

a. primitive economy. b. market economy. c. hybrid economy. d. centrally-planned economy.

ANS: D DIF: 1 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Market economy MSC: Definitional

23. Communist countries worked under the premise that

a. markets were the best way to organize economic activity. b. central planners were in the best position to determine the allocation of scarce resources in

the economy. c. households and firms, guided by an “invisible hand,” could achieve the most efficient

allocation of scarce resources. d. allowing the market forces of supply and demand to operate with no government

intervention would acheive the most efficient allocation of scarce resources.

ANS: B DIF: 2 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Markets MSC: Interpretive

24. Prior to the collapse of communism, communist countries worked on the premise that economic

well-being could be best attained by a. a market economy. b. a strong reliance on prices and individuals’ self-interests. c. a system of large privately-owned firms. d. the actions of government central planners.

ANS: D DIF: 2 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Communism MSC: Interpretive

25. The idea that only the government can organize economic activity in a way that promotes economic

well-being for a country as a whole a. is a basic principle regarding individual decisionmaking. b. amounts to a denial of one of the basic principles regarding interactions among people. c. supports the idea that the "invisible hand" should guide economic activity. d. was promoted by the economist Adam Smith in a well-known 1776 book.

ANS: B DIF: 2 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Markets MSC: Interpretive


26. Which of the following statements about markets is most accurate?

a. Markets are usually a good way to organize economic activity. b. Markets are usually inferior to central planning as a way to organize economic activity. c. Markets fail and are therefore not an acceptable way to organize economic activity. d. Markets are a good way to organize economic activity in developed nations, but not in less

developed nations.

ANS: A DIF: 1 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Markets MSC: Interpretive

27. Which of the following observations was made famous by Adam Smith in his book The Wealth of

Nations?

a. There is no such thing as a free lunch. b. People buy more when prices are low than when prices are high. c. No matter how much people earn, they tend to spend more than they earn. d. Households and firms interacting in markets are guided by an "invisible hand" that leads

them to desirable market outcomes.

ANS: D DIF: 1 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Invisible hand MSC: Definitional

28. The term "invisible hand" was coined by

a. Adam Smith. b. David Ricardo. c. Karl Marx. d. Benjamin Franklin.

ANS: A DIF: 1 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Invisible hand MSC: Definitional

29. The famous observation that households and firms interacting in markets act as if they are guided by

an “invisible hand” that leads them to desirable market outcomes comes from whose 1776 book? a. David Ricardo b. Thorstein Veblen c. John Maynard Keynes d. Adam Smith

ANS: D DIF: 1 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Markets MSC: Interpretive


30. Adam Smith's book The Wealth of Nations was published in

a. 1692. b. 1776. c. 1816. d. 1936.

ANS: B DIF: 1 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Invisible hand MSC: Definitional

31. Both The Wealth of Nations and the Declaration of Independence share the point of view that

a. every person is entitled to life, liberty, and the pursuit of happiness. b. individuals are best left to their own devices without the government guiding their actions. c. the government plays a central role in organizing a market economy. d. because of human nature a strong legal system is necessary for a market system to survive.

ANS: B DIF: 2 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Invisible hand MSC: Interpretive

32. The "invisible hand" directs economic activity through

a. advertising. b. prices. c. central planning. d. government regulations.

ANS: B DIF: 2 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Invisible hand MSC: Interpretive

33. The invisible hand refers to

a. how central planners made economic decisions. b. how the decisions of households and firms lead to desirable market outcomes. c. the control that large firms have over the economy. d. government regulations without which the economy would be less efficient.

ANS: B DIF: 1 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Invisible hand MSC: Definitional

34. The invisible hand's ability to coordinate the decisions of the firms and households in the economy

can be hindered by a. government actions that distort prices. b. increased competition in markets. c. enforcement of property rights. d. too much attention paid to efficiency.

ANS: A DIF: 2 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Invisible hand MSC: Interpretive


35. When the "invisible hand" guides economic activity, prices of products reflect

a. only the values that society places on those products. b. only the costs to society of producing those products. c. both the values that society places on those products and the costs to society of producing

those products. d. none of the above; when the "invisible hand" guides economic activity, prices of products

are set by the government in a manner that is thought to be "fair."

ANS: C DIF: 2 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Invisible hand | Markets MSC: Interpretive

36. The invisible hand works to promote general well-being in the economy primarily through

a. government intervention. b. the political process. c. people’s pursuit of self-interest. d. altruism.

ANS: C DIF: 1 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Invisible hand MSC: Interpretive

37. According to Adam Smith, the success of decentralized market economies is primarily due to

a. the basic benevolence of society. b. society's legal system. c. individuals' pursuit of self-interest. d. partnerships that are forged between business and government.

ANS: C DIF: 2 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Invisible hand MSC: Interpretive

38. The self-interest of the participants in an economy is guided into promoting general economic self-

interest by a. the invisible hand. b. market power. c. government intervention. d. oikonomos.

ANS: A DIF: 1 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Invisible hand MSC: Interpretive


39. In an economy in which decisions are guided by prices and individual self-interest, there is

a. the potential to achieve efficiency in production. b. a strong need for government intervention in the market. c. less efficiency than would be observed in a centrally-planned economy. d. more need for a strong legal system to control individual greed than would be needed in a

centrally-planned economy.

ANS: A DIF: 2 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Market economy MSC: Interpretive

40. In a market economy, who makes the decisions that guide most economic activity?

a. firms only b. households only c. firms and households d. government


41. In a market economy, economic activity is guided by

a. the government. b. corporations. c. central planners. d. self-interest and prices.

ANS: D DIF: 1 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Market economy MSC: Definitional

42. 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.


43. The decisions of firms and households are guided by prices and self-interest in a

a. command economy. b. centrally-planned economy. c. market economy. d. All of the above are correct.

ANS: C DIF: 1 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Market economy MSC: Definitional


44. For markets to work well, there must be

a. market power. b. a central planner. c. property rights. d. abundant, not scarce, resources.

ANS: C DIF: 2 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Markets | Property rights MSC: Interpretive

45. Prices usually reflect

a. only the value of a good to society. b. only the cost to society of making a good. c. both the value of a good to society and the cost to society of making the good. d. neither the value of a good to society nor the cost to society of making the good.


46. Prices direct economic activity in a market economy by

a. influencing the actions of buyers and sellers. b. reducing scarcity of the goods and services produced. c. eliminating the need for government intervention. d. allocating goods and services in the most equitable way.

ANS: A DIF: 2 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Market economy MSC: Interpretive

47. A friend of yours asks you why market prices are better than government-determined prices.

Because you understand economic principles, you say that market-determined prices are better because they generally reflect a. the value of a good to society, but not the cost of making it. b. the cost of making a good to society, but not its value. c. both the value of a good to society and the cost of making it. d. neither the value of a good to society nor the cost of making it.

ANS: C DIF: 2 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Markets | Prices MSC: Interpretive


48. If the price of visiting a doctor were fixed below the current price, then we would expect

a. an increase in the number of visits people want to make and an increase in the number of visits health care providers want to provide.

b. an increase in the number of visits people want to make and a decrease in the number of visits health care providers want to provide.

c. a decrease in the number of visits people want to make and an increase in the number of visits health care providers want to provide.

d. a decrease in the number of visits people want to make and a decrease in the number of visits health care providers want to provide.

ANS: B DIF: 2 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Markets MSC: Applicative

49. If the price of a gallon of milk were fixed above the current price, then we would expect

a. an increase in the number of gallons of milk people want to buy and an increase in the number of gallons of milk dairy farmers want to sell.

b. an increase in the number of gallons of milk people want to buy and a decrease in the number of gallons of milk dairy farmers want to sell.

c. a decrease in the number of gallons of milk people want to buy and an increase in the number of gallons of milk dairy farmers want to sell.

d. a decrease in the number of gallons of milk people want to buy and a decrease in the number of gallons of milk dairy farmers want to sell.

ANS: C DIF: 2 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Markets MSC: Applicative

50. When the government prevents prices from adjusting naturally to supply and demand,

a. it equates the amount buyers want to buy with the amount sellers want to sell. b. it adversely affects the allocation of resources. c. it improves equality and efficiency. d. it improves efficiency but reduces equality.

ANS: B DIF: 2 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities | The role of government TOP: Prices | Government MSC: Applicative

51. One reason we need government, even in a market economy, is that

a. there is insufficient market power in the absence of government. b. property rights are too strong in the absence of government. c. the invisible hand is not perfect. d. Both a and b are correct.

ANS: C DIF: 2 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities | The role of government TOP: Market economy | Government MSC: Interpretive


52. The government enforces property rights by

a. requiring property owners to pay property taxes. b. providing police and courts. c. forcing people to own property. d. providing public parks and recreation facilities.

ANS: B DIF: 2 REF: 1-2 NAT: Analytic LOC: The role of government TOP: Government | Property rights MSC: Interpretive

53. A company that formerly produced software went out of business because too many potential

customers bought illegally-produced copies of the software instead of buying the product directly from the company. This instance serves as an example of a. market power. b. inefficient trade. c. inadequate enforcement of property rights. d. the invisible hand at work.

ANS: C DIF: 2 REF: 1-2 NAT: Analytic LOC: The role of government TOP: Property rights MSC: Interpretive

54. For which of the following problems can well-designed public policy enhance economic efficiency?

a. both externalities and market power b. externalities, but not market power c. market power, but not externalities d. neither externalities nor market power

ANS: A DIF: 2 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Public policy, Market failures MSC: Interpretative

55. Public policies

a. may be able to improve either economic efficiency or equality. b. may be able to improve economic efficiency but cannot improve equality. c. may be able to improve equality but cannot improve economic efficiency. d. cannot improve either equality or economic efficiency.

ANS: A DIF: 2 REF: 1-2 NAT: Analytic LOC: Efficiency and equity TOP: Public policy, Efficiency, Equality MSC: Interpretative

56. To say that government intervenes in the economy to promote efficiency is to say that government is

attempting to a. create a more fair distribution of income. b. change the way in which the economic pie is divided. c. enlarge the economic pie. d. All of the above are correct.

ANS: C DIF: 2 REF: 1-2 NAT: Analytic LOC: The role of government TOP: Efficiency | Government MSC: Interpretive


57. Which of the following could reduce economic efficiency?

a. laws that encourage lawsuits. b. policies that redistribute income c. policies that impose significant restrictions on international trade d. All of the above are correct

ANS: D DIF: 1 REF: 1-2 NAT: Analytic LOC: Efficiency and equity TOP: Efficiency MSC: Applicative

58. The term used to describe a situation in which markets do not allocate resources efficiently is

a. economic meltdown. b. market failure. c. equilibrium. d. the effect of the invisible hand.

ANS: B DIF: 1 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Market failure MSC: Definitional

59. A rationale for government involvement in a market economy is as follows:

a. Markets sometimes fail to produce a fair distribution of economic well-being. b. Markets sometimes fail to produce an efficient allocation of resources. c. Property rights have to be enforced. d. All of the above are correct.

ANS: D DIF: 1 REF: 1-2 NAT: Analytic LOC: The role of government TOP: Government | Markets MSC: Interpretive

60. The term market failure refers to

a. a situation in which the market on its own fails to allocate resources efficiently. b. an unsuccessful advertising campaign which reduces demand for a product. c. a situation in which competition among firms becomes ruthless. d. a firm which is forced out of business because of losses.

ANS: A DIF: 1 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Market failure MSC: Definitional

61. Which of the following is not generally regarded by economists as a legitimate reason for the

government to intervene in a market? a. to promote efficiency b. to promote equality c. to enforce property rights d. to protect an industry from foreign competition

ANS: D DIF: 2 REF: 1-2 NAT: Analytic LOC: The role of government TOP: Government | Markets MSC: Interpretive


62. Causes of market failure include

a. externalities and market power. b. market power and incorrect forecasts of consumer demand. c. externalities and foreign competition. d. incorrect forecasts of consumer demand and foreign competition.

ANS: A DIF: 2 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Market failure MSC: Interpretive

63. Market failure can be caused by

a. low consumer demand. b. equilibrium prices. c. externalities and market power. d. high prices and foreign competition.

ANS: C DIF: 2 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Market failure MSC: Interpretive

64. The term "market failure"

a. means the same thing as "market power." b. refers to the dissolution of a market when firms decide to quit producing a certain product. c. refers to the failure of a market to produce an efficient allocation of resources. d. refers to government's failure to enforce the property rights of households or firms that

participate in a certain market.

ANS: C DIF: 2 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Market failure MSC: Interpretive

65. If an externality is present in a market, economic efficiency may be enhanced by

a. government intervention. b. increased competition. c. better informed market participants. d. weaker property rights.

ANS: A DIF: 2 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Externalities | Efficiency MSC: Interpretive

66. An example of an externality is the impact of

a. bad weather on the income of farmers. b. the personal income tax on a person's ability to purchase goods and services. c. pollution from a factory on the health of people in the vicinity of the factory. d. increases in health care costs on the health of individuals in society.

ANS: C DIF: 2 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Externalities MSC: Interpretive


67. Which of the following is an example of an externality?

a. Aaron purchases a new flat screen television. b. Bonnie cannot catch the flu from Bobby because Bobby got a flu vaccine. c. Clyde sells a book to Cathy. d. Doug turns up the heat in his apartment.

ANS: B DIF: 2 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Externalities MSC: Interpretive

68. The willingness of citizens to pay for a vaccinations does not include the benefit society receives

from having vaccinated citizens who cannot transmit an illness to others. This extra benefit society gets from vaccinating its citizens is known as a. productivity. b. an externality. c. market power. d. property rights.

ANS: B DIF: 2 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Externalities MSC: Applicative

69. If a paper factory does not bear the entire cost of the pollution it emits, it will

a. not emit any pollution so as to avoid the entire cost of the pollution. b. emit lower levels of pollution. c. emit an acceptable level of pollution. d. emit too much pollution.

ANS: D DIF: 2 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Externalities MSC: Interpretive

70. Laws that restrict the smoking of cigarettes in public places are examples of government

intervention that is intended to reduce a. efficiency. b. equality. c. externalities. d. productivity.

ANS: C DIF: 2 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Externalities | Government MSC: Applicative

71. Which of these consumption activities will most likely impose an external cost?

a. An athlete works out at a gym. b. A secretary smokes a cigarette in a crowded break room. c. A young mother pushes her baby in a stroller. d. A construction worker eats a hotdog during his lunch break.



72. Which of these activities will most likely result in an external benefit?

a. A college student buys a deck of cards to play solitaire in her dorm room. b. An elderly woman plants a flower garden on the vacant lot next to her house. c. An executive purchases a book to read on a business trip. d. A ten-year-old uses his allowance to buy new Nike shoes.


73. When a single person (or small group) has the ability to influence market prices, there is

a. competition. b. market power. c. an externality. d. a lack of property rights.

ANS: B DIF: 1 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Market power MSC: Definitional

74. Market power refers to the

a. power of a single person or small group to influence market prices. b. ability of a person or small group to successfully market new products. c. power of the government to regulate a market. d. importance of a certain market in relation to the overall economy.

ANS: A DIF: 1 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Market power MSC: Definitional

75. Which of the following firms is likely to have the greatest market power?

a. An electric company b. A farmer c. A grocery store d. A local electronics retailer

ANS: A DIF: 2 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Market power MSC: Applicative

76. Which of the following firms is most likely to have market power?

a. a grocery store in a metropolitan area b. a gas station in a suburb c. a pub in a college town d. the only hotel in a rural area

ANS: D DIF: 2 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Market power MSC: Interpretive


77. An example of a firm with market power is a

a. delicatessen in New York. b. cable TV provider in St. Louis. c. clothing store in Los Angeles. d. family farm in Illinois.

ANS: B DIF: 2 REF: 1-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Market power MSC: Interpretive

Multiple Choice-Sec03-How the Economy as a Whole Works

MULTIPLE CHOICE

1. In the United States, incomes historically have grown about 2 percent per year. At this rate, average

income doubles every a. 15 years. b. 25 years. c. 35 years. d. 45 years.

ANS: C DIF: 2 REF: 1-3 NAT: Analytic LOC: Productivity and growth TOP: Income MSC: Interpretive

2. In the United States, incomes have historically grown

a. about 0.5 percent per year. b. about 2 percent per year. c. about 4 percent per year. d. about 6 percent per year.

ANS: B DIF: 1 REF: 1-3 NAT: Analytic LOC: Productivity and growth TOP: Income MSC: Definitional

3. Over the past century, the average income in the United States has risen about

a. twofold. b. fivefold. c. eightfold. d. tenfold.

ANS: C DIF: 1 REF: 1-3 NAT: Analytic LOC: Productivity and growth TOP: Income MSC: Definitional


4. The term "productivity"

a. means the same thing as "efficiency." b. is seldom used by economists, as its meaning is not precise. c. refers to the quantity of goods and services produced from each unit of labor input. d. refers to the variety of goods and services from which households can choose when they

shop.

ANS: C DIF: 1 REF: 1-3 NAT: Analytic LOC: Productivity and growth TOP: Productivity MSC: Definitional

5. Productivity is defined as the

a. amount of goods and services produced from each unit of labor input. b. number of workers required to produce a given amount of goods and services. c. amount of labor that can be saved by replacing workers with machines. d. actual amount of effort workers put into an hour of working time.

ANS: A DIF: 2 REF: 1-3 NAT: Analytic LOC: Productivity and growth TOP: Productivity MSC: Definitional

6. The amount of goods and services produced from each unit of labor input is called

a. opportunity cost. b. productivity. c. externality. d. marginal benefit.

ANS: B DIF: 1 REF: 1-3 NAT: Analytic LOC: Productivity and growth TOP: Productivity MSC: Definitional

7. What is the most important factor that explains differences in living standards across countries?

a. the quantity of money b. the level of unemployment c. productivity d. equality

ANS: C DIF: 1 REF: 1-3 NAT: Analytic LOC: Productivity and growth TOP: Productivity MSC: Interpretive

8. Almost all variation in living standards is attributable to differences in countries'

a. population growth rates. b. productivity. c. systems of public education. d. taxes.

ANS: B DIF: 2 REF: 1-3 NAT: Analytic LOC: Productivity and growth TOP: Standard of living MSC: Interpretive


9. The income of a typical worker in a country is most closely linked to which of the following?

a. population b. productivity c. market power d. government policies

ANS: B DIF: 2 REF: 1-3 NAT: Analytic LOC: Productivity and growth TOP: Productivity | Income MSC: Interpretive

10. A direct or positive relationship exists between a country's

a. productivity and its standard of living. b. amount of government spending and its productivity. c. total population and its average citizen’s income. d. rate of population growth and the extent of its trade with other countries.

ANS: A DIF: 2 REF: 1-3 NAT: Analytic LOC: Productivity and growth TOP: Productivity | Standard of living MSC: Interpretive

11. The primary determinant of a country's standard of living is

a. the country’s ability to prevail over foreign competition. b. the country’s ability to produce goods and services. c. the total supply of money in the economy. d. the average age of the country's labor force.

ANS: B DIF: 2 REF: 1-3 NAT: Analytic LOC: Productivity and growth TOP: Standard of living MSC: Interpretive

12. The historical rise in living standards of American workers is primarily a result of

a. the influence of labor unions in America. b. tariff protection imposed by the American government. c. the enactment of minimum-wage laws in America. d. the rise in American productivity.

ANS: D DIF: 2 REF: 1-3 NAT: Analytic LOC: Productivity and growth TOP: Productivity | Standard of living MSC: Interpretive

13. The fact that different countries experience different standards of living is largely explained by

differences in those countries' a. populations. b. productivity levels. c. locations. d. none of the above; economists are puzzled by differences in standards of living around the

world.

ANS: B DIF: 1 REF: 1-3 NAT: Analytic LOC: Productivity and growth TOP: Standard of living | Productivity MSC: Interpretive


14. Suppose that the average income of a Kenyan is higher than the average income of a South African.

You might conclude that a. Kenyan firms are faced with stricter government regulations than South African firms. b. total income is divided among fewer workers in Kenya since it has a smaller labor force

than South Africa. c. Kenya's climate allows for longer growing seasons and therefore Kenya can produce large

quantities of grain and other crops. d. productivity in Kenya is higher than in South Africa.

ANS: D DIF: 2 REF: 1-3 NAT: Analytic LOC: Productivity and growth TOP: Productivity | Income MSC: Applicative

15. The slow growth of U.S. incomes during the 1970s and 1980s can best be explained by

a. unstable economic conditions in Eastern Europe. b. increased competition from abroad. c. a decline in the rate of increase in U.S. productivity. d. a strong U.S. dollar abroad, hurting U.S. exports.

ANS: C DIF: 3 REF: 1-3 NAT: Analytic LOC: Productivity and growth TOP: Productivity | Income MSC: Applicative

16. Suppose a typical worker in France can produce 32 units of product in an eight-hour day, while a

typical worker in Germany can produce 30 units of product in a 10-hour day. We can conclude that a. worker productivity in Germany is higher than in France. b. the standard of living will likely be higher in France than in Germany. c. productivity is 4 units per hour for the German worker and 3 units per hour for the French

worker. d. there will be no difference between the standard of living in France and Germany.

ANS: B DIF: 3 REF: 1-3 NAT: Analytic LOC: Productivity and growth TOP: Productivity | Standard of living MSC: Applicative

17. Suppose that in Chile total annual output is worth $600 million and people work 70 million hours.

In Argentina total annual output is worth $450 million and people work 40 million hours. Productivity is higher a. in Chile. Most variation in the standard of living across countries is due to differences in

productivity. b. in Chile. Differences in productivity explain very little of the variation in the standard of

living across countries. c. in Argentina. Most variation in the standard of living across countries is due to

differences in productivity. d. in Argentina. Differences in productivity explain very little of the variation in the standard

of living across countries.

ANS: C DIF: 2 REF: 1-3 NAT: Analytic LOC: Productivity and growth TOP: Productivity, Standard of living MSC: Analytical


18. In a particular country in 1998, the average worker needed to work 25 hours to produce 40 units of

output. In that same country in 2008, the average worker needed to work 40 hours to produce 68 units of output. In that country, the productivity of the average worker a. decreased by 1.7 percent between 1998 and 2008. b. remained unchanged between 1998 and 2008. c. increased by 4.75 percent between 1998 and 2008. d. increased by 6.25 percent between 1998 and 2008.

ANS: D DIF: 3 REF: 1-3 NAT: Analytic LOC: Productivity and growth TOP: Productivity MSC: Analytical


output. In that same country in 2008, the average worker needed to work 30 hours to produce 45 units of output. In that country, the productivity of the average worker a. decreased by about 6 percent between 2000 and 2008. b. remained unchanged between 2000 and 2008. c. increased by about 9 percent between 2000 and 2008. d. increased by about 18 percent between 2000 and 2008.

ANS: C DIF: 3 REF: 1-3 NAT: Analytic LOC: Productivity and growth TOP: Productivity MSC: Analytical


output. In that same country in 2008, the average worker needed to work 35 hours to produce 55 units of output. In that country, the productivity of the average worker a. decreased between 1998 and 2008, so we would expect the standard of living to have

decreased accordingly. b. increased between 1998 and 2008, so we would expect the standard of living to have

increased accordingly. c. decreased between 1998 and 2008, so we would expect inflation to have decreased

accordingly. d. increased between 1998 and 2008, so we would expect inflation to have increased

accordingly.

ANS: B DIF: 3 REF: 1-3 NAT: Analytic LOC: Productivity and growth TOP: Productivity | Standard of living MSC: Analytical

21. In a particular country in 1997, the average worker had to work 18 hours to produce 45 units of

output. In that same country in 2007, the average worker needed to work 24 hours to produce 60 units of output. In that country, the productivity of the average worker a. increased by 2 percent between 1997 and 2007. b. increased by 5 percent between 1997 and 2007. c. remained unchanged between 1997 and 2007. d. decreased by 3 percent between 1997 and 2007.

ANS: C DIF: 3 REF: 1-3 NAT: Analytic LOC: Productivity and growth TOP: Productivity MSC: Analytical


22. A worker in Thailand can earn $2 per day making cotton cloth on a hand loom. A worker in the

United States can earn $80 per day making cotton cloth with a mechanical loom. What accounts for the difference in wages? a. U.S. textile workers belong to a union. b. There is little demand for cotton cloth in Thailand and great demand in the U.S. c. Labor is more productive making cotton cloth with a mechanical loom than with a hand

loom. d. Thailand has a low-wage policy to make its textile industry more competitive in world

markets.

ANS: C DIF: 3 REF: 1-3 NAT: Analytic LOC: Productivity and growth TOP: Productivity MSC: Applicative

23. To promote good economic outcomes, policymakers should strive to enact policies that

a. enhance productivity. b. enhance individuals' market power. c. result in a rapidly-growing quantity of money. d. All of the above are correct.

ANS: A DIF: 2 REF: 1-3 NAT: Analytic LOC: Productivity and growth TOP: Productivity | Market power | Inflation MSC: Applicative

24. To raise productivity, policymakers could

a. increase spending on education. b. provide tax credits to firms for capital improvements. c. fund research and development. d. All of the above are correct.

ANS: D DIF: 3 REF: 1-3 NAT: Analytic LOC: Productivity and growth TOP: Productivity | Government MSC: Applicative

25. To increase living standards, public policy should

a. ensure that workers are well educated and have the necessary tools and technology. b. make unemployment benefits more generous. c. move workers into jobs directly from high school. d. ensure a greater degree of equality, taking all income-earners into account.

ANS: A DIF: 2 REF: 1-3 NAT: Analytic LOC: Productivity and growth TOP: Productivity | Standard of living MSC: Applicative


26. To improve living standards, policymakers should

a. impose restrictions on foreign competition. b. formulate policies designed to increase productivity. c. impose tougher immigration policies. d. provide tax breaks for the middle class.

ANS: B DIF: 2 REF: 1-3 NAT: Analytic LOC: Productivity and growth TOP: Productivity | Standard of living MSC: Applicative

27. Incomes of U.S. households in the 1970s and 1980s

a. grew rapidly, due to the widespread success of labor unions in pushing up wages during those decades.

b. grew rapidly, due to several increases in the minimum wage during those decades. c. grew rapidly, due to government policies that discouraged the importation of foreign

products during those decades. d. grew slowly, due to slow growth of the output of goods and services per hour of U.S.

workers' time during those decades.

ANS: D DIF: 2 REF: 1-3 NAT: Analytic LOC: Productivity and growth TOP: Productivity | Income MSC: Applicative

28. An increase in the overall level of prices in an economy is referred to as

a. the income effect. b. inflation. c. deflation. d. the substitution effect.

ANS: B DIF: 1 REF: 1-3 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation MSC: Definitional

29. Inflation is defined as

a. a period of rising productivity in the economy. b. a period of rising income in the economy. c. an increase in the overall level of output in the economy. d. an increase in the overall level of prices in the economy.

ANS: D DIF: 1 REF: 1-3 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation MSC: Definitional

30. In the early 1920s,

a. Germany experienced a very high rate of inflation. b. the quantity of German money was declining rapidly. c. the value of German money remained almost constant. d. All of the above are correct.

ANS: A DIF: 2 REF: 1-3 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation | Money MSC: Interpretive


31. During the early 1920s in Germany, prices

a. doubled annually. b. doubled monthly. c. tripled monthly. d. tripled annually.

ANS: C DIF: 2 REF: 1-3 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation MSC: Definitional

32. One of the 20th century’s worst episodes of inflation occurred in

a. the United States in the 1960s. b. Italy in the 1950s. c. Russia in the 1930s. d. Germany in the 1920s.

ANS: D DIF: 1 REF: 1-3 TOP: Inflation MSC: Definitional

33. In the United States, the overall level of prices more than doubled during the

a. 1950s. b. 1960s. c. 1970s. d. 1980s.

ANS: C DIF: 1 REF: 1-3 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation MSC: Definitional

34. President Gerald Ford referred to inflation as

a. a blight on our nation's economy. b. a necessary evil to combat high unemployment. c. public enemy number one. d. a fly in the ointment.

ANS: C DIF: 2 REF: 1-3 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation MSC: Interpretive

35. The U.S. president who referred to inflation as “public enemy number one” was

a. Richard Nixon. b. Gerald Ford. c. Jimmy Carter. d. Ronald Reagan.

ANS: B DIF: 1 REF: 1-3 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation MSC: Interpretive


36. In which of the following decades was there both high inflation and rapid money supply growth in

the US? a. the 1970’s and the 1990’s b. the 1970’s but not the 1990’s c. the 1990’s but not the 1970’s d. neither the 1970’s nor the 1990’s

ANS: B DIF: 2 REF: 1-3 NAT: Analytic LOC: The role of money TOP: Inflation MSC: Definitional

37. In the 1990s, inflation in the United States was

a. very close to zero. b. about 3 percent per year. c. about 6 percent per year. d. commonly referred to as “public enemy number one.”


38. Large or persistent inflation is almost always caused by

a. excessive government spending. b. excessive growth in the quantity of money. c. foreign competition. d. higher-than-normal levels of productivity.


39. Which of the following would a permanent increase in the growth rate of the money supply change

permanently? a. inflation b. unemployment c. both inflation and unemployment d. neither inflation nor unemployment

ANS: A DIF: 2 REF: 1-3 NAT: Analytic LOC: Unemployment and inflation TOP: The short-run trade-off between inflation and unemployment MSC: Applicative

40. Most economists believe that an increase in the quantity of money results in

a. an increase in the demand for goods and services. b. lower unemployment in the short run. c. higher inflation in the long run. d. All of the above are correct.

ANS: D DIF: 3 REF: 1-3 NAT: Analytic LOC: Unemployment and inflation TOP: Money | Inflation | Unemployment MSC: Applicative


41. In the short run, which of the following rates of growth in the money supply is likely to lead to the

lowest level of unemployment in the economy? a. 3 percent per year b. 5 percent per year c. 7 percent per year d. 9 percent per year

ANS: D DIF: 2 REF: 1-3 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation | Unemployment MSC: Analytical

42. In the short run, which of the following rates of growth in the money supply is likely to lead to the

highest level of unemployment in the economy? a. 1 percent per year b. 2 percent per year c. 3 percent per year d. 4 percent per year

ANS: A DIF: 2 REF: 1-3 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation | Unemployment MSC: Analytical

43. In the short run, an increase in the money supply is likely to lead to

a. lower unemployment and lower inflation. b. lower unemployment and higher inflation. c. higher unemployment and lower inflation. d. higher unemployment and higher inflation.

ANS: B DIF: 2 REF: 1-3 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation | Unemployment MSC: Applicative

44. 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 because a. the Federal Reserve Bank is worried about inflation. b. the Federal Reserve Bank is worried about unemployment. c. the Federal Reserve Bank is hoping to reduce the demand for goods and services. d. the Federal Reserve Bank is worried that the economy is growing too quickly.

ANS: B DIF: 2 REF: 1-3 NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment MSC: Applicative

45. Low rates of inflation are generally associated with

a. low rates of government spending. b. small or nonexistent government budget deficits. c. low rates of productivity growth. d. low rates of growth of the quantity of money.

ANS: D DIF: 2 REF: 1-3 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation MSC: Interpretive


46. Which of the following is the most correct statement about the relationship between inflation and

unemployment? a. In the short run, falling inflation is associated with falling unemployment. b. In the short run, falling inflation is associated with rising unemployment. c. In the long run, falling inflation is associated with falling unemployment. d. In the long run, falling inflation is associated with rising unemployment.

ANS: B DIF: 2 REF: 1-3 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation | Unemployment | Tradeoffs MSC: Applicative

47. Which of the following is an important cause of inflation in an economy?

a. increases in productivity in the economy b. the influence of positive externalities on the economy c. lack of property rights in the economy d. growth in the quantity of money in the economy

ANS: D DIF: 2 REF: 1-3 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation MSC: Interpretive

48. The mainstream view among economists is that

a. society faces a tradeoff between unemployment and inflation, but only in the short run. b. society faces a tradeoff between unemployment and inflation, but only in the long run. c. society faces a tradeoff between unemployment and inflation, both in the short run and in

the long run. d. no tradeoff exists between unemployment and inflation, either in the short run or in the

long run.

ANS: A DIF: 2 REF: 1-3 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation | Unemployment | Tradeoffs MSC: Applicative

49. Which of the following claims is consistent with the views of mainstream economists?

a. If we increase the rate of inflation from 3 percent to 6 percent, then the rate of unemployment will temporarily fall.

b. If we increase the rate of inflation from 3 percent to 6 percent, then the rate of unemployment will temporarily rise.

c. If we increase the rate of inflation from 3 percent to 6 percent, then the rate of unemployment will permanently fall.

d. If we increase the rate of inflation from 3 percent to 6 percent, then the rate of unemployment will permanently rise.



50. For a very long time Tropicland has had inflation of 12%. Suddenly its inflation rate drops to 4%.

The drop in the inflation rate a. could be due to slower money supply growth. We would expect unemployment to be

higher. b. could be due to slower money supply growth. We would expect unemployment to be

lower. c. could be due to higher money supply growth. We would expect unemployment to be

higher. d. could be due to higher money supply growth. We would expect unemployment to be

lower.

ANS: A DIF: 2 REF: 1-3 NAT: Analytic LOC: Unemployment and inflation TOP: The short-run trade-off between inflation and unemployment MSC: Applicative

51. For a number of years country A had inflation of 3% but for the last five years has had inflation of

6%. Country B had inflation of 4% for many years, but very recently inflation unexpectedly rose to 9%. Other things the same, in which of the countries would the higher inflation rate be more likely to reduce unemployment? a. both country A and country B b. neither country A nor country B c. country A but not country B d. country B but not country A

ANS: D DIF: 3 REF: 1-3 NAT: Analytic LOC: Unemployment and inflation TOP: Short-run trade-off between inflation and unemployment MSC: Interpretive

52. In the early 1980s, U.S. economic policy was directed toward reducing inflation. What would you

have expected to observe during this short period of time? a. Inflation fell and unemployment fell. b. Inflation and unemployment were both unaffected. c. Inflation fell and unemployment increased. d. Inflation fell and unemployment was unchanged.

ANS: C DIF: 2 REF: 1-3 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation | Unemployment | Tradeoffs MSC: Applicative

53. The relatively low inflation experienced in the United States in the 1990s is attributable to

a. slow growth of U.S. productivity during the 1990s. b. slow growth of the quantity of money in the U.S. in the 1990s. c. low levels of government spending in the U.S. in the 1980s and 1990s. d. the eight-year presidency of William Jefferson Clinton during the 1990s.

ANS: B DIF: 2 REF: 1-3 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation | Money MSC: Interpretive


54. 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 that a. the United Kingdom has a better education system than Turkey. b. the rate of growth of the quantity of money was slower in the United Kingdom than in

Turkey. c. workers in Turkey are more productive than workers in the United Kingdom. d. there are more instances of market power in Turkey than in the United Kingdom.

ANS: B DIF: 2 REF: 1-3 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation | Money MSC: Interpretive

55. The tradeoff between inflation and unemployment

a. implies that policies designed to reduce unemployment also reduce inflation. b. was eliminated by improved economic policies in the 1900s. c. is a long-run tradeoff, persisting for decades, according to most economists. d. None of the above are correct.

ANS: D DIF: 2 REF: 1-3 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation | Unemployment | Tradeoffs MSC: Interpretive

56. Germany could have avoided the high inflation that it experienced in the 1920s by

a. not directing so many of its resources toward preparation for World War II. b. not increasing taxes so much on the German middle class. c. not allowing the quantity of money to increase so rapidly. d. using government policies to stimulate the economy more so than what was done.

ANS: C DIF: 2 REF: 1-3 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation | Money MSC: Applicative

57. In the short run, which of the following is not correct?

a. Increasing the money supply increases the demand for goods and services. b. Increasing the money supply encourages firms to hire more workers. c. Lowering the money supply leads to a higher level of unemployment. d. Policies that encourage higher employment will also induce a lower rate of inflation.

ANS: D DIF: 2 REF: 1-3 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation | Unemployment MSC: Interpretive


58. The short-run tradeoff between inflation and unemployment implies that, in the short run,

a. a decrease in the growth rate of the quantity of money will be accompanied by an increase in the unemployment rate.

b. an increase in the growth rate of the quantity of money will be accompanied by an increase in the unemployment rate.

c. policymakers are able to reduce the inflation rate and, at the same time, reduce the unemployment rate.

d. policymakers can influence the inflation rate, but not the unemployment rate.


59. The business cycle is the

a. relationship between unemployment and inflation. b. irregular fluctuations in economic activity. c. positive relationship between the quantity of money in an economy and inflation. d. predictable changes in economic activity due to changes in government spending and

taxes.

ANS: B DIF: 1 REF: 1-3 NAT: Analytic LOC: Unemployment and inflation TOP: Business cycle MSC: Definitional

60. The business cycle is measured by the

a. production of goods and services. b. number of people employed. c. the interest rate. d. both a and b

ANS: D DIF: 2 REF: 1-3 NAT: Analytic LOC: Unemployment and inflation TOP: Business cycle MSC: Definitional

61. The “broken window fallacy”

a. explains why inflation is so high. b. is a justification for the government to print more money. c. is illustrated when a government program is justified not on its merits but on the number

of jobs it will create. d. has nothing to do with public policy.

ANS: C DIF: 1 REF: 1-3 NAT: Analytic LOC: The role of government TOP: Broken window fallacy MSC: Definitional


62. It once took 90 percent of our population to grow our food. It now takes only 3 percent of the

population to grow our food. Which of the following statements is true? a. This loss of jobs has been detrimental to our economy. b. The government should provide subsidies to encourage more people to become farmers. c. This reduction in the number of farmers explains the increase in the price of food. d. Economists understand this is progress because the proportion of the population that used

to be farmers is now employed in other professions.

ANS: D DIF: 1 REF: 1-3 NAT: Analytic LOC: The role of government TOP: Broken window fallacy MSC: Definitional

64

Chapter 2

Thinking Like An Economist

TRUE/FALSE

1. Economists try to address their subject with a scientist’s objectivity.

ANS: T DIF: 1 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Economists MSC: Definitional

2. Economists devise theories, collect data, and then analyze these data in an attempt to verify or refute

their theories.


3. The scientific method is the dispassionate development and testing of theories about how the world

works.

ANS: T DIF: 1 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Scientific method MSC: Definitional

4. The scientific method can be applied to the study of economics.

ANS: T DIF: 2 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Scientific method MSC: Interpretive

5. While the scientific method is applicable to studying natural sciences, it is not applicable to studying

a nation’s economy.

ANS: F DIF: 2 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Scientific method MSC: Interpretive

6. For economists, conducting experiments is often difficult and sometimes impossible.


7. Economists usually have to make do with whatever data the world happens to give them.


Chapter 2/Thinking Like An Economist 65

8. It is difficult for economists to make observations and develop theories, but it is easy for economists

to run experiments to generate data to test their theories.

ANS: F DIF: 2 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Economists MSC: Interpretive

9. Since economists cannot use natural experiments offered by history, they must use carefully

constructed laboratory experiments instead.


10. Historical episodes are not valuable to economists.


11. Historical episodes allow economists to illustrate and evaluate economic theories of the present.


12. Good assumptions simplify a problem without substantially affecting the answer.

ANS: T DIF: 2 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Assumptions MSC: Interpretive

13. Assumptions can simplify the complex world and make it easier to understand.

ANS: T DIF: 1 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Assumptions MSC: Definitional

14. Economists often find it worthwhile to make assumptions that do not necessarily describe the real

world.

ANS: T DIF: 2 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Economists MSC: Interpretive

15. Economists use one standard set of assumptions to answer all economic questions.


66 Chapter 2/Thinking Like An Economist

16. Economic models are most often composed of diagrams and equations.

ANS: T DIF: 1 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Economic models MSC: Definitional

17. Economic models omit many details to allow us to see what is truly important.


18. Economic models can help us understand reality only when they include all details of the economy.

ANS: F DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Economic models MSC: Interpretive

19. An economic model can accurately explain how the economy is organized because it is designed to

include, to the extent possible, all features of the real world.

ANS: F DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Economic models MSC: Interpretive

20. All scientific models, including economic models, simplify reality in order to improve our

understanding of it.


21. The circular-flow diagram explains, in general terms, how the economy is organized and how

participants in the economy interact with one another.

ANS: T DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Circular-flow diagram MSC: Interpretive

22. A circular-flow diagram is a visual model of the economy.

ANS: T DIF: 1 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Circular-flow diagram MSC: Definitional

23. In the circular-flow diagram, households and firms are the decision makers.



24. In the circular-flow diagram, firms produce goods and services using the factors of production.

ANS: T DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Circular-flow diagram | Factors of production MSC: Interpretive

25. In the circular-flow diagram, factors of production are the goods and services produced by firms.

ANS: F DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Circular-flow diagram | Factors of production MSC: Interpretive

26. In the circular-flow diagram, factors of production include land, labor, and capital.

ANS: T DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Circular-flow diagram | Factors of production MSC: Interpretive

27. In the circular-flow diagram, firms own the factors of production and use them to produce goods and

services.

ANS: F DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Circular-flow diagram | Factors of production MSC: Interpretive

28. In the circular-flow diagram, firms consume all the goods and services that they produce.

ANS: F DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Circular-flow diagram MSC: Interpretive

29. In the circular-flow diagram, the two types of markets in which households and firms interact are the

markets for goods and services and the markets for factors of production.


30. In the markets for goods and services in the circular-flow diagram, households are buyers and firms

are sellers.



31. In the markets for the factors of production in the circular-flow diagram, households are buyers and

firms are sellers.

ANS: F DIF: 1 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Circular-flow diagram MSC: Definitional

32. In the circular-flow diagram, one loop represents the flow of goods, services, and factors of

production, and the other loop represents the corresponding flow of dollars.


33. In the circular-flow diagram, one loop represents the flow of goods and services, and the other loop

represents the flow of factors of production.

ANS: F DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Circular-flow diagram MSC: Interpretive

34. In the circular-flow diagram, payments for labor, land, and capital flow from firms to households

through the markets for the factors of production.


35. The production possibilities frontier is a graph that shows the various combinations of outputs that

the economy can possibly produce given the available factors of production and the available production technology.

ANS: T DIF: 1 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier MSC: Definitional


Figure 2-14

houses

A

DB

C

dishwashers

15 30 45 60 75 dog-

5

10

15

20

25

30

35

40

45

36. Refer to Figure 2-14. If this economy uses all its resources in the dishwasher industry, it produces

35 dishwashers and no doghouses.

ANS: T DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier MSC: Applicative

37. Refer to Figure 2-14. It is possible for this economy to produce 75 doghouses.

ANS: F DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier MSC: Applicative

38. Refer to Figure 2-14. It is possible for this economy to produce 30 doghouses and 20 dishwashers.


39. Refer to Figure 2-14. It is possible for this economy to produce 45 doghouses and 30 dishwashers.


40. Refer to Figure 2-14. Given the technology available for manufacturing doghouses and

dishwashers, this economy does not have enough of the factors of production to support the level of output represented by point C.



41. Refer to Figure 2-14. Points A, B, and D represent feasible outcomes for this economy.


42. Refer to Figure 2-14. Points B and C represent infeasible outcomes for this economy.


43. Refer to Figure 2-14. Points A, B, and D represent efficient outcomes for this economy.

ANS: F DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Efficiency MSC: Applicative

44. Refer to Figure 2-14. Point B represents an inefficient outcome for this economy.

ANS: T DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Efficiency MSC: Applicative

45. Refer to Figure 2-14. Unemployment could cause this economy to produce at point B.

ANS: T DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Unemployment MSC: Applicative

46. Refer to Figure 2-14. The opportunity cost of moving from point A to point D is 10 dishwashers.

ANS: T DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Opportunity cost MSC: Applicative

47. Refer to Figure 2-14. The opportunity cost of moving from point B to point D is 15 doghouses.

ANS: F DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Opportunity cost MSC: Applicative

48. Refer to Figure 2-14. The opportunity cost of moving from point B to point A is zero.



49. Refer to Figure 2-14. The opportunity cost of an additional doghouse increases as more doghouses

are produced.


50. With the resources it has, an economy can produce at any point on or outside the production

possibilities frontier, but it cannot produce at points inside the frontier.

ANS: F DIF: 1 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier MSC: Definitional

51. Points inside the production possibilities frontier represent feasible levels of production.

ANS: T DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier MSC: Interpretive

52. Points outside the production possibilities frontier represent infeasible levels of production.


53. An outcome is said to be efficient if an economy is getting all it can from the scarce resources it has

available.

ANS: T DIF: 1 REF: 2-1 NAT: Analytic LOC: Efficiency and equality TOP: Efficiency MSC: Definitional

54. An outcome is said to be efficient if an economy is conserving the largest possible quantity of its

scarce resources while still meeting the basic needs of society.

ANS: F DIF: 2 REF: 2-1 NAT: Analytic LOC: Efficiency and equality TOP: Efficiency MSC: Interpretive

55. A production point is said to be efficient if there is no way for the economy to produce more of one

good without producing less of another.

ANS: T DIF: 2 REF: 2-1 NAT: Analytic LOC: Efficiency and equality TOP: Efficiency MSC: Interpretive


56. If an economy can produce more of one good without giving up any of another good, then the

economy’s current production point is inefficient.


57. Points on the production possibilities frontier represent efficient levels of production.

ANS: T DIF: 1 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Efficiency MSC: Definitional

58. Points inside the production possibilities frontier represent inefficient levels of production.

ANS: T DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Efficiency MSC: Interpretive

59. Unemployment causes production levels to be inefficient.


60. The opportunity cost of something is what you give up to get it.

ANS: T DIF: 1 REF: 2-1 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Opportunity cost MSC: Definitional

61. The production possibilities frontier shows the opportunity cost of one good as measured in terms of

the other good.

ANS: T DIF: 1 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Opportunity cost MSC: Definitional

62. When a production possibilities frontier is bowed outward, the opportunity cost of one good in terms

of the other is constant.

ANS: F DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Opportunity cost MSC: Interpretive


63. When a production possibilities frontier is bowed outward, the opportunity cost of one good in terms

of the other depends on how much of each good is being produced.

ANS: T DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Opportunity cost MSC: Interpretive

64. When a production possibilities frontier is bowed outward, the opportunity cost of the first good in

terms of the second good increases as more of the second good is produced.


65. When a production possibilities frontier is bowed outward, the opportunity cost of the second good

in terms of the first good increases as more of the second good is produced.


66. When a production possibilities frontier is bowed outward, the opportunity cost of the second good

in terms of the first good is higher when the economy is producing much of the second good and little of the first good than it is when the economy is producing little of the second good and much of the first good.


67. When a production possibilities frontier is bowed outward, the opportunity cost of the first good in

terms of the second good is higher when the economy is producing much of the second good and little of the first good than it is when the economy is producing little of the second good and much of the first good.


68. Economists believe that production possibilities frontiers rarely have a bowed shape.

ANS: F DIF: 1 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Economists | Production possibilities frontier MSC: Definitional


69. A production possibilities frontier will be bowed outward if some of the economy’s resources are

better suited to producing one good than another.


70. The trade-off between the production of one good and the production of another good can change

over time because of technological advances.

ANS: T DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Trade-offs MSC: Interpretive

71. A technological advance in the production of the first good increases the opportunity cost of the first

good in terms of the second good.

ANS: T DIF: 3 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Opportunity cost | Technological advance MSC: Analytical

72. While the production possibilities frontier is a useful model, it cannot be used to illustrate economic

growth.

ANS: F DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Economic growth MSC: Interpretive

73. Economic growth causes a production possibilities frontier to shift outward.

ANS: T DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Economic growth MSC: Interpretive

74. If new government regulations designed to protect wetlands remove very productive farmland from

production, then the production possibilities frontier will shift inward.


75. Production possibilities frontiers can be used to illustrate scarcity, trade-offs, opportunity cost,

efficiency, unemployment, technological advances, and economic growth.

ANS: T DIF: 3 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier MSC: Analytical


76. Microeconomics is the study of how households and firms make decisions and how they interact in

specific markets.

ANS: T DIF: 1 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Microeconomics MSC: Definitional

77. Macroeconomics is the study of economywide phenomena.

ANS: T DIF: 1 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Macroeconomics MSC: Definitional

78. The effects of borrowing by the federal government would be studied by a microeconomist rather

than a macroeconomist.

ANS: F DIF: 2 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Microeconomics | Macroeconomics MSC: Applicative

79. The effects of foreign competition on the U.S. textile industry would be studied by a

microeconomist rather than a macroeconomist.

ANS: T DIF: 2 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Microeconomics | Macroeconomics MSC: Applicative

80. Microeconomics and macroeconomics are closely intertwined.

ANS: T DIF: 1 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Microeconomics | Macroeconomics MSC: Definitional

81. When economists are trying to explain the world, they are scientists, and when they are trying to

help improve the world, they are policy advisers.


82. Economists acting as scientists make positive statements, while economists acting as policy advisers

make normative statements.

ANS: T DIF: 2 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Positive statements | Normative statements MSC: Interpretive


83. Normative statements describe how the world is, while positive statements prescribe how the world

should be.

ANS: F DIF: 2 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Positive statements | Normative statements MSC: Interpretive

84. Positive statements are descriptive, while normative statements are prescriptive.


85. Positive statements can be evaluated using data alone, but normative statements cannot.


86. Evaluating normative statements involves values as well as facts.

ANS: T DIF: 1 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Normative statements MSC: Definitional

87. "Society would be better off if the welfare system were abolished" is a normative statement, not a

positive statement.

ANS: T DIF: 2 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Positive statements | Normative statements MSC: Applicative

88. "Other things equal, an increase in supply causes a decrease in price" is a normative statement, not a

positive statement.

ANS: F DIF: 2 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Positive statements | Normative statements MSC: Applicative

89. Trade-offs are involved in most policy decisions.

ANS: T DIF: 1 REF: 2-2 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Trade-offs | Policy decisions MSC: Definitional


90. Since 1946, the president of the United States has received guidance from the Council of Economic

Advisers.

ANS: T DIF: 1 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Council of Economic Advisers MSC: Definitional

91. The Council of Economic Advisers consists of thirty members and a staff of several dozen

economists.

ANS: F DIF: 1 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Council of Economic Advisers MSC: Definitional

92. The duties of the Council of Economic Advisers are to advise the president of the United States and

to determine U.S. monetary policy.

ANS: F DIF: 1 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Council of Economic Advisers MSC: Definitional

93. The Council of Economic Advisers’ Economic Report of the President discusses recent

developments in the economy and presents the council’s analysis of current policy issues.

ANS: T DIF: 1 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Council of Economic Advisers MSC: Definitional

94. Economists at the U.S. Department of the Treasury help design U.S. coins and paper money.

ANS: F DIF: 1 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Economists MSC: Definitional

95. Economists at the U.S. Department of Justice help enforce the nation’s antitrust laws.


96. Economists work both inside and outside the administrative branch of the U.S. government.

ANS: T DIF: 2 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Economists MSC: Interpretive


97. The Congressional Budget Office, which is staffed by economists, provides Congress with

independent evaluations of policy proposals.


98. There is only one explanation for why economists give conflicting advice on policy issues, and it is

that they have different values about what policy should try to accomplish.


99. Economists may disagree about the validity of alternative positive theories about how the world

works.


100. In surveys of professional economists, fourteen propositions were endorsed by an overwhelming

majority of respondents.


101. In economics, graphs serve two purposes: they offer a way to visually express ideas, and they

provide a way of finding and interpreting patterns when analyzing economic data.

ANS: T DIF: 2 REF: 2-5 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Graphs MSC: Interpretive

102. Examples of graphs of a single variable include pie charts, bar graphs, and time-series graphs.


103. In the ordered pair (10,30), 10 is the y-coordinate and 30 is the z-coordinate.

ANS: F DIF: 2 REF: 2-5 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Graphs MSC: Applicative


104. In the ordered pair (10,30), 10 is the horizontal location of the point and 30 is the vertical location of

the point.

ANS: T DIF: 2 REF: 2-5 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Graphs MSC: Applicative

105. Two variables that have a positive correlation move in the same direction.


106. Two variables that have a negative correlation move in opposite directions.


107. When two variables move in opposite directions, the curve relating them is upward sloping, and we

say the variables are positively related.

ANS: F DIF: 2 REF: 2-5 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Graphs MSC: Interpretive

108. When two variables move in the same direction, the curve relating them is downward sloping, and

we say the variables are negatively related.


109. When a variable that is named on an axis of a graph changes, the curve shifts.


110. When a variable that is not named on either axis of a graph changes, we read the change as a

movement along the curve.



111. The concept of slope can be used to answer questions about how much one variable responds to

changes in another variable.

ANS: T DIF: 1 REF: 2-5 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Graphs MSC: Definitional

112. The slope of a line is equal to the change in the x-variable divided by the change in the y-variable.

ANS: F DIF: 1 REF: 2-5 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Graphs MSC: Definitional

113. The slope of an upward-sloping line is positive, and the slope of a downward-sloping line is

negative.


114. The slope of a horizontal line is infinite, and the slope of a vertical line is zero.


115. If a line passes through the points (20,5) and (10,10), then the slope of the line is 1/2.


116. If a line passes through the points (20,5) and (10,10), then the slope of the line is -2.


117. Changes in one variable on a graph might be caused by the other variable on the graph or by a third

omitted variable.



SHORT ANSWER

1. Using the outline below, draw a circular-flow diagram representing the interactions between

households and firms in a simple economy. Explain briefly the various parts of the diagram.

ANS:


This diagram should duplicate the essential characteristics of the diagram in the text, with an explanation of the meaning of each flow and each market. It is important that the student understands that the inner loop represents the flow of real goods and services and that the outer loop represents the corresponding flow of payments.

PTS: 1 DIF: 1 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Circular-flow diagram MSC: Definitional

2. The prairie dog has always been considered a problem for American cattle ranchers. They dig holes

that cattle and horses can step in, and they eat grass necessary for cattle. Recently, ranchers have discovered that there is a demand for prairie dogs as pets. In some areas, prairie dogs can sell for as high as $150 each. Cattlemen are now fencing off prairie dog towns on their land so these towns will not be disturbed by their cattle.

Draw a rancher’s production possibilities frontier showing increasing opportunity cost of cattle production in terms of prairie dog production. Using a separate graph for each situation, show what would happen to the initial production possibilities frontier in each of the following situations:

a. The outcome is efficient, with ranchers choosing to produce equal numbers of cattle and prairie dogs.

b. As a protest against the government introducing the gray wolf back into the wild in their state, ranchers decide to withhold 25 percent of the available grassland for grazing.

c. The price of prairie dogs increases to $200 each, so ranchers decide to allot additional land for prairie dogs.

d. The government grants new leases to ranchers, giving them 10,000 new acres of grassland each for grazing.

e. A drought destroys most of the available grass for grazing of cattle, but not for prairie dogs since they also eat plant roots.

ANS: (a) (b)

dogs

A

prairie

cattle

dogs

B

prairie

cattle


(c) (d)

dogs

C

D

prairie

cattle

dogsprairie

cattle

(e)

dogsprairie

cattle

PTS: 1 DIF: 3 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier MSC: Analytical


3. Draw a production possibilities frontier showing increasing opportunity cost of hammers in terms of

horseshoes. a. On the graph, identify the area of feasible outcomes and the area of infeasible outcomes. b. On the graph, label a point that is efficient and a point that is inefficient. c. On the graph, illustrate the effect of the discovery of a new vein of iron ore, a resource

needed to make both horseshoes and hammers, on this economy. d. On a second graph, illustrate the effect of a new computerized assembly line in the

production of hammers on this economy.

ANS: (a-c) (d)

shoes

feasible

infeasible

inefficient

efficient

discovery

horse-

hammers

shoeshorse-

hammers

PTS: 1 DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier MSC: Applicative

4. Identify each of the following topics as being part of microeconomics or macroeconomics:

a. the impact of a change in consumer income on the purchase of luxury automobiles b. the effect of a change in the price of Coke on the purchase of Pepsi c. the impact of a war in the Middle East on the rate of inflation in the United States d. factors influencing the rate of economic growth e. factors influencing the demand for tractors f. the impact of tax policy on national saving g. the effect of pollution taxes on the U.S. copper industry h. the degree of competition in the cable television industry i. the effect of a balanced-budget amendment on economic stability j. the impact of deregulation on the savings and loan industry

ANS: a, b, e, g, h, and j are microeconomic topics. c, d, f, and i are macroeconomic topics.

PTS: 1 DIF: 2 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Microeconomics | Macroeconomics MSC: Applicative


5. Which of the following statements are positive and which are normative?

a. The minimum wage creates unemployment among young and unskilled workers. b. The minimum wage ought to be abolished. c. If the price of a product in a market decreases, then, other things equal, quantity demanded will

increase. d. A little bit of inflation is worse for society than a little bit of unemployment. e. There is a tradeoff between inflation and unemployment in the short run. f. If consumer income increases, then, other things equal, the demand for automobiles will

increase. g. The U.S. income distribution is not fair. h. U.S. workers deserve more liberal unemployment benefits. i. If interest rates increase, then investment will decrease. j. If welfare benefits were reduced, then the country would be better off.

ANS: a, c, e, f, and i are positive statements. b, d, g, h, and j are normative statements.

PTS: 1 DIF: 2 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Positive statements | Normative statements MSC: Applicative


6. Use the following graph to answer the following questions.

a. How would point J be represented as an ordered pair? b. What type of curve is this? c. Does this curve show a positive or negative correlation between price and quantity? d. Compute the slope of D1 between points J and L. e. What is the slope of D1 between points L and N? Why would you not have to calculate

this answer? f. What is it called if we move from D1 to D2? g. How do you know that the slope of D2 is the same as the slope of D1?

D1 D2

J K

L M

N

10 20 30 40 50 60 70 80 quantity

4

8

12

16

20

24

28

32

36

40price

ANS:

a. (20,24) b. a demand curve c. a negative correlation between price and quantity d. -8/20 or -2/5 e. -2/5; because the slope of a straight line is constant f. an increase in demand. g. because the 2 lines are parallel

PTS: 1 DIF: 2 REF: 2-5 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Graphs MSC: Applicative


Sec00 - Thinking Like an Economist

MULTIPLE CHOICE

1. 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 of study

do. c. Supply, demand, elasticity, comparative advantage, consumer surplus, and deadweight

loss are all terms that are part of the economist’s language. d. 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.

ANS: B DIF: 2 REF: 2-0 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Economics MSC: Interpretive

Sec01 - Thinking Like an Economist - The Economist as Scientist

MULTIPLE CHOICE

1. Economists, like mathematicians, physicists, and biologists,

a. make use of the scientific method. b. try to address their subject with a scientist’s objectivity. c. devise theories, collect data, and then analyze these data in an attempt to verify or refute

their theories. d. All of the above are correct.

ANS: D DIF: 2 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Economists MSC: Interpretive

2. The essence of science is

a. the laboratory experiment. b. the scientific method. c. the study of nature, but not the study of society. d. All of the above are correct.

ANS: B DIF: 1 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Scientific method MSC: Definitional


3. The scientific method is

a. the use of modern technology to understand the way the world works. b. the use of controlled laboratory experiments to understand the way the world works. c. the dispassionate development and testing of theories about how the world works. d. the search for evidence to support preconceived theories about how the world works.

ANS: C DIF: 1 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Scientific method MSC: Definitional

4. The scientific method is applicable to studying

a. natural sciences, but not social sciences. b. social sciences, but not natural sciences. c. both natural sciences and social sciences. d. None of the above is correct.

ANS: C DIF: 2 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Scientific method MSC: Interpretive

5. Who said, "The whole of science is nothing more than the refinement of everyday thinking"?

a. Isaac Newton b. Albert Einstein c. Adam Smith d. Benjamin Franklin

ANS: B DIF: 1 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Scientific method MSC: Definitional

6. Albert Einstein once made the following observation about science:

a. "The whole of science is nothing more than the refinement of everyday thinking." b. "The whole of science is nothing more than an interesting intellectual exercise." c. "In order to understand science, one must rely solely on abstraction." d. "In order to understand science, one must transcend everyday thinking."

ANS: A DIF: 1 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Scientific method MSC: Definitional

7. Sir Isaac Newton's development of the theory of gravity after observing an apple fall from a tree is

an example of a. a controlled experiment that lead to the formulation of a scientific theory. b. being in the right place at the right time. c. an idea whose time had come. d. the interplay between observation and theory in science.

ANS: D DIF: 2 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Scientific method MSC: Interpretive


8. The goal of an economist who formulates new theories is to

a. provide an interesting framework of analysis, whether or not the framework turns out to be of much use in understanding how the world works.

b. provoke stimulating debate in scientific journals. c. contribute to an understanding of how the world works. d. demonstrate that economists, like other scientists, can formulate testable theories.

ANS: C DIF: 2 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Economists MSC: Interpretive

9. Which of the following statements applies to economics, as well as to other sciences such as

physics? a. Experiments are considered valid only when they are conducted in a laboratory. b. Good theories do not need to be tested. c. Real-world observations often lead to theories. d. Economics, as well as other sciences, is concerned primarily with abstract concepts.


10. With respect to how economists study the economy, which of the following statements is most

accurate? a. Economists study the past, but they do not try to predict the future. b. Economists use “rules of thumb” to predict the future. c. Economists devise theories, collect data, and analyze the data to test the theories. d. Economists use controlled experiments in much the same way that biologists and

physicists do.


11. Economists face an obstacle that many other scientists do not face. What is that obstacle?

a. It is often difficult to formulate theories in economics. b. It is often difficult and sometimes impossible to perform experiments in economics. c. Economics cannot be addressed objectively; it must be addressed subjectively. d. The scientific method cannot be applied to the study of economics.

ANS: B DIF: 2 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Economists MSC: Interpretive


12. In conducting their research, economists face an obstacle that not all scientists face; specifically, in

economics, it is often difficult and sometimes impossible to a. make use of theory and observation. b. rely upon the scientific method. c. conduct laboratory experiments. d. find articles or books that were written before 1900.


13. The use of theory and observation is more difficult in economics than in sciences such as physics

due to the difficulty in a. performing an experiment in an economic system. b. applying mathematical methods to economic analysis. c. analyzing available data. d. formulating theories about economic events.

ANS: A DIF: 2 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Economists MSC: Interpretive

14. Which of the following statements is (are) correct?

a. Relative to other scientists, economists find it more difficult to generate useful data. b. Theory and observation are important in economics as well as in other sciences. c. To obtain data, economists often rely upon the natural experiments offered by history. d. All of the above are correct.


15. Because it is difficult for economists to use experiments to generate data, they generally must

a. do without data. b. substitute assumptions for data when data are unavailable. c. rely upon hypothetical data that were previously concocted by other economists. d. use whatever data the world gives them.



16. Which of the following statements is correct?

a. Economists almost always find it easy to conduct experiments in order to test their theories.

b. Economics is not a true science because economists are not usually allowed to conduct experiments to test their theories.

c. Economics is a social science rather than a true science because it cannot employ the scientific method.

d. Economists are usually not allowed to conduct experiments, so they must rely on natural experiments offered by history.


17. Instead of conducting laboratory experiments to generate data to test their theories, economists often

a. ask winners of the Nobel Prize in Economics to evaluate their theories. b. argue that data is impossible to collect in economics. c. gather data from historical episodes of economic change. d. assume that data would support their theories.


18. The most common data for testing economic theories come from

a. carefully controlled and conducted laboratory experiments. b. computer models of economies. c. historical episodes of economic change. d. centrally planned economies.


19. In conducting their research, economists often substitute historical events and historical episodes for

a. theories and observations. b. laboratory experiments. c. models. d. assumptions.



20. For economists, substitutes for laboratory experiments often come in the form of

a. natural experiments offered by history. b. untested theories. c. “rules of thumb” and other such conveniences. d. reliance upon the wisdom of elders in the economics profession.


21. Economists regard events from the past as

a. irrelevant, since history is unlikely to repeat itself. b. of limited interest, since those events seldom provide any useful economic data. c. interesting but not particularly valuable, since those events cannot be used to evaluate

present-day economic theories. d. interesting and valuable, since those events are capable of helping us to understand the

past, the present, and the future.


22. For economists, historical episodes

a. are not worthy of study because they offer few insights into current economic events and problems.

b. are not worthy of study because laboratory experiments provide more reliable data. c. are worthy of study because economists rely entirely on observation, rather than on theory. d. are worthy of study because they serve as valuable substitutes for laboratory experiments.


23. Historical episodes are

a. valuable to economists because they allow economists to see how the science of economics has evolved.

b. valuable to economists because they allow economists to evaluate economic theories of the present.

c. not of concern to economists because economics is about predicting the future, not dwelling on the past.

d. not of concern to economists because the exact circumstances of historical episodes are unlikely to be observed again.



24. One thing economists do to help them understand how the real world works is

a. make assumptions. b. ignore the past. c. they try to capture every aspect of the real world in the models they construct. d. All of the above are correct.

ANS: A DIF: 2 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Assumptions MSC: Interpretive

25. Economists make assumptions in order to

a. mimic the methodologies employed by other scientists. b. minimize the number of experiments that yield no useful data. c. minimize the likelihood that some aspect of the problem at hand is being overlooked. d. focus their thinking on the essence of the problem at hand.

ANS: D DIF: 2 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Assumptions MSC: Interpretive

26. Economists make use of assumptions, some of which are unrealistic, for the purpose of

a. teaching economics to people who have never before studied economics. b. advancing their political agendas. c. developing models when the scientific method cannot be used. d. focusing their thinking.


27. For an economist, the idea of making assumptions is regarded generally as a

a. bad idea, since doing so leads to the omission of important ideas and variables from economic models.

b. bad idea, since doing so invariably leads to data-collection problems. c. good idea, since doing so helps to simplify the complex world and make it easier to

understand. d. good idea, since economic analysis without assumptions leads to complicated results that

the general public finds hard to understand.

ANS: C DIF: 2 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Assumptions MSC: Interpretive


28. An economic theory about international trade that is based on the assumption that there are only two

countries trading two goods a. is useless, since the real world has many countries trading many goods. b. can be useful only in situations involving two countries and two goods. c. can be useful in the classroom, but is useless in the real world. d. can be useful in helping economists understand the complex world of international trade

involving many countries and many goods.


29. The art in scientific thinking -- whether in chemistry, economics, or biology -- is

a. the design and implementation of laboratory experiments. b. knowing when to stop collecting data and when to start analyzing the data. c. deciding which assumptions to make. d. being able to mathematically model natural phenomena.

ANS: C DIF: 1 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Assumptions MSC: Definitional

30. The art in scientific thinking is

a. finding the right problem to study. b. deciding which assumptions to make. c. the ability to make an abstract subject easy to understand. d. not something in which economists have to be skilled.

ANS: B DIF: 1 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Assumptions MSC: Definitional

31. The decision of which assumptions to make is

a. an easy decision for an economist, but a difficult decision for a physicist or a chemist. b. not a particularly important decision for an economist. c. usually regarded as an art in scientific thinking. d. usually regarded as the easiest part of the scientific method.

ANS: C DIF: 2 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Assumptions MSC: Interpretive

32. An example of a price that changes only infrequently is the price of

a. stocks on the New York Stock Exchange. b. crude oil. c. residential real estate. d. magazines sold at newsstands.

ANS: D DIF: 1 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Assumptions | Prices MSC: Definitional


33. When studying the effects of public policy changes, economists

a. always refrain from making assumptions. b. sometimes make different assumptions about the short run and the long run. c. consider only the direct effects of those policy changes and not the indirect effects. d. consider only the short-run effects of those policy changes and not the long-run effects.

ANS: B DIF: 2 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Public policy | Assumptions | Short run | Long run MSC: Interpretive

34. When studying the effects of changes in public policy, economists believe that

a. it is important to distinguish between the short run and the long run. b. the assumptions used in studying those effects should be the same for the short run as for

the long run. c. the short-run effects of those changes are always more beneficial to society than are the

long-run effects. d. the long-run effects of those changes are always more beneficial to society than are the

short-run effects.

ANS: A DIF: 2 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Public policy | Short run | Long run MSC: Interpretive

35. A model can be accurately described as a

a. theoretical abstraction with very little value. b. device that is useful only to the people who created it. c. realistic and carefully constructed theory. d. simplification of reality.

ANS: D DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Economic models MSC: Interpretive

36. Which of the following statements about models is correct?

a. The more details a model includes, the better the model. b. Models assume away irrelevant details. c. Models cannot be used to explain how the economy functions. d. Models cannot be used to make predictions.

ANS: B DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Economic models MSC: Interpretive

37. In building economic models, economists often omit

a. assumptions. b. theories. c. details. d. equations.

ANS: C DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Economic models MSC: Interpretive


38. Which of the following statements about economic models is correct?

a. Economic models are built to mirror reality exactly. b. Economic models are useful, but they should not be used for the purpose of improving

public policies. c. Because economic models omit many details, they allow us to see what is truly important. d. Economic models seldom incorporate equations or diagrams.


39. Economic models

a. cannot be useful if they are based on false assumptions. b. were once thought to be useful, but that is no longer true. c. must incorporate all aspects of the economy if they are to be useful. d. can be useful, even if they are not particularly realistic.


40. Which of the following is not correct about most economic models?

a. They are composed of equations and diagrams. b. They contribute very little to economists’ understanding of the real world. c. They omit many features of the real-world economy. d. In constructing models, economists make assumptions.


41. Economic models

a. are constructed to mirror reality as closely as possible, and in this respect economic models are no different from other scientific models.

b. are constructed to mirror reality as closely as possible, and in this respect economic models are very different from other scientific models.

c. are simplifications of reality, and in this respect economic models are no different from other scientific models.

d. are simplifications of reality, and in this respect economic models are very different from other scientific models.



42. Just like models constructed in other areas of science, economic models

a. incorporate assumptions that contradict reality. b. incorporate all details of the real world. c. complicate reality. d. avoid the use of diagrams and equations.

ANS: A DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Economic models MSC: Interpretive

43. Which types of models are built with assumptions?

a. economic models, but not models in other disciplines such as physics and biology b. economic models as well as models in other disciplines such as physics and biology c. models that are built for teaching purposes but not for research purposes d. bad models


44. Economists build economic models by

a. generating data. b. conducting controlled experiments in a lab. c. making assumptions. d. reviewing statistical forecasts.


45. Economic models are built with

a. recommendations concerning public policies. b. facts about the legal system. c. assumptions. d. statistical forecasts.


46. In constructing models, economists

a. leave out equations, since equations and models tend to contradict one another. b. ignore the long run, since models are useful only for short-run analysis. c. make assumptions that are contrary to features of the real world. d. try to include every feature of the economy.



47. Economic models

a. are people who act out the behavior of firms and households so that economists can study this behavior.

b. are usually detailed replications of reality. c. incorporate simplifying assumptions that often contradict reality, but also help economists

better understand reality. d. are useful to researchers but not to teachers because economic models omit many details

of the real-world economy.



a. Few economic models incorporate assumptions. b. Different economic models employ different sets of assumptions. c. Good economic models attempt to mimic reality as closely as possible. d. Economic models, to be accepted, must be tested by conducting experiments.


49. Which of these statements about economic models is correct?

a. For economists, economic models provide insights about the world. b. Economic models are built with assumptions. c. Economic models are often composed of equations and diagrams. d. All of the above are correct.


50. The circular-flow diagram is an example of

a. a laboratory experiment. b. an economic model. c. a mathematical model. d. All of the above are correct.

ANS: B DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Circular-flow diagram MSC: Interpretive

51. The circular-flow diagram is a

a. visual model of the economy. b. visual model of the relationships among money, prices, and businesses. c. model that shows the effects of government on the economy. d. mathematical model of how the economy works.

ANS: A DIF: 1 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Circular-flow diagram MSC: Definitional


52. A circular-flow diagram is a model that

a. helps to explain how participants in the economy interact with one another. b. helps to explain how the economy is organized. c. incorporates all aspects of the real economy. d. Both (a) and (b) are correct.

ANS: D DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Circular-flow diagram MSC: Interpretive

53. The circular-flow diagram

a. is an economic model. b. incorporates two types of decision makers: households and firms. c. represents the flows of inputs, outputs, and dollars. d. All of the above are correct.


54. Which of the following statements about the circular-flow diagram is correct?

a. One must imagine that the economy operates without money in order to make sense of the diagram.

b. The diagram leaves out details that are not essential for understanding the economic transactions that occur between households and firms.

c. The government cannot be excluded as a decision maker in a circular-flow diagram. d. All of the above are correct.


55. In the simple circular-flow diagram, the participants in the economy are

a. firms and government. b. households and firms. c. households and government. d. households, firms, and government.

ANS: B DIF: 1 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Circular-flow diagram MSC: Definitional

56. Which two groups of decision makers are included in the simple circular-flow diagram?

a. markets and government b. households and government c. firms and government d. households and firms

ANS: D DIF: 1 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Circular-flow diagram MSC: Definitional


57. In the circular-flow diagram, firms produce

a. goods and services using factors of production. b. output using inputs. c. factors of production using goods and services. d. Both (a) and (b) are correct.


58. Factors of production are

a. the mathematical calculations firms make in determining their optimal production levels. b. social and political conditions that affect production. c. the physical relationships between economic inputs and outputs. d. inputs into the production process.

ANS: D DIF: 1 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Factors of production MSC: Definitional

59. Factors of production are

a. used to produce goods and services. b. also called output. c. abundant in most economies. d. assumed to be owned by firms in the circular-flow diagram.

ANS: A DIF: 2 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Factors of production MSC: Interpretive

60. In the circular-flow diagram, which of the following is not a factor of production?

a. labor b. land c. capital d. money

ANS: D DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Circular-flow diagram | Factors of production MSC: Interpretive

61. In the circular-flow diagram,

a. firms own the factors of production. b. the factors of production are labor, land, and capital. c. the factors of production are also called “output.” d. All of the above are correct.

ANS: B DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Circular-flow diagram | Factors of production MSC: Interpretive


62. Which of these terms are used interchangeably?

a. "goods and services" and "inputs" b. "goods and services" and "factors of production" c. "inputs" and "factors of production" d. "land, labor, and capital" and "goods and services"

ANS: C DIF: 1 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Factors of production MSC: Definitional

63. Another term for factors of production is

a. inputs. b. output. c. goods. d. services.

ANS: A DIF: 1 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Factors of production MSC: Definitional

64. In economics, capital refers to

a. the finances necessary for firms to produce their products. b. buildings and machines used in the production process. c. the money households use to purchase firms' output. d. stocks and bonds.

ANS: B DIF: 1 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Capital MSC: Definitional

65. In the simple circular-flow diagram, households

a. are the only decision makers. b. own the factors of production. c. are buyers of inputs. d. consume only some of the goods and services that firms produce.


66. In the simple circular-flow diagram,

a. households own the factors of production. b. households buy all the goods and services that firms produce. c. land, labor, and capital flow from households to firms. d. All of the above are correct.



67. In the simple circular-flow diagram, who consumes the goods and services that firms produce?

a. households only b. firms only c. both households and firms d. neither households nor firms

ANS: A DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Circular-flow diagram MSC: Interpretive

68. In the circular-flow diagram, another name for goods and services produced by firms is

a. factors of production. b. output. c. inputs. d. resources.


69. Which markets are represented in the simple circular-flow diagram?

a. markets for goods and services and markets for financial assets b. markets for factors of production and markets for financial assets c. markets for goods and services and markets for factors of production d. markets for goods and services and markets for imports and exports

ANS: C DIF: 1 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Circular-flow diagram MSC: Definitional

70. In the markets for goods and services in the circular-flow diagram,

a. households and firms are both buyers. b. households and firms are both sellers. c. households are buyers and firms are sellers. d. households are sellers and firms are buyers.

ANS: C DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Circular-flow diagram MSC: Interpretive

71. In the circular-flow diagram, in the markets for

a. goods and services, households and firms are both sellers. b. goods and services, households are buyers and firms are sellers. c. the factors of production, households are buyers and firms are sellers. d. the factors of production, households and firms are both buyers.



72. In the markets for goods and services in the circular-flow diagram,

a. households provide firms with savings for investment. b. households provide firms with labor, land, and capital. c. firms provide households with output. d. firms provide households with profit.


73. In the markets for the factors of production in the circular-flow diagram,

a. households are sellers and firms are buyers. b. households are buyers and firms are sellers. c. households and firms are both buyers. d. households and firms are both sellers.

ANS: A DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Circular-flow diagram | Factor markets MSC: Interpretive

74. In the circular-flow diagram, in the markets for

a. goods and services, households and firms are both sellers. b. goods and services, households are sellers and firms are buyers. c. the factors of production, households are sellers and firms are buyers. d. the factors of production, households and firms are both buyers.

ANS: C DIF: 1 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Circular-flow diagram | Factor markets MSC: Definitional

75. In the markets for factors of production in the circular-flow diagram,

a. households provide firms with labor, land, and capital. b. households provide firms with savings for investment. c. firms provide households with goods and services. d. firms provide households with profit.

ANS: A DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Circular-flow diagram | Factor markets MSC: Interpretive

76. Which of the following transactions does not take place in the markets for factors of production in

the circular-flow diagram? a. a landowner leases land to a farmer b. a farmer hires a teenager to help with harvest c. a retired farmer sells his combine to a new farmer d. a woman buys corn for dinner

ANS: D DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Circular-flow diagram | Factor markets MSC: Applicative


77. Which of the following transactions does not take place in the markets for the factors of production

in the circular-flow diagram? a. Kosuke provides plumbing services for a plumbing company and receives an hourly wage

from the company for his services. b. Alfonso works as a marriage counselor and his clients pay him on a per-hour basis for his

services. c. Geovany owns several shopping malls and receives rent payments from the companies

that operate those malls. d. Carlos sells advertising for a newspaper and receives a commission from the newspaper

company for each advertisement that he sells.

ANS: B DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Circular-flow diagram | Factor markets MSC: Applicative


a. firms are buyers in the markets for goods and services. b. households are sellers in the markets for the factors of production. c. firms are sellers in the markets for factors of production and in the markets for goods and

services. d. dollars that are spent on goods and services flow directly from firms to households.


79. The two loops in the circular-flow diagram represent

a. the flow of goods and the flow of services. b. the flow of dollars and the flow of financial assets. c. the flow of inputs into production processes and the flow of outputs from production

processes. d. the flows of inputs and outputs and the flow of dollars.



a. profit flows from households to firms. b. labor flows from households to firms. c. services flow from households to firms. d. All of the above are correct.




a. taxes flow from households to firms, and transfer payments flow from firms to households.

b. income payments flow from firms to households, and sales revenue flows from households to firms.

c. resources flow from firms to households, and goods and services flow from households to firms.

d. inputs and outputs flow in the same direction as the flow of dollars, from firms to households.



a. factors of production flow from government to firms. b. goods and services flow from households to firms. c. income paid to the factors of production flows from firms to households. d. spending on goods and services flows from firms to households.


83. In the circular-flow diagram, which of the following items does not flow from households to firms?

a. revenue b. land, labor, and capital c. factors of production d. profit


84. In the circular-flow diagram, which of the following items does not flow from firms to households?

a. goods b. services c. capital d. profit



85. In the circular-flow diagram, which of the following items flows from households to firms through

the markets for goods and services? a. goods and services b. dollars paid to land, labor, and capital c. dollars spent on goods and services d. wages, rent, and profit


86. In the circular-flow diagram, which of the following items flows from firms to households through

the markets for goods and services? a. goods and services b. dollars paid to land, labor, and capital c. dollars spent on goods and services d. wages, rent, and profit


87. In the circular-flow diagram, which of the following items flows from firms to households through

the markets for the factors of production? a. goods and services b. land, labor, and capital c. dollars spent on goods and services d. wages, rent, and profit


88. In the circular-flow diagram, which of the following items flows from households to firms through

the markets for the factors of production? a. goods and services b. land, labor, and capital c. dollars spent on goods and services d. wages, rent, and profit



89. In the circular-flow diagram, which of the following items represents a payment for a factor of

production? a. interest b. capital c. spending by households on goods d. spending by households on services


90. Among economic models, the circular-flow diagram is unusual in that it

a. drastically simplifies the real world. b. features more than one type of market. c. features flows of dollars. d. does not involve mathematics.

ANS: D DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Circular-flow diagram | Economic models MSC: Interpretive

Figure 2-1

91. Refer to Figure 2-1. Which arrow represents the flow of goods and services?

a. A b. B c. C d. D



92. Refer to Figure 2-1. Which arrow represents the flow of spending by households?

a. A b. B c. C d. D


93. Refer to Figure 2-1. Which arrow represents the flow of land, labor, and capital?

a. A b. B c. C d. D


94. Refer to Figure 2-1. Which arrow represents the flow of income payments?

a. A b. B c. C d. D


95. Refer to Figure 2-1. Julio buys a new pair of shoes at a shoe store. To which of the arrows does

this transaction directly contribute? a. A only b. A and B c. C only d. C and D

ANS: B DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Circular-flow diagram MSC: Applicative

96. Refer to Figure 2-1. Enid 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 only b. A and B c. C only d. C and D

ANS: D DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Circular-flow diagram MSC: Applicative


Figure 2-2

97. Refer to Figure 2-2. Boxes A and B of this circular-flow diagram represent

a. firms and households. b. households and government. c. the markets for goods and services and the markets for financial assets. d. the markets for goods and the markets for services.


98. Refer to Figure 2-2. Boxes C and D of this circular-flow diagram represent

a. households and government. b. firms and government. c. the markets for goods and services and the markets for financial assets. d. the markets for goods and services and the markets for factors of production.


99. Refer to Figure 2-2. If Box A of this circular-flow diagram represents firms, then which box

represents households? a. Box B b. Box C c. Box D d. Any one of the other boxes (B, C, or D) could represent households.



100. Refer to Figure 2-2. If households are sellers in the markets represented by Box D of this circular-

flow diagram, then a. 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.


101. Refer to Figure 2-2. If households are buyers in the markets represented by Box C of this circular-

flow diagram, then a. Box C must represent the markets for the factors of production. b. Box D must represent the markets for goods and services. c. firms are sellers in the markets represented by Box C. d. All of the above are correct.


102. Refer to Figure 2-2. If the owners of land, labor, and capital are represented by Box B of this

circular-flow diagram, then a. households are represented by Box A. b. firms are represented by Box C. c. firms are represented by Box A. d. firms are sellers in Box B.


103. Refer to Figure 2-2. If the outer loop of this circular-flow diagram represents flows of dollars, then

the inner loop includes a. flows of goods and services from households to firms. b. flows of inputs from households to firms. c. flows of rent payments paid to owners of land. d. flows of wages and salaries paid to workers.



104. 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, then a. the flow of factors of production is also part of what is represented by the inner loop. b. the flow of income paid to households is also part of what is represented by the inner loop. c. the flow of revenue to firms is also part of what is represented by the inner loop. d. households must be sellers of output.


105. Refer to Figure 2-2. Malika works as an attorney for a corporation and is paid a salary in exchange

for the legal services she performs. Jarel owns office buildings and rents his buildings to companies in exchange for rent payments. If Malika’s income is represented by a flow of dollars from Box D to Box B of this circular-flow diagram, then Jarel’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.

ANS: D DIF: 3 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Circular-flow diagram MSC: Analytical

106. Refer to Figure 2-2. Alisha regularly buys fruits and vegetables at a grocery store. Santo regularly

pays a lawn-care company to mow his lawn. If the flow of fruits and vegetables from the grocery store to Alisha is represented by an arrow from Box C to Box B of this circular-flow diagram, then the money paid by Santo to the lawn-care company is represented by an arrow a. from Box A to Box D. b. from Box B to Box C. c. from Box C to Box B. d. from Box D to Box A.

ANS: B DIF: 3 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Circular-flow diagram MSC: Analytical

107. The production possibilities frontier is a graph that shows the various combinations of output that an

economy can possibly produce given the available factors of production and a. society’s preferences. b. the available production technology. c. a fair distribution of the output. d. the available demand for the output.

ANS: B DIF: 1 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier MSC: Definitional


108. The production possibilities frontier is a graph that shows the various combinations of output that an

economy a. should produce. b. wants to produce. c. can produce. d. demands.

ANS: C DIF: 1 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier MSC: Definitional

109. When constructing a production possibilities frontier, which of the following assumptions is not

made? a. The economy produces only two goods or two types of goods. b. Firms produce goods using factors of production. c. The technology available to firms is given. d. The quantities of the factors of production that are available are increasing over the

relevant time period.

ANS: D DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier MSC: Interpretive

110. Any point on a country's production possibilities frontier represents a combination of two goods that

an economy a. will never be able to produce. b. can produce using all available resources and technology. c. can produce using some portion, but not all, of its resources and technology. d. may be able to produce in the future with more resources and/or superior technology.

ANS: B DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier MSC: Interpretive

111. Which of the following is a correct statement about production possibilities frontiers?

a. An economy can produce only on the production possibilities frontier. b. An economy can produce at any point inside or outside a production possibilities frontier. c. An economy can produce at any point on or inside the production possibilities frontier, but

not outside the frontier. d. An economy can produce at any point inside the production possibilities frontier, but not

on or outside the frontier.

ANS: C DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier MSC: Interpretive


112. Where can an economy not produce?

a. inside its production possibilities frontier b. on its production possibilities frontier c. outside its production possibilities frontier d. at the endpoints of its production possibilities frontier


113. An economic outcome is said to be efficient if the economy is

a. using all of the scarce resources it has available. b. conserving on resources, rather than using all available resources. c. getting all it can get from the scarce resources it has available. d. able to produce more than what is currently being produced without additional resources.

ANS: C DIF: 1 REF: 2-1 NAT: Analytic LOC: Efficiency and equality TOP: Efficiency MSC: Definitional

114. Production is efficient if the economy is producing at a point

a. on the production possibilities frontier. b. outside the production possibilities frontier. c. on or inside the production possibilities frontier. d. inside the production possibilities frontier.

ANS: A DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Efficiency MSC: Interpretive

115. If an economy is producing efficiently, then

a. there is no way to produce more of one good without producing less of another good. b. it is possible to produce more of both goods without increasing the quantities of inputs that

are being used. c. it is possible to produce more of one good without producing less of another good. d. it is not possible to produce more of any good at any cost.

ANS: A DIF: 2 REF: 2-1 NAT: Analytic LOC: Efficiency and equality TOP: Efficiency MSC: Interpretive

116. An economy’s production of two goods is efficient if

a. all members of society consume equal portions of the goods. b. the goods are produced using only some of society’s available resources. c. it is impossible to produce more of one good without producing less of the other. d. the opportunity cost of producing more of one good is zero.

ANS: C DIF: 2 REF: 2-1 NAT: Analytic LOC: Efficiency and equality TOP: Efficiency MSC: Interpretive


117. When an economy is operating at a point on its production possibilities frontier, then

a. consumers are content with the mix of goods and services that is being produced. b. there is no way to produce more of one good without producing less of the other. c. equal amounts of the two goods are being produced. d. All of the above are correct.


118. Efficiency is illustrated by

a. both the production possibilities frontier and the circular-flow diagram. b. neither the production possibilities frontier nor the circular-flow diagram. c. the production possibilities frontier only. d. the circular-flow diagram only.

ANS: C DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Circular-flow diagram | Efficiency MSC: Interpretive

119. Suppose a nation is currently producing at a point inside its production possibilities frontier. We

know that a. the nation is producing beyond its capacity, so inflation will occur. b. the nation is not using all available resources or is using inferior technology or both. c. the nation is producing an efficient combination of goods. d. there will be a large opportunity cost if the nation tries to increase production of any good.


120. When an economy is operating inside its production possibilities frontier, we know that

a. 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.

ANS: A DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier MSC: Interpretive


121. It is possible for an economy to increase its production of both goods if the economy

a. moves downward and to the right along its production possibilities frontier and the frontier is bowed outward.

b. moves upward and to the left along its production possibilities frontier and the frontier is bowed outward.

c. moves in either direction along its production possibilities frontier and the frontier is a straight line.

d. moves from a situation of inefficient production to a situation of efficient production.

ANS: D DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Efficiency MSC: Interpretive

122. Unemployment would cause an economy to

a. produce inside its production possibilities frontier. b. produce on its production possibilities frontier. c. produce outside its production possibilities frontier. d. experience an inward shift of its production possibilities frontier.

ANS: A DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Unemployment MSC: Interpretive

123. The production possibilities frontier provides an illustration of the principle that

a. trade can make everyone better off. b. governments can sometimes improve market outcomes. c. people face trade-offs. d. people respond to incentives.

ANS: C DIF: 1 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Trade-offs MSC: Definitional

124. The production possibilities frontier illustrates

a. the trade-off between efficiency and equality. b. the combination of output that an economy should produce. c. the combination of output that each member of society should consume. d. None of the above is correct.



125. Which of the following trade-offs does the production possibilities frontier illustrate?

a. if an economy wants to increase efficiency in production, then it must sacrifice equality in consumption

b. once an economy has reached the efficient points on its production possibilities frontier, the only way of getting more of one good is to get less of the other

c. for an economy to consume more of one good, it must stop consuming the other good entirely

d. for an economy to produce and consume goods, it must sacrifice environmental quality


126. Which of the following concepts cannot be illustrated by the production possibilities frontier?

a. efficiency b. opportunity cost c. equality d. trade-offs


127. The opportunity cost of obtaining more of one good is shown on the production possibilities frontier

as the a. amount of the other good that must be given up. b. market price of the additional amount produced. c. amount of resources that must be devoted to its production. d. number of dollars that must be spent to produce it.

ANS: A DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Opportunity cost MSC: Interpretive

128. The bowed shape of the production possibilities frontier can be explained by the fact that

a. all resources are scarce. b. economic growth is always occurring. c. the opportunity cost of one good in terms of the other depends on how much of each good

the economy is producing. d. the only way to get more of one good is to get less of the other.

ANS: C DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Opportunity cost MSC: Interpretive


129. When a production possibilities frontier is bowed outward, the opportunity cost of producing an

additional unit of a good a. increases as more of the good is produced. b. decreases as more of the good is produced. c. does not change as more of the good is produced. d. may increase, decrease, or not change as more of the good is produced.


130. If a production possibilities frontier is bowed outward, then the opportunity cost of producing more

of the first good is highest when a. the economy is producing much of the first good and little of the second good. b. the economy is producing equal amounts of the first and second goods. c. the economy is producing little of the first good and much of the second good. d. None of the above is correct because the opportunity cost of producing more of the first

good is constant.


131. Production possibilities frontiers are usually bowed outward. This is because

a. the more resources a society uses to produce one good, the fewer resources it has available to produce another good.

b. it reflects the fact that the opportunity cost of producing a good decreases as more and more of that good is produced.

c. of the effects of technological change. d. resources are specialized; that is, some are better at producing particular goods rather than

other goods.


132. Economists believe that production possibilities frontiers

a. never have a bowed shape. b. rarely have a bowed shape. c. often have a bowed shape. d. always have a bowed shape.

ANS: C DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Economists MSC: Interpretive


133. The following table contains some production possibilities for an economy for a given month.

Sweaters Gloves

4 300

6 ?

8 100

If the production possibilities frontier is bowed outward, then “?” could be

a. 100. b. 150. c. 200. d. 250.

ANS: D DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier MSC: Applicative

134. The following table contains some production possibilities for an economy for a given year:

Cars Newspapers

10 400

12 360

14 ?

If the production possibilities frontier is bowed outward, then "?" could be

a. 340. b. 330. c. 320. d. 310.


135. A production possibilities frontier can shift outward if

a. government increases the amount of money in the economy. b. there is a technological improvement. c. resources are shifted from the production of one good to the production of the other good. d. the economy abandons inefficient production methods in favor of efficient production

methods.



136. A production possibilities frontier shifts outward when

a. the economy experiences economic growth. b. the desires of the economy’s citizens change. c. at least one of the basic principles of economics is violated. d. opportunity costs are lessened.

ANS: A DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Economic growth MSC: Interpretive

137. In a certain economy, peanuts and books are produced, and the economy currently operates on its

production possibilities frontier. Which of the following events would allow the economy to produce more peanuts and more books, relative to the quantities of those goods that are being produced now? a. Unemployed labor is put to work producing peanuts and books. b. The economy puts its idle capital to work producing peanuts and books. c. The economy experiences economic growth. d. All of the above are correct.

ANS: C DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Economic growth MSC: Applicative

138. In a certain economy, brooms and radios are produced, and the economy currently operates on its

production possibilities frontier. Which of the following events would allow the economy to produce more brooms and more radios, relative to the quantities of those goods that are being produced now? a. The economy experiences economic growth. b. There is a technological advance in the broom industry, but the radio industry experiences

no such advance. c. There is a technological advance in the radio industry, but the broom industry experiences

no such advance. d. All of the above are correct.

ANS: D DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Economic growth MSC: Applicative

139. The country of Econoland produces two goods, textbooks and widgets. Last year, it produced 200

textbooks and 500 widgets. This year, it produced 250 textbooks and 600 widgets. Given no other information, which of the following events could not explain this change? a. Econoland experienced a reduction in unemployment. b. Econoland experienced an improvement in widget-making technology. c. Econoland acquired more resources. d. Any of these events could, in fact, explain the change.



140. Suppose an economy produces two goods, food and machines. This economy always operates on its

production possibilities frontier. Last year, it produced 50 units of food and 30 machines. This year, it is producing 55 units of food and 33 machines. Which of the following events could not explain the increase in output? a. a reduction in unemployment b. an increase in available labor c. an improvement in technology d. Any of these events could explain the increase in output.

ANS: A DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier MSC: Applicative

141. Suppose an economy produces two goods, food and machines. This economy always operates on its

production possibilities frontier. Last year, it produced 50 units of food and 30 machines. This year it experienced a technological advance in its machine-making industry. As a result, this year the society wants to produce 55 units of food and 30 machines. Which of the following statements is correct? a. Because the technological advance occurred in the machine-making industry, it will not be

possible to increase food production without reducing machine production below 30. b. Because the technological advance occurred in the machine-making industry, increases in

output can only occur in the machine industry. c. In order to increase food production in these circumstances without reducing machine

production, the economy must reduce inefficiencies. d. The technological advance reduced the amount of resources needed to produce 30

machines, so these resources could be used to produce more food.

ANS: D DIF: 3 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier MSC: Analytical

142. A certain production possibilities frontier shows production possibilities for two goods: wheat and

shirts. Which of the following concepts cannot be illustrated by this model? a. the flow of dollars between sellers of wheat and shirts and buyers of wheat and shirts b. the tradeoff between production of wheat and production of shirts c. the opportunity cost of shirts in terms of wheat d. the effect of economic growth on production possibilities involving wheat and shirts


143. The production possibilities frontier is used to illustrate some basic economic ideas, including

a. scarcity. b. opportunity cost. c. economic growth. d. All of the above are correct.

ANS: D DIF: 1 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier MSC: Definitional


Table 2-1

Production Possibilities for Toyland

Dolls Fire Trucks

400 0

300 200

200 350

100 450

0 500

144. Refer to Table 2-1. What is the opportunity cost to Toyland of increasing the production of dolls

from 200 to 300? a. 100 fire trucks b. 150 fire trucks c. 200 fire trucks d. 350 fire trucks

ANS: B DIF: 2 REF: 2-1 NAT: Analytic LOC: Scarcity, trade-offs, and opportunity cost TOP: Opportunity cost MSC: Interpretive

145. Refer to Table 2-1. Which of the following statements is correct?

a. The opportunity cost of an additional 100 dolls is constant at 50 fire trucks. b. The opportunity cost of an additional 100 dolls is constant at 100 fire trucks. c. Toyland’s production possibilities frontier is a straight, downward-sloping line. d. The opportunity cost of an additional 100 dolls increases as more dolls are produced.

ANS: D DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Opportunity cost MSC: Applicative


Table 2-2

Production Possibilities for Batterland

Pancakes Waffles

600 0

450 150

300 250

150 325

0 375

146. Refer to Table 2-2. What is the opportunity cost to Batterland of increasing the production of

pancakes from 150 to 300? a. 75 waffles b. 150 waffles c. 250 waffles d. 325 waffles

ANS: A DIF: 2 REF: 2-1 NAT: Analytic LOC: Scarcity, trade-offs, and opportunity cost TOP: Opportunity cost MSC: Interpretive

Figure 2-3

J

K

L

M

N

tubas

tractors

147. Refer to Figure 2-3. At which point is this economy producing its maximum possible quantity of

tubas? a. J b. L c. M d. N



148. Refer to Figure 2-3. This economy has the ability to produce at which point(s)?

a. J, K, M, N b. K, M, N c. K, N d. M

ANS: B DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier MSC: Applicative

149. Refer to Figure 2-3. This economy cannot produce at which point(s)?

a. J b. J, L c. J, L, M d. L


150. Refer to Figure 2-3. Efficient production is represented by which point(s)?

a. J, K, N b. K, M, N c. K, N d. L, M

ANS: C DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Efficiency MSC: Applicative

151. Refer to Figure 2-3. Inefficient production is represented by which point(s)?

a. J, L b. J, L, M c. K, N d. M

ANS: D DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Efficiency MSC: Applicative

152. Refer to Figure 2-3. Unemployment could cause this economy to produce at which point(s)?

a. J, L b. J, L, M c. K, N d. M

ANS: D DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Unemployment MSC: Applicative


Figure 2-4

brushes

A

B

C

D

10 20 30 40 50 60 70 80 tooth-

5

10

15

20

25

30

35

40

45

50toasters

153. Refer to Figure 2-4. If this economy devotes all of its resources to the production of toothbrushes,

then it will produce a. 0 toothbrushes and 40 toasters. b. 35 toothbrushes and 20 toasters. c. 70 toothbrushes and 0 toasters. d. 70 toothbrushes and 40 toasters.

ANS: C DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier MSC: Applicative

154. Refer to Figure 2-4. It is possible for this economy to produce

a. 40 toothbrushes and 20 toasters. b. 50 toothbrushes and 30 toasters. c. 70 toothbrushes and 40 toasters. d. All of the above.


155. Refer to Figure 2-4. It is not possible for this economy to produce at point

a. A. b. B. c. C. d. D.



156. Refer to Figure 2-4. This economy cannot currently produce 30 toothbrushes and 45 toasters

because a. some of its resources are unemployed. b. inefficiencies exist in this economy’s production process. c. given its current technology, it does not have the resources to produce that level of output. d. All of the above are correct.


157. Refer to Figure 2-4. Suppose this economy is producing at point D. Which of the following

statements would best explain this situation? a. The economy lacks the resources to produce at a more desirable point. b. The economy’s available technology prevents it from producing at a more desirable point. c. There is widespread unemployment in the economy. d. Any of the above statements would be a legitimate explanation for this situation.

ANS: C DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Unemployment MSC: Applicative


a. A, B b. A, B, C c. A, B, D d. C

ANS: A DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Efficiency MSC: Applicative


a. A, B b. C c. C, D d. D


160. Refer to Figure 2-4. The opportunity cost of this economy moving from point A to point B is

a. 0 toasters. b. 10 toasters. c. 10 toothbrushes. d. 20 toasters.

ANS: B DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Opportunity cost MSC: Applicative


161. Refer to Figure 2-4. The opportunity cost of obtaining 20 additional toasters by moving from point

D to point C is a. 0 toothbrushes. b. 10 toothbrushes. c. 50 toothbrushes. d. None of the above; the economy cannot move from point D to point C.


162. Refer to Figure 2-4. The opportunity cost of obtaining 10 additional toasters by moving from point

D to point A is a. 0 toothbrushes. b. 10 toothbrushes. c. 50 toothbrushes. d. None of the above; the economy cannot move from point D to point A.

ANS: A DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Opportunity cost MSC: Applicative

Figure 2-5

A

B

C

D

baseballs

F

30 60 90 120 150 180 210 240 270 300 330 bananas

25

50

75

100

125

150

175

200

225

163. Refer to Figure 2-5. If this economy devotes all of its resources to the production of bananas, then

it will produce a. 0 bananas and 200 baseballs. b. 180 bananas and 125 baseballs. c. 300 bananas and 0 baseballs. d. 300 bananas and 200 baseballs.



164. Refer to Figure 2-5. If this economy devotes one-half of its available resources to the production of

baseballs and the other half to the production of bananas, it could produce a. 150 bananas and 100 baseballs. b. 150 bananas and 150 baseballs. c. 300 bananas and 200 baseballs. d. We would have to know the details of this economy’s technology in order to determine

this.


165. Refer to Figure 2-5. A movement from point C to point D could be caused by

a. unemployment. b. a decrease in society's preference for bananas. c. fewer resources available for production of bananas. d. All of the above are correct.

ANS: A DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Unemployment MSC: Applicative

166. Refer to Figure 2-5. If this economy moves from point A to point B, then which of the following

statements is correct? a. This economy has moved from a point of inefficient production to a point of efficient

production. b. This economy has experienced economic growth. c. This economy has experienced an increase in employment. d. None of the above is correct.


167. Refer to Figure 2-5. The opportunity cost of this economy moving from point A to point C is

a. 75 baseballs. b. 125 baseballs. c. 125 baseballs and 240 bananas. d. 240 bananas.



168. Refer to Figure 2-5. The opportunity cost of this economy moving from point D to point B is

a. zero. b. 50 baseballs. c. 60 bananas. d. 50 baseballs and 60 bananas.


Figure 2-6

A

B

C

D

FG

2 4 6 8 10 12 14 16 bathtubs

5

10

15

20

25

30

35

40

45

barrels

169. Refer to Figure 2-6. If this economy devotes all of its resources to the production of bathtubs, then

it will produce a. 0 bathtubs and 35 barrels. b. 10 bathtubs and 25 barrels. c. 16 bathtubs and 0 barrels. d. 16 bathtubs and 35 barrels.


170. Refer to Figure 2-6. This economy has the ability to produce at which point(s)?

a. A, B b. A, B, D c. A, B, C, F, G d. C, F, G



171. Refer to Figure 2-6. This economy cannot produce at which point(s)?

a. A, B, D b. C, D, F, G c. C, F, G d. D



a. A, B b. A, B, C, F, G c. C, F, G d. D



a. A, B b. C, D, F, G c. C, F, G d. D


174. Refer to Figure 2-6. Unemployment could cause this economy to produce at which point(s)?

a. A, B b. C, D, F, G c. C, F, G d. D

ANS: C DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Unemployment MSC: Applicative

175. Refer to Figure 2-6. If this economy moved from point C to point F, then

a. it still would not be producing efficiently. b. there would be no gain in either bathtubs or barrels. c. it would be producing more barrels and more bathtubs than at point C. d. It is not possible for this economy to move from point C to point F without additional

resources.



176. Refer to Figure 2-6. What is the opportunity cost of moving from point A to point B?

a. zero b. 6 bathtubs c. 6 bathtubs and 15 barrels d. 15 barrels


Figure 2-7

A

B

C

D

steaks

400 800 1200 1600 books

400

800

1200

1600

2000

2400

2800

ribeye

177. Refer to Figure 2-7. Point B represents an outcome in which

a. production is inefficient. b. some of the economy’s resources are unemployed. c. the economy is using all of its resources to produce books. d. the economy is using all of its ribeye steaks to produce books.


178. Refer to Figure 2-7. Which point on the graph best represents the fact that, because resources are

scarce, not every conceivable outcome is feasible? a. point A b. point B c. point C d. point D




a. A b. A, B c. A, B, C d. A, B, D

ANS: B DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Efficiency MSC: Applicative


a. B, D b. C c. C, D d. D


181. Refer to Figure 2-7. In order to reach point C, the economy would have to

a. acquire more resources or experience a technological advance. b. begin using its available resources more efficiently than it is currently using them. c. shift resources away from the production of ribeye steaks and toward production of books. d. None of the above are correct; the economy will never be able to reach point C.


182. Refer to Figure 2-7. For this economy, as more and more books are produced, the opportunity cost

of an additional book produced, in terms of ribeye steaks, a. remains constant. b. increases. c. decreases. d. This cannot be determined from the graph.



Figure 2-8

Panel (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

7

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

7

183. Refer to Figure 2-8, Panel (a). Production at point K is

a. possible and efficient. b. possible but inefficient. c. impossible but efficient. d. impossible and inefficient.

ANS: B DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Efficiency MSC: Applicative

184. Refer to Figure 2-8, Panel (a). Production is

a. possible at points J, K, L, and M, but efficient only at points J, L, and M. b. possible at points J, K, L, and M, but efficient only at point K. c. possible at points J, L, M, and N, but efficient only at points J, L, and M. d. possible at points J, L, M, and N, but efficient only at point N.



185. Refer to Figure 2-8, Panel (a). The movement from point M to point K could be caused by

a. an advance in production technology. b. an improvement in efficiency. c. economic growth. d. unemployment.

ANS: D DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Unemployment MSC: Applicative

186. Refer to Figure 2-8, Panel (a). The opportunity cost of moving from point J to point L is

a. 2 donuts. b. 2 donuts and 2 cups of coffee. c. 2 cups of coffee. d. 6 cups of coffee.

ANS: C DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Opportunity cost MSC: Applicative

187. Refer to Figure 2-8, Panel (a). The opportunity cost of moving from point M to point L is

a. 2 donuts. b. 2 donuts and 4 cups of coffee. c. 4 donuts. d. 4 cups of coffee.


188. Refer to Figure 2-8, Panel (a). The opportunity cost of moving from point K to point L is

a. 0 cups of coffee. b. 1 donut. c. 2 donuts. d. 4 cups of coffee.


189. Refer to Figure 2-8, Panel (a). The opportunity cost of one cup of coffee is highest when the

economy produces a. 0 cups of coffee. b. 2 cups of coffee. c. 4 cups of coffee. d. 6 cups of coffee.

ANS: D DIF: 3 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Opportunity cost MSC: Analytical


190. Refer to Figure 2-8, Panel (a). In order to gain 2 donuts by moving from point L to point M,

society must sacrifice a. efficiency. b. employment. c. 4 cups of coffee. d. More than one of the above is correct.

ANS: C DIF: 3 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Opportunity cost MSC: Analytical

191. 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 by a. unemployment. b. an improvement in donut production technology. c. an improvement in coffee production technology. d. an improvement in both donut and coffee production technology.


192. Refer to Figure 2-8, Panel (a) and Panel (b). Which of the following is not a result of the shift of

the economy’s production possibilities frontier from Panel (a) to Panel (b)? a. the tradeoff between the production of donuts and coffee changes b. the opportunity cost of a cup of coffee is higher at all levels of coffee production c. production of 4 donuts and 2 cups of coffee becomes possible d. production of 1 donut and 4 cups of coffee becomes efficient



Figure 2-9

Panel (a) Panel (b)

Q

R

S

T

U

televisions

1 2 3 4 5 6 radios

1

2

3

4

5

6

7

8

9

10

11

12

13

televisions

1 2 3 4 5 6 7 8 9 10 radios

1

2

3

4

5

6

7

8

9

10

11

12

13

193. Refer to Figure 2-9, Panel (a). Production at point R is

a. impossible and inefficient. b. impossible but efficient. c. possible but inefficient. d. possible and efficient.


194. Refer to Figure 2-9, Panel (a). Production is

a. possible at points Q, R, S, and T, but efficient only at points Q, S, and T. b. possible at points Q, R, S, and T, but efficient only at point R. c. possible at points Q, S, T, and U, but efficient only at points Q, S, and T. d. possible at points Q, S, T, and U, but efficient only at point U.



195. Refer to Figure 2-9, Panel (a). The movement from point S to point R could be caused by

a. economic growth. b. unemployment. c. an improvement in efficiency. d. an advance in production technology.

ANS: B DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Unemployment MSC: Applicative

196. Refer to Figure 2-9, Panel (a). The opportunity cost of one television is highest when the economy

produces a. 0 televisions. b. 6 televisions. c. 10 televisions. d. 12 televisions.


197. Refer to Figure 2-9, Panel (a). In order to gain 2 radios by moving from point S to point T, society

must sacrifice a. 6 televisions. b. employment. c. efficiency. d. More than one of the above is correct.

ANS: A DIF: 3 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Opportunity cost MSC: Analytical

198. Refer to Figure 2-9, Panel (a) and Panel (b). A shift of the economy’s production possibilities

frontier from Panel (a) to Panel (b) could be caused by a. unemployment. b. an improvement in television production technology. c. an improvement in radio production technology. d. an improvement in both television and radio production technology.



199. Refer to Figure 2-9, Panel (a) and Panel (b). Which of the following is not a result of the shift of

the economy’s production possibilities frontier from Panel (a) to Panel (b)? a. the tradeoff between the production of radios and televisions changes b. production of 2 radios and 5 televisions becomes efficient c. production of 6 radios and 7 televisions becomes possible d. the opportunity cost of a television is higher at all levels of television production

ANS: B DIF: 3 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier MSC: Analytical

Figure 2-10

batteries

A

B

bagels

200. 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 batteries. b. The economy experienced a technological advance in the production of batteries. c. More capital became available in the economy. d. More labor became available in the economy.


201. Refer to Figure 2-10. The shift of the production possibilities frontier from A to B illustrates

a. simultaneous technological advances in the battery and bagel industries. b. a reallocation of resources away from the production of bagels and toward the production

of batteries. c. economic growth. d. All of the above are correct.

ANS: C DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Economic growth MSC: Applicative


Figure 2-11

goods

goods

A B

consumer

capital

202. Refer to Figure 2-11. Which of the following would most likely have caused the production

possibilities frontier to shift outward from A to B? a. a decrease in unemployment b. a technological advance in the consumer goods industries c. a general technological advance d. an increase in the availability of capital-producing resources


203. Refer to Figure 2-11. The shift of the production possibilities frontier from A to B can best be

described as a. a downturn in the economy. b. economic growth. c. an enhancement of equality. d. an improvement in the allocation of resources.

ANS: B DIF: 2 REF: 2-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Economic growth MSC: Applicative

204. The field of economics is traditionally divided into two broad subfields,

a. national economics and international economics. b. consumer economics and producer economics. c. private sector economics and public sector economics. d. microeconomics and macroeconomics.

ANS: D DIF: 1 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Microeconomics | Macroeconomics MSC: Definitional


205. Microeconomics is the study of

a. how money affects the economy. b. how individual households and firms make decisions. c. how government affects the economy. d. how the economy as a whole works.

ANS: B DIF: 1 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Microeconomics | Macroeconomics MSC: Definitional

206. Macroeconomics is the study of

a. individual decision makers. b. international trade. c. economy-wide phenomena. d. markets for large products.

ANS: C DIF: 1 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Microeconomics | Macroeconomics MSC: Definitional

207. A microeconomist — as opposed to a macroeconomist — might study

a. the effect of borrowing by the federal government on the inflation rate. b. the effect of rising oil prices on employment in the airline industry. c. changes in the nation’s unemployment rate over short periods of time. d. alternative policies to promote higher living standards throughout the nation.

ANS: B DIF: 2 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Microeconomics MSC: Applicative

208. Which of the following areas of study typifies microeconomics as opposed to macroeconomics?

a. the impact of minimum-wage laws on employment in the fast food industry b. the effect of changes in household saving rates on the growth rate of national income c. the impact of faster money growth on the rate of inflation d. a comparison of alternative tax policies and their respective impacts on the rate of the

nation’s economic growth

ANS: A DIF: 2 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Microeconomics MSC: Applicative

209. Which of the following would likely be studied by a microeconomist rather than a macroeconomist?

a. the effect of foreign direct investment on economic growth b. the effect of a sales tax on the cigarette industry c. the effect of an investment tax credit on the economy’s capital stock d. the effect of a war on government spending

ANS: B DIF: 2 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Microeconomics MSC: Applicative


210. A macroeconomist — as opposed to a microeconomist — might study

a. the effect of agricultural price support programs on the cotton industry b. the effect on U.S. steel producers of an import quota imposed on foreign steel c. the effect of an increasing inflation rate on national living standards d. the effect of an increase in the price of imported coffee beans on the U.S. coffee industry

ANS: C DIF: 2 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Macroeconomics MSC: Applicative

211. Which of the following areas of study typifies macroeconomics as opposed to microeconomics?

a. the effects of rent control on the availability of housing in New York City b. the economic impact of tornadoes on cities and towns in Oklahoma c. how tariffs on shoes affects the shoe industry d. the effect on the economy of changes in the nation’s unemployment rate

ANS: D DIF: 2 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Macroeconomics MSC: Applicative

212. Which of the following would likely be studied by a macroeconomist rather than a microeconomist?

a. the effect of an increase in the cigarette tax on smokers b. the effect of foreign competition on the domestic textile industry c. the effect of a war on automobile prices d. the effect of an increase in the minimum wage on an economy’s overall rate of

unemployment

ANS: D DIF: 2 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Macroeconomics MSC: Applicative

213. Which of the following statements best captures the relationship between microeconomics and

macroeconomics? a. For the most part, microeconomists are unconcerned with macroeconomics, and

macroeconomists are unconcerned with microeconomics. b. Microeconomists study markets for small products, whereas macroeconomists study

markets for large products. c. Microeconomics and macroeconomics are distinct from one another, yet they are closely

related. d. Microeconomics is oriented toward policy studies, whereas macroeconomics is oriented

toward theoretical studies.

ANS: C DIF: 2 REF: 2-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Microeconomics | Macroeconomics MSC: Interpretive


Sec02 - Thinking Like an Economist - The Economist as Policy Adviser

MULTIPLE CHOICE

1. When economists are trying to explain the world, they are

a. scientists. b. policy advisers. c. in the realm of microeconomics rather than macroeconomics. d. in the realm of normative economics rather than positive economics.

ANS: A DIF: 1 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Economists MSC: Definitional

2. When economists are trying to help improve the world, they are

a. in the realm of positive economics rather than normative economics. b. in the realm of macroeconomics rather than microeconomics. c. scientists. d. policy advisers.

ANS: D DIF: 1 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Economists MSC: Definitional

3. Which of the following statements is correct about the roles of economists?

a. Economists are best viewed as policy advisers. b. Economists are best viewed as scientists. c. In trying to explain the world, economists are policy advisers; in trying to improve the

world, they are scientists. d. In trying to explain the world, economists are scientists; in trying to improve the world,

they are policy advisers.


4. For economists, statements about the world are of two types:

a. assumptions and theories. b. true statements and false statements. c. specific statements and general statements. d. positive statements and normative statements.

ANS: D DIF: 2 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Economists | Positive statements | Normative statements MSC: Interpretive


5. Normative statements are

a. prescriptive, whereas positive statements are descriptive. b. descriptive, whereas positive statements are prescriptive. c. backward-looking, whereas positive statements are forward-looking. d. forward-looking, whereas positive statements are backward-looking.

ANS: A DIF: 1 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Positive statements | Normative statements MSC: Definitional

6. Positive statements are

a. prescriptive. b. claims about how the world should be. c. claims about how the world is. d. made by economists speaking as policy advisers.

ANS: C DIF: 1 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Positive statements MSC: Definitional

7. Normative statements are

a. descriptive. b. claims about how the world should be. c. claims about how the world is. d. made by economists speaking as scientists.

ANS: B DIF: 1 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Normative statements MSC: Definitional

8. Positive statements are not

a. descriptive. b. prescriptive. c. claims about how the world is. d. made by economists speaking as scientists.

ANS: B DIF: 2 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Positive statements MSC: Interpretive

9. Normative statements are not

a. descriptive. b. prescriptive. c. claims about how the world should be. d. made by economists speaking as policy advisers.

ANS: A DIF: 2 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Normative statements MSC: Interpretive


10. One way to characterize the difference between positive statements and normative statements is as

follows: a. Positive statements tend to reflect optimism about the economy and its future, whereas

normative statements tend to reflect pessimism about the economy and its future. b. Positive statements offer descriptions of the way things are, whereas normative statements

offer opinions on how things ought to be. c. Positive statements involve advice on policy matters, whereas normative statements are

supported by scientific theory and observation. d. Economists outside of government tend to make normative statements, whereas

government-employed economists tend to make positive statements.

ANS: B DIF: 2 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Positive statements | Normative statements MSC: Interpretive

11. Economists view positive statements as

a. affirmative, justifying existing economic policy. b. optimistic, putting the best possible interpretation on things. c. descriptive, making a claim about how the world is. d. prescriptive, making a claim about how the world ought to be.

ANS: C DIF: 2 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Economists | Positive statements MSC: Interpretive

12. Economists view normative statements as

a. prescriptive, making a claim about how the world ought to be. b. descriptive, making a claim about how the world is. c. statements about the normal condition of the world. d. pessimistic, putting the worst possible interpretation on things.

ANS: A DIF: 2 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Economists | Normative statements MSC: Interpretive

13. Economists speaking like scientists make

a. normative statements. b. prescriptive statements. c. claims about how the world is. d. claims about how the world should be.

ANS: C DIF: 2 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Economists | Positive statements MSC: Interpretive


14. Economists speaking like policy advisers make

a. positive statements. b. descriptive statements. c. claims about how the world is. d. claims about how the world should be.

ANS: D DIF: 2 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Economists | Normative statements MSC: Interpretive

15. Economists speaking like scientists make

a. positive statements. b. prescriptive statements. c. claims about how the world should be. d. More than one of the above is correct.

ANS: A DIF: 2 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Economists | Positive statements MSC: Interpretive

16. Economists speaking like policy advisers make

a. claims about how the world is. b. descriptive statements. c. normative statements. d. More than one of the above is correct.

ANS: C DIF: 2 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Economists | Normative statements MSC: Interpretive

17. When economists make positive statements, they are

a. speaking as scientists. b. speaking as policy advisers. c. making claims about how the world should be. d. revealing that they are very conservative in their views of how the world works.


18. When economists make normative statements, they are

a. speaking as scientists. b. speaking as policy advisers. c. making claims about how the world is. d. revealing that they are very liberal in their views of how the world works.

ANS: B DIF: 2 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Economists | Normative statements MSC: Interpretive


19. When economists make

a. positive statements, they are speaking not as policy advisers but as scientists. b. positive statements, they are speaking not as scientists but as forecasters. c. normative statements, they are speaking not as scientists but as policy advisers. d. normative statements, they are speaking not as policy advisers but as model-builders.


20. When economists make

a. positive statements, they are speaking not as scientists but as policy advisers. b. positive statements, they are speaking not as scientists but as forecasters. c. normative statements, they are speaking not as scientists but as policy advisers. d. normative statements, they are speaking not as policy advisers but as model-builders.


21. You know an economist has crossed the line from policy adviser to scientist when he or she

a. claims that the problem at hand is widely misunderstood by non-economists. b. makes positive statements. c. talks about values. d. makes a claim about how the world should be.

ANS: B DIF: 2 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Economists | Positive statements MSC: Interpretive

22. You know an economist has crossed the line from scientist to policy adviser when he or she

a. claims that the problem at hand is widely misunderstood by non-economists. b. talks about the evidence. c. makes normative statements. d. makes a claim about how the world is.


23. A positive economic statement such as “Pollution taxes decrease the quantity of pollution generated

by firms” a. would likely be made by an economist acting as a policy advisor. b. would require values and data in order to be evaluated. c. would require data but not values in order to be evaluated. d. could not be evaluated by economists acting as scientists.

ANS: C DIF: 2 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Positive statements MSC: Interpretive


24. A normative economic statement such as “The minimum wage should be abolished”

a. would likely be made by an economist acting as a scientist. b. would require values and data in order to be evaluated. c. would require data but not values in order to be evaluated. d. could not be evaluated by economists acting as policy advisers.

ANS: B DIF: 2 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Normative statements MSC: Interpretive

25. In principle, we can

a. ignore positive statements when choosing among various public policy alternatives. b. ignore normative statements when choosing among various public policy alternatives. c. confirm or refute positive statements by examining evidence. d. confirm or refute normative statements by examining evidence.

ANS: C DIF: 2 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Positive statements MSC: Interpretive


a. Evaluating statements about how the world should be involves values as well as facts. b. Positive statements can, in principle, be confirmed or refuted by examining evidence. c. Normative statements can be judged using data alone. d. Deciding what is good or bad policy is not just a matter of science.

ANS: C DIF: 2 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Normative statements MSC: Interpretive

27. When an economist evaluates a positive statement, he or she is primarily

a. examining evidence. b. evaluating values as well as facts. c. acting as a policy adviser. d. concerned with making a sound decision on how the world ought to be.


28. Normative conclusions

a. come from positive analysis alone. b. are based on ignorance of positive analysis. c. involve value judgments. d. reflect the economist’s role as scientist.

ANS: C DIF: 2 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Normative statements MSC: Interpretive


29. Which of the following is an example of a positive, as opposed to normative, statement?

a. Inflation is more harmful to the economy than unemployment is. b. If welfare payments increase, the world will be a better place. c. Prices rise when the government prints too much money. d. When public policies are evaluated, the benefits to the economy of improved equality

should be considered more important than the costs of reduced efficiency.

ANS: C DIF: 2 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Positive statements MSC: Applicative

30. Which of the following is an example of a positive, as opposed to normative, statement?

a. Income tax rates should not have been cut as they were a few years ago. b. The quantity of money has grown too slowly in recent years. c. When the quantity of money grows rapidly, inflation is a predictable consequence. d. All of the above are positive statements.

ANS: C DIF: 2 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Positive statements MSC: Applicative

31. “Prices rise when the quantity of money rises rapidly” is an example of a

a. negative economic statement. b. positive economic statement. c. normative economic statement. d. statement that contradicts one of the basic principles of economics.

ANS: B DIF: 2 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Positive statements MSC: Applicative

32. Which of the following is not an example of a positive, as opposed to normative, statement?

a. Higher gasoline prices will reduce gasoline consumption. b. Equality is more important than efficiency. c. Trade restrictions lower our standard of living. d. If a nation wants to avoid inflation, it will restrict the growth rate of the quantity of money.

ANS: B DIF: 2 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Positive statements | Normative statements MSC: Applicative

33. Which of the following is an example of a normative, as opposed to positive, statement?

a. Universal health care would be good for U.S. citizens. b. An increase in the cigarette tax would cause a decrease in the number of smokers. c. A decrease in the minimum wage would decrease unemployment. d. A law requiring the federal government to balance its budget would increase economic

growth.

ANS: A DIF: 2 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Normative statements MSC: Applicative



a. Gasoline prices ought to be lower than they are now. b. The federal government should raise taxes on wealthy people. c. The social security system is a good system and it deserves to be preserved as it is. d. All of the above are normative statements.

ANS: D DIF: 2 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Normative statements MSC: Applicative


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

ANS: B DIF: 2 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Normative statements MSC: Applicative


a. The price of gasoline came down sharply during the second half of 2006. b. If the government were to set a maximum legal price on gasoline, then there would be a

shortage of gasoline. c. Income taxes should be reduced. d. The federal government obtains much of its revenue from income taxes.

ANS: C DIF: 2 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Normative statements MSC: Applicative

37. The Council of Economic Advisers

a. was created in 1776 and consists of three members and a staff of several dozen economists.

b. was created in 1776 and consists of thirty members and a staff of a dozen economists. c. was created in 1946 and consists of three members and a staff of several dozen

economists. d. was created in 1946 and consists of thirty members and a staff of a dozen economists.

ANS: C DIF: 2 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Council of Economic Advisers MSC: Interpretive

38. The Council of Economic Advisers

a. was created in 1946. b. advises the president of the United States on economic policy matters. c. writes the annual Economic Report of the President. d. All of the above are correct.

ANS: D DIF: 2 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Council of Economic Advisers MSC: Interpretive


39. Duties of the Council of Economic Advisers include

a. advising the president and writing the annual Economic Report of the President. b. implementing the president’s tax policies. c. tracking the behavior of the nation’s money supply. d. All of the above are correct.

ANS: A DIF: 2 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Council of Economic Advisers MSC: Interpretive

40. In addition to advising the president, one duty of the Council of Economic Advisors is to

a. prepare the federal budget. b. write government regulations. c. advise Congress on economic matters. d. write the annual Economic Report of the President.

ANS: D DIF: 1 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Council of Economic Advisers MSC: Definitional

41. Economists at the Department of the Treasury

a. design U.S. currency and coins. b. provide Congress with the annual budget. c. enforce the U.S. antitrust laws. d. provide advice on tax policy to the President.


42. The president of the United States receives tax policy advice from economists in the

a. Federal Reserve. b. Department of Justice. c. Department of the Treasury. d. Congressional Budget Office.

ANS: C DIF: 1 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Economists MSC: Definitional

43. The design of tax policy is one of the responsibilities of economists who work at the

a. Council of Economic Advisers. b. Federal Reserve. c. Department of the Treasury. d. Congressional Budget Office.



44. A duty of economists at the Department of Labor is to

a. analyze data on workers. b. schedule federal holidays. c. enforce the nation's antitrust laws. d. All of the above are correct.


45. Economists at the Department of Justice

a. track the behavior of the nation’s money supply. b. advise Congress on economic matters. c. help enforce the nation’s antitrust laws. d. prepare the federal budget.


46. The nation's antitrust laws are enforced by economists at the Department of

a. Labor. b. Health and Human Services. c. Justice. d. Treasury.


47. Some, but not all, government economists are employed within the administrative branch of

government. Which of the following government agencies employs economists outside of the administrative branch? a. the Department of Labor b. the Department of the Treasury c. the Congressional Budget Office d. the Council of Economic Advisers


48. Economists who are primarily responsible for advising Congress on economic matters work in

which agency? a. the Federal Reserve b. the Congressional Budget Office c. the Department of the Treasury d. the Department of Commerce

ANS: B DIF: 1 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Economists MSC: Definitional


49. Congress relies on economists at the Congressional Budget Office to

a. enforce the nation's antitrust laws. b. set the nation’s monetary policy. c. provide evidence that incumbent members of Congress are performing well in their jobs. d. provide independent evaluations of policy proposals.


50. The Federal Reserve

a. designs tax policy. b. enforces the nation's antitrust laws. c. sets the nation's monetary policy. d. analyzes data on workers.

ANS: C DIF: 1 REF: 2-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Federal Reserve MSC: Definitional

51. John Maynard Keynes believed the ideas of economists to be

a. generally incorrect. b. powerful. c. academic and without practical application. d. rantings of madmen.


Sec03 - Thinking Like an Economist - Why Economists Disagree

MULTIPLE CHOICE

1. “If all economists were laid end to end, they would not reach a conclusion.” Who made this

whimsical observation? a. Harry Truman b. George Bernard Shaw c. John Maynard Keynes d. Ronald Reagan



2. President Ronald Reagan once joked that a Trivial Pursuit game designed for economists would

a. have no questions but hundreds of answers. b. have 100 questions and 3,000 answers. c. have 1,000 questions but no answers. d. never produce a winner.


3. Economists sometimes give conflicting advice because

a. graduate students in economics are encouraged to argue with each other. b. economists have different values and scientific judgment. c. economists acting as scientists do not like to agree with economists acting as policy

advisers. d. economics is more of a belief system than a science.


4. The two basic reasons why economists often appear to give conflicting advice to policymakers are

differences in a. opinions and education. b. opinions and values. c. scientific judgments and education. d. scientific judgments and values.


5. Sometimes economists disagree because their scientific judgments differ. Which of the following

instances best reflects this source of disagreement? a. One economist believes income tax cuts are unfair to those with low incomes; another

economist believes income tax cuts are not unfair to those with low incomes. b. One economist believes unemployment causes more human suffering than does inflation;

another economist believes inflation causes more human suffering than does unemployment.

c. One economist believes the policies of the Democratic party offer the best hope for America's future; another economist believes the policies of the Republican party offer the best hope for America's future.

d. One economist believes increases in the minimum wage increase unemployment; another economist believes increases in the minimum wage do not increase unemployment.



6. Sometimes economists disagree because their values differ. Which of the following instances best

reflects this source of disagreement? a. One economist believes the North American Free Trade Agreement (NAFTA) has led to a

loss of American jobs; another economist disputes this claim. b. One economist believes that when income taxes are cut, people will increase their

spending; another economist believes that when income taxes are cut, people will increase their saving.

c. One economist advises against increases in sales taxes because she thinks such increases are unfair to low-income people; another economist disputes the idea that increases in sales taxes are unfair to low-income people.

d. One economist believes that, prior to the Civil War, slavery contributed to economic growth in the South; another economist believes that slavery held back the South's economic growth.


7. Which of the following statements is correct about the extent of disagreement among economists?

a. There is a great deal of agreement among economists on virtually every economic issue. b. There is a great deal of agreement among economists on many important economic issues. c. All disagreements among economists are attributable to differences in their values. d. All disagreements among economists are attributable to the fact that different economists

have different degrees of faith in the validity of alternative economic theories.


8. A survey which sought the opinion of professional economists on fourteen propositions about

economic policy found that a. the respondents were almost equally divided on the propositions. b. the respondents favored the propositions by a slight margin. c. the respondents disagreed with the propositions by a slight margin. d. there was overwhelming endorsement of the propositions among the respondents.


9. A survey of professional economists revealed that more than three-fourths of them agreed with a

number of statements, including which of the following? a. Tariffs and import quotas usually reduce general economic welfare. b. A large federal budget deficit has an adverse effect on the economy. c. A minimum wage increases unemployment among young and unskilled workers. d. All of the above are correct.



10. A survey of professional economists revealed that more than three-fourths of them agreed with

fourteen economic propositions. Which of the following is not one of those propositions? a. The United States should not restrict employers from outsourcing work to foreign

countries. b. The United States should withdraw from the North American Free Trade Agreement

(NAFTA). c. The United States should eliminate agricultural subsidies. d. Local and state governments should eliminate subsidies to professional sports franchises.


11. A survey of professional economists revealed that more than three-fourths of them agreed with

fourteen economic propositions. Which of the following is not one of those propositions? a. A ceiling on rents reduces the quantity and quality of housing available. b. Fiscal policy has a significant stimulative impact on a less than fully employed economy. c. The gap between Social Security funds and expenditures will become unsustainably large

within the next fifty years if current policies remain unchanged. d. The United States should implement universal health care for its citizens.


12. Almost all economists agree that rent control

a. has no effect on the rental income of landlords. b. allows the market for housing to work more efficiently. c. adversely affects the availability and quality of housing. d. is a very inexpensive way to help the most needy members of society.


13. Policies such as rent control and trade barriers persist in spite of the fact that economists are

virtually united in their opposition to such policies, probably because a. economists have not yet convinced the general public that the policies are undesirable. b. economists engage in positive analysis, not normative analysis. c. economists have values that are different from the values of most non-economists. d. economists’ theories are not easily confirmed or refuted in laboratory analysis.



14. Policies such as rent control and trade barriers persist

a. because economists are about evenly divided as to the merits of those policies. b. because almost all economists agree that those policies have no discernible economic

effects. c. because almost all economists agree that those policies are desirable. d. despite the fact that almost all economists agree that those policies are undesirable.


Sec04 - Thinking Like an Economist - Let's Get Going

MULTIPLE CHOICE

1. 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.


2. How did the influential economist John Maynard Keynes explain his remark that although

economics is an easy subject compared with the higher branches of philosophy or pure science, it is a subject at which few excel? a. Most people who study economics are not very bright. b. Good economists must possess a rare combination of gifts. c. Economics is quite boring; hence, people tend to lose interest in it before mastering it. d. Good thinkers become frustrated with economics because it does not make use of the

scientific method.



Sec05 - Thinking Like an Economist - Graphing: A Brief Review

MULTIPLE CHOICE


a. When developing economic theories, graphs offer a way to visually express ideas that might be less clear if described with equations or words.

b. Graphs are one way of expressing the relationships among variables. c. When studying the relationship between two economic variables, graphs allow economists

to draw indisputable conclusions about causes and effects. d. When analyzing economic data, graphs provide a powerful way of finding and interpreting

patterns.

ANS: C DIF: 2 REF: 2-5 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Graphs MSC: Interpretive

2. Which of the following is not an example of a graph of a single variable?

a. a pie chart b. a bar graph c. a time-series graph d. a scatterplot

ANS: D DIF: 2 REF: 2-5 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Graphs MSC: Interpretive

3. Graphs such as bar graphs and pie charts are limited in that they

a. can only show variables that are positively related. b. can only show variables that have a negative correlation. c. provide information on only one variable. d. provide information on no more than two variables.


4. The use of the coordinate system allows

a. for the display of the flows of dollars, goods and services, and factors of production in an economic system.

b. for the display of how labor and other resources are organized in the production process. c. for the display of two variables on a single graph. d. for the creation of pie charts and bar graphs.



5. In order to display information on two variables, an economist must use

a. a bar graph. b. a pie chart. c. the coordinate system. d. a time-series graph.


6. An ordered pair is

a. the process of checking calculations twice before placing them on a graph. b. two numbers that can be represented by a single point on a graph. c. two numbers that are represented by two points on a graph. d. two points on a graph that are of equal distance from the origin.

ANS: B DIF: 2 REF: 2-5 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Graphs MSC: Interpretive

7. The x-coordinate is the

a. first number of an ordered pair and represents the point's horizontal location. b. second number of an ordered pair and represents the point's horizontal location. c. first number of an ordered pair and represents the point's vertical location. d. second number of an ordered pair and represents the point's vertical location.

ANS: A DIF: 1 REF: 2-5 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Graphs MSC: Definitional

8. The x-coordinate of an ordered pair specifies the

a. diagonal location of the point. b. vertical location of the point. c. horizontal location of the point. d. quadrant location in which the point is located.

ANS: C DIF: 1 REF: 2-5 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Graphs MSC: Definitional

9. The first number in any ordered pair is

a. the x-coordinate. b. the y-coordinate. c. the vertical location of the point. d. the slope.



10. The y-coordinate is the

a. first number of an ordered pair and represents the point's horizontal location. b. second number of an ordered pair and represents the point's horizontal location. c. first number of an ordered pair and represents the point's vertical location. d. second number of an ordered pair and represents the point's vertical location.

ANS: D DIF: 1 REF: 2-5 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Graphs MSC: Definitional

11. The y-coordinate of an ordered pair specifies the

a. diagonal location of the point. b. vertical location of the point. c. horizontal location of the point. d. quadrant location in which the point is located.

ANS: B DIF: 1 REF: 2-5 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Graphs MSC: Definitional

12. The second number in any ordered pair is

a. the x-coordinate. b. the y-coordinate. c. the horizontal location of the point. d. the slope.


13. In the ordered pair (17, 75), 17 is the

a. vertical location of the point. b. the slope. c. the x-coordinate. d. the y-coordinate.

ANS: C DIF: 2 REF: 2-5 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Graphs MSC: Applicative

14. In the ordered pair (17, 75), 75 is the

a. horizontal location of the point. b. the slope. c. the x-coordinate. d. the y-coordinate.

ANS: D DIF: 2 REF: 2-5 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Graphs MSC: Applicative


15. The point where both x and y are zero is known as the

a. origin. b. null. c. zero coordinate. d. center.


16. The ordered pair that represents the origin on a graph is

a. (1, 1). b. (0, 0). c. (-1, -1). d. ( ).


17. When two variables have a positive correlation,

a. they tend to move in opposite directions. b. they tend to move in the same direction. c. one variable will move while the other remains constant. d. the variables’ values are never negative.


18. When two variables have a positive correlation,

a. when the x-variable increases, the y-variable decreases. b. when the x-variable decreases, the y-variable increases. c. when the x-variable increases, the y-variable increases. d. More than one of the above is correct.


19. When two variables have a negative correlation,

a. they tend to move in opposite directions. b. they tend to move in the same direction. c. one variable will move while the other remains constant. d. the variables’ values are never positive.



20. When two variables have a negative correlation,

a. when the x-variable decreases, the y-variable decreases. b. when the x-variable decreases, the y-variable increases. c. when the x-variable increases, the y-variable increases. d. More than one of the above is correct.


Figure 2-12

cups of coffee per day

hours without sleep

21. Refer to Figure 2-12. The graph shown is known as a

a. time-series graph. b. bar graph. c. scatterplot. d. pie chart.

ANS: C DIF: 1 REF: 2-5 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Graphs MSC: Definitional

22. Refer to Figure 2-12. Cups of coffee per day and the hours that someone can go without sleep

appear to have a. a positive correlation. b. a negative correlation. c. a random correlation. d. no correlation.

ANS: A DIF: 2 REF: 2-5 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Graphs MSC: Applicative


23. Refer to Figure 2-12. Taking cause and effect into account, which of the following interpretations

would be most reasonable regarding the relationship between coffee and hours without sleep? a. The less coffee a person drinks per day, the more time he can go without sleep. b. There is no relationship between how much coffee per day a person drinks and how long

he can go without sleep. c. The more coffee a person drinks per day, the more time he can go without sleep. d. The more coffee a person drinks per day, the less time he can go without sleep.


24. When two variables move in opposite directions, the curve relating them is

a. upward sloping, and we say the variables are positively related. b. upward sloping, and we say the variables are negatively related. c. downward sloping, and we say the variables are positively related. d. downward sloping, and we say the variables are negatively related.


25. When two variables move in the same direction, the curve relating them is

a. upward sloping, and we say the variables are positively related. b. upward sloping, and we say the variables are negatively related. c. downward sloping, and we say the variables are positively related. d. downward sloping, and we say the variables are negatively related.

ANS: A DIF: 2 REF: 2-5 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Graphs MSC: Interpretive

26. When a relevant variable that is not named on either axis changes,

a. there will be a movement along the curve. b. the curve will rotate clockwise. c. the curve will be unaffected since only the variables on the axis affect the curve. d. the curve will shift.


27. Suppose price is measured along the vertical axis on a graph. When price changes, there will be a

a. rotation of the curve. b. shift of the curve. c. movement along the curve. d. change in the slope of the curve.



28. A demand curve shows the relationship

a. between income and quantity demanded. b. between price and income. c. between price and quantity demanded. d. among income, price, and quantity demanded.

ANS: C DIF: 2 REF: 2-5 NAT: Analytic LOC: Supply and demand TOP: Demand MSC: Interpretive

29. If Steven’s income decreases and, as a result, he chooses to buy fewer bagels per month at each

price, then his demand curve will a. shift to the right. b. shift to the left. c. not shift; instead, Steven will move along his demand curve downward and to the right. d. not shift; instead, Steven will move along his demand curve upward and to the left.

ANS: B DIF: 2 REF: 2-5 NAT: Analytic LOC: Supply and demand TOP: Demand MSC: Applicative

Figure 2-13

dozens of roses

price of a dozen roses

A

B

C

1 2 3 4 5 6 7 8 9 10

5

10

15

20

25

30

35

40

30. Refer to Figure 2-13. The curves shown are

a. supply curves. b. demand curves. c. preference curves. d. income-consumption curves.

ANS: B DIF: 1 REF: 2-5 NAT: Analytic LOC: Supply and demand TOP: Demand MSC: Definitional


31. Refer to Figure 2-13. The movement from point A to point B is a(n)

a. shift of the demand curve. b. indication of a change in preferences for roses. c. movement along the demand curve. d. indication of an increase in income.


32. Refer to Figure 2-13. The movement from point B to point C is a(n)

a. shift of the demand curve. b. movement along the demand curve. c. indication that the price of roses has changed. d. indication that the costs incurred by firms that produce roses have changed.

ANS: A DIF: 2 REF: 2-5 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Graphs MSC: Applicative

33. Refer to Figure 2-13. The movement from point B to point C could have been caused by

a. inflation. b. a change in income. c. a change in the price of roses. d. a change in the cost of producing roses.

ANS: B DIF: 2 REF: 2-5 NAT: Analytic LOC: Supply and demand TOP: Demand MSC: Applicative

34. Refer to Figure 2-10. The slope of the curve between points A and B is

a. -5/2 b. -2/5 c. 2/5 d. 5/2

ANS: A DIF: 2 REF: 2-5 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Graphs | Slope MSC: Applicative

35. The slope of a line is equal to

a. the change in the value of x divided by the change in the value of y. b. the change in the value of y divided by the change in the value of x. c. the horizontal distance divided by the vertical distance. d. the value of y divided by the value of x.

ANS: B DIF: 1 REF: 2-5 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Graphs | Slope MSC: Definitional


36. The slope of a line is equal to

a. rise divided by run. b. run divided by rise. c. rise minus run. d. rise plus run.

ANS: A DIF: 1 REF: 2-5 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Graphs | Slope MSC: Definitional


a. The slope of a line will be a small positive number for a fairly flat upward-sloping line. b. The slope of a line will be a large positive number for a steep upward-sloping line. c. The slope of a line will be a negative number for a downward-sloping line. d. The slope of a line will be infinite for a horizontal line.

ANS: D DIF: 2 REF: 2-5 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Graphs | Slope MSC: Interpretive

38. Which of the following is correct?

a. A horizontal line has an infinite slope, and a vertical line has a zero slope. b. A horizontal line has a slope of 1, and a vertical line has a slope of -1. c. A horizontal line has a zero slope, and a vertical line has an infinite slope. d. A horizontal line has a slope of -1, and a vertical line has a slope of 1.

ANS: C DIF: 2 REF: 2-5 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Graphs | Slope MSC: Interpretive

39. The slope of a fairly flat upward-sloping line will be a

a. small positive number. b. large positive number. c. small negative number. d. large negative number.

ANS: A DIF: 1 REF: 2-5 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Graphs | Slope MSC: Definitional

40. The slope of a steep upward-sloping line will be a

a. small positive number. b. large positive number. c. small negative number. d. large negative number.

ANS: B DIF: 1 REF: 2-5 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Graphs | Slope MSC: Definitional


41. The slope of a line that passes through the points (10, 15) and (20, 7) is

a. -5/4. b. -4/5. c. 4/5. d. 5/4.

ANS: B DIF: 2 REF: 2-5 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Graphs | Slope MSC: Applicative

42. The slope of a line that passes through the points (15, 10) and (7, 30) is

a. -5/2. b. -2/5. c. 2/5. d. 5/2.


43. A relatively steep demand curve indicates that

a. quantity demanded will adjust only slightly to a price change. b. quantity demanded will adjust significantly to a price change. c. quantity demanded will not adjust to a price change. d. the change in quantity demanded will exactly equal a change in price.


44. A relatively flat demand curve indicates that

a. quantity demanded will adjust only slightly to a price change. b. quantity demanded will adjust significantly to a price change. c. quantity demanded will not adjust to a price change. d. the change in quantity demanded will exactly equal a change in price.

ANS: B DIF: 2 REF: 2-5 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Graphs | Slope MSC: Applicative

45. Suppose that someone makes the argument that because empty alcohol containers are found at many

accidents, the containers cause accidents. This would be an example of a. sound logic. b. reverse causality. c. omitted variables. d. bias.

ANS: C DIF: 2 REF: 2-5 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Omitted variable MSC: Applicative


46. Bill has noticed that increases in unemployment insurance claims are associated with recessions, and

therefore he advocates limits on unemployment insurance so as to prevent recessions. Martha has noticed that most drug addicts once attended schools, and therefore she advocates getting rid of schools so as to prevent drug addiction. a. The reasoning of both Bill and Martha suffers from the omitted variable problem. b. The reasoning of both Bill and Martha suffers from the reverse causality problem. c. Bill's reasoning suffers from the reverse causality problem, and Martha's reasoning suffers

from the omitted variable problem. d. Martha's reasoning suffers from the reverse causality problem, and Bill's reasoning suffers

from the omitted variable problem.

ANS: A DIF: 2 REF: 2-5 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Omitted variable MSC: Applicative

47. In the early 19th century, the Russian government sent doctors to southern Russian villages to

provide assistance during a cholera epidemic. The villagers noticed that wherever doctors appeared, people died. Therefore, many doctors were chased away from villages, and some were even killed. This reaction to the correlation between doctors and deaths is most likely a problem of a. omitted variables. b. reverse causality. c. government propaganda. d. medical incompetence.

ANS: B DIF: 2 REF: 2-5 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Reverse causality MSC: Applicative

167

Chapter 3

Interdependence and the Gains from Trade

TRUE/FALSE

1. In most countries today, many goods and services consumed are imported from abroad, and many

goods and services produced are exported to foreign customers.

ANS: T DIF: 1 REF: 3-0 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Trade MSC: Definitional

2. Interdependence among individuals and interdependence among nations are both based on the gains

from trade.

ANS: T DIF: 2 REF: 3-0 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Gains from trade MSC: Interpretive

3. If a person chooses self-sufficiency, then she can only consume what she produces.

ANS: T DIF: 1 REF: 3-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Self-sufficiency MSC: Definitional

4. If Wrex can produce more math problems per hour and more book reports per hour than Maxine

can, then Wrex cannot gain from trading math problems and book reports with Maxine.

ANS: F DIF: 2 REF: 3-1 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Gains from trade MSC: Applicative

5. It is possible for the U.S. to gain from trade with Germany even if it takes U.S. workers fewer hours

to produce every good than it takes German workers.

ANS: T DIF: 2 REF: 3-1 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Gains from trade MSC: Applicative

6. A production possibilities frontier is a graph that shows the combination of outputs that an economy

should produce.

ANS: F DIF: 2 REF: 3-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier MSC: Interpretive

168 Chapter 3 /Interdependence and the Gains from Trade

7. Production possibilities frontiers cannot be used to illustrate tradeoffs.

ANS: F DIF: 1 REF: 3-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier MSC: Definitional

8. An economy can produce at any point on or inside its production possibilities frontier, but it cannot

produce at points outside its production possibilities frontier.


9. Trade allows a country to consume outside its production possibilities frontier.

ANS: T DIF: 2 REF: 3-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Trade MSC: Interpretive

10. Opportunity cost refers to how many inputs a producer requires to produce a good.

ANS: F DIF: 1 REF: 3-2 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Opportunity cost MSC: Definitional

11. Opportunity cost measures the trade-off between two goods that each producer faces.

ANS: T DIF: 1 REF: 3-2 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Opportunity cost MSC: Definitional

12. For a country producing two goods, the opportunity cost of one good will be the inverse of the

opportunity cost of the other good.

ANS: T DIF: 2 REF: 3-2 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Opportunity cost MSC: Interpretive

13. Henry can make a bird house in 3 hours and he can make a bird feeder in 1 hour. The opportunity

cost to Henry of making a bird house is 1/3 bird feeder.


Chapter 3 /Interdependence and the Gains from Trade 169

14. Suppose that in one hour Dewey can produce either 10 bushels of corn or 20 yards of cloth. Then

Dewey’s opportunity cost of producing one bushel of corn is 1/2 yard of cloth.


15. Jake can complete an oil change in 45 minutes and he can write a poem in 90 minutes. Ming-la can

complete an oil change in 30 minutes and she can write a poem in 90 minutes. Jake's opportunity cost of writing a poem is lower than Ming-la's opportunity cost of writing a poem.

ANS: T DIF: 2 REF: 3-2 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Opportunity cost MSC: Applicative

16. Harry is a computer company executive, earning $200 per hour managing the company and

promoting its products. His daughter Quinn is a high school student, earning $6 per hour helping her grandmother on the farm. Harry's computer is broken. He can repair it himself in one hour. Quinn can repair it in 10 hours. Harry’s opportunity cost of repairing the computer is lower than Quinn’s.


17. If one producer has the absolute advantage in the production of all goods, then that same producer

will have the comparative advantage in the production of all goods as well.

ANS: F DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Absolute advantage | Comparative advantage MSC: Interpretive

18. If a country has the comparative advantage in producing a product, then that country must also have

the absolute advantage in producing that product.


19. In an economy consisting of two people producing two goods, it is possible for one person to have

the absolute advantage and the comparative advantage in both goods.



20. If one producer is able to produce a good at a lower opportunity cost than some other producer, then

the producer with the lower opportunity cost is said to have an absolute advantage in the production of that good.

ANS: F DIF: 1 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Comparative advantage MSC: Definitional

21. Unless two people who are producing two goods have exactly the same opportunity costs, then one

person will have a comparative advantage in one good, and the other person will have a comparative advantage in the other good.

ANS: T DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Comparative advantage MSC: Interpretive

22. Zora can produce 4 quilts in a week and she can produce 1 corporate website in a week. Lou can

produce 9 quilts in a week and he can produce 2 corporate websites in a week. Zora has the comparative advantage in quilts and the absolute advantage in neither good, while Lou has the comparative advantage in corporate websites and the absolute advantage in both goods.

ANS: F DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Absolute advantage | Comparative advantage MSC: Applicative

23. Timmy can edit 2 pages in one minute and he can type 80 words in one minute. Olivia can edit 1

page in one minute and she can type 100 words in one minute. Timmy has an absolute advantage and a comparative advantage in editing, while Olivia has an absolute advantage and a comparative advantage in typing.

ANS: T DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Absolute advantage | Comparative advantage MSC: Applicative

24. Suppose Hank and Tony can both produce corn. If Hank’s opportunity cost of producing a bushel of

corn is 2 bushels of soybeans and Tony’s opportunity cost of producing a bushel of corn is 3 bushels of soybeans, then Hank has the comparative advantage in the production of corn.

ANS: T DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Comparative advantage MSC: Applicative

25. It takes Anne 3 hours to make a pie and 4 hours to make a shirt. It takes Mary 2 hours to make a pie

and 5 hours to make a shirt. Anne should specialize in making shirts and Mary should specialize in making pies, and they should trade.

ANS: T DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Specialization MSC: Applicative


26. The principle of comparative advantage states that, regardless of the price at which trade takes place,

everyone will benefit from trade if they specialize in the production of the good for which they have a comparative advantage.

ANS: F DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Comparative advantage MSC: Interpretive

27. The gains from specialization and trade are based on absolute advantage.

ANS: F DIF: 1 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Gains from trade MSC: Definitional

28. Trade can benefit everyone in society because it allows people to specialize in activities in which

they have a comparative advantage.

ANS: T DIF: 1 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Gains from trade MSC: Definitional

29. Two countries can achieve gains from trade even if one country has an absolute advantage in the

production of both goods.


30. It takes Ross 6 hours to produce a bushel of corn and 2 hours to wash and polish a car. It takes

Courtney 6 hours to produce a bushel of corn and 1 hour to wash and polish a car. Courtney and Ross cannot gain from specialization and trade, since it takes each of them 6 hours to produce 1 bushel of corn.

ANS: F DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Gains from trade MSC: Applicative

31. Differences in opportunity cost allow for gains from trade.


32. As long as two people have different opportunity costs, each can gain from trade with the other,

since trade allows each person to obtain a good at a price lower than his or her opportunity cost.



33. Trade allows a person to obtain goods at prices that are less than that person's opportunity cost

because each person specializes in the activity for which he or she has the lower opportunity cost.


34. When each person specializes in producing the good in which he or she has a comparative

advantage, each person can gain from trade but total production in the economy is unchanged.

ANS: F DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Gains from trade MSC: Interpretive

35. For both parties to gain from trade, the price at which they trade must lie exactly in the middle of the

two opportunity costs.


36. Adam Smith was the author of the 1776 book An Inquiry into the Nature and Causes of the Wealth

of Nations.


37. David Ricardo was the author of the 1817 book Principles of Political Economy and Taxation.


38. Adam Smith wrote that a person should never attempt to make at home what it will cost him more to

make than to buy.


39. Adam Smith developed the theory of comparative advantage as we know it today.

ANS: F DIF: 1 REF: 3-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Economists | Comparative advantage MSC: Definitional


40. Goods produced abroad and sold domestically are called exports and goods produced domestically

and sold abroad are called imports.

ANS: F DIF: 1 REF: 3-3 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Exports | Imports MSC: Definitional

41. International trade may make some individuals in a nation better off, while other individuals are

made worse off.


42. For international trade to benefit a country, it must benefit all citizens of that country.


43. Some countries win in international trade, while other countries lose.


44. Trade can make some individuals worse off, even as it makes the country as a whole better off.


45. Trade allows all countries to achieve greater prosperity.



SHORT ANSWER

1. Explain the difference between absolute advantage and comparative advantage. Which is more

important in determining trade patterns, absolute advantage or comparative advantage? Why?

ANS: Absolute advantage refers to productivity, as in the producer who can produce a product at a lower cost in terms of the resources used in production. Comparative advantage refers to the producer who can produce a product at a lower opportunity cost. Comparative advantage is the principle upon which trade patterns are based. Comparative advantage is based on opportunity cost, and opportunity cost measures the real cost to an individual or country of producing a particular product. Opportunity cost is therefore the information necessary for an individual or nation to determine whether to produce a good or buy it from someone else.

PTS: 1 DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Absolute advantage | Comparative advantage | Trade MSC: Interpretive


2. The only two countries in the world, Alpha and Omega, face the following production possibilities

frontiers. Alpha’s Production Possibilities Frontier Omega’s Production Possibilities Frontier

25 50 75 100 125 150 175 200 225 250 peanuts

25

50

75

100

125

150

175

200

225

250

275

300

popcorn

25 50 75 100 125 150 175 200 225 peanuts

25

50

75

100

125

150

175

200

225

250

275

300

popcorn

a. Assume that each country decides to use half of its resources in the production of each good. Show these points on the graphs for each country as point A.

b. If these countries choose not to trade, what would be the total world production of popcorn and peanuts?

c. Now suppose that each country decides to specialize in the good in which each has a comparative advantage. By specializing, what is the total world production of each product now?

d. If each country decides to trade 100 units of popcorn for 100 units of peanuts, show on the graphs the gain each country would receive from trade. Label these points B.

ANS: Alpha’s Production Possibilities Frontier Omega’s Production Possibilities Frontier


A

B

Consumptionwith trade

25 50 75 100 125 150 175 200 225 250 peanuts

25

50

75

100

125

150

175

200

225

250

275

300

popcorn

A

B

Consumptionwith trade

25 50 75 100 125 150 175 200 225 peanuts

25

50

75

100

125

150

175

200

225

250

275

300

popcorn

a. Alpha would be producing 125 units of peanuts and 75 units of popcorn (point A on its production possibilities frontier) and Omega would be producing 50 units of peanuts and 150 units of popcorn (point A on its production possibilities frontier).

b. The total world production of peanuts would be 175 units and the total world production of popcorn would be 225 units.

c. The total world production of peanuts would now be 250 units and the total world production of popcorn would now be 300 units.

d. Alpha would be producing 250 units of peanuts and would trade 100 of them to Omega, leaving Alpha with 150 units of peanuts. Alpha would then receive 100 units of popcorn from Omega. Omega would be producing 300 units of popcorn and would trade 100 of them to Alpha, leaving Omega with 200 units of popcorn. Omega would then receive 100 units of peanuts from Alpha.

PTS: 1 DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Production possibilities frontier | Gains from trade MSC: Applicative

3. Julia can fix a meal in 1 hour, and her opportunity cost of one hour is $50. Jacque can fix the same

kind of meal in 2 hours, and his opportunity cost of one hour is $20. Will both Julia and Jacque be better off if she pays him $45 per meal to fix her meals? Explain.

ANS: Since Julia's opportunity cost of preparing a meal is $50, and Jacque's opportunity cost of preparing a meal is $40, each of them will be better off by $5 per meal if this arrangement is made.

PTS: 1 DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Gains from trade MSC: Applicative


4. Gary and Diane must prepare a presentation for their marketing class. As part of their presentation,

they must do a series of calculations and prepare 50 PowerPoint slides. It would take Gary 10 hours to do the required calculation and 10 hours to prepare the slides. It would take Diane 12 hours to do the calculations and 20 hours to prepare the slides. a. How much time would it take the two to complete the project if they divide the calculations

equally and the slides equally? b. How much time would it take the two to complete the project if they use comparative

advantage and specialize in calculating or preparing slides? c. If Diane and Gary have the same opportunity cost of $5 per hour, is there a better solution than

for each to specialize in calculating or preparing slides?

ANS:

a. If both tasks are divided equally, it will take 11 hours for the calculations and 15 hours for the writing, for a total of 26 hours.

b. If Diane specializes in calculating and Gary specializes in preparing slides, it will take 22 hours to complete the project.

c. If Diane specializes in calculating, her opportunity cost will be $60; hence, Diane would be better off if she paid Gary any amount less than $60 to do the calculating. Since Gary's opportunity cost of doing the calculations is only $50, he would be better off if Diane paid him between $50 and $60 dollars to do the calculations. In this case, the total time spent on the project would be 20 hours.

PTS: 1 DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Gains from trade MSC: Applicative

Sec00 - Interdependence and the Gains from Trade

MULTIPLE CHOICE

1. People who provide you with goods and services

a. are acting out of generosity. b. do so because they get something in return. c. have chosen not to become interdependent. d. are required to do so by the government.

ANS: B DIF: 1 REF: 3-0 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Trade MSC: Definitional


2. When an economist points out that you and millions of other people are interdependent, he or she is

referring to the fact that we all a. rely upon the government to provide us with the basic necessities of life. b. rely upon one another for the goods and services we consume. c. have similar tastes and abilities. d. are concerned about one another’s well-being.

ANS: B DIF: 1 REF: 3-0 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Interdependence MSC: Definitional

Sec01 - Interdependence and the Gains from Trade - A Parable for the Modern

Economy

MULTIPLE CHOICE

1. Which of the following is not a reason people choose to depend on others for goods and services?

a. to improve their lives b. to allow them to enjoy a greater variety of goods and services c. to consume more of each good without working any more hours d. to allow people to produce outside their production possibilities frontiers


2. When can two countries gain from trading two goods?

a. when the first country can only produce the first good and the second country can only produce the second good

b. when the first country can produce both goods, but can only produce the second good at great cost, and the second country can produce both goods, but can only produce the first good at great cost

c. when the first country is better at producing both goods and the second country is worse at producing both goods

d. Two countries could gain from trading two goods under all of the above conditions.


3. Regan grows flowers and makes ceramic vases. Jayson also grows flowers and makes ceramic

vases, but Regan is better at producing both goods. In this case, trade could a. benefit both Jayson and Regan. b. benefit Jayson, but not Regan. c. benefit Regan, but not Jayson. d. benefit neither Jayson nor Regan.



4. Ben bakes bread and Shawna knits sweaters. Ben and Shawna both like to eat bread and wear

sweaters. In which of the following cases is it impossible for both Ben and Shawna to benefit from trade? a. Ben cannot knit sweaters and Shawna cannot bake bread. b. Ben is better than Shawna at baking bread and Shawna is better than Ben at knitting

sweaters. c. Ben is better than Shawna at baking bread and at knitting sweaters. d. Both Ben and Shawna can benefit from trade in all of the above cases.

ANS: D DIF: 2 REF: 3-1 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Gains from trade MSC: Applicative

5. Shannon bakes cookies and Justin grows vegetables. In which of the following cases is it

impossible for both Shannon and Justin to benefit from trade? a. Shannon does not like vegetables and Justin does not like cookies. b. Shannon is better than Justin at baking cookies and Justin is better than Shannon at

growing vegetables. c. Justin is better than Shannon at baking cookies and at growing vegetables. d. Both Shannon and Justin can benefit from trade in all of the above cases.


6. The production possibilities frontier illustrates

a. the combinations of output that an economy should produce. b. the combinations of output that an economy should consume. c. the combinations of output that an economy can produce. d. All of the above are correct.


7. An economy’s production possibilities frontier is also its consumption possibilities frontier

a. under all circumstances. b. under no circumstances. c. when the economy is self-sufficient. d. when the rate of tradeoff between the two goods being produced is constant.



8. A production possibilities frontier is bowed outward when

a. the more resources the economy uses to produce one good, the fewer resources it has available to produce the other good.

b. an economy is self-sufficient instead of interdependent and engaged in trade. c. the rate of tradeoff between the two goods being produced is constant. d. the rate of tradeoff between the two goods being produced depends on how much of each

good is being produced.


9. A production possibilities frontier is a straight line when

a. the more resources the economy uses to produce one good, the fewer resources it has available to produce the other good.

b. an economy is interdependent and engaged in trade instead of self-sufficient. c. the rate of tradeoff between the two goods being produced is constant. d. the rate of tradeoff between the two goods being produced depends on how much of each

good is being produced.



Sweaters Gloves

4 300

6 ?

8 100


a. 100. b. 150. c. 200. d. 250.




Sweaters Gloves

4 300

6 ?

8 100

If the production possibilities frontier is a straight line, then “?” must be

a. 100. b. 150. c. 200. d. 250.


12. The following table contains some production possibilities for an economy for a given year.

Cars Newspapers

10 400

12 360

14 ?


a. 340. b. 330. c. 320. d. 310.


13. The following table contains some production possibilities for an economy for a given year.

Cars Newspapers

10 400

12 360

14 ?


a. 340. b. 330. c. 320. d. 310.




Bagels Donuts

40 150

60 ?

80 50


a. 50. b. 75. c. 100. d. 125.



Bagels Donuts

40 150

60 ?

80 50


a. 50. b. 75. c. 100. d. 125.


Sec02 - Interdependence and the Gains from Trade - Comparative Advantage: The

Driving Force of Specialization

MULTIPLE CHOICE

1. Assume for the United States that the opportunity cost of each airplane is 100 cars. Then which of

these pairs of points could be on the United States' production possibilities frontier? a. (200 airplanes, 5,000 cars) and (150 airplanes, 4,000 cars) b. (200 airplanes, 10,000 cars) and (150 airplanes, 20,000 cars) c. (300 airplanes, 15,000 cars) and (200 airplanes, 25,000 cars) d. (300 airplanes, 25,000 cars) and (200 airplanes, 40,000 cars)

ANS: C DIF: 3 REF: 3-2 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier | Opportunity cost MSC: Analytical


2. Assume for Namibia that the opportunity cost of each hut is 200 bowls. Then which of these pairs

of points could be on Namibia's production possibilities frontier? a. (200 huts, 30,000 bowls) and (150 huts, 35,000 bowls) b. (200 huts, 40,000 bowls) and (150 huts, 30,000 bowls) c. (300 huts, 50,000 bowl) and (200 huts, 60,000 bowls) d. (300 huts, 60,000 bowls) and (200 huts, 80,000 bowls)


3. What must be given up to obtain an item is called

a. out-of-pocket cost. b. comparative worth. c. opportunity cost. d. absolute value.

ANS: C DIF: 1 REF: 3-2 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Opportunity cost MSC: Definitional

4. The opportunity cost of an item is

a. the number of hours that one must work in order to buy one unit of the item. b. what you give up to get that item. c. always less than the dollar value of the item. d. always greater than the cost of producing the item.

ANS: B DIF: 1 REF: 3-2 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Opportunity cost MSC: Definitional

5. A farmer has the ability to grow either corn or cotton or some combination of the two. Given no

other information, it follows that the farmer’s opportunity cost of a bushel of corn multiplied by his opportunity cost of a bushel of cotton a. is equal to 0. b. is between 0 and 1. c. is equal to 1. d. is greater than 1.



6. If Korea is capable of producing either shoes or soccer balls or some combination of the two, then

a. Korea should specialize in the product in which it has an absolute advantage. b. it would be impossible for Korea to have an absolute advantage over another country in

both products. c. it would be difficult for Korea to benefit from trade with another country if Korea is

efficient in the production of both goods. d. Korea’s opportunity cost of shoes is the inverse of its opportunity cost of soccer balls.


7. Suppose a gardener produces both green beans and corn in her garden. If she must give up 14

bushels of corn to get 5 bushels of green beans, then her opportunity cost of 1 bushel of green beans is a. 0.36 bushel of corn. b. 2.8 bushels of corn. c. 14 bushels of corn. d. 70 bushels of corn.


8. Suppose a gardener produces both green beans and corn in her garden. If the opportunity cost of

one bushel of corn is 3/5 bushel of green beans, then the opportunity cost of 1 bushel of green beans is a. 3/5 bushel of corn. b. 5/3 bushels of corn. c. 3 bushels of corn. d. 5 bushels of corn.


9. 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 chair is a. 1/5 table for Mike and 1/3 table for Sandy. b. 1/5 table for Mike and 3 tables for Sandy. c. 5 tables for Mike and 1/3 table for Sandy. d. 5 tables for Mike and 3 tables for Sandy.




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 is a. 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.


11. If he devotes all of his available resources to cantaloupe production, a farmer can produce 120

cantaloupes. If he sacrifices 1.5 watermelons for each cantaloupe that he produces, it follows that a. if he devotes all of his available resources to watermelon production, then he can produce

80 watermelons. b. he cannot have a comparative advantage over other farmers in producing cantaloupes. c. his opportunity cost of one watermelon is 2/3 of a cantaloupe. d. his production possibilities frontier is bowed-out.


12. Absolute advantage is found by comparing different producers’

a. opportunity costs. b. payments to land, labor, and capital. c. input requirements per unit of output. d. locational and logistical circumstances.

ANS: C DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Absolute advantage MSC: Interpretive

13. The producer that requires a smaller quantity of inputs to produce a certain amount of a good,

relative to the quantities of inputs required by other producers to produce the same amount of that good, a. has a low opportunity cost of producing that good, relative to the opportunity costs of

other producers. b. has a comparative advantage in the production of that good. c. has an absolute advantage in the production of that good. d. should be the only producer of that good.

ANS: C DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Absolute advantage MSC: Interpretive


14. If Shawn can produce more donuts in one day than Sue can produce in one day, then

a. Shawn has a comparative advantage in the production of donuts. b. Sue has a comparative advantage in the production of donuts. c. Shawn has an absolute advantage in the production of donuts. d. Sue has an absolute advantage in the production of donuts.

ANS: C DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Absolute advantage MSC: Applicative


make 4 tables or 20 chairs, while Sandy can make 6 tables or 18 chairs. Given this, we know that a. Mike has an absolute advantage in chairs. b. Mike has a comparative advantage in tables. c. Sandy has an absolute advantage in chairs. d. Sandy has a comparative advantage in chairs.

ANS: A DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Absolute advantage MSC: Applicative

16. Travis can mow a lawn in two hours or he can trim a tree in one hour. Ricardo can mow a lawn in

three hours or he can trim a tree in two hours. a. Travis has an absolute advantage over Ricardo in trimming trees. b. Travis has a comparative advantage over Ricardo in mowing lawns. c. Ricardo has a comparative advantage over Travis in trimming trees. d. All of the above are correct.


17. Suppose Susan can wash three windows per hour or she can iron six shirts per hour. Paul can wash

two windows per hour or he can iron five shirts per hour. a. Susan has an absolute advantage over Paul in washing windows. b. Susan has a comparative advantage over Paul in washing windows. c. Paul has a comparative advantage over Susan in ironing shirts. d. All of the above are correct.

ANS: D DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Absolute advantage | Comparative advantage MSC: Applicative


18. Suppose Jim and Tom can both produce two goods: baseball bats and hockey sticks. Which of the

following is not possible? a. Jim has an absolute advantage in the production of baseball bats and in the production of

hockey sticks. b. Jim has an absolute advantage in the production of baseball bats and a comparative

advantage in the production of hockey sticks. c. Jim has an absolute advantage in the production of hockey sticks and a comparative

advantage in the production of baseball bats. d. Jim has a comparative advantage in the production of baseball bats and in the production

of hockey sticks.

ANS: D DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Comparative advantage MSC: Applicative

19. Kelly and David are both capable of repairing cars and cooking meals. Which of the following

scenarios is not possible? a. Kelly has a comparative advantage in repairing cars and David has a comparative

advantage in cooking meals. b. Kelly has an absolute advantage in repairing cars and David has an absolute advantage in

cooking meals. c. Kelly has a comparative advantage in repairing cars and in cooking meals. d. David has an absolute advantage in repairing cars and in cooking meals.

ANS: C DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Comparative advantage MSC: Applicative

20. Suppose Jim and Tom can both produce baseball bats. If Jim’s opportunity cost of producing

baseball bats is lower than Tom’s opportunity cost of producing baseball bats, then a. Tom must have an absolute advantage in the production of baseball bats. b. Jim must have an absolute advantage in the production of baseball bats. c. Tom has a comparative advantage in the production of baseball bats. d. Jim has a comparative advantage in the production of baseball bats.

ANS: D DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Comparative advantage MSC: Applicative

21. If Shawn can produce donuts at a lower opportunity cost than Sue, then

a. Shawn has a comparative advantage in the production of donuts. b. Sue has a comparative advantage in the production of donuts. c. Shawn should not produce donuts. d. Shawn is capable of producing more donuts than Sue in a given amount of time.

ANS: A DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Comparative advantage MSC: Applicative


22. If Iowa’s opportunity cost of corn is lower than Oklahoma’s opportunity cost of corn, then

a. Iowa has a comparative advantage in the production of corn. b. Iowa has an absolute advantage in the production of corn. c. Iowa should import corn from Oklahoma. d. Oklahoma should produce just enough corn to satisfy its own residents’ demands.


23. Canada and the U.S. both produce wheat and computer software. Canada is said to have the

comparative advantage in producing wheat if a. Canada requires fewer resources than the U.S. to produce a bushel of wheat. b. the opportunity cost of producing a bushel of wheat is lower for Canada than it is for the

U.S. c. the opportunity cost of producing a bushel of wheat is lower for the U.S. than it is for

Canada. d. the U.S. has an absolute advantage over Canada in producing computer software.

ANS: B DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Comparative advantage MSC: Applicative

24. Comparative advantage is related most closely to which of the following?

a. output per hour b. opportunity cost c. efficiency d. bargaining strength in international trade

ANS: B DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Comparative advantage MSC: Interpretive

25. For two individuals who engage in the same two productive activities, it is impossible for one of the

two individuals to a. have a comparative advantage in both activities. b. have an absolute advantage in both activities. c. be more productive per unit of time in both activities. d. gain from trade with each other.

ANS: A DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Comparative advantage MSC: Interpretive


26. Two individuals engage in the same two productive activities. In which of the following

circumstances would neither individual have a comparative advantage in either activity? a. One individual’s production possibilities frontier is steeper than the other individual’s

production possibilities frontier. b. One individual is faster at both activities than the other individual. c. One individual’s opportunity costs are the same as the other individual’s opportunity

costs. d. None of the above is correct; one of the two individuals always will have a comparative

advantage in at least one of the two activities.

ANS: C DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Comparative advantage MSC: Interpretive

27. Which of the following statements about comparative advantage is not true?

a. Comparative advantage is determined by which person or group of persons can produce a given quantity of a good using the fewest resources.

b. The principle of comparative advantage applies to countries as well as to individuals. c. Economists use the principle of comparative advantage to emphasize the potential benefits

of free trade. d. A country may have a comparative advantage in producing a good, even though it lacks an

absolute advantage in producing that good.

ANS: A DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Comparative advantage MSC: Interpretive

28. 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. How are the gains from trade shared among the parties to a trade? d. Is it possible for specialization and trade to increase total output of traded goods?

ANS: C DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Comparative advantage MSC: Interpretive

29. The principle of comparative advantage does not provide answers to certain questions. One of those

questions is a. Is it possible for specialization and trade to benefit more than one party to a trade? b. Is it possible for specialization and trade to increase total output of traded goods? c. Do opportunity costs play a role in people’s decisions to specialize in certain activities? d. What determines the price at which trade takes place?

ANS: D DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Comparative advantage MSC: Interpretive



a. The producer who requires a smaller quantity of inputs to produce a good is said to have an absolute advantage in producing that good.

b. The producer who gives up less of other goods to produce Good X has the smaller opportunity cost of producing Good X.

c. The producer who has the smaller opportunity cost of producing a good is said to have a comparative advantage in producing that good.

d. The gains from specialization and trade are based not on comparative advantage but on absolute advantage.

ANS: D DIF: 1 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Absolute advantage | Comparative advantage MSC: Definitional

31. Suppose that a worker in Cornland can grow either 40 bushels of corn or 10 bushels of oats per year,

and a worker in Oatland can grow either 20 bushels of corn or 5 bushels of oats per year. There are 20 workers in Cornland and 20 workers in Oatland. Which of the following statements is true? a. Both countries could gain from trade with each other. b. Neither country could gain from trade with each other because Cornland has an absolute

advantage in both goods. c. Neither country could gain from trade with each other because neither one has a

comparative advantage. d. Oatland could gain from trade between the two countries, but Cornland definitively would

lose.

ANS: C DIF: 3 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Comparative advantage | Trade MSC: Analytical

32. Suppose that the country of Xenophobia chose to isolate itself from the rest of the world. Its ruler

proclaimed that Xenophobia should become self-sufficient, so it would not engage in foreign trade. From an economic perspective, this idea would a. make sense if Xenophobia had an absolute advantage in all goods. b. make sense if Xenophobia had no absolute advantages in any good. c. not make sense as long as Xenophobia had a comparative advantage in some good. d. not make sense as long as Xenophobia had an absolute advantage in at least half the goods

that could be traded.

ANS: C DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Comparative advantage | Trade MSC: Applicative

33. Specialization and trade are closely linked to

a. absolute advantage. b. comparative advantage. c. gains to some traders that exactly offset losses to other traders. d. shrinkage of the economic pie.

ANS: B DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Specialization MSC: Interpretive


34. When each person specializes in producing the good in which he or she has a comparative

advantage, total production in the economy a. falls. b. stays the same. c. rises. d. may fall, rise, or stay the same.

ANS: C DIF: 1 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Specialization MSC: Definitional

35. Total output in an economy increases when each person specializes because

a. there is less competition for the same resources. b. each person spends more time producing that product in which he or she has a

comparative advantage. c. a wider variety of products will be produced within each country due to specialization. d. government necessarily plays a larger role in the economy due to specialization.

ANS: B DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Specialization MSC: Interpretive

36. Which of the following statements is not correct?

a. Trade allows for specialization. b. Trade has the potential to benefit all nations. c. Trade allows nations to consume outside of their production possibilities curves. d. Absolute advantage is the driving force of specialization.

ANS: D DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Specialization MSC: Interpretive

37. Assume that Greece has a comparative advantage in fish and Germany has a comparative advantage

in cars. Also assume that Germany has an absolute advantage in both fish and cars. If these two countries specialize and trade so as to maximize the benefits of specialization and trade, then a. the two countries’ combined output of both goods will be higher than it would be in the

absence of trade. b. Greece will produce more fish than it would produce in the absence of trade. c. Germany will produce more cars than it would produce in the absence of trade. d. All of the above are correct.

ANS: D DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Specialization MSC: Applicative


38. Suppose that a worker in Radioland can produce either 4 radios or 1 television per year and a worker

in Teeveeland can produce either 2 radios or 5 televisions per year. Each nation has 100 workers, and each country specializes according to the principle of comparative advantage. If Radioland trades 100 televisions to Teeveeland in exchange for 100 radios each year, then each country's maximum consumption of new radios and televisions per year will be a. higher than it would be in the absence of trade because of the gains from trade. b. the same as it would be in the absence of trade. c. less than it would be in the absence of trade because neither country is specializing in the

product in which it has a comparative advantage. d. less than it would be in the absence of trade because Teeveeland has an absolute advantage

in both goods and so it cannot benefit by trading with Radioland.

ANS: C DIF: 3 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Specialization | Trade MSC: Analytical

39. Suppose that a worker in Radioland can produce either 4 radios or 1 television per year, and a

worker in Teeveeland can produce either 2 radios or 4 televisions per year. Each nation has 100 workers. Also suppose that each country completely specializes in producing the good in which it has a comparative advantage. If Radioland trades 100 radios to Teeveeland in exchange for 100 televisions each year, then each country's maximum consumption of new radios and televisions per year will be a. 100 radios, 300 televisions in Radioland and 300 radios, 100 televisions in Teeveeland. b. 300 radios, 100 televisions in Radioland and 100 radios, 300 televisions in Teeveeland. c. 200 radios, 100 televisions in Radioland and 100 radios, 200 televisions in Teeveeland. d. 300 radios, 100 televisions in Radioland and 100 radios, 400 televisions in Teeveeland.

ANS: B DIF: 3 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Specialization | Trade MSC: Analytical

40. Suppose that a worker in Freedonia can produce either 6 units of corn or 2 units of wheat per year,

and a worker in Sylvania can produce either 2 units of corn or 6 units of wheat per year. Each nation has 10 workers. Without trade, Freedonia produces and consumes 30 units of corn and 10 units of wheat per year. Sylvania produces and consumes 10 units of corn and 30 units of wheat. Suppose that trade is then initiated between the two countries, and Freedonia sends 30 units of corn to Sylvania in exchange for 30 units of wheat. Freedonia will now be able to consume a maximum of a. 30 units of corn and 30 units of wheat. b. 40 units of corn and 30 units of wheat. c. 40 units of corn and 20 units of wheat. d. 10 units of corn and 40 units of wheat.

ANS: A DIF: 3 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Specialization | Trade MSC: Analytical



and a worker in Sylvania can produce either 2 units of corn or 6 units of wheat per year. Each nation has 10 workers. Without trade, Freedonia produces and consumes 30 units of corn and 10 units of wheat per year. Sylvania produces and consumes 10 units of corn and 30 units of wheat. Suppose that trade is then initiated between the two countries, and Freedonia sends 30 units of corn to Sylvania in exchange for 30 units of wheat. Sylvania will now be able to consume a maximum of a. 30 units of corn and 30 units of wheat. b. 40 units of corn and 30 units of wheat. c. 40 units of corn and 20 units of wheat. d. 10 units of corn and 40 units of wheat.


42. Suppose that a worker in Agland can produce either 10 units of organic grain or 2 units of incense

per year, and a worker in Zenland can produce either 5 units of organic grain or 15 units of incense per year. There are 20 workers in Agland and 10 workers in Zenland. Currently the two countries do not trade. Agland produces and consumes 100 units of grain and 20 units of incense per year. Zenland produces and consumes 50 units of grain and no incense per year. If each country made the decision to specialize in producing the good in which it has a comparative advantage, then the combined yearly output of the two countries would increase by a. 30 units of grain and 100 units of incense. b. 30 units of grain and 150 units of incense. c. 50 units of grain and 90 units of incense. d. 50 units of grain and 130 units of incense.

ANS: D DIF: 3 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Specialization | Trade MSC: Analytical

43. Suppose that a worker in Cornland can grow either 40 bushels of corn or 10 bushels of oats per year,

and a worker in Oatland can grow either 5 bushels of corn or 50 bushels of oats per year. There are 20 workers in Cornland and 20 workers in Oatland. If the two countries do not trade, Cornland will produce and consume 400 bushels of corn and 100 bushels of oats, while Oatland will produce and consume 60 bushels of corn and 400 bushels of oats. If each country made the decision to specialize in producing the good in which it has a comparative advantage, then the combined yearly output of the two countries would increase by a. 280 bushels of corn and 450 bushels of oats. b. 340 bushels of corn and 500 bushels of oats. c. 360 bushels of corn and 520 bushels of oats. d. 360 bushels of corn and 640 bushels of oats.




and a worker in Sylvania can produce either 2 units of corn or 6 units of wheat per year. Each nation has 10 workers. For many years the two countries traded, each completely specializing according to their respective comparative advantages. Now, however, war has broken out between them and all trade has stopped. Without trade, Freedonia produces and consumes 30 units of corn and 10 units of wheat per year. Sylvania produces and consumes 10 units of corn and 30 units of wheat. The war has caused the combined yearly output of the two countries to decline by a. 10 units of corn and 10 units of wheat. b. 20 units of corn and 20 units of wheat. c. 30 units of corn and 30 units of wheat. d. 40 units of corn and 40 units of wheat.


45. Suppose that a worker in Caninia can produce either 2 blankets or 8 meals per day, and a worker in

Felinia can produce either 5 blankets or 1 meal per day. Each nation has 10 workers. For many years, the two countries traded, each completely specializing according to their respective comparative advantages. Now war has broken out between them and all trade has stopped. Without trade, Caninia produces and consumes 10 blankets and 40 meals per day and Felinia produces and consumes 25 blankets and 5 meals per day. The war has caused the combined daily output of the two countries to decline by a. 15 blankets and 35 meals. b. 25 blankets and 40 meals. c. 35 blankets and 45 meals. d. 50 blankets and 80 meals.


46. Two people can benefit from specialization and trade by obtaining a good at a price that is

a. lower than his or her opportunity cost of that good. b. the same as his or her opportunity cost of that good. c. higher than his or her opportunity cost of that good. d. different than his or her opportunity cost of that good.

ANS: A DIF: 1 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Gains from trade MSC: Definitional


47. The gains from trade are

a. evident in economic models, but seldom observed in the real world. b. evident in the real world, but impossible to capture in economic models. c. a result of more efficient resource allocation than would be observed in the absence of

trade. d. based on the principle of absolute advantage.

ANS: C DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Gains from trade MSC: Interpretive

48. Trade can make everybody better off because it

a. increases cooperation among nations. b. allows people to specialize according to comparative advantage. c. requires some workers in an economy to be retrained. d. reduces competition among domestic companies.

ANS: B DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Gains from trade MSC: Interpretive

49. If labor in Mexico is less productive than labor in the United States in all areas of production,

a. then neither nation can benefit from trade. b. then Mexico can benefit from trade but the United States cannot. c. then the United States will have a comparative advantage relative to Mexico in the

production of all goods. d. then both Mexico and the United States still can benefit from trade.

ANS: D DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Gains from trade MSC: Applicative

50. Adam Smith

a. and David Ricardo both opposed free trade. b. opposed free trade, but David Ricardo supported it. c. supported free trade, but David Ricardo opposed it. d. and David Ricardo both supported free trade.

ANS: D DIF: 1 REF: 3-2 NAT: Analytic LOC: The study of economics and the definitions of economics TOP: Economists MSC: Interpretive

51. Adam Smith asserted that a person should never attempt to make at home

a. what it will cost him more to make than to buy. b. any good in which that person does not have an absolute advantage. c. any luxury good. d. any necessity.

ANS: A DIF: 2 REF: 3-2 NAT: Analytic LOC: The study of economics and the definitions of economics TOP: Economists MSC: Interpretive


52. Which famous economist developed the principle of comparative advantage as we know it today?

a. Adam Smith b. David Ricardo c. John Maynard Keynes d. Milton Friedman

ANS: B DIF: 1 REF: 3-2 NAT: Analytic LOC: The study of economics and the definitions of economics TOP: Economists MSC: Definitional


a. Economists are generally united in their support of free trade. b. The conclusions of Adam Smith and David Ricardo on the gains from trade have held up

well over time. c. David Ricardo argued that Britain should not restrict imports of grain. d. Economists’ opposition to trade restrictions is still based largely on the principle of

absolute advantage.

ANS: D DIF: 1 REF: 3-2 NAT: Analytic LOC: The study of economics and the definitions of economics TOP: Economists MSC: Definitional

54. Economists generally support

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

ANS: D DIF: 2 REF: 3-2 NAT: Analytic LOC: The study of economics and the definitions of economics TOP: Economists MSC: Interpretive

Sec03 - Interdependence and the Gains from Trade - Applications of Comparative

Advantage

MULTIPLE CHOICE

1. By definition, imports are

a. people who work in foreign countries. b. goods in which a country has an absolute advantage. c. limits placed on the quantity of goods leaving a country. d. goods produced abroad and sold domestically.

ANS: D DIF: 1 REF: 3-3 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Imports MSC: Definitional


2. By definition, exports are

a. limits placed on the quantity of goods brought into a country. b. goods in which a country has an absolute advantage. c. people who work in foreign countries. d. goods produced domestically and sold abroad.

ANS: D DIF: 1 REF: 3-3 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Exports MSC: Definitional

3. Trade between countries

a. allows each country to consume at a point outside its production possibilities frontier. b. limits a country’s ability to produce goods and services on its own. c. must benefit both countries equally; otherwise, trade is not mutually beneficial. d. can best be understood by examining the countries’ absolute advantages.


4. When a country has a comparative advantage in producing a certain good,

a. the country should import that good. b. the country should produce just enough of that good for its own consumption. c. the country’s opportunity cost of that good is high relative to other countries’ opportunity

costs of that same good. d. None of the above is correct.

ANS: D DIF: 2 REF: 3-3 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Comparative advantage MSC: Interpretive

5. Which of the following would not result from all countries specializing according to the principle of

comparative advantage? a. The size of the economic pie would increase. b. Worldwide production of goods and services would increase. c. The well-being of citizens in each country would be enhanced. d. Each country’s production possibilities frontier would shift outward.

ANS: D DIF: 2 REF: 3-3 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Specialization | Trade MSC: Interpretive

6. A country that currently does not trade with other countries could benefit by

a. restricting imports and promoting exports. b. promoting imports and restricting exports. c. restricting both imports and exports. d. not restricting trade.



7. Suppose the United States has a comparative advantage over Mexico in producing pork. The

principle of comparative advantage asserts that a. the United States should produce more pork than what it requires and export some of it to

Mexico. b. the United States should produce a moderate quantity of pork and import the remainder of

what it requires from Mexico. c. the United States should refrain altogether from producing pork and import all of what it

requires from Mexico. d. Mexico has nothing to gain from importing United States pork.

ANS: A DIF: 2 REF: 3-3 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Comparative advantage | Trade MSC: Applicative

8. Belarus has a comparative advantage in the production of linen, but Russia has an absolute

advantage in the production of linen. If these two countries decide to trade, a. Belarus should export linen to Russia. b. Russia should export linen to Belarus. c. trading linen would provide no net advantage to either country. d. Without additional information about opportunity costs, this question cannot be answered.

ANS: A DIF: 2 REF: 3-3 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Comparative advantage | Trade MSC: Applicative

9. Suppose that a worker in Boatland can produce either 5 units of wheat or 25 units of fish per year,

and a worker in Farmland can produce either 25 units of wheat or 5 units of fish per year. There are 10 workers in each country. Political pressure from the fish lobby in Farmland and from the wheat lobby in Boatland has prevented trade between the two countries on the grounds that cheap imports would kill the fish industry in Farmland and the wheat industry in Boatland. As a result, Boatland produces and consumes 25 units of wheat and 125 units of fish per year while Farmland produces and consumes 125 units of wheat and 25 units of fish per year. If the political pressure were overcome and trade were to occur, each country would completely specialize in the product in which it has a comparative advantage. If trade were to occur, the combined output of the two countries would increase by a. 25 units of wheat and 25 units of fish. b. 50 units of wheat and 50 units of fish. c. 75 units of wheat and 75 units of fish. d. 100 units of wheat and 100 units of fish.



10. Suppose that a worker in Boatland can produce either 5 units of wheat or 25 units of fish per year,

and a worker in Farmland can produce either 25 units of wheat or 5 units of fish per year. There are 30 workers in each country. No trade occurs between the two countries. Boatland produces and consumes 75 units of wheat and 375 units of fish per year while Farmland produces and consumes 375 units of wheat and 75 units of fish per year. If trade were to occur, Boatland would trade 90 units of fish to Farmland in exchange for 80 units of wheat. If Boatland now completely specializes in fish production, how many units of fish could it now consume along with the 80 units of imported wheat? a. 490 units b. 500 units c. 610 units d. 660 units


Sec01-03 -Tables & Figures - Interdependence and the Gains from Trade

MULTIPLE CHOICE

Table 3-1

Assume that Sardi and Tinaka can switch between producing corn and producing pork at a constant rate.

Minutes Needed to Make 1

Bushel of Corn Pound of Pork

Sardi 20 12

Tinaka 15 10

1. Refer to Table 3-1. Assume that Sardi and Tinaka each has 360 minutes available. If each person

divides his time equally between the production of corn and pork, then total production is a. 10.5 bushels of corn and 16.5 pounds of pork. b. 21 bushels of corn and 33 pounds of pork. c. 35 bushels of corn and 22 pounds of pork. d. 42 bushels of corn and 66 pounds of pork.

ANS: B DIF: 2 REF: 3-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production MSC: Applicative


2. Refer to Table 3-1. Which of the following combinations of corn and pork could Sardi produce in

one 8-hour day? a. 6 bushels of corn and 35 pounds of pork b. 9 bushels of corn and 25 pounds of pork c. 15 bushels of corn and 20 pounds of pork d. 24 bushels of corn and 40 pounds of pork

ANS: B DIF: 3 REF: 3-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production MSC: Analytical

3. Refer to Table 3-1. Which of the following combinations of corn and pork could Tinaka not

produce in one 10-hour day? a. 10 bushels of corn and 45 pounds of pork b. 20 bushels of corn and 30 pounds of pork c. 25 bushels of corn and 25 pounds of pork d. 30 bushels of corn and 15 pounds of pork

ANS: C DIF: 3 REF: 3-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production MSC: Analytical

4. Refer to Table 3-1. What is Sardi’s opportunity cost of producing one bushel of corn?

a. 3/5 pound of pork b. 6/5 pounds of pork c. 4/3 pounds of pork d. 5/3 pounds of pork


5. Refer to Table 3-1. What is Sardi’s opportunity cost of producing one pound of pork?

a. 3/5 bushel of corn b. 6/5 bushels of corn c. 4/3 bushels of corn d. 5/3 bushels of corn


6. Refer to Table 3-1. What is Tinaka’s opportunity cost of producing one bushel of corn?

a. 2/3 pound of pork b. 3/4 pound of pork c. 5/6 pound of pork d. 3/2 pounds of pork



7. Refer to Table 3-1. What is Tinaka’s opportunity cost of producing one pound of pork?

a. 2/3 bushel of corn b. 3/4 bushel of corn c. 5/6 bushel of corn d. 3/2 bushels of corn


8. Refer to Table 3-1. Sardi has an absolute advantage in the production of

a. corn and Tinaka has an absolute advantage in the production of pork. b. pork and Tinaka has an absolute advantage in the production of corn. c. both goods and Tinaka has an absolute advantage in the production of neither good. d. neither good and Tinaka has an absolute advantage in the production of both goods.

ANS: D DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Absolute advantage MSC: Applicative

9. Refer to Table 3-1. Sardi has a comparative advantage in the production of

a. corn and Tinaka has a comparative advantage in the production of pork. b. pork and Tinaka has a comparative advantage in the production of corn. c. both goods and Tinaka has a comparative advantage in the production of neither good. d. neither good and Tinaka has a comparative advantage in the production of both goods.


10. Refer to Table 3-1. Sardi should specialize in the production of

a. corn and Tinaka should specialize in the production of pork. b. pork and Tinaka should specialize in the production of corn. c. both goods and Tinaka should specialize in the production of neither good. d. neither good and Tinaka should specialize in the production of both goods.

ANS: B DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Specialization MSC: Applicative

11. Refer to Table 3-1. Assume that Sardi and Tinaka each has 60 minutes available. If each person

spends all his time producing the good in which he has a comparative advantage, then total production is a. 3 bushels of corn and 6 pounds of pork. b. 3.5 bushels of corn and 5.5 pounds of pork. c. 4 bushels of corn and 5 pounds of pork. d. 7 bushels of corn and 11 pounds of pork.

ANS: C DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Specialization MSC: Applicative


12. Refer to Table 3-1. At which of the following prices would both Sardi and Tinaka gain from trade

with each other? a. 6 bushels of corn for 10.5 pounds of pork b. 12 bushels of corn for 19 pounds of pork c. 24 bushels of corn for 34 pounds of pork d. Sardi and Tinaka could not both gain from trade with each other at any price.

ANS: B DIF: 3 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Price of trade MSC: Analytical

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

Labor Hours Needed to Make 1

Cooler Radio

Aruba 2 5

Iceland 1 4

13. 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

b.

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

d.

100 200 300 400 500 coolers

100

200

300

400

500

radios



14. Refer to Table 3-2. Which of the following represents Iceland's production possibilities frontier

when 100 labor hours are available? a.

1 2 3 4 5 coolers

1

2

3

4

5

radios

b.

1 2 3 4 5 coolers

1

2

3

4

5

radios

c.

25 50 75 100 125 coolers

25

50

75

100

125

radios

d.

100 200 300 400 500 coolers

100

200

300

400

500

radios



15. Refer to Table 3-2. Assume that Aruba and Iceland each has 80 labor hours available. If each

country divides its time equally between the production of coolers and radios, then total production is a. 28 coolers and 50 radios. b. 30 coolers and 9 radios. c. 60 coolers and 18 radios. d. 120 coolers and 36 radios.

ANS: C DIF: 2 REF: 3-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production MSC: Applicative

16. 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 radios b. 5 coolers and 6 radios c. 11 coolers and 4 radios d. 13 coolers and 3 radios


17. Refer to Table 3-2. Aruba’s opportunity cost of one cooler is

a. 0.4 radio and Iceland’s opportunity cost of one cooler is 0.25 radio. b. 0.4 radio and Iceland’s opportunity cost of one cooler is 4 radios. c. 2.5 radios and Iceland’s opportunity cost of one cooler is 0.25 radio. d. 2.5 radios and Iceland’s opportunity cost of one cooler is 4 radios.


18. Refer to Table 3-2. Suppose Aruba decides to increase its production of radios by 10. What is the

opportunity cost of this decision? a. 0.25 coolers b. 2.5 coolers c. 4 coolers d. 25 coolers



19. Refer to Table 3-2. Aruba has an absolute advantage in the production of

a. coolers and Iceland has an absolute advantage in the production of radios. b. radios and Iceland has an absolute advantage in the production of coolers. c. both goods and Iceland has an absolute advantage in the production of neither good. d. neither good and Iceland has an absolute advantage in the production of both goods.


20. Refer to Table 3-2. Aruba has a comparative advantage in the production of

a. coolers and Iceland has a comparative advantage in the production of radios. b. radios and Iceland has a comparative advantage in the production of coolers. c. both goods and Iceland has a comparative advantage in the production of neither good. d. neither good and Iceland has a comparative advantage in the production of both goods.


21. Refer to Table 3-2. Aruba should specialize in the production of

a. coolers and Iceland should specialize in the production of radios. b. radios and Iceland should specialize in the production of coolers. c. both goods and Iceland should specialize in the production of neither good. d. neither good and Iceland should specialize in the production of both goods.


22. Refer to Table 3-2. Assume that Aruba and Iceland each has 80 labor hours available. Originally,

each country divided its time equally between the production of coolers and radios. Now, each country spends all its time producing the good in which it has a comparative advantage. As a result, the total output of coolers increased by a. 20. b. 40. c. 60. d. 80.

ANS: A DIF: 3 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Specialization MSC: Analytical


23. Refer to Table 3-2. At which of the following prices would both Aruba and Iceland gain from trade

with each other? a. 2 radios for 4 coolers b. 2 radio for 6 coolers c. 2 radio for 10 coolers d. Aruba and Iceland could not both gain from trade with each other at any price.


24. Refer to Table 3-2. Aruba and Iceland would not be able to gain from trade if Iceland's opportunity

cost of one radio changed to a. 0 coolers. b. 0.25 coolers. c. 2.5 coolers. d. Aruba and Iceland can always gain from trade regardless of their opportunity costs.

ANS: C DIF: 3 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Gains from trade MSC: Analytical

25. Refer to Table 3-2. Aruba should export

a. coolers and import radios. b. radios and import coolers. c. both goods and import neither good. d. neither good and import both goods.

ANS: B DIF: 2 REF: 3-3 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Exports | Imports MSC: Applicative

26. Refer to Table 3-2. Iceland should export

a. coolers and import radios. b. radios and import coolers. c. both goods and import neither good. d. neither good and import both goods.

ANS: A DIF: 2 REF: 3-3 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Exports | Imports MSC: Applicative


Table 3-3

Assume that Zimbabwe and Portugal can switch between producing toothbrushes and producing hairbrushes at a constant rate.

Machine Minutes Needed to Make 1

Toothbrush Hairbrush

Zimbabwe 3 10

Portugal 5 6

27. Refer to Table 3-3. Which of the following represents Zimbabwe’s and Portugal’s production

possibilities frontiers when each country has 60 minutes of machine time available? a. Zimbabwe Portugal

Toothbrushes

Hairbrushes

1 2 3 4 5

2

4

6

8

10

Toothbrushes

Hairbrushes

1 2 3 4 5

2

4

6

8

10

b. Zimbabwe Portugal

Toothbrushes

Hairbrushes

2 4 6 8 10

1

2

3

4

5

Toothbrushes

Hairbrushes

2 4 6 8 10

1

2

3

4

5

c. Zimbabwe Portugal

Toothbrushes

Hairbrushes

36 72 108 144 180

100

200

300

400

500

600

Toothbrushes

Hairbrushes

100 200 300 400 500

72

144

216

288

360

432

d. Zimbabwe Portugal


Toothbrushes

Hairbrushes

5 10 15 20 25

2

4

6

8

10

Toothbrushes

Hairbrushes

2 4 6 8 10

2

4

6

8

10


28. Refer to Table 3-3. Assume that Zimbabwe and Portugal each has 180 machine minutes available.

If each country divides its time equally between the production of toothbrushes and hairbrushes, then total production is a. 24 toothbrushes and 12 hairbrushes. b. 48 toothbrushes and 24 hairbrushes. c. 96 toothbrushes and 48 hairbrushes. d. 720 toothbrushes and 1440 hairbrushes.


29. Refer to Table 3-3. Which of the following combinations of toothbrushes and hairbrushes could

Portugal produce in 30 minutes? a. 1 toothbrush and 4 hairbrushes b. 4 toothbrushes and 2 hairbrushes c. 5 toothbrushes and 6 hairbrushes d. 6 toothbrushes and 5 hairbrushes

ANS: A DIF: 3 REF: 3-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production MSC: Analytical

30. Refer to Table 3-3. Which of the following combinations of toothbrushes and hairbrushes could

Zimbabwe not produce in 120 minutes? a. 5 toothbrushes and 11 hairbrushes b. 10 toothbrushes and 9 hairbrushes c. 20 toothbrushes and 6 hairbrushes d. 30 toothbrushes and 3 hairbrushes



31. Refer to Table 3-3. Zimbabwe’s opportunity cost of one hairbrush is

a. 3/10 toothbrush and Portugal’s opportunity cost of one hairbrush is 5/6 toothbrush. b. 3/10 toothbrush and Portugal’s opportunity cost of one hairbrush is 6/5 toothbrushes. c. 10/3 toothbrushes and Portugal’s opportunity cost of one hairbrush is 5/6 toothbrush. d. 10/3 toothbrushes and Portugal’s opportunity cost of one hairbrush is 6/5 toothbrushes.


32. Refer to Table 3-3. Suppose Zimbabwe decides to increase its production of toothbrushes by 10.

What is the opportunity cost of this decision? a. 0.3 hairbrush b. 3 hairbrushes c. 30 hairbrushes d. 100 hairbrushes


33. Refer to Table 3-3. Zimbabwe has an absolute advantage in the production of

a. toothbrushes and a comparative advantage in the production of toothbrushes. b. toothbrushes and a comparative advantage in the production of hairbrushes. c. hairbrushes and a comparative advantage in the production of toothbrushes. d. hairbrushes and a comparative advantage in the production of hairbrushes.

ANS: A DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Absolute advantage | Comparative advantage MSC: Applicative

34. Refer to Table 3-3. Portugal has an absolute advantage in the production of

a. toothbrushes and a comparative advantage in the production of toothbrushes. b. toothbrushes and a comparative advantage in the production of hairbrushes. c. hairbrushes and a comparative advantage in the production of toothbrushes. d. hairbrushes and a comparative advantage in the production of hairbrushes.



35. Refer to Table 3-3. Assume that Zimbabwe and Portugal each has 60 machine minutes available.

Originally, each country divided its time equally between the production of toothbrushes and hairbrushes. Now, each country spends all its time producing the good in which it has a comparative advantage. As a result, the total output increased by a. 4 toothbrushes and 2 hairbrushes. b. 10 toothbrushes and 5 hairbrushes. c. 16 toothbrushes and 8 hairbrushes. d. 20 toothbrushes and 10 hairbrushes.


36. Refer to Table 3-3. Zimbabwe and Portugal would not be able to gain from trade if Zimbabwe's

opportunity cost of one toothbrush changed to a. 0 coolers. b. 5/6 cooler. c. 6/5 coolers. d. Zimbabwe and Portugal can always gain from trade regardless of their opportunity costs.

ANS: B DIF: 3 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Gains from trade MSC: Analytical

Table 3-4

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

Labor Hours Needed to Make 1 Pound of

Pounds Produced in 40 Hours

Meat Potatoes Meat Potatoes

Farmer 10 2 4 20

Rancher 4 8 10 5

37. Refer to Table 3-4. Assume that the farmer and the rancher each has 40 labor hours available. If

each person divides his time equally between the production of meat and potatoes, then total production is a. 5 pounds of meat and 10 pounds of potatoes. b. 7 pounds of meat and 12.5 pounds of potatoes. c. 10 pounds of meat and 20 pounds of potatoes. d. 14 pounds of meat and 25 pounds of potatoes.



38. Refer to Table 3-4. Which of the following combinations of meat and potatoes could the farmer

produce in 40 hours? a. 1 pound of meat and 15 pounds of potatoes. b. 2 pounds of meat and 11 pounds of potatoes. c. 3 pounds of meat and 6 pounds of potatoes. d. 4 pounds of meat and 20 pounds of potatoes.


39. Refer to Table 3-4. Which of the following combinations of meat and potatoes could the rancher

not produce in 40 hours? a. 2.5 pounds of meat and 3.75 pounds of potatoes. b. 5 pounds of meat and 2.5 pounds of potatoes. c. 7.5 pounds of meat and 1.25 pounds of potatoes. d. 10 pounds of meat and 0.5 pound of potatoes.

ANS: D DIF: 3 REF: 3-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production MSC: Analytical

40. Refer to Table 3-4. The opportunity cost of 1 pound of meat for the farmer is

a. 1/5 pound of potatoes. b. 1/5 hour of labor. c. 5 pounds of potatoes. d. 10 hours of labor.


41. Refer to Table 3-4. The opportunity cost of 1 pound of meat for the rancher is

a. 1/2 pound of potatoes. b. 2 hours of labor. c. 2 pounds of potatoes. d. 4 hours of labor.


42. Refer to Table 3-4. The opportunity cost of 1 pound of potatoes for the farmer is

a. 1/5 pound of meat. b. 2 hours of labor. c. 5 pounds of meat. d. 5 hours of labor.



43. Refer to Table 3-4. The opportunity cost of 1 pound of potatoes for the rancher is

a. 1/2 pound of meat. b. 1/2 hour of labor. c. 2 pounds of meat. d. 8 hours of labor.


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

a. meat. b. potatoes. c. both goods. d. neither good.

ANS: B DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Absolute advantage MSC: Applicative

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



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



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




48. Refer to Table 3-4. The farmer should specialize in the production of

a. meat and the rancher should specialize in the production of potatoes. b. potatoes and the rancher should specialize in the production of meat. c. both goods and the rancher should specialize in the production of neither good. d. neither good and the rancher should specialize in the production of both goods.



each person spends all his time producing the good in which he has a comparative advantage, then total production is a. 4 pounds of meat and 5 pounds of potatoes. b. 10 pounds of meat and 20 pounds of potatoes. c. 14 pounds of meat and 25 pounds of potatoes. d. 24 pounds of meat and 15 pounds of potatoes.



each person spends all his time producing the good in which he has a comparative advantage and trade takes place at a price of 2 pounds of meat for 6 pounds of potatoes, then a. the farmer and the rancher will both gain from this trade. b. the farmer will gain from this trade, but the rancher will not. c. the rancher will gain from this trade, but the farmer will not. d. neither the farmer nor the rancher will gain from this trade.

ANS: A DIF: 3 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Gains from trade MSC: Analytical

51. Refer to Table 3-4. Without trade, the farmer produced and consumed 3 pounds of meat and 5

pounds of potatoes and the rancher produced and consumed 4 pounds of meat and 3 pounds of potatoes. Then, each person agreed to specialize in the production of the good in which they have a comparative advantage and trade 4 pounds of meat for 8 pounds of potatoes. As a result, the farmer gained a. 1 pound of meat and 3 pounds of potatoes and the rancher gained 0 pounds of meat and 5

pounds of potatoes. b. 1 pound of meat and 7 pounds of potatoes and the rancher gained 2 pounds of meat and 5

pounds of potatoes. c. 4 pounds of meat and 8 pounds of potatoes and the rancher gained 4 pounds of meat and 8

pounds of potatoes. d. 4 pounds of meat and 12 pounds of potatoes and the rancher gained 6 pounds of meat and

8 pounds of potatoes.



Table 3-5

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

Labor Hours Needed to Make 1 Unit of

Number of Units Produced in 40 Hours

Cheese Bread Cheese Bread

England 1 4 40 10

Spain 4 8 10 5

52. 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 is a. 20 units of cheese and 5 units of bread. b. 25 units of cheese and 7.5 units of bread. c. 40 units of cheese and 10 units of bread. d. 50 units of cheese and 15 units of bread.


53. Refer to Table 3-5. Which of the following combinations of cheese and bread could Spain produce

in 40 hours? a. 2.25 units of cheese and 4 units of bread. b. 5.5 units of cheese and 3 units of bread. c. 7 units of cheese and 1.5 units of bread. d. 10 units of cheese and 5 units of bread.


54. 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.



55. 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, then a. the slope of England’s production possibilities frontier would be -4 and the slope of

Spain’s production possibilities frontier would be -2. b. the slope of England’s production possibilities frontier would be -0.25 and the slope of

Spain’s production possibilities frontier would be -0.5. c. the slope of England’s production possibilities frontier would be 0.25 and the slope of

Spain’s production possibilities frontier would be 0.5. d. the slope of England’s production possibilities frontier would be 4 and the slope of Spain’s

production possibilities frontier would be 2.



frontier for England and a second production possibilities frontier for Spain. If we were to do this, measuring bread along the horizontal axis, then a. the slope of England’s production possibilities frontier would be -4 and the slope of

Spain’s production possibilities frontier would be -2. b. the slope of England’s production possibilities frontier would be -0.25 and the slope of

Spain’s production possibilities frontier would be -0.5. c. the slope of England’s production possibilities frontier would be 0.25 and the slope of

Spain’s production possibilities frontier would be 0.5. d. the slope of England’s production possibilities frontier would be 4 and the slope of Spain’s


ANS: A DIF: 3 REF: 3-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier MSC: Analytical

57. Refer to Table 3-5. The opportunity cost of 1 unit of cheese for England is

a. 1/4 unit of bread. b. 1 hour of labor. c. 4 units of bread. d. 4 hours of labor.


58. Refer to Table 3-5. The opportunity cost of 1 unit of cheese for Spain is

a. 1/2 unit of bread. b. 2 hours of labor. c. 2 units of bread. d. 4 hours of labor.



59. Refer to Table 3-5. The opportunity cost of 1 unit of bread for England is

a. 1/4 unit of cheese. b. 1/4 hour of labor. c. 4 units of cheese. d. 4 hours of labor.


60. Refer to Table 3-5. The opportunity cost of 1 unit of bread for Spain is

a. 1/2 unit of cheese. b. 1/2 hour of labor. c. 2 units of cheese. d. 8 hours of labor.


61. Refer to Table 3-5. England has an absolute advantage in the production of

a. cheese and Spain has an absolute advantage in the production of bread. b. bread and Spain has an absolute advantage in the production of cheese. c. both goods and Spain has an absolute advantage in the production of neither good. d. neither good and Spain has an absolute advantage in the production of both goods.


62. Refer to Table 3-5. England has a comparative advantage in the production of

a. cheese and Spain has a comparative advantage in the production of bread. b. bread and Spain has a comparative advantage in the production of cheese. c. both goods and Spain has a comparative advantage in the production of neither good. d. neither good and Spain has a comparative advantage in the production of both goods.


63. Refer to Table 3-5. England should specialize in the production of

a. cheese and Spain should specialize in the production of bread. b. bread and Spain should specialize in the production of cheese. c. both goods and Spain should specialize in the production of neither good. d. neither good and Spain should specialize in the production of both goods.

ANS: A DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Specialization MSC: Applicative


64. Refer to Table 3-5. Assume that England and Spain each has 40 labor hours available. Originally,

each country divided its time equally between the production of cheese and bread. Now, each country spends all its time producing the good in which it has a comparative advantage. As a result, the total output of cheese increased by a. 15. b. 20. c. 25. d. 40.


65. Refer to Table 3-5. At which of the following prices would both England and Spain gain from

trade with each other? a. 16 units of bread for 16 units of cheese b. 16 units of bread for 24 units of cheese c. 16 units of bread for 48 units of cheese d. England and Spain could not both gain from trade with each other at any price.

ANS: C DIF: 3 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Price of trade MSC: Analytical

66. Refer to Table 3-5. If England and Spain each spends all its time producing the good in which it

has a comparative advantage and the countries agree to trade 2 units of bread for 6 units of cheese, then England will consume a. 34 units of cheese and 2 units of bread and Spain will consume 6 units of cheese and 3

units of bread. b. 34 units of cheese and 2 units of bread and Spain will consume 16 units of cheese and 3

units of bread. c. 34 units of cheese and 12 units of bread and Spain will consume 6 units of cheese and 3

units of bread. d. 34 units of cheese and 12 units of bread and Spain will consume 16 units of cheese and 3

units of bread.

ANS: A DIF: 3 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Comparative advantage | Trade MSC: Analytical


67. Refer to Table 3-5. Without trade, England produced and consumed 32 units of cheese and 2 units

of bread and Spain produced and consumed 6 units of cheese and 2 units of bread. Then, each country agreed to specialize in the production of the good in which it has a comparative advantage and trade 7 units of cheese for 2.5 units of bread. As a result, England gained a. 0 units of cheese and 0.5 unit of bread and Spain gained 1 unit of cheese and 0.5 unit of

bread. b. 1 unit of cheese and 0.5 unit of bread and Spain gained 1 unit of cheese and 0.5 unit of

bread. c. 7 units of cheese and 2.5 units of bread and Spain gained 7 units of cheese and 2.5 units of

bread. d. 33 units of cheese and 2.5 units of bread and Spain gained 7 units of cheese and 2.5 units

of bread.


68. Refer to Table 3-5. England should export

a. cheese and import bread. b. bread and import cheese. c. both goods and import neither good. d. neither good and import both goods.

ANS: A DIF: 2 REF: 3-3 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Exports | Imports MSC: Applicative

69. Refer to Table 3-5. Spain should export

a. cheese and import bread. b. bread and import cheese. c. both goods and import neither good. d. neither good and import both goods.

ANS: B DIF: 2 REF: 3-3 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Exports | Imports MSC: Applicative


Table 3-6

Assume that Hilda and Carlos can switch between producing quilts and producing dresses at a constant rate.

Hours Needed To Make 1

Amount Produced in 90 Hours

Quilt Dress Quilts Dresses

Hilda 30 10 3 9

Carlos 90 45 1 2

70. Refer to Table 3-6. Assume that Hilda and Carlos each has 90 hours available. If each person

divides their time equally between the production of quilts and dresses, then total production is a. 1 quilt and 9 dresses. b. 2 quilts and 5.5 dresses. c. 3 quilts and 2 dresses. d. 4 quilts and 11 dresses.


71. Refer to Table 3-6. Which of the following combinations of quilts and dresses could Hilda produce

in 90 hours? a. 1.5 quilts and 5 dresses. b. 2 quilts and 3 dresses. c. 2.5 quilts and 2 dresses. d. 3 quilts and 1 dress.


72. Refer to Table 3-6. Which of the following combinations of quilts and dresses could Carlos not

produce in 90 hours? a. 0 quilts and 2 dresses. b. 0.5 quilt and 1.5 dresses. c. 0.75 quilt and 0.5 dress. d. 1 quilt and 0 dresses.




frontier for Hilda and a second production possibilities frontier for Carlos. If we were to do this, measuring quilts along the horizontal axis, then a. the slope of Hilda’s production possibilities frontier would be -3 and the slope of Carlos’

production possibilities frontier would be -2. b. the slope of Hilda’s production possibilities frontier would be -0.33 and the slope of

Carlos’ production possibilities frontier would be -0.5. c. the slope of Hilda’s production possibilities frontier would be 0.33 and the slope of

Carlos’ production possibilities frontier would be 0.5. d. the slope of Hilda’s production possibilities frontier would be 3 and the slope of Carlos’




frontier for Hilda and a second production possibilities frontier for Carlos. If we were to do this, measuring dresses along the horizontal axis, then a. the slope of Hilda’s production possibilities frontier would be -3 and the slope of Carlos’

production possibilities frontier would be -2. b. the slope of Hilda’s production possibilities frontier would be -0.33 and the slope of

Carlos’ production possibilities frontier would be -0.5. c. the slope of Hilda’s production possibilities frontier would be 0.33 and the slope of

Carlos’ production possibilities frontier would be 0.5. d. the slope of Hilda’s production possibilities frontier would be 3 and the slope of Carlos’



75. Refer to Table 3-6. The opportunity cost of 1 quilt for Hilda is

a. 1/3 dress. b. 1/3 hour of labor. c. 3 dresses. d. 30 hours of labor.


76. Refer to Table 3-6. The opportunity cost of 1 quilt for Carlos is

a. 1/2 dress. b. 1/2 hour of labor. c. 2 dresses. d. 90 hours of labor.



77. Refer to Table 3-6. The opportunity cost of 1 dress for Hilda is

a. 1/3 quilt. b. 3 hours of labor. c. 3 quilts. d. 10 hours of labor.


78. Refer to Table 3-6. The opportunity cost of 1 dress for Carlos is

a. 1/2 quilt. b. 2 hours of labor. c. 2 quilts. d. 45 hours of labor.


79. Refer to Table 3-6. Hilda has an absolute advantage in the production of

a. both goods and a comparative advantage in the production of quilts. b. both goods and a comparative advantage in the production of dresses. c. neither good and a comparative advantage in the production of quilts. d. neither good and a comparative advantage in the production of dresses.

ANS: B DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Absolute advantage | Comparative advantage MSC: Applicative

80. Refer to Table 3-6. Carlos has an absolute advantage in the production of

a. both goods and a comparative advantage in the production of quilts. b. both goods and a comparative advantage in the production of dresses. c. neither good and a comparative advantage in the production of quilts. d. neither good and a comparative advantage in the production of dresses.

ANS: C DIF: 2 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Absolute advantage | Comparative advantage MSC: Applicative

81. Refer to Table 3-6. Hilda should specialize in the production of

a. quilts and Carlos should specialize in the production of dresses. b. dresses and Carlos should specialize in the production of quilts. c. both goods and Carlos should specialize in the production of neither good. d. neither good and Carlos should specialize in the production of both goods.



82. Refer to Table 3-6. Assume that Hilda and Carlos each has 90 hours available. Originally, each

person divided their time equally between the production of quilts and dresses. Now, each person spends all their time producing the good in which they have a comparative advantage. As a result, the total output of dresses increased by a. 3.5. b. 4.5. c. 5.5. d. 9.


83. Refer to Table 3-6. At which of the following prices would both Hilda and Carlos gain from trade

with each other? a. 10 quilts for 25 dresses b. 20 quilts for 70 dresses c. 30 quilts for 120 dresses d. Hilda and Carlos could not both gain from trade with each other at any price.

ANS: A DIF: 3 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Price of trade MSC: Analytical

Table 3-7

Assume that Japan and Korea can switch between producing cars and producing airplanes at a constant rate.

Hours Needed to Make 1

Quantity Produced in 2400 Hours

Car Airplane Cars Airplanes

Japan 30 150 80 16

Korea 50 150 48 16

84. Refer to Table 3-7. Assume that Japan and Korea each has 2400 hours available. If each country

divides its time equally between the production of cars and airplanes, then total production is a. 40 cars and 8 airplanes. b. 64 cars and 16 airplanes. c. 80 cars and 16 airplanes. d. 128 cars and 32 airplanes.




frontier for Japan and a second production possibilities frontier for Korea. If we were to do this, measuring cars along the horizontal axis, then a. the slope of Japan’s production possibilities frontier would be -5 and the slope of Korea’s

production possibilities frontier would be -3. b. the slope of Japan’s production possibilities frontier would be -0.2 and the slope of

Korea’s production possibilities frontier would be -0.33. c. the slope of Japan’s production possibilities frontier would be 0.2 and the slope of Korea’s

production possibilities frontier would be 0.33. d. the slope of Japan’s production possibilities frontier would be 5 and the slope of Korea’s




frontier for Japan and a second production possibilities frontier for Korea. If we were to do this, measuring airplanes along the horizontal axis, then a. the slope of Japan’s production possibilities frontier would be -5 and the slope of Korea’s

production possibilities frontier would be -3. b. the slope of Japan’s production possibilities frontier would be -0.2 and the slope of

Korea’s production possibilities frontier would be -0.33. c. the slope of Japan’s production possibilities frontier would be 0.2 and the slope of Korea’s

production possibilities frontier would be 0.33. d. the slope of Japan’s production possibilities frontier would be 5 and the slope of Korea’s



87. Refer to Table 3-7. Japan’s opportunity cost of one airplane is

a. 1/5 car and Korea’s opportunity cost of one airplane is 1/3 car. b. 1/5 car and Korea’s opportunity cost of one airplane is 3 cars. c. 5 cars and Korea’s opportunity cost of one airplane is 1/3 car. d. 5 cars and Korea’s opportunity cost of one airplane is 3 cars.



88. Refer to Table 3-7. Suppose Japan decides to increase its production of cars by 45. What is the

opportunity cost of this decision? a. 9 airplanes b. 15 airplanes c. 135 airplanes d. 225 airplanes


89. Refer to Table 3-7. Japan has an absolute advantage in the production of

a. cars and a comparative advantage in the production of cars. b. cars and a comparative advantage in the production of airplanes. c. neither good and a comparative advantage in the production of cars. d. neither good and a comparative advantage in the production of airplanes.


90. Refer to Table 3-7. Korea has an absolute advantage in the production of

a. cars and a comparative advantage in the production of cars. b. cars and a comparative advantage in the production of airplanes. c. neither good and a comparative advantage in the production of cars. d. neither good and a comparative advantage in the production of airplanes.


91. Refer to Table 3-7. Assume that Japan and Korea each has 2400 hours available. Originally, each

country divided its time equally between the production of cars and airplanes. Now, each country spends all its time producing the good in which it has a comparative advantage. As a result, the total output of cars increased by a. 16. b. 40. c. 64. d. 80.



92. Refer to Table 3-7. Japan and Korea would not be able to gain from trade if Korea's opportunity

cost of one car changed to a. 1/5 airplane. b. 1/3 airplane. c. 3 airplanes. d. 5 airplanes.


93. Refer to Table 3-7. Assume that Japan and Korea each has 2400 hours available. If each country

spends all its time producing the good in which it has a comparative advantage and trade takes place at a price of 12 cars for 6 airplanes, then a. Japan and Korea will both gain from this trade. b. Japan will gain from this trade, but Korea will not. c. Korea will gain from this trade, but Japan will not. d. neither Japan nor Korea will gain from this trade.


94. Refer to Table 3-7. Without trade, Japan produced and consumed 50 cars and 6 airplanes and

Korea produced and consumed 27 cars and 7 airplanes. Then, each country agreed to specialize in the production of the good in which it has a comparative advantage and trade 28 cars for 8 airplanes. As a result, Japan gained a. 0 cars and 2 airplanes and Korea gained 1 car and 1 airplane. b. 2 cars and 2 airplanes and Korea gained 1 car and 1 airplane. c. 28 cars and 8 airplanes and Korea gained 28 cars and 8 airplanes. d. 52 cars and 8 airplanes and Korea gained 28 cars and 8 airplanes.


95. Refer to Table 3-7. Japan should specialize in the production of

a. cars and import airplanes. b. airplanes and import cars. c. both goods and import neither good. d. neither good and import both goods.

ANS: A DIF: 2 REF: 3-3 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Specialization | Imports MSC: Applicative


96. Refer to Table 3-7. Korea should specialize in the production of

a. cars and import airplanes. b. airplanes and import cars. c. both goods and import neither good. d. neither good and import both goods.

ANS: B DIF: 2 REF: 3-3 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Specialization | Imports MSC: Applicative

Table 3-8

Assume that Kito and Penda can switch between producing baskets and producing birdhouses at a constant rate.

Labor Hours Needed to Make 1

Quantity Produced in 24 Hours

Basket Birdhouse Baskets Birdhouses

Kito 8 2 3 12

Penda 1.5 2 16 12

97. Refer to Table 3-8. Assume that Kito and Penda each has 24 labor hours available. If each person

divides their time equally between the production of baskets and birdhouses, then total production is a. 4.75 baskets and 2 birdhouses. b. 9.5 baskets and 12 birdhouses. c. 16 baskets and 12 birdhouses. d. 19 baskets and 24 birdhouses.


98. Refer to Table 3-8. Which of the following points would not be on Kito's production possibilities

frontier, based on a 24-hour production period? a. (1 basket, 8 birdhouses) b. (1.5 baskets, 6 birdhouses) c. (2 baskets, 4 birdhouses) d. (2.5 baskets, 3 birdhouses)



99. Refer to Table 3-8. Which of the following points would be on Penda's production possibilities

frontier, based on a 24-hour production period? a. (4 baskets, 10 birdhouses) b. (8 baskets, 6 birdhouses) c. (12 baskets, 2 birdhouses) d. More than one of the above would be on Penda’s production possibilities frontier.


100. Refer to Table 3-8. The opportunity cost of 1 basket for Kito is

a. 1/4 birdhouse. b. 2/3 birdhouse. c. 3/2 birdhouses. d. 4 birdhouses.


101. Refer to Table 3-8. The opportunity cost of 1 basket for Penda is

a. 1/8 birdhouse. b. 3/4 birdhouse. c. 4/3 birdhouses. d. 8 birdhouses.


102. Refer to Table 3-8. The opportunity cost of 1 birdhouse for Kito is

a. 1/4 basket. b. 2/3 basket. c. 3/2 baskets. d. 4 baskets.


103. Refer to Table 3-8. The opportunity cost of 1 birdhouse for Penda is

a. 1/8 basket. b. 3/4 basket. c. 4/3 baskets. d. 8 baskets.



104. Refer to Table 3-8. Kito has an absolute advantage in the production of

a. baskets and a comparative advantage in the production of baskets. b. baskets and a comparative advantage in the production of birdhouses. c. neither good and a comparative advantage in the production of baskets. d. neither good and a comparative advantage in the production of birdhouses.


105. Refer to Table 3-8. Penda has an absolute advantage in the production of

a. baskets and a comparative advantage in the production of baskets. b. baskets and a comparative advantage in the production of birdhouses. c. neither good and a comparative advantage in the production of baskets. d. neither good and a comparative advantage in the production of birdhouses.


106. Refer to Table 3-8. Assume that Kito and Penda each has 24 labor hours available. Originally,

each person divided their time equally between the production of baskets and birdhouses. Now, each person spends all their time producing the good in which they have a comparative advantage. As a result, the total output of baskets increased by a. 6.5. b. 8. c. 9.5. d. 16.


107. Refer to Table 3-8. At which of the following prices would both Kito and Penda gain from trade

with each other? a. 30 baskets for 15 birdhouses b. 30 baskets for 18 birdhouses c. 30 baskets for 24 birdhouses d. Kito and Penda could not both gain from trade with each other at any price.



Table 3-9

Barb and Jim run a business that sets up and tests computers. Assume that Barb and Jim can switch between setting up and testing computers at a constant rate. The following table applies.

Minutes Needed to Number of Computers Set Up or Tested in a 40-

Hour Week

Set Up 1 Computer

Test 1 Computer

Computers Set Up

Computers Tested

Barb 48 ? 50 40

Jim 30 40 80 60

108. Refer to Table 3-9. The number of minutes needed by Barb to test a computer is

a. 36. b. 48. c. 60. d. 64.


109. Refer to Table 3-9. Which of the following points would not be on Barb's production possibilities

frontier, based on a 40-hour week? a. (0 computers set up, 40 computers tested) b. (8 computers set up, 32 computers tested) c. (25 computers set up, 20 computers tested) d. (30 computers set up, 16 computers tested)


110. Refer to Table 3-9. Which of the following points would not be on Jim's production possibilities

frontier, based on a 40-hour week? a. (0 computers set up, 60 computers tested) b. (40 computers set up, 30 computers tested) c. (60 computers set up, 12 computers tested) d. (72 computers set up, 6 computers tested)

ANS: C DIF: 3 REF: 3-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier MSC: Analytical


111. Refer to Table 3-9. Barb’s opportunity cost of setting up one computer is testing

a. 4/5 computer and Jim’s opportunity cost of setting up one computer is testing 3/4 computer.

b. 4/5 computer and Jim’s opportunity cost of setting up one computer is testing 4/3 computers.

c. 5/4 computers and Jim’s opportunity cost of setting up one computer is testing 3/4 computer.

d. 5/4 computers and Jim’s opportunity cost of setting up one computer is testing 4/3 computers.


112. Refer to Table 3-9. Barb’s opportunity cost of testing one computer is setting up

a. 4/5 computer and Jim’s opportunity cost of testing one computer is setting up 3/4 computer.

b. 4/5 computer and Jim’s opportunity cost of testing one computer is setting up 4/3 computers.

c. 5/4 computers and Jim’s opportunity cost of testing one computer is setting up 3/4 computer.

d. 5/4 computers and Jim’s opportunity cost of testing one computer is setting up 4/3 computers.


113. Refer to Table 3-9. Barb has an absolute advantage in

a. both setting up and testing computers and a comparative advantage in setting up computers.

b. both setting up and testing computers and a comparative advantage in testing computers. c. neither setting up nor testing computers and a comparative advantage in setting up

computers. d. neither setting up nor testing computers and a comparative advantage in testing computers.


114. Refer to Table 3-9. Jim has an absolute advantage in

a. both setting up and testing computers and a comparative advantage in setting up computers.

b. both setting up and testing computers and a comparative advantage in testing computers. c. neither setting up nor testing computers and a comparative advantage in setting up

computers. d. neither setting up nor testing computers and a comparative advantage in testing computers.



Table 3-10

Juanita and Shantala run a business that programs and tests cellular phones. Assume that Juanita and Shantala can switch between programming and testing cellular phones at a constant rate. The following table applies.

Minutes Needed to Number of Cellular Phones Programmed or Tested in a 40-

Hour Week

Program 1 Cellular Phone

Test 1 Cellular Phone

Cellular Phones Programmed

Cellular Phones Tested

Juanita ? 2 160 1200

Shantala 10 4 240 600

115. Refer to Table 3-10. The number of minutes needed by Juanita to program a cellular phone is

a. 4. b. 5. c. 7.5. d. 15.

ANS: D DIF: 2 REF: 3-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production MSC: Applicative

116. Refer to Table 3-10. Which of the following points would be on Juanita's production possibilities

frontier, based on a 40-hour week? a. (120 cellular phones programmed, 295 cellular phones tested) b. (130 cellular phones programmed, 225 cellular phones tested) c. (140 cellular phones programmed, 155 cellular phones tested) d. Both (a) and (b) would be on Juanita’s production possibilities frontier.


117. Refer to Table 3-10. Which of the following points would be on Shantala's production possibilities

frontier, based on a 40-hour week? a. (120 cellular phones programmed, 250 cellular phones tested) b. (180 cellular phones programmed, 150 cellular phones tested) c. (240 cellular phones programmed, 600 cellular phones tested) d. More than one of the above would be on Shantala’s production possibilities frontier.



118. Refer to Table 3-10. Juanita has an absolute advantage in

a. programming cellular phones and a comparative advantage in programming cellular phones.

b. programming cellular phones and a comparative advantage in testing cellular phones. c. testing cellular phones and a comparative advantage in programming cellular phones. d. testing cellular phones and a comparative advantage in testing cellular phones.


119. Refer to Table 3-10. Shantala has an absolute advantage in

a. programming cellular phones and a comparative advantage in programming cellular phones.

b. programming cellular phones and a comparative advantage in testing cellular phones. c. testing cellular phones and a comparative advantage in programming cellular phones. d. testing cellular phones and a comparative advantage in testing cellular phones.


Table 3-11 Assume that Falda and Varick can switch between producing wheat and producing cloth at a constant rate.

Quantity Produced in 1 Hour

Bushels of

Wheat

Yards of

Cloth

Falda 8 12

Varick 6 15

120. Refer to Table 3-11. Assume that Falda and Varick each has 1 hour available. If each person

divides their time equally between the production of wheat and cloth, then total production is a. 4 bushels of wheat and 7.5 yards of cloth. b. 7 bushels of wheat and 13.5 yards of cloth. c. 8 bushels of wheat and 15 yards of cloth. d. 14 bushels of wheat and 27 yards of cloth.



121. Refer to Table 3-11. Falda’s opportunity cost of one bushel of wheat is

a. 2/3 yard of cloth and Varick’s opportunity cost of one bushel of wheat is 2/5 yard of cloth. b. 2/3 yard of cloth and Varick’s opportunity cost of one bushel of wheat is 5/2 yards of

cloth. c. 3/2 yards of cloth and Varick’s opportunity cost of one bushel of wheat is 2/5 yard of

cloth. d. 3/2 yards of cloth and Varick’s opportunity cost of one bushel of wheat is 5/2 yards of

cloth.


122. Refer to Table 3-11. Falda’s opportunity cost of one yard of cloth is

a. 2/3 bushel of wheat and Varick’s opportunity cost of one yard of cloth is 2/5 bushel of wheat.

b. 2/3 bushel of wheat and Varick’s opportunity cost of one yard of cloth is 5/2 bushels of wheat.

c. 3/2 bushels of wheat and Varick’s opportunity cost of one yard of cloth is 2/5 bushel of wheat.

d. 3/2 bushels of wheat and Varick’s opportunity cost of one yard of cloth is 5/2 bushels of wheat.


123. Refer to Table 3-11. Falda has an absolute advantage in the production of

a. wheat. b. cloth. c. both goods. d. neither good.


124. Refer to Table 3-11. Varick has an absolute advantage in the production of




125. Refer to Table 3-11. Falda has a comparative advantage in the production of



126. Refer to Table 3-11. Varick has a comparative advantage in the production of



Figure 3-1

Panel (a) Panel (b)

chairs

couches

chairs

couches

127. Refer to Figure 3-1. The rate of tradeoff between producing chairs and producing couches is

constant in a. Panel (a). b. Panel (b). c. both Panel (a) and Panel (b). d. neither Panel (a) nor Panel (b).



128. Refer to Figure 3-1. The rate of tradeoff between producing chairs and producing couches depends

on how many chairs and couches are being produced in a. Panel (a). b. Panel (b). c. both Panel (a) and Panel (b). d. neither Panel (a) nor Panel (b).

ANS: A DIF: 2 REF: 3-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production possibilities frontier MSC: Interpretive

Figure 3-2 Peru’s Production Possibilities Frontier

1 2 3 4 5 6 7 8 emeralds

40

80

120

160

200

240

280

320

360

400rubies

129. Refer to Figure 3-2. The fact that the line slopes downward reflects the fact that

a. for Peru, it is more costly to produce emeralds than it is to produce rubies. b. Peru will produce more emeralds and fewer rubies as time goes by. c. Peru faces a tradeoff between producing emeralds and producing rubies. d. Peru should specialize in producing rubies.


130. Refer to Figure 3-2. If the production possibilities frontier shown is for 40 hours of production,

then how long does it take Peru to make one emerald? a. 1/6 hour b. 1/5 hour c. 5 hours d. 6 hours



131. Refer to Figure 3-2. If the production possibilities frontier shown is for 40 hours of production,

then how long does it take Peru to make one ruby? a. 1/6 hour b. 1/5 hour c. 5 hours d. 6 hours

ANS: A DIF: 2 REF: 3-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production MSC: Applicative

132. Refer to Figure 3-2. If the production possibilities frontier shown is for one month of production,

then which of the following combinations of emeralds and rubies could Peru produce in a given month? a. 7 emeralds and 40 rubies b. 5 emeralds and 92 rubies c. 3 emeralds and 165 rubies d. 2 emeralds and 180 rubies


133. Refer to Figure 3-2. If the production possibilities frontier shown is for one month of production,

then which of the following combinations of emeralds and rubies could Peru not produce in a given month? a. 6 emeralds and 60 rubies b. 4 emeralds and 120 rubies c. 3 emeralds and 160 rubies d. 1 emeralds and 210 rubies


134. Refer to Figure 3-2. Suppose Peru decides to increase its production of rubies by 30. What is the

opportunity cost of this decision? a. 1/8 emerald b. 1/3 emerald c. 1 emerald d. 3 emeralds



135. Refer to Figure 3-2. Suppose Peru decides to increase its production of emeralds by 2. What is the

opportunity cost of this decision? a. 30 rubies b. 40 rubies c. 60 rubies d. 120 rubies


136. Refer to Figure 3-2. Suppose Madagascar is willing to trade 40 rubies to Peru for each emerald

that Peru produces and sends to Madagascar. Which of the following combinations of emeralds and rubies could Peru then consume, assuming Peru specializes in emerald production? a. 2 emeralds and 240 rubies b. 3 emeralds and 220 rubies c. 4 emeralds and 200 rubies d. 5 emeralds and 140 rubies

ANS: A DIF: 3 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Trade MSC: Analytical


Figure 3-3

Bob’s Production Possibilities Frontier Enid’s Production Possibilities Frontier

50 100 150 200 250 300 350 400 tacos

50

100

150

200

250

300

350

400

450

500burritos

50 100 150 200 250 300 350 400 tacos

50

100

150

200

250

300

350

400

450

500burritos

137. Refer to Figure 3-3. If Enid must work 0.25 hour to produce each taco, then her production

possibilities frontier is based on how many hours of work? a. 40 hours b. 100 hours c. 400 hours d. 1600 hours


138. Refer to Figure 3-3. If the production possibilities frontier shown for Bob is for 100 hours of

production, then how long does it take Bob to make one burrito? a. 1/4 hour b. 1/3 hour c. 3 hours d. 4 hours


139. Refer to Figure 3-3. If Bob and Enid both spend all of their time producing tacos, then total

production is a. 400 tacos and 0 burritos. b. 400 tacos and 250 burritos. c. 800 tacos and 0 burritos. d. 800 tacos and 500 burritos.



140. Refer to Figure 3-3. If Bob and Enid each divides their time equally between the production of

tacos and burritos, then total production is a. 200 tacos and 150 burritos. b. 400 tacos and 250 burritos. c. 400 tacos and 300 burritos. d. 800 tacos and 500 burritos.


141. Refer to Figure 3-3. If the production possibilities frontiers shown are each for one day of

production, then which of the following combinations of tacos and burritos could Bob and Enid together produce in a given day? a. 400 tacos and 350 burritos b. 500 tacos and 250 burritos c. 600 tacos and 150 burritos d. 700 tacos and 100 burritos



production, then which of the following combinations of tacos and burritos could Bob and Enid together not produce in a given day? a. 200 tacos and 400 burritos b. 300 tacos and 350 burritos c. 400 tacos and 300 burritos d. 600 tacos and 250 burritos


143. Refer to Figure 3-3. Bob’s opportunity cost of one burrito is

a. 3/4 taco and Enid’s opportunity cost of one burrito is 1/2 taco. b. 3/4 taco and Enid’s opportunity cost of one burrito is 2 tacos. c. 4/3 tacos and Enid’s opportunity cost of one burrito is 1/2 taco. d. 4/3 tacos and Enid’s opportunity cost of one burrito is 2 tacos.



144. Refer to Figure 3-3. Bob would incur an opportunity cost of 36 burritos if he increased his

production of tacos by a. 27. b. 48. c. 108. d. 144.

ANS: B DIF: 3 REF: 3-2 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Opportunity cost MSC: Analytical

145. Refer to Figure 3-3. Which of the following is not correct?

a. Bob and Enid could each consume 100 tacos and 100 burritos without trade. b. Neither Bob nor Enid could each consume 200 tacos and 200 burritos without trade. c. Bob and Enid could each consume 200 tacos and 200 burritos with trade. d. Total consumption of burritos could not be 600 either with or without trade.

ANS: C DIF: 3 REF: 3-2 NAT: Analytic LOC: Understanding and applying economic models TOP: Consumption MSC: Analytical

146. Refer to Figure 3-3. Suppose Bob is willing to trade 6 burritos to Enid for each 10 tacos that Enid

produces and sends to Bob. Which of the following combinations of tacos and burritos could Enid then consume, assuming Enid specializes in taco production and Bob specializes in burrito production? a. 100 tacos and 200 burritos b. 200 tacos and 130 burritos c. 300 tacos and 60 burritos d. 340 tacos and 40 burritos

ANS: C DIF: 3 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Trade MSC: Analytical

147. Refer to Figure 3-3. Bob has an absolute advantage in the production of

a. burritos and a comparative advantage in the production of tacos. b. burritos and a comparative advantage in the production of burritos. c. neither good and a comparative advantage in the production of tacos. d. neither good and a comparative advantage in the production of burritos.



148. Refer to Figure 3-3. Enid has an absolute advantage in the production of

a. burritos and a comparative advantage in the production of tacos. b. burritos and a comparative advantage in the production of burritos. c. neither good and a comparative advantage in the production of tacos. d. neither good and a comparative advantage in the production of burritos.


149. Refer to Figure 3-3. Bob should specialize in the production of

a. tacos and Enid should specialize in the production of burritos. b. burritos and Enid should specialize in the production of tacos. c. both goods and Enid should specialize in the production of neither good. d. neither good and Enid should specialize in the production of both goods.


150. Refer to Figure 3-3. If Bob and Enid switch from each person dividing their time equally between

the production of tacos and burritos to each person spending all of their time producing the good in which they have a comparative advantage, then total production of burritos will increase by a. 50. b. 100. c. 150. d. 300.


151. Refer to Figure 3-3. At which of the following prices would both Bob and Enid gain from trade

with each other? a. 12 burritos for 21 tacos b. 12 burritos for 27 tacos c. 12 burritos for 36 tacos d. Bob and Enid could not both gain from trade with each other at any price.



152. Refer to Figure 3-3. Bob and Enid would not be able to gain from trade if Enid's opportunity cost

of one taco changed to a. 1/2 burrito. b. 3/4 burrito. c. 4/3 burritos. d. 2 burritos.


153. Refer to Figure 3-3. Without trade, Bob produced and consumed 240 tacos and 120 burritos and

Enid produced and consumed 100 tacos and 150 burritos. Then, each person agreed to specialize in the production of the good in which they have a comparative advantage and trade 260 tacos for 156 burritos. As a result, Bob gained a. 20 tacos and 24 burritos and Enid gained 40 tacos and 6 burritos. b. 20 tacos and 36 burritos and Enid gained 160 tacos and 6 burritos. c. 260 tacos and 144 burritos and Enid gained 140 tacos and 156 burritos. d. 260 tacos and 156 burritos and Enid gained 260 tacos and 156 burritos.



Figure 3-4

Perry’s Production Possibilities Frontier Jordan’s Production Possibilities Frontier

1 2 3 4 5 6 7 8 novels

2

4

6

8

10

12

14

16

18

20poems

1 2 3 4 5 6 7 8 novels

2

4

6

8

10

12

14

16

18

20poems

154. Refer to Figure 3-4. If Jordan must work 3 months to write each novel, then her production

possibilities frontier is based on how many months of work? a. 1 month b. 3 months c. 4 months d. 12 months


155. Refer to Figure 3-4. If the production possibilities frontier shown for Perry is for 6 months of

writing, then how long does it take Perry to write one poem? a. 1/3 month b. 1/2 month c. 2 months d. 3 months


156. Refer to Figure 3-4. If Perry and Jordan both spend all of their time writing poems, then total

production is a. 3 poems. b. 6 poems. c. 12 poems. d. 24 poems.



157. Refer to Figure 3-4. If Perry and Jordan each divides their time equally between writing novels and

writing poems, then total production is a. 2 novels and 6 poems. b. 3 novels and 12 poems. c. 4 novels and 12 poems. d. 6 novels and 24 poems.


158. Refer to Figure 3-4. If the production possibilities frontiers shown are each for one year of writing,

then which of the following combinations of novels and poems could Perry and Jordan together write in a given year? a. 1 novel and 22 poems b. 2 novels and 18 poems c. 3 novels and 16 poems d. 5 novels and 8 poems


159. Refer to Figure 3-4. If the production possibilities frontiers shown are each for one year of writing,

then which of the following combinations of novels and poems could Perry and Jordan together not

write in a given year? a. 1 novel and 21 poems b. 2 novels and 20 poems c. 3 novels and 15 poems d. 5 novels and 6 poems


160. Refer to Figure 3-4. The opportunity cost of 1 novel for Perry is

a. 1/6 poem. b. 2 poems. c. 6 poems. d. 12 poems.



161. Refer to Figure 3-4. The opportunity cost of 1 novel for Jordan is

a. 1/3 poem. b. 3 poems. c. 4 poems. d. 12 poems.


162. Refer to Figure 3-4. The opportunity cost of 1 poem for Perry is

a. 1/12 novel. b. 1/6 novel. c. 2 novels. d. 6 novels.


163. Refer to Figure 3-4. The opportunity cost of 1 poem for Jordan is

a. 1/2 novel. b. 1/3 novel. c. 3 novels. d. 4 novels.


164. Refer to Figure 3-4. Which of the following is not correct?

a. Perry and Jordan could each consume 2 novels and 6 poems without trade. b. Jordan could consume 2 novels and 6 poems both with and without trade. c. Perry and Jordan could each consume 2 novels and 6 poems with trade. d. Perry and Jordan could each consume 12 poems without trade.

ANS: A DIF: 3 REF: 3-2 NAT: Analytic LOC: Understanding and applying economic models TOP: Consumption MSC: Analytical

165. Refer to Figure 3-4. Suppose Perry is willing to trade 4 poems to Jordan for each novel that Jordan

writes and sends to Perry. Which of the following combinations of novels and poems could Jordan then consume, assuming Jordan specializes in novel production and Perry specializes in poem production? a. 1 novel and 14 poems b. 2 novels and 8 poems c. 3 novels and 6 poems d. 4 novels and 2 poems

ANS: B DIF: 3 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Trade MSC: Analytical


166. Refer to Figure 3-4. Perry has an absolute advantage in the production of

a. novels and Jordan has an absolute advantage in the production of poems. b. poems and Jordan has an absolute advantage in the production of novels. c. novels and Jordan has an absolute advantage in the production of neither good. d. neither good and Jordan has an absolute advantage in the production of novels.


167. Refer to Figure 3-4. Perry has a comparative advantage in the production of

a. novels and Jordan has a comparative advantage in the production of poems. b. poems and Jordan has a comparative advantage in the production of novels. c. novels and Jordan has a comparative advantage in the production of neither good. d. neither good and Jordan has a comparative advantage in the production of novels.


168. Refer to Figure 3-4. Perry should specialize in the production of

a. novels. b. poems. c. both goods. d. neither good.


169. Refer to Figure 3-4. Jordan should specialize in the production of

a. novels. b. poems. c. both goods. d. neither good.


170. Refer to Figure 3-4. If Perry and Jordan switch from each person dividing their time equally

between the production of novels and poems to each person spending all of their time producing the good in which they have a comparative advantage, then total production of novels will increase by a. 1. b. 2. c. 3. d. 4.



171. Refer to Figure 3-4. If Perry and Jordan each spends all their time producing the good in which

they have a comparative advantage and trade takes place at a price of 1 novel for 7 poems, then a. Perry and Jordan will both gain from this trade. b. Perry will gain from this trade, but Jordan will not. c. Jordan will gain from this trade, but Perry will not. d. neither Perry nor Jordan will gain from this trade.


Figure 3-5

Puneet’s Production Possibilities Frontier Chirag’s Production Possibilities Frontier

1 2 3 4 5 6 7 8 9 10 purses

1

2

3

4

5

6

7

8

9

10wallets

1 2 3 4 5 6 7 8 9 10 purses

1

2

3

4

5

6

7

8

9

10wallets

172. Refer to Figure 3-5. If Puneet must work 0.5 hour to make each purse, then his production

possibilities frontier is based on how many hours of work? a. 2 hours b. 5 hours c. 20 hours d. 50 hours


173. Refer to Figure 3-5. If the production possibilities frontier shown for Chirag is for 8 hours of work,

then how long does it take Chirag to make one purse? a. 1/2 hour b. 2 hours c. 4 hours d. 8 hours



174. Refer to Figure 3-5. If Puneet and Chirag both spend all of their time making wallets, then total

production is a. 7 wallets. b. 8 wallets. c. 14 wallets. d. 28 wallets.


175. Refer to Figure 3-5. If Puneet and Chirag each divides his time equally between making purses and

making wallets, then total production is a. 4 purses and 8 wallets. b. 7 purses and 7 wallets. c. 10 purses and 6 wallets. d. 14 purses and 14 wallets.


176. Refer to Figure 3-5. Puneet’s opportunity cost of one purse is

a. 4/5 wallet and Chirag’s opportunity cost of one purse is 2/3 wallet. b. 4/5 wallet and Chirag’s opportunity cost of one purse is 3/2 wallets. c. 5/4 wallets and Chirag’s opportunity cost of one purse is 2/3 wallet. d. 5/4 wallets and Chirag’s opportunity cost of one purse is 3/2 wallets.


177. Refer to Figure 3-5. Puneet’s opportunity cost of one wallet is

a. 4/5 purse and Chirag’s opportunity cost of one wallet is 2/3 purse. b. 4/5 purse and Chirag’s opportunity cost of one wallet is 3/2 purses. c. 5/4 purses and Chirag’s opportunity cost of one wallet is 2/3 purse. d. 5/4 purses and Chirag’s opportunity cost of one wallet is 3/2 purses.


178. Refer to Figure 3-5. Puneet has an absolute advantage in the production of

a. purses and Chirag has an absolute advantage in the production of wallets. b. wallets and Chirag has an absolute advantage in the production of purses. c. both goods and Chirag has an absolute advantage in the production of neither good. d. neither good and Chirag has an absolute advantage in the production of both goods.



179. Refer to Figure 3-5. Puneet has a comparative advantage in the production of

a. purses and Chirag has a comparative advantage in the production of wallets. b. wallets and Chirag has a comparative advantage in the production of purses. c. both goods and Chirag has a comparative advantage in the production of neither good. d. neither good and Chirag has a comparative advantage in the production of both goods.


180. Refer to Figure 3-5. Puneet should specialize in the production of

a. purses. b. wallets. c. both goods. d. neither good.


181. Refer to Figure 3-5. Chirag should specialize in the production of

a. purses. b. wallets. c. both goods. d. neither good.


182. Refer to Figure 3-5. If Puneet and Chirag switch from each person dividing his time equally

between the production of purses and wallets to each person spending all of his time producing the good in which he has a comparative advantage, then total production of purses will increase by a. 2. b. 3. c. 5. d. 10.

ANS: B DIF: 3 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Specialization MSC: Analytical

183. Refer to Figure 3-5. At which of the following prices would both Puneet and Chirag gain from

trade with each other? a. 5 wallets for 1.25 purses b. 5 wallets for 2.5 purses c. 5 wallets for 3.75 purses d. Puneet and Chirag could not both gain from trade with each other at any price.



Figure 3-6

Maxine’s Production Possibilities Frontier Daisy’s Production Possibilities Frontier

3 6 9 12 15 18 21 24 27 30 pies

2

4

6

8

10

12

14

16

18

20tarts

3 6 9 12 15 18 21 24 27 30 pies

2

4

6

8

10

12

14

16

18

20

tarts

184. Refer to Figure 3-6. If Daisy must work 2.5 hours to make each pie, then her production

possibilities frontier is based on how many hours of work? a. 6 hours b. 7.5 hours c. 37.5 hours d. 50 hours


185. Refer to Figure 3-6. If the production possibilities frontier shown for Maxine is for 3 hours of

work, then how long does it take Maxine to make one pie? a. 1/4 hour b. 1/3 hour c. 3 hours d. 4 hours

ANS: A DIF: 2 REF: 3-1 NAT: Analytic LOC: Understanding and applying economic models TOP: Production MSC: Applicative


186. Refer to Figure 3-6. If Maxine and Daisy each divides her time equally between making pies and

making tarts, then total production is a. 6 pies and 10 tarts. b. 7.5 pies and 3 tarts. c. 7.5 pies and 10 tarts. d. 13.5 pies and 13 tarts.


187. Refer to Figure 3-6. If the production possibilities frontiers shown are each for one day of work,

then which of the following combinations of pies and tarts could Maxine and Daisy together make in a given day? a. 6 pies and 24 tarts b. 8 pies and 22 tarts c. 14 pies and 18 tarts d. 18 pies and 14 tarts


188. Refer to Figure 3-6. If the production possibilities frontiers shown are each for one day of work,

then which of the following combinations of pies and tarts could Maxine and Daisy together not make in a given day? a. 2 pies and 25 tarts b. 10 pies and 22 tarts c. 12 pies and 15 tarts d. 15 pies and 16 tarts


189. Refer to Figure 3-6. Suppose Maxine decides to increase her production of tarts by 5. What is the

opportunity cost of this decision? a. 2/5 pie b. 2 pies c. 5/2 pies d. 10 pies



190. Refer to Figure 3-6. Suppose Daisy decides to increase her production of pies by 6. What is the

opportunity cost of this decision? a. 8/3 tarts b. 4.5 tarts c. 8 tarts d. 10 tarts


191. Refer to Figure 3-6. Suppose Daisy is willing to trade 3/4 tart to Maxine for each pie that Maxine

makes and sends to Daisy. Which of the following combinations of pies and tarts could Maxine not then consume, assuming Maxine specializes in making pies and Daisy specializes in making tarts? a. 4 pies and 6 tarts b. 6 pies and 5 tarts c. 8 pies and 3 tarts d. 10 pies and 1.5 tarts


192. Refer to Figure 3-6. Maxine has an absolute advantage in the production of

a. both goods and a comparative advantage in the production of pies. b. both goods and a comparative advantage in the production of tarts. c. neither good and a comparative advantage in the production of pies. d. neither good and a comparative advantage in the production of tarts.


193. Refer to Figure 3-6. Daisy has an absolute advantage in the production of

a. both goods and a comparative advantage in the production of pies. b. both goods and a comparative advantage in the production of tarts. c. neither good and a comparative advantage in the production of pies. d. neither good and a comparative advantage in the production of tarts.



194. Refer to Figure 3-6. If Maxine and Daisy switch from each person dividing her time equally

between the production of pies and tarts to each person spending all of her time producing the good in which she has a comparative advantage, then total production of tarts will increase by a. 7. b. 10. c. 17. d. 20.


195. Refer to Figure 3-6. At which of the following prices would both Maxine and Daisy gain from

trade with each other? a. 4 tarts for 2 pies b. 8 tarts for 12 pies c. 12 tarts for 28 pies d. Maxine and Daisy could not both gain from trade with each other at any price.



Figure 3-7

Bintu’s Production Possibilities Frontier Juba’s Production Possibilities Frontier

1 2 3 4 5 6 7 8 bowls

1

2

3

4

5

6

7

8

9

10cups

1 2 3 4 5 6 7 8 bowls

1

2

3

4

5

6

7

8

9

10cups

196. Refer to Figure 3-7. If Bintu must work 2 hours to make each cup, then her production possibilities

frontier is based on how many hours of work? a. 2 hours b. 4 hours c. 8 hours d. 16 hours


197. Refer to Figure 3-7. If the production possibilities frontier shown for Juba is for 2 hours of work,

then how long does it take Juba to make one bowl? a. 1/8 hour b. 1/2 hour c. 2 hours d. 8 hours


198. Refer to Figure 3-7. If Bintu and Juba both spend all of their time making bowls, then total

production is a. 2 bowls. b. 3 bowls. c. 4 bowls. d. 6 bowls.



199. Refer to Figure 3-7. If Bintu and Juba each divides her time equally between making bowls and

making cups, then total production is a. 2 bowls and 6 cups. b. 3 bowls and 7 cups. c. 4 bowls and 8 cups. d. 6 bowls and 14 cups.


200. Refer to Figure 3-7. If the production possibilities frontiers shown are each for 4 hours of work,

then which of the following combinations of bowls and cups could Bintu and Juba together make in a given 4-hour production period? a. 1 bowl and 14 cups b. 2 bowls and 11 cups c. 3 bowls and 10 cups d. 5 bowls and 5 cups


201. Refer to Figure 3-7. If the production possibilities frontiers shown are each for 4 hours of work,

then which of the following combinations of bowls and cups could Bintu and Juba together not

make in a given 4-hour production period? a. 3 bowls and 9.5 cups b. 4.5 bowls and 6 cups c. 5 bowls and 4 cups d. 6 bowls and 1 cups


202. Refer to Figure 3-7. The opportunity cost of 1 bowl for Bintu is

a. 1/4 cup. b. 1/2 cup. c. 2 cups. d. 4 cups.



203. Refer to Figure 3-7. The opportunity cost of 1 bowl for Juba is

a. 1/4 cup. b. 2/3 cup. c. 3/2 cups. d. 4 cups.


204. Refer to Figure 3-7. The opportunity cost of 1 cup for Bintu is

a. 1/8 bowl. b. 1/4 bowl. c. 4 bowls. d. 8 bowls.


205. Refer to Figure 3-7. The opportunity cost of 1 cup for Juba is

a. 1/6 bowl. b. 2/3 bowl. c. 3/2 bowls. d. 6 bowls.


206. Refer to Figure 3-7. Suppose Juba is willing to trade one bowl to Bintu for every two cups that

Bintu makes and sends to Juba. Which of the following combinations of bowls and cups could Bintu then consume, assuming Bintu specializes in making cups and Juba specializes in making bowls? a. 1 bowl and 7 cups b. 2 bowls and 4 cups c. 3 bowls and 3 cups d. 4 bowls and 1 cup


207. Refer to Figure 3-7. Bintu has an absolute advantage in the production of

a. bowls and Juba has an absolute advantage in the production of cups. b. cups and Juba has an absolute advantage in the production of bowls. c. both goods and Juba has an absolute advantage in the production of neither good. d. neither good and Juba has an absolute advantage in the production of both goods.



208. Refer to Figure 3-7. Bintu has a comparative advantage in the production of

a. bowls and Juba has a comparative advantage in the production of cups. b. cups and Juba has a comparative advantage in the production of bowls. c. both goods and Juba has a comparative advantage in the production of neither good. d. neither good and Juba has a comparative advantage in the production of both goods.


209. Refer to Figure 3-7. If Bintu and Juba switch from each person dividing her time equally between

the production of cups and bowls to each person spending all of her time producing the good in which she has a comparative advantage, then total production will increase by a. 1 bowl and 1 cup. b. 2 bowls and 4 cups. c. 3 bowls and 5 cups. d. 4 bowls and 8 cups.


Figure 3-8

Belgium’s Production Possibilities Frontier Latvia’s Production Possibilities Frontier

2 4 6 8 10 12 14 16 18 20 waffles

2

4

6

8

10

12

14

16

18

20pancakes

2 4 6 8 10 12 14 16 18 20 waffles

2

4

6

8

10

12

14

16

18

20pancakes

210. Refer to Figure 3-8. If Belgium and Latvia each divides its time equally between making waffles

and making pancakes, then total production is a. 12 waffles and 12 pancakes. b. 14 waffles and 9 pancakes. c. 16 waffles and 6 pancakes. d. 28 waffles and 18 pancakes.




production, then which of the following combinations of waffles and pancakes could Belgium and Latvia together make in a given day? a. 4 waffles and 16 pancakes b. 8 waffles and 15 pancakes c. 16 waffles and 10 pancakes d. 24 waffles and 4 pancakes



production, then which of the following combinations of waffles and pancakes could Belgium and Latvia together not make in a given day? a. 4 waffles and 17 pancakes b. 8 waffles and 14 pancakes c. 16 waffles and 9 pancakes d. 24 waffles and 3 pancakes


213. Refer to Figure 3-8. Belgium’s opportunity cost of one waffle is

a. 3/4 pancake and Latvia’s opportunity cost of one waffle is 1/2 pancake. b. 3/4 pancake and Latvia’s opportunity cost of one waffle is 2 pancakes. c. 4/3 pancakes and Latvia’s opportunity cost of one waffle is 1/2 pancake. d. 4/3 pancakes and Latvia’s opportunity cost of one waffle is 2 pancakes.


214. Refer to Figure 3-8. Belgium would incur an opportunity cost of 36 waffles if it increased its

production of pancakes by a. 12. b. 27. c. 30. d. 48.

ANS: B DIF: 3 REF: 3-2 NAT: Analytic LOC: Scarcity, tradeoffs, and opportunity cost TOP: Opportunity cost MSC: Analytical


215. Refer to Figure 3-8. Belgium has an absolute advantage in the production of

a. waffles and Latvia has an absolute advantage in the production of pancakes. b. pancakes and Latvia has an absolute advantage in the production of waffles. c. both goods and Latvia has an absolute advantage in the production of neither good. d. neither good and Latvia has an absolute advantage in the production of both goods.


216. Refer to Figure 3-8. Belgium has a comparative advantage in the production of

a. waffles and Latvia has a comparative advantage in the production of pancakes. b. pancakes and Latvia has a comparative advantage in the production of waffles. c. both goods and Latvia has a comparative advantage in the production of neither good. d. neither good and Latvia has a comparative advantage in the production of both goods.


217. Refer to Figure 3-8. If Belgium and Latvia switch from each country dividing its time equally

between the production of waffles and pancakes to each country spending all of its time producing the good in which it has a comparative advantage, then total production of pancakes will increase by a. 3. b. 6. c. 9. d. 12.


218. Refer to Figure 3-8. At which of the following prices would both Belgium and Latvia gain from

trade with each other? a. 6 pancakes for 9 waffles b. 8 pancakes for 20 waffles c. 11 pancakes for 33 waffles d. Belgium and Latvia could not both gain from trade with each other at any price.



219. Refer to Figure 3-8. If Belgium and Latvia each spends all its time producing the good in which it

has a comparative advantage and the countries agree to trade 7 waffles for 5 pancakes, then Belgium will consume a. 7 waffles and 7 pancakes and Latvia will consume 5 waffles and 5 pancakes. b. 7 waffles and 7 pancakes and Latvia will consume 5 waffles and 11 pancakes. c. 23 waffles and 7 pancakes and Latvia will consume 5 waffles and 5 pancakes. d. 23 waffles and 7 pancakes and Latvia will consume 5 waffles and 11 pancakes.

ANS: A DIF: 3 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Comparative advantage | Trade MSC: Analytical

220. Refer to Figure 3-8. Belgium and Latvia would not be able to gain from trade if Latvia's

opportunity cost of one pancake changed to a. 1/2 waffle. b. 3/4 waffle. c. 4/3 waffles. d. 2 waffles.


221. Refer to Figure 3-8. Belgium should specialize in the production of

a. waffles and import pancakes. b. pancakes and import waffles. c. both goods and import neither good. d. neither good and import both goods.

ANS: B DIF: 2 REF: 3-3 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Specialization | Imports MSC: Applicative

222. Refer to Figure 3-8. Latvia should specialize in the production of

a. waffles and import pancakes. b. pancakes and import waffles. c. both goods and import neither good. d. neither good and import both goods.

ANS: A DIF: 2 REF: 3-3 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Specialization | Imports MSC: Applicative


Figure 3-9

Uzbekistan’s Production Possibilities Frontier Azerbaijan’s Production Possibilities Frontier

5 10 15 20 25 30 35 40 45 50 bolts

10

20

30

40

50

60

70

80

90

100nails

5 10 15 20 25 30 35 40 45 50 bolts

10

20

30

40

50

60

70

80

90

100nails

223. Refer to Figure 3-9. If Uzbekistan and Azerbaijan each divides its time equally between making

bolts and making nails, then total production is a. 15 bolts and 40 nails. b. 25 bolts and 70 nails. c. 30 bolts and 80 nails. d. 50 bolts and 140 nails.


224. Refer to Figure 3-9. If the production possibilities frontiers shown are each for two days of

production, then which of the following combinations of bolts and nails could Uzbekistan and Azerbaijan together make in a given 2-day production period? a. 12 bolts and 120 nails b. 24 bolts and 96 nails c. 38 bolts and 50 nails d. 44 bolts and 24 nails



225. Refer to Figure 3-9. If the production possibilities frontiers shown are each for two days of

production, then which of the following combinations of bolts and nails could Uzbekistan and Azerbaijan together not make in a given 2-day production period? a. 9 bolts and 122 nails b. 21 bolts and 98 nails c. 36 bolts and 56 nails d. 46 bolts and 18 nails


226. Refer to Figure 3-9. Azerbaijan’s opportunity cost of one nail is

a. 1/4 bolt and Uzbekistan’s opportunity cost of one nail is 1/2 bolt. b. 1/4 bolt and Uzbekistan’s opportunity cost of one nail is 2 bolts. c. 4 bolts and Uzbekistan’s opportunity cost of one nail is 1/2 bolt. d. 4 bolts and Uzbekistan’s opportunity cost of one nail is 2 bolts.


227. Refer to Figure 3-9. Suppose Uzbekistan decides to increase its production of bolts by 10. What is

the opportunity cost of this decision? a. 1/2 nail b. 2 nails c. 5 nails d. 20 nails


228. Refer to Figure 3-9. Suppose Azerbaijan is willing to trade 3 nails to Uzbekistan for every bolt that

Uzbekistan makes and sends to Azerbaijan. Which of the following combinations of bolts and nails could Azerbaijan then consume, assuming Uzbekistan specializes in making bolts and Azerbaijan specializes in making nails? a. 8 bolts and 56 nails b. 14 bolts and 44 nails c. 18 bolts and 32 nails d. 20 bolts and 26 nails

ANS: A DIF: 3 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Trade MSC: Analytical


229. Refer to Figure 3-9. Uzbekistan has an absolute advantage in the production of

a. bolts and a comparative advantage in the production of bolts. b. bolts and a comparative advantage in the production of nails. c. nails and a comparative advantage in the production of bolts. d. nails and a comparative advantage in the production of nails.


230. Refer to Figure 3-9. Azerbaijan has an absolute advantage in the production of

a. bolts and a comparative advantage in the production of bolts. b. bolts and a comparative advantage in the production of nails. c. nails and a comparative advantage in the production of bolts. d. nails and a comparative advantage in the production of nails.


231. Refer to Figure 3-9. If Uzbekistan and Azerbaijan switch from each country dividing its time

equally between the production of bolts and nails to each country spending all of its time producing the good in which it has a comparative advantage, then total production will increase by a. 5 bolts and 10 nails. b. 15 bolts and 40 nails. c. 20 bolts and 50 nails. d. 30 bolts and 80 nails.


232. Refer to Figure 3-9. If Uzbekistan and Azerbaijan each spends all its time producing the good in

which it has a comparative advantage and trade takes place at a price of 12 bolts for 36 nails, then a. neither Uzbekistan nor Azerbaijan will gain from this trade. b. Uzbekistan will gain from this trade, but Azerbaijan will not. c. Azerbaijan will gain from this trade, but Uzbekistan will not. d. both Uzbekistan and Azerbaijan will gain from this trade.

ANS: D DIF: 3 REF: 3-2 NAT: Analytic LOC: Gains from trade, specialization and trade TOP: Gains from trade MSC: Analytical


233. Refer to Figure 3-9. Without trade, Uzbekistan produced and consumed 12 bolts and 36 nails and

Azerbaijan produced and consumed 14 bolts and 24 nails. Then, each country agreed to specialize in the production of the good in which it has a comparative advantage and trade 16 bolts for 38 nails. As a result, Uzbekistan gained a. 2 bolts and 2 nails and Azerbaijan gained 2 bolts and 18 nails. b. 4 bolts and 2 nails and Azerbaijan gained 2 bolts and 14 nails. c. 14 bolts and 38 nails and Azerbaijan gained 16 bolts and 42 nails. d. 16 bolts and 38 nails and Azerbaijan gained 16 bolts and 38 nails.


266

Chapter 4

The Market Forces of Supply and Demand

TRUE/FALSE

1. Prices allocate a market economy’s scarce resources.

ANS: T DIF: 1 REF: 4-0 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Market economies MSC: Definitional

2. In a market economy, supply and demand determine both the quantity of each good produced and

the price at which it is sold.


3. A market is a group of buyers and sellers of a particular good or service.

ANS: T DIF: 1 REF: 4-1 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Markets MSC: Definitional

4. Sellers as a group determine the demand for a product, and buyers as a group determine the supply

of a product.

ANS: F DIF: 1 REF: 4-1 NAT: Analytic LOC: Supply and demand TOP: Demand | Supply MSC: Definitional

5. A yard sale is an example of a market.

ANS: T DIF: 2 REF: 4-1 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Markets MSC: Applicative

6. A newspaper’s classified ads are an example of a market.

ANS: T DIF: 2 REF: 4-1 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Markets MSC: Applicative

7. Most markets in the economy are highly competitive.

ANS: T DIF: 1 REF: 4-1 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Markets MSC: Definitional

Chapter 4 /The Market Forces of Supply and Demand 267

8. In a competitive market, the quantity of each good produced and the price at which it is sold are not

determined by any single buyer or seller.

ANS: T DIF: 1 REF: 4-1 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Competitive markets MSC: Definitional

9. In a competitive market, there are so few buyers and so few sellers that each has a significant impact

on the market price.

ANS: F DIF: 1 REF: 4-1 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Competitive markets MSC: Definitional

10. In a perfectly competitive market, the goods offered for sale are all exactly the same.

ANS: T DIF: 1 REF: 4-1 NAT: Analytic LOC: Perfect competition TOP: Perfect competition MSC: Definitional

11. In a perfectly competitive market, buyers and sellers are price setters.

ANS: F DIF: 1 REF: 4-1 NAT: Analytic LOC: Perfect competition TOP: Perfect competition MSC: Definitional

12. All goods and services are sold in perfectly competitive markets.

ANS: F DIF: 1 REF: 4-1 NAT: Analytic LOC: Perfect competition TOP: Perfect competition MSC: Definitional

13. If a good or service has only one seller, then the seller is called a monopoly.

ANS: T DIF: 1 REF: 4-1 NAT: Analytic LOC: Monopoly TOP: Monopoly MSC: Definitional

14. Monopolists are price takers.

ANS: F DIF: 2 REF: 4-1 NAT: Analytic LOC: Monopoly TOP: Monopoly MSC: Interpretive

15. Local cable TV companies frequently are monopolists.

ANS: T DIF: 1 REF: 4-1 NAT: Analytic LOC: Monopoly TOP: Monopoly MSC: Definitional

268 Chapter 4 /The Market Forces of Supply and Demand

16. The quantity demanded of a product is the amount that buyers are willing and able to purchase at a

particular price.

ANS: T DIF: 1 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Quantity demanded MSC: Definitional

17. The law of demand is true for most goods in the economy.

ANS: T DIF: 1 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Law of demand MSC: Definitional

18. The law of demand states that, other things equal, when the price of a good rises, the quantity

demanded of the good rises, and when the price falls, the quantity demanded falls.

ANS: F DIF: 1 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Law of demand MSC: Definitional

19. The demand curve is the upward-sloping line relating price and quantity demanded.

ANS: F DIF: 1 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Demand curve MSC: Definitional

20. Individual demand curves are summed horizontally to obtain the market demand curve.

ANS: T DIF: 1 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Market demand curve MSC: Definitional

21. The market demand curve shows how the total quantity demanded of a good varies as the income of

buyers varies, while all the other factors that affect how much consumers want to buy are held constant.

ANS: F DIF: 1 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Market demand curve MSC: Definitional

22. If something happens to alter the quantity demanded at any given price, then the demand curve

shifts.

ANS: T DIF: 1 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Demand curve MSC: Definitional


23. A movement upward and to the left along a given demand curve is called a decrease in demand..

ANS: F DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Demand curve MSC: Interpretive

24. An increase in demand shifts the demand curve to the left.

ANS: F DIF: 1 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Demand curve MSC: Definitional

25. If the demand for a good falls when income falls, then the good is called an inferior good.

ANS: F DIF: 1 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Normal goods MSC: Definitional

26. When Mario's income decreases, he buys more pasta. For Mario, pasta is a normal good.

ANS: F DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Inferior goods MSC: Applicative

27. A decrease in income will shift the demand curve for an inferior good to the right.

ANS: T DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Inferior goods MSC: Interpretive

28. An increase in the price of a substitute good will shift the demand curve for a good to the right.

ANS: T DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Substitutes MSC: Interpretive

29. Baseballs and baseball bats are substitute goods.

ANS: F DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Complements MSC: Applicative

30. A decrease in the price of a complement will shift the demand curve for a good to the left.

ANS: F DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Complements MSC: Interpretive


31. When an increase in the price of one good lowers the demand for another good, the two goods are

called complements.

ANS: T DIF: 1 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Complements MSC: Definitional

32. Cocoa and marshmallows are complements, so a decrease in the price of cocoa will cause an

increase in the demand for marshmallows.

ANS: T DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Complements MSC: Applicative

33. If a person expects the price of socks to increase next month, then that person’s current demand for

socks will increase.

ANS: T DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Expectations MSC: Applicative

34. A decrease in the price of a product and an increase in the number of buyers in the market affect the

demand curve in the same general way.

ANS: F DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Demand curve MSC: Interpretive

35. Whenever a determinant of demand other than price changes, the demand curve shifts.

ANS: T DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Demand curve MSC: Interpretive

36. An increase in the price of pizza will shift the demand curve for pizza to the left.

ANS: F DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Demand curve MSC: Applicative

37. Public service announcements, mandatory health warnings on cigarette packages, and the

prohibition of cigarette advertising on television are all policies aimed at shifting the demand curve for cigarettes to the right.

ANS: F DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Demand curve MSC: Applicative


38. Most studies have found that tobacco and marijuana are complements rather than substitutes.

ANS: T DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Complements MSC: Applicative

39. The quantity supplied of a good or service is the amount that sellers are willing and able to sell at a

particular price.

ANS: T DIF: 1 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Quantity supplied MSC: Definitional

40. When the price of a good is high, selling the good is profitable, and so the quantity supplied is large.

ANS: T DIF: 1 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Law of supply MSC: Definitional

41. When the price of a good is low, selling the good is profitable, and so the quantity supplied is large.

ANS: F DIF: 1 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Law of supply MSC: Definitional

42. Price cannot fall so low that some sellers choose to supply a quantity of zero.

ANS: F DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Quantity supplied MSC: Interpretive

43. The law of supply states that, other things equal, when the price of a good rises, the quantity

supplied of the good falls.

ANS: F DIF: 1 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Law of supply MSC: Definitional

44. The law of supply states that, other things equal, when the price of a good falls, the quantity

supplied falls as well.

ANS: T DIF: 1 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Law of supply MSC: Definitional

45. If a higher price means a greater quantity supplied, then the supply curve slopes upward.

ANS: T DIF: 1 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Supply curve MSC: Definitional


46. Individual supply curves are summed vertically to obtain the market supply curve.

ANS: F DIF: 1 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Market supply curve MSC: Definitional

47. The market supply curve shows how the total quantity supplied of a good varies as input prices vary,

holding constant all the other factors that influence producers’ decisions about how much to sell.

ANS: F DIF: 1 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Market supply curve MSC: Definitional

48. If something happens to alter the quantity supplied at any given price, then we move along the fixed

supply curve to a new quantity supplied.

ANS: F DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Supply curve MSC: Interpretive

49. A movement along a supply curve is called a change in supply while a shift of the supply curve is

called a change in quantity supplied.

ANS: F DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Supply | Quantity supplied MSC: Interpretive

50. A decrease in supply shifts the supply curve to the left.

ANS: T DIF: 1 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Supply curve MSC: Definitional

51. A reduction in an input price will cause a change in quantity supplied, but not a change in supply.

ANS: F DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Input prices MSC: Interpretive

52. An increase in the price of ink will shift the supply curve for pens to the left.

ANS: T DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Input prices MSC: Applicative


53. If there is an improvement in the technology used to produce a good, then the supply curve for that

good will shift to the left.

ANS: F DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Technology MSC: Interpretive

54. Advances in production technology typically reduce firms’ costs.

ANS: T DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Technology MSC: Interpretive

55. If a company making frozen orange juice expects the price of its product to be higher next month, it

will supply more to the market this month.

ANS: F DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Expectations MSC: Applicative

56. When a seller expects the price of its product to decrease in the future, the seller's supply curve

shifts left now.

ANS: F DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Expectations MSC: Interpretive

57. An increase in the price of a product and an increase in the number of sellers in the market affect the

supply curve in the same general way.

ANS: F DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Supply curve MSC: Interpretive

58. Whenever a determinant of supply other than price changes, the supply curve shifts.

ANS: T DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Supply curve MSC: Interpretive

59. A decrease in the price of pizza will shift the supply curve for pizza to the left.

ANS: F DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Supply curve MSC: Applicative


60. Supply and demand together determine the price and quantity of a good sold in a market.

ANS: T DIF: 1 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Equilibrium MSC: Definitional

61. A market’s equilibrium is the point at which the supply and demand curves intersect.

ANS: T DIF: 1 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Equilibrium MSC: Definitional

62. At the equilibrium price, quantity demanded is equal to quantity supplied.

ANS: T DIF: 1 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Equilibrium MSC: Definitional

63. The equilibrium price is the same as the market-clearing price.


64. At the equilibrium price, buyers have bought all they want to buy, but sellers have not sold all they

want to sell.

ANS: F DIF: 1 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Equilibrium MSC: Definitional

65. The actions of buyers and sellers naturally move markets toward equilibrium.


66. When the market price is above the equilibrium price, the quantity of the good demanded exceeds

the quantity supplied.


67. When the market price is above the equilibrium price, suppliers are unable to sell all they want to

sell.


68. A surplus is the same as an excess demand.

ANS: F DIF: 1 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Surplus MSC: Definitional


69. Sellers respond to a surplus by cutting their prices.

ANS: T DIF: 1 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Surplus MSC: Definitional

70. Price will rise to eliminate a surplus.

ANS: F DIF: 2 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Surplus MSC: Interpretive

71. When quantity supplied exceeds quantity demanded at the current market price, the market has a

surplus and market price will likely rise in the future to eliminate the surplus.

ANS: F DIF: 2 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Surplus MSC: Interpretive

72. When the market price is below the equilibrium price, the quantity of the good demanded exceeds

the quantity supplied.


73. When the market price is below the equilibrium price, suppliers are unable to sell all they want to

sell.


74. A shortage is the same as an excess demand.

ANS: T DIF: 1 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Shortage MSC: Definitional

75. Sellers respond to a shortage by cutting their prices.

ANS: F DIF: 1 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Shortage MSC: Definitional

76. Price will rise to eliminate a shortage.

ANS: T DIF: 2 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Shortage MSC: Interpretive


77. When quantity demanded exceeds quantity supplied at the current market price, the market has a

shortage and market price will likely rise in the future to eliminate the shortage.

ANS: T DIF: 2 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Shortage MSC: Interpretive

78. Surpluses drive price up while shortages drive price down.

ANS: F DIF: 2 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Shortage | Surplus MSC: Interpretive

79. A shortage will occur at any price below equilibrium price and a surplus will occur at any price

above equilibrium price.

ANS: T DIF: 2 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Shortage | Surplus MSC: Interpretive

80. In a market, the price of any good adjusts until quantity demanded equals quantity supplied.

ANS: T DIF: 2 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Equilibrium MSC: Interpretive

81. When a supply curve or a demand curve shifts, the equilibrium price and equilibrium quantity

change.


82. Demand refers to the amount buyers wish to buy, whereas the quantity demanded refers to the

position of the demand curve.

ANS: F DIF: 1 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Demand | Quantity demanded MSC: Definitional

83. Supply refers to the position of the supply curve, whereas the quantity supplied refers to the amount

suppliers wish to sell.

ANS: T DIF: 1 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Supply | Quantity supplied MSC: Definitional

84. It is not possible for demand and supply to shift at the same time.

ANS: F DIF: 2 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Supply | Demand MSC: Interpretive


85. A decrease in demand will cause a decrease in price, which will cause a decrease in supply.

ANS: F DIF: 2 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Equilibrium MSC: Interpretive

86. An increase in demand will cause an increase in price, which will cause an increase in quantity

supplied.

ANS: T DIF: 2 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Equilibrium MSC: Interpretive

87. An increase in supply will cause a decrease in price, which will cause an increase in demand.

ANS: F DIF: 2 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Equilibrium MSC: Interpretive

88. A decrease in supply will cause an increase in price, which will cause a decrease in quantity

demanded.

ANS: T DIF: 2 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Equilibrium MSC: Interpretive

89. In a market economy, prices are the signals that guide the allocation of scarce resources.



SHORT ANSWER

1. a. What is the difference between a "change in demand" and a "change in quantity

demanded?" Graph your answer. b. For each of the following changes, determine whether there will be a change in quantity

demanded or a change in demand. i. a change in the price of a related good ii. a change in tastes iii. a change in the number of buyers iv. a change in price v. a change in consumer expectations vi. a change in income

ANS:

a. A change in demand refers to a shift of the demand curve. A change in quantity demanded refers to a movement along a fixed demand curve.

b. A change in price causes a change in quantity demanded. All of the other changes listed shift the demand curve.

A change in quantity demanded A change in demand

D

quantity

price

D D'

quantity

price

PTS: 1 DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Demand | Quantity demanded MSC: Interpretive


2.

a. What is the difference between a "change in supply" and a "change in quantity supplied?" Graph your answer.

b. For each of the following changes, determine whether there will be a change in quantity supplied or a change in supply.

i. a change in input costs ii a change in producer expectations iii. a change in price iv. a change in technology v. a change in the number of sellers

ANS:

a. A change in supply refers to a shift of the supply curve. A change in quantity supplied refers to a movement along a fixed supply curve.

b. A change in price causes a change in quantity supplied. All of the other changes listed shift the supply curve.

A change in quantity supplied A change in supply

S

quantity

price

S S'

quantity

price

PTS: 1 DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Supply | Quantity supplied MSC: Interpretive


3.

a. Given the table below, graph the demand and supply curves for flashlights. Make certain to label the equilibrium price and equilibrium quantity.

Price Quantity Demanded Per Month

Quantity Supplied Per Month

$5 6,000 10,000

$4 8,000 8,000

$3 10,000 6,000

$2 12,000 4,000

$1 14,000 2,000

b. What is the equilibrium price and the equilibrium quantity? c. Suppose the price is currently $5. What problem would exist in the market? What

would you expect to happen to price? Show this on your graph. d. Suppose the price is currently $2. What problem would exist in the market? What

would you expect to happen to price? Show this on your graph.

ANS:

a.

D

SSurplus of 4000

Shortage of 8000

Pe

Qe

1000 2000 3000 4000 5000 6000 7000 8000 9000 10000 11000 12000 quantity

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

price

b. The equilibrium price (Pe) is $4 and the equilibrium quantity (Qe) is 8,000. c. A surplus of 4,000 flashlights would be the problem in the market, and we would expect

the price to fall. d. A shortage of 8,000 flashlights would be the problem in the market, and we would expect

the price to rise.

PTS: 1 DIF: 2 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Equilibrium | Shortage | Surplus MSC: Applicative


4. Fill in the table below, showing whether equilibrium price and equilibrium quantity go up, go down,

stay the same, or change ambiguously.

No Change in Supply An Increase in Supply A Decrease in Supply

No Change in Demand

An Increase in Demand

A Decrease in Demand

ANS:

No Change in Supply An Increase in Supply A Decrease in Supply

No Change in Demand

P same Q same

P down Q up

P up Q down

An Increase in Demand

P up Q up

P ambiguous Q up

P up Q ambiguous

A Decrease in Demand

P down Q down

P down Q ambiguous

P ambiguous Q down

PTS: 1 DIF: 2 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Demand | Supply MSC: Interpretive


5. Suppose we are analyzing the market for hot chocolate. Graphically illustrate the impact each of the

following would have on demand or supply. Also show how equilibrium price and equilibrium quantity would change. a. Winter starts and the weather turns sharply colder. b. The price of tea, a substitute for hot chocolate, falls. c. The price of cocoa beans decreases. d. The price of whipped cream falls. e. A better method of harvesting cocoa beans is introduced. f. The Surgeon General of the U.S. announces that hot chocolate cures acne. g. Protesting farmers dump millions of gallons of milk, causing the price of milk to rise. h. Consumer income falls because of a recession, and hot chocolate is considered a normal

good. i. Producers expect the price of hot chocolate to increase next month. j. Currently, the price of hot chocolate is $0.50 per cup above equilibrium.

ANS: (a) (b)

D D'

S

Pe'

Pe

Qe Qe' quantity

price

D' D

S

Pe

Pe'

Qe' Qe quantity

price

(c) (d)

D

S'S

Pe'

Pe

Qe Qe' quantity

price

D D'

S

Pe'

Pe

Qe Qe' quantity

price

(e) (f)


D

S'S

Pe'

Pe

Qe Qe' quantity

price

D D'

S

Pe'

Pe

Qe Qe' quantity

price

(g) (h)

D

SS'

Pe

Pe'

Qe' Qe quantity

price

D' D

S

Pe

Pe'

Qe' Qe quantity

price

(i) (j)

D

SS'

Pe

Pe'

Qe' Qe quantity

price

D

S

Pe

Pe+

Qd Qe

$0.50

Qs

Surplus

quantity

price

In (j), a price above equilibrium will affect both quantity demanded and quantity supplied and will cause a surplus in the market. It will not cause either demand or supply to shift.

PTS: 1 DIF: 2 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Demand | Supply MSC: Applicative


Sec00 - The Market Forces of Supply and Demand

MULTIPLE CHOICE

1. The two words most often used by economists are

a. prices and quantities. b. resources and allocation. c. supply and demand. d. efficiency and equity.


2. The forces that make market economies work are

a. work and leisure. b. politics and religion. c. supply and demand. d. taxes and government spending.

ANS: C DIF: 1 REF: 4-0 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Market economies MSC: Definitional

3. In a market economy, supply and demand determine

a. both the quantity of each good produced and the price at which it is sold. b. the quantity of each good produced, but not the price at which it is sold. c. the price at which each good is sold, but not the quantity of each good produced. d. neither the quantity of each good produced nor the price at which it is sold.

ANS: A DIF: 1 REF: 4-0 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Market economies MSC: Definitional

4. In a market economy, supply and demand are important because they

a. play a critical role in the allocation of the economy’s scarce resources. b. determine how much of each good gets produced. c. can be used to predict the impact on the economy of various events and policies. d. All of the above are correct.

ANS: D DIF: 1 REF: 4-0 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Market economies MSC: Definitional


5. 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.


Sec01 - The Market Forces of Supply and Demand - Markets and Competition

MULTIPLE CHOICE

1. A group of buyers and sellers of a particular good or service is called a(n)

a. coalition. b. economy. c. market. d. competition.



a. Buyers determine supply and sellers determine demand. b. Buyers determine demand and sellers determine supply. c. Buyers determine both demand and supply. d. Sellers determine both demand and supply.

ANS: B DIF: 1 REF: 4-1 NAT: Analytic LOC: Supply and demand TOP: Demand | Supply MSC: Definitional

3. The demand for a good or service is determined by

a. those who buy the good or service. b. the government. c. those who sell the good or service. d. both those who buy and those who sell the good or service.

ANS: A DIF: 1 REF: 4-1 NAT: Analytic LOC: Supply and demand TOP: Demand MSC: Definitional


4. The supply of a good or service is determined by

a. those who buy the good or service. b. the government. c. those who sell the good or service. d. both those who buy and those who sell the good or service.

ANS: C DIF: 1 REF: 4-1 NAT: Analytic LOC: Supply and demand TOP: Supply MSC: Definitional

5. For a market for a good or service to exist,

a. there must be a group of buyers and sellers. b. there must be a specific time and place at which the good or service is traded. c. there must be a high degree of organization present. d. All of the above are correct.

ANS: A DIF: 1 REF: 4-1 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Markets MSC: Definitional

6. Which of the following is an example of a market?

a. a gas station b. a garage sale c. a barber shop d. All of the above are examples of markets.

ANS: D DIF: 2 REF: 4-1 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Markets MSC: Applicative

7. The market for ice cream is

a. a monopolistic market. b. a highly competitive market. c. a highly organized market. d. both (b) and (c) are correct.

ANS: B DIF: 1 REF: 4-1 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Markets MSC: Definitional

8. Most markets in the economy are

a. markets in which sellers, rather than buyers, control the price of the product. b. markets in which buyers, rather than sellers, control the price of the product. c. perfectly competitive. d. highly competitive.

ANS: D DIF: 1 REF: 4-1 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Markets MSC: Definitional


9. In a competitive market, the price of a product

a. is determined by buyers and the quantity of the product produced is determined by sellers. b. is determined by sellers and the quantity of the product produced is determined by buyers. c. and the quantity of the product produced are both determined by sellers. d. None of the above is correct.

ANS: D DIF: 2 REF: 4-1 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Competitive markets MSC: Interpretive

10. In a competitive market, the quantity of a product produced and the price of the product are

determined by a. buyers. b. sellers. c. both buyers and sellers. d. None of the above is correct.

ANS: C DIF: 2 REF: 4-1 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Competitive markets MSC: Interpretive

11. In a competitive market, the quantity of a product produced and the price of the product are

determined by a. a single buyer. b. a single seller. c. one buyer and one seller working together. d. all buyers and all sellers.

ANS: D DIF: 2 REF: 4-1 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Competitive markets MSC: Interpretive

12. A competitive market is a market in which

a. an auctioneer helps set prices and arrange sales. b. there are only a few sellers. c. the forces of supply and demand do not apply. d. no individual buyer or seller has any significant impact on the market price.

ANS: D DIF: 1 REF: 4-1 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Competitive markets MSC: Definitional


13. A competitive market is one in which

a. there is only one seller, but there are many buyers. b. there are many sellers and each seller has the ability to set the price of his product. c. there are many sellers and they compete with one another in such a way that some sellers

are always being forced out of the market. d. there are so many buyers and so many sellers that each has a negligible impact on the price

of the product.


14. Assume Tibana buys computers in a competitive market. It follows that

a. Tibana has a limited number of sellers to turn to when she buys a computer. b. Tibana will find herself negotiating with sellers whenever she buys a computer. c. if Tibana buys a large number of computers, the price of computers will rise noticeably. d. None of the above is correct.

ANS: D DIF: 2 REF: 4-1 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Competitive markets MSC: Applicative

15. In a competitive market, each seller has limited control over the price of his product because

a. other sellers are offering similar products. b. buyers exert more control over the price than do sellers. c. these markets are highly regulated by the government. d. sellers usually agree to set a common price that will allow each seller to earn a

comfortable profit.

ANS: A DIF: 1 REF: 4-1 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Competitive markets MSC: Definitional

16. For a competitive market, which of the following statements is correct?

a. A seller can always increase her profit by raising the price of her product. b. If a seller charges more than the going price, buyers will go elsewhere to make their

purchases. c. A seller often charges less than the going price to increase sales and profit. d. A single buyer can influence the price of the product, but only when purchasing from

several sellers in a short period of time.

ANS: B DIF: 1 REF: 4-1 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Competitive markets MSC: Definitional


17. If a seller in a competitive market chooses to charge more than the going price, then

a. the sellers’ profits definitely would increase. b. the owners of the raw materials used in production would raise the prices for the raw

materials. c. other sellers would also raise their prices. d. buyers will make purchases from other sellers.


18. The highest form of competition is called

a. absolute competition. b. cutthroat competition. c. perfect competition. d. market competition.

ANS: C DIF: 1 REF: 4-1 NAT: Analytic LOC: Perfect competition TOP: Perfect competition MSC: Definitional

19. Which of the following is not a characteristic of a perfectly competitive market?

a. Different sellers sell identical products. b. There are many sellers. c. Sellers must accept the price the market determines. d. All of the above are characteristics of a perfectly competitive market.

ANS: D DIF: 2 REF: 4-1 NAT: Analytic LOC: Perfect competition TOP: Perfect competition MSC: Interpretive

20. Which of the following is not a characteristic of a perfectly competitive market?

a. Sellers set the price of the product. b. There are many sellers. c. Buyers must accept the price the market determines. d. All of the above are characteristics of a perfectly competitive market.

ANS: A DIF: 2 REF: 4-1 NAT: Analytic LOC: Perfect competition TOP: Perfect competition MSC: Interpretive

21. The term price takers refers to buyers and sellers in

a. perfectly competitive markets. b. monopolistic markets. c. markets that are regulated by the government. d. markets in which buyers cannot buy all they want and/or sellers cannot sell all they want.



22. Buyers and sellers who have no influence on market price are referred to as

a. market pawns. b. monopolists. c. price takers. d. price makers.


23. All market participants are price takers that have no influence over prices in markets that feature

a. only a few buyers and a few sellers. b. numerous sellers but only a few buyers. c. numerous buyers but only a few sellers. d. numerous buyers and numerous sellers.

ANS: D DIF: 2 REF: 4-1 NAT: Analytic LOC: Perfect competition TOP: Perfect competition MSC: Interpretive

24. If buyers and sellers in a certain market are price takers, then individually

a. they have no influence on market price. b. they have some influence on market price, but that influence is limited. c. buyers will be able to find prices lower than those determined in the market. d. sellers will find it difficult to sell all they want to sell at the market price.


25. In a perfectly competitive market, at the market price,

a. buyers cannot buy all they want and sellers cannot sell all they want. b. buyers cannot buy all they want, but sellers can sell all they want. c. buyers can buy all they want, but sellers cannot sell all they want. d. buyers can buy all they want and sellers can sell all they want.

ANS: D DIF: 1 REF: 4-1 NAT: Analytic LOC: Perfect competition TOP: Perfect competition MSC: Definitional

26. An example of a perfectly competitive market would be the

a. cable TV market. b. soybean market. c. breakfast cereal market. d. shampoo market.

ANS: B DIF: 2 REF: 4-1 NAT: Analytic LOC: Perfect competition TOP: Perfect competition MSC: Applicative


27. Assume the market for tennis balls is perfectly competitive. When one tennis ball producer exits the

market, a. the price of tennis balls increases. b. the price of tennis balls decreases. c. the price of tennis balls does not change. d. there is no longer a market for tennis balls.

ANS: C DIF: 2 REF: 4-1 NAT: Analytic LOC: Perfect competition TOP: Perfect competition MSC: Applicative

28. Assume the market for pork is perfectly competitive. When one pork buyer exits the market,

a. the price of pork increases. b. the price of pork decreases. c. the price of pork does not change. d. there is no longer a market for pork.

ANS: C DIF: 2 REF: 4-1 NAT: Analytic LOC: Perfect competition TOP: Perfect competition MSC: Applicative

29. A monopoly is a market

a. with one seller, and that seller is a price taker. b. with one seller, and that seller sets the price. c. with one buyer, and that buyer is a price taker. d. with one buyer, and that buyer sets the price.

ANS: B DIF: 1 REF: 4-1 NAT: Analytic LOC: Monopoly TOP: Monopoly MSC: Definitional

30. Which of the following would most likely serve as an example of a monopoly?

a. a bakery in a large city b. a bank in a large city c. a local cable television company d. a small group of corn farmers

ANS: C DIF: 2 REF: 4-1 NAT: Analytic LOC: Monopoly TOP: Monopoly MSC: Applicative

31. Which of the following is not a reason perfect competition is a useful simplification, despite the

diversity of market types we find in the world? a. Perfectly competitive markets are the easiest to analyze because everyone participating in

the market takes the price as given by market conditions. b. Some degree of competition is present in most markets. c. There are many buyers and many sellers in all types of markets. d. Many of the lessons that we learn by studying supply and demand under perfect

competition apply in more complicated markets as well.



Sec02 - The Market Forces of Supply and Demand - Demand

MULTIPLE CHOICE

1. The quantity demanded of a good is the amount that buyers

a. are willing to purchase. b. are willing and able to purchase. c. are willing and able and need to purchase. d. are able to purchase.

ANS: B DIF: 1 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Quantity demanded MSC: Definitional

2. “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 demanded a. 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.

ANS: D DIF: 1 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Law of demand MSC: Definitional

3. The law of demand states that, other things equal,

a. when the price of a good falls, the demand for the good rises. b. when the price of a good rises, the quantity demanded of the good rises. c. when the price of a good rises, the demand for the good falls. d. when the price of a good falls, the quantity demanded of the good rises.

ANS: D DIF: 1 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Law of demand MSC: Definitional

4. The law of demand states that, other things equal,

a. an increase in price causes quantity demanded to increase. b. an increase in price causes quantity demanded to decrease. c. an increase in quantity demanded causes price to increase. d. an increase in quantity demanded causes price to decrease.

ANS: B DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Law of demand MSC: Interpretive


5. Which of these statements best represents the law of demand?

a. When buyers’ tastes for a good increase, they purchase more of the good. b. When income levels increase, buyers purchase more of most goods. c. When the price of a good decreases, buyers purchase more of the good. d. When buyers’ demands for a good increase, the price of the good increases.

ANS: C DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Law of demand MSC: Interpretive

6. A downward-sloping demand curve illustrates

a. that demand decreases over time. b. that prices fall over time. c. the relationship between income and quantity demanded. d. the law of demand.

ANS: D DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Law of demand MSC: Interpretive

7. Benny rents 5 movies per month when the price is $3.00 per rental and 7 movies per month when

the price is $2.50 per rental. Benny’s demand demonstrates the law of a. price. b. supply. c. demand. d. income.

ANS: C DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Law of demand MSC: Applicative

8. Which of the following demonstrates the law of demand?

a. After Jon got a raise at work, he bought more pretzels at $1.50 per pretzel than he did before his raise.

b. Melissa buys fewer muffins at $0.75 per muffin than at $1 per muffin, other things equal. c. Dave buys more donuts at $0.25 per donut than at $0.50 per donut, other things equal. d. Kendra buys fewer Snickers at $0.60 per Snickers since the price of Milky Ways fell to

$0.50 per Milky Way.



9. The following table contains a demand schedule for a good.

Price Quantity Demanded

$10 100

$20 ?

If the law of demand applies to this good, then “?” could be

a. 0. b. 100. c. 200. d. 400.

ANS: A DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Law of demand MSC: Applicative

10. A table that shows the relationship between the price of a good and the quantity demanded of that

good is called a a. price-quantity schedule. b. buyer schedule. c. demand schedule. d. demand curve.

ANS: C DIF: 1 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Demand schedule MSC: Definitional

11. A demand schedule is a table that shows the relationship between

a. quantity demanded and quantity supplied. b. income and quantity demanded. c. price and quantity demanded. d. price and income.

ANS: C DIF: 1 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Demand schedule MSC: Definitional

12. Which of the following is not held constant in a demand schedule?

a. income b. tastes c. price d. expectations

ANS: C DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Demand schedule MSC: Interpretive


13. The demand curve for a good is

a. a line that relates price and quantity demanded. b. a line that relates income and quantity demanded. c. a line that relates quantity demanded and quantity supplied. d. a line that relates price and income.

ANS: A DIF: 1 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Demand curve MSC: Definitional

14. The line that relates the price of a good and the quantity demanded of that good is called the

a. demand schedule, and it usually slopes upward. b. demand schedule, and it usually slopes downward. c. demand curve, and it usually slopes upward. d. demand curve, and it usually slopes downward.

ANS: D DIF: 1 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Demand curve MSC: Definitional

15. When drawing a demand curve,

a. demand is on the vertical axis and price is on the horizontal axis. b. quantity demanded is on the vertical axis and price is on the horizontal axis. c. price is on the vertical axis and demand is on the horizontal axis. d. price is on the vertical axis and quantity demanded is on the horizontal axis.

ANS: D DIF: 1 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Demand curve MSC: Definitional

16. The sum of all the individual demand curves for a product is called

a. total demand. b. consumer demand. c. aggregate demand. d. market demand.

ANS: D DIF: 1 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Market demand MSC: Definitional

17. The market demand curve

a. is found by vertically adding the individual demand curves. b. slopes upward. c. represents the sum of the prices that all the buyers are willing to pay for a given quantity

of the good. d. represents the sum of the quantities demanded by all the buyers at each price of the good.

ANS: D DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Market demand MSC: Interpretive


18. The market demand curve

a. is the sum of all individual demand curves. b. is the demand curve for every product in an industry. c. shows the average quantity demanded by individual demanders at each price. d. is always flatter than an individual demand curve.

ANS: A DIF: 1 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Market demand MSC: Definitional

19. To obtain the market demand curve for a product, sum the individual demand curves

a. vertically. b. diagonally. c. horizontally. d. and then average them.

ANS: C DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Market demand MSC: Interpretive

20. A market demand curve shows

a. the relationship between price and the number of buyers in a market. b. how quantity demanded changes when the number of buyers changes. c. the sum of all prices that individual buyers are willing and able to pay for each possible

quantity of the good. d. how much of a good all buyers are willing and able to buy at each possible price.

ANS: D DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Market demand MSC: Interpretive

21. A market demand curve shows how the total quantity demanded of a good varies as

a. income varies. b. price varies. c. the number of buyers varies. d. supply varies.

ANS: B DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Market demand MSC: Interpretive


22. Suppose Spencer and Kate are the only two demanders of lemonade. Each month, Spencer buys six

glasses of lemonade when the price is $1.00 per glass, and he buys four glasses when the price is $1.50 per glass. Each month, Kate buys four glasses of lemonade when the price is $1.00 per glass, and she buys two glasses when the price is $1.50 per glass. Which of the following points is on the market demand curve? a. (quantity demanded = 2, price = $1.50) b. (quantity demanded = 4, price = $2.50) c. (quantity demanded = 10, price = $1.00) d. (quantity demanded = 16, price = $2.50)

ANS: C DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Market demand MSC: Applicative

Table 4-1

Price Aaron’s Quantity

Demanded

Angela’s Quantity

Demanded

Austin’s Quantity

Demanded

Alyssa’s Quantity

Demanded

$0.00 20 16 4 8

$0.50 18 12 6 6

$1.00 14 10 2 5

$1.50 12 8 0 4

$2.00 6 6 0 2

$2.50 0 4 0 0

23. Refer to Table 4-1. Whose demand does not obey the law of demand?

a. Aaron’s b. Angela’s c. Austin’s d. Alyssa’s


24. Refer to Table 4-1. If these are the only four buyers in the market, then the market quantity

demanded at a price of $1 is a. 4 units. b. 7.75 units. c. 14 units. d. 31 units.

ANS: D DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Market demand MSC: Applicative



demanded at a price of $2 is a. 0 units. b. 3.5 units. c. 6 units. d. 14 units.

ANS: D DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Market demand MSC: Applicative

26. Refer to Table 4-1. If these are the only four buyers in the market, then when the price increases

from $1.00 to $1.50, the market quantity demanded a. decreases by 1.75 units. b. increases by 2 units. c. decreases by 7 units. d. decreases by 24 units.


27. Refer to Table 4-1. For whom is the good a normal good?

a. Aaron b. Austin c. all of the four demanders d. This cannot be determined from the table.

ANS: D DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Normal goods MSC: Applicative


Table 4-2

Price Audrey’s Quantity

Demanded

Bob’s Quantity

Demanded

Chuck’s Quantity

Demanded

Dottie’s Quantity

Demanded

$12 2 1 3 4

$10 4 4 4 5

$8 6 7 5 6

$6 8 8 4 7

$4 10 9 3 8

$2 12 10 2 9

28. Refer to Table 4-2. Whose demand does not obey the law of demand?

a. Audrey’s b. Bob’s c. Chuck’s d. Dottie’s



demanded at a price of $8 is a. 4 units. b. 6 units. c. 24 units. d. 32 units.


30. Refer to Table 4-2. If these are the only four buyers in the market, then when the price decreases

from $6 to $4, the market quantity demanded a. increases by 0.75 units. b. increases by 3 units. c. increases by 8 units. d. decreases by 27 units.

ANS: B DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Market demand MSC: Applicative


Figure 4-1

Consumer 1 Consumer 2

D

2 4 6 8 10 12 14 16 quantity

2

4

6

8

10

12

14

16

18

20price

D

5 10 15 20 25 30 35 40 quantity

3

6

9

12

15

18

21

24

27

30price

31. Refer to Figure 4-1. If these are the only two consumers in the market, then the market quantity

demanded at a price of $6 is a. 12 units. b. 14 units. c. 19 units. d. 21 units.


32. When we move along a given demand curve,

a. only price is held constant. b. income and price are held constant. c. all nonprice determinants of demand are held constant. d. all determinants of quantity demanded are held constant.

ANS: C DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Demand curve MSC: Interpretive

33. Once the demand curve for a product or service is drawn, it

a. 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.

ANS: B DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Demand curve MSC: Interpretive


34. If something happens to alter the quantity demanded at any given price, then

a. the demand curve becomes steeper. b. the demand curve becomes flatter. c. the demand curve shifts. d. we move along the demand curve.

ANS: C DIF: 1 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Demand curve MSC: Definitional

35. When quantity demanded decreases at every possible price, we know that the demand curve has

a. shifted to the left. b. shifted to the right. c. not shifted; rather, we have moved along the demand curve to a new point on the same

curve. d. not shifted; rather, the demand curve has become flatter.

ANS: A DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Demand curve MSC: Interpretive

36. When quantity demanded increases at every possible price, we know that the demand curve has

a. shifted to the left. b. shifted to the right. c. not shifted; rather, we have moved along the demand curve to a new point on the same

curve. d. not shifted; rather, the demand curve has become steeper.


37. An increase in demand is represented by

a. a movement downward and to the right along a demand curve. b. a movement upward and to the left along a demand curve. c. a rightward shift of a demand curve. d. a leftward shift of a demand curve.


38. A decrease in demand is represented by

a. a movement downward and to the right along a demand curve. b. a movement upward and to the left along a demand curve. c. a rightward shift of a demand curve. d. a leftward shift of a demand curve.

ANS: D DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Demand curve MSC: Interpretive


39. An increase in quantity demanded

a. results in a movement downward and to the right along a fixed demand curve. b. results in a movement upward and to the left along a fixed demand curve. c. shifts the demand curve to the left. d. shifts the demand curve to the right.


40. A decrease in quantity demanded

a. results in a movement downward and to the right along a fixed demand curve. b. results in a movement upward and to the left along a fixed demand curve. c. shifts the demand curve to the left. d. shifts the demand curve to the right.


41. A leftward shift of a demand curve is called

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


42. A rightward shift of a demand curve is called



43. A movement upward and to the left along a demand curve is called




44. A movement downward and to the right along a demand curve is called



45. An increase in the price of a good will

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


46. A decrease in the price of a good will

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


47. When the price of a good or service changes,

a. the supply curve shifts in the opposite direction. b. the demand curve shifts in the opposite direction. c. the demand curve shifts in the same direction. d. there is a movement along a given demand curve.



48. The demand curve for hot dogs

a. shifts when the price of hot dogs changes because the price of hot dogs is measured on the vertical axis of the graph.

b. shifts when the price of hot dogs changes because the quantity demanded of hot dogs is measured on the horizontal axis of the graph.

c. does not shift when the price of hot dogs changes because the price of hot dogs is measured on the vertical axis of the graph.

d. does not shift when the price of hot dogs changes because the quantity demanded of hot dogs is measured on the horizontal axis of the graph.

ANS: C DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Demand curve MSC: Applicative

49. Which of the following changes would not shift the demand curve for a good or service?

a. a change in income b. a change in the price of the good or service c. a change in expectations about the future price of the good or service d. a change in the price of a related good or service


50. Which of the following would not shift the demand curve for mp3 players?

a. a decrease in the price of mp3 players b. a fad that makes mp3 players more popular among 12-25 year olds c. an increase in the price of CDs, a complement for mp3 players d. a decrease in the price of satellite radio, a substitute for mp3 players

ANS: A DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Demand curve MSC: Applicative

51. Which of the following events would cause a movement upward and to the left along the demand

curve for olives? a. The number of buyers of olives decreases. b. Consumer income decreases, and olives are a normal good. c. The price of pickles decreases, and pickles are a substitute for olives. d. The price of olives rises.

ANS: D DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Demand curve MSC: Applicative


52. A movement along the demand curve might be caused by a change in

a. income. b. the prices of substitutes or complements. c. expectations about future prices. d. the price of the good or service that is being demanded.


53. Holding the nonprice determinants of demand constant, a change in price would

a. result in either a decrease in demand or an increase in demand. b. result in a movement along a stationary demand curve. c. result in a shift of supply. d. have no effect on the quantity demanded.


54. A decrease in the price of a good would

a. increase the supply of the good. b. increase the quantity demanded of the good. c. give producers an incentive to produce more to keep profits from falling. d. shift the supply curve for the good to the left.


55. The demand curve for textbooks shifts

a. when a determinant of the demand for textbooks other than income changes. b. when a determinant of the demand for textbooks other than the price of textbooks changes. c. when any determinant of the demand for textbooks changes. d. only when the number of textbook-buyers changes.

ANS: B DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Determinants of demand MSC: Applicative

56. Which of the following is not a determinant of the demand for a particular good?

a. the prices of related goods b. income c. tastes d. the prices of the inputs used to produce the good

ANS: D DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Determinants of demand MSC: Interpretive


57. Each of the following is a determinant of demand except

a. tastes. b. technology. c. expectations. d. the prices of related goods.

ANS: B DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Determinants of demand MSC: Interpretive

58. Which of the following is not a determinant of demand?

a. the price of a resource that is used to produce the good b. the price of a complementary good c. the price of the good next month d. the price of a substitute good

ANS: A DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Determinants of demand MSC: Interpretive

59. If the demand for a good falls when income falls, then the good is called

a. a normal good. b. a regular good. c. a luxury good. d. an inferior good.

ANS: A DIF: 1 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Normal goods MSC: Definitional

60. If a good is normal, then an increase in income will result in

a. an increase in the demand for the good. b. a decrease in the demand for the good. c. a movement down and to the right along the demand curve for the good. d. a movement up and to the left along the demand curve for the good.

ANS: A DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Normal goods MSC: Interpretive

61. If Francis experiences a decrease in his income, then we would expect Francis’s demand for

a. each good he purchases to remain unchanged. b. normal goods to decrease. c. luxury goods to increase. d. inferior goods to decrease.

ANS: B DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Normal goods MSC: Applicative


62. You lose your job and, as a result, you buy fewer romance novels. This shows that you consider

romance novels to be a(n) a. luxury good. b. inferior good. c. normal good. d. complementary good.

ANS: C DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Normal goods MSC: Applicative

63. Pizza is a normal good if

a. the demand for pizza rises when income rises. b. the demand for pizza rises when the price of pizza falls. c. the demand curve for pizza slopes downward. d. the demand curve for pizza shifts to the right when the price of burritos rises, assuming

pizza and burritos are substitutes.

ANS: A DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Normal goods MSC: Applicative

64. Suppose that when income rises, the demand curve for computers shifts to the right. In this case, we

know computers are a. inferior goods. b. normal goods. c. perfectly competitive goods. d. durable goods.


65. Which of the following would shift the demand curve for gasoline to the right?

a. a decrease in the price of gasoline b. an increase in consumer income, assuming gasoline is a normal good c. an increase in the price of cars, a complement for gasoline d. a decrease in the expected future price of gasoline


66. If a decrease in income increases the demand for a good, then the good is

a. a substitute good. b. a complementary good. c. a normal good. d. an inferior good.

ANS: D DIF: 1 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Inferior goods MSC: Definitional


67. If a good is inferior, then an increase in income will result in

a. an increase in the demand for the good. b. a decrease in the demand for the good. c. a movement down and to the right along the demand curve for the good. d. a movement up and to the left along the demand curve for the good.

ANS: B DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Inferior goods MSC: Interpretive

68. Currently you purchase 6 packages of hot dogs a month. You will graduate from college in

December, and you will start a new job in January. You have no plans to purchase hot dogs in January. For you, hot dogs are a. a substitute good. b. a normal good. c. an inferior good. d. a complementary good.

ANS: C DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Inferior goods MSC: Applicative

69. Soup is an inferior good if

a. the demand for soup falls when the price of a substitute for soup rises. b. the demand for soup rises when the price of soup falls. c. the demand curve for soup slopes upward. d. the demand for soup falls when income rises.

ANS: D DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Inferior goods MSC: Applicative

70. Suppose that Carolyn receives a pay increase. We would expect

a. to observe Carolyn moving down and to the right along her given demand curve. b. Carolyn's demand for inferior goods to decrease. c. Carolyn's demand for each of two goods that are complements to increase. d. Carolyn's demand for normal goods to decrease.

ANS: B DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Inferior goods MSC: Applicative

71. Two goods are substitutes when a decrease in the price of one good

a. decreases the demand for the other good. b. decreases the quantity demanded of the other good. c. increases the demand for the other good. d. increases the quantity demanded of the other good.

ANS: A DIF: 1 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Substitutes MSC: Definitional


72. Suppose that a decrease in the price of good X results in fewer units of good Y being sold. This

implies that X and Y are a. complementary goods. b. normal goods. c. inferior goods. d. substitute goods.

ANS: D DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Substitutes MSC: Interpretive

73. Good X and good Y are substitutes. If the price of good Y increases, then the

a. demand for good X will decrease. b. quantity demanded of good X will decrease. c. demand for good X will increase. d. quantity demanded of good X will increase.

ANS: C DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Substitutes MSC: Interpretive

74. A likely example of substitute goods for most people would be

a. peanut butter and jelly. b. tennis balls and tennis rackets. c. televisions and subscriptions to cable television services. d. pencils and pens.

ANS: D DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Substitutes MSC: Applicative

75. A higher price for bagels would result in a(n)

a. increase in the demand for bagels. b. decrease in the demand for bagels. c. increase in the demand for muffins. d. decrease in the demand for muffins.

ANS: C DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Substitutes MSC: Applicative

76. You wear either shorts or sweatpants every day. You notice that sweatpants have gone on sale, so

your demand for a. sweatpants will increase. b. sweatpants will decrease. c. shorts will increase. d. shorts will decrease.

ANS: D DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Substitutes MSC: Applicative


77. Two goods are complements when a decrease in the price of one good

a. decreases the quantity demanded of the other good. b. decreases the demand for the other good. c. increases the quantity demanded of the other good. d. increases the demand for the other good.

ANS: D DIF: 1 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Complements MSC: Definitional

78. If goods A and B are complements, then an increase in the price of good A will result in

a. more of good A being sold. b. more of good B being sold. c. less of good B being sold. d. no difference in the quantity sold of either good.

ANS: C DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Complements MSC: Interpretive

79. A likely example of complementary goods for most people would be

a. butter and margarine. b. lawnmowers and automobiles. c. chips and salsa. d. cola and lemonade.

ANS: C DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Complements MSC: Applicative

80. A higher price for batteries would result in a(n)

a. increase in the demand for flashlights. b. decrease in the demand for flashlights. c. increase in the demand for batteries. d. decrease in the demand for batteries.

ANS: B DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Complements MSC: Applicative

81. Suppose you like to make, from scratch, pies filled with banana cream and vanilla pudding. You

notice that the price of bananas has increased. How would this price increase affect your demand for vanilla pudding? a. It would decrease. b. It would increase. c. It would be unaffected. d. There is insufficient information given to answer the question.

ANS: A DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Complements MSC: Applicative


82. Holding all other things constant, a higher price for ski lift tickets would

a. increase the number of skiers. b. increase the price of skis. c. decrease the number of skis sold. d. decrease the demand for other winter recreational activities.

ANS: C DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Complements MSC: Applicative

83. When quantity demanded has increased at every price, it might be because

a. the number of buyers in the market has decreased. b. income has increased and the good is an inferior good. c. the costs incurred by sellers producing the good have decreased. d. the price of a complementary good has decreased.

ANS: D DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Complements MSC: Interpretive

84. Which of the following might cause the demand curve for an inferior good to shift to the left?

a. a decrease in income b. an increase in the price of a substitute c. an increase in the price of a complement d. None of the above is correct.

ANS: C DIF: 3 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Complements MSC: Analytical

85. When it comes to people's tastes, economists generally believe that

a. tastes are based on forces that are well within the realm of economics. b. tastes are based on historical and psychological forces that are beyond the realm of

economics. c. tastes can only be studied through well-constructed, real-life models. d. since tastes do not directly affect demand, there is little need to explain people's tastes.

ANS: B DIF: 1 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Tastes MSC: Definitional


86. Economists normally

a. do not try to explain people's tastes, but they do try to explain what happens when tastes change.

b. believe that they must be able to explain people's tastes in order to explain what happens when tastes change.

c. do not believe that people's tastes determine demand and therefore they ignore the subject of tastes.

d. incorporate tastes into economic models only to the extent that tastes determine whether pairs of goods are substitutes or complements.

ANS: A DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Tastes MSC: Interpretive

87. 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 for a. hair gel to increase. b. razors to increase. c. combs to increase. d. shampoo to increase.

ANS: B DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Tastes MSC: Applicative

88. Suppose scientists provide evidence that chocolate pudding increases the bad cholesterol levels of

those who eat it. We would expect to see a. no change in the demand for chocolate pudding. b. a decrease in the demand for chocolate pudding. c. an increase in the demand for chocolate pudding. d. a decrease in the supply of chocolate pudding.


89. If buyers today become more willing and able than before to purchase larger quantities of Vanilla

Coke at each price of Vanilla Coke, then a. we will observe a movement downward and to the right along the demand curve for

Vanilla Coke. b. we will observe a movement upward and to the left along the demand curve for Vanilla

Coke. c. the demand curve for Vanilla Coke will shift to the right. d. the demand curve for Vanilla Coke will shift to the left.

ANS: C DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Tastes MSC: Applicative


90. A very hot summer in Atlanta will cause

a. the demand curve for lemonade to shift to the left. b. the demand for air conditioners to decrease. c. the demand for jackets to decrease. d. a movement downward and to the right along the demand curve for tank tops.


91. If a study by medical researchers found that brown sugar caused weight loss while white sugar

caused weight gain, then we likely would see a. an increase in demand for brown sugar and a decrease in demand for white sugar. b. a decrease in demand for brown sugar and an increase in demand for white sugar. c. an increase in demand for both brown sugar and white sugar. d. no change in demand for either type of sugar because weight loss is not a determinant of

demand.

ANS: A DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Tastes MSC: Applicative

92. Which of the following events could shift the demand curve for gasoline to the left?

a. The income of gasoline buyers rises, and gasoline is a normal good. b. The income of gasoline buyers falls, and gasoline is an inferior good. c. Public service announcements run on television encourage people to walk or ride bicycles

instead of driving cars. d. The price of gasoline rises.


93. An increase in the number of college scholarships issued by private foundations would

a. increase the supply of education. b. decrease the supply of education. c. increase the demand for education. d. decrease the demand for education.


94. Today, people changed their expectations about the future. This change

a. can cause a movement along a demand curve. b. can affect future demand, but not today’s demand. c. can affect today’s demand. d. cannot affect either today’s demand or future demand.

ANS: C DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Expectations MSC: Interpretive


95. If Juan expects to earn a higher income next month, he may choose to

a. save more now and spend less of his current income on goods and services. b. save less now and spend more of his current income on goods and services. c. decrease his current demand for goods and services. d. move along his current demand curves for goods and services.

ANS: B DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Expectations MSC: Applicative

96. You love peanut butter. You hear on the news that 50 percent of the peanut crop in the South has

been wiped out by drought, and that this will cause the price of peanuts to double by the end of the year. As a result, a. your demand for peanut butter will increase, but not until the end of the year. b. your demand for peanut butter increases today. c. your demand for peanut butter decreases as you look for a substitute good. d. your demand for peanut butter shifts left today.


97. Ford Motor Company announces that next month it will offer $3,000 rebates on new Mustangs. As

a result of this information, today’s demand curve for Mustangs a. shifts to the right. b. shifts to the left. c. shifts either to the right or to the left, but we cannot determine the direction of the shift

from the given information. d. will not shift; rather, the demand curve for Mustangs will shift to the right next month.


98. What will happen in the rice market now if buyers expect higher rice prices in the near future?

a. The demand for rice will increase. b. The demand for rice will decrease. c. The demand for rice will be unaffected. d. The supply of rice will increase.

ANS: A DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Expectations MSC: Applicative


99. Today's demand curve for gasoline could shift in response to

a. a change in today's price of gasoline. b. a change in the expected future price of gasoline. c. a change in the number of sellers of gasoline. d. All of the above are correct.


100. If the number of buyers in a market decreases, then

a. demand will increase. b. demand will decrease. c. supply will increase. d. supply will decrease.

ANS: B DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Number of buyers MSC: Interpretive

101. Which of the following does not affect an individual's demand curve?

a. expectations b. income c. prices of related goods d. the number of buyers

ANS: D DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Number of buyers MSC: Interpretive

102. Warrensburg is a small college town in Missouri. At the end of August each year, the market

demand for fast food in Warrensburg a. increases. b. decreases. c. remains constant, but we observe a movement downward and to the right along the

demand curve. d. remains constant, but we observe a movement upward and to the left along the demand

curve.

ANS: A DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Number of buyers MSC: Applicative


Figure 4-2

D

P

P'

Q Q'

A

B

quantity

price

103. Refer to Figure 4-2. The movement from point A to point B on the graph shows

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


104. Refer to Figure 4-2. The movement from point A to point B on the graph is caused by

a. an increase in price. b. a decrease in price. c. a decrease in the price of a substitute good. d. an increase in income.


105. Refer to Figure 4-2. It is apparent from the figure that

a. the good is inferior. b. the demand for the good decreases as income increases. c. the demand for the good conforms to the law of demand. d. All of the above are correct.

ANS: C DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Law of demand MSC: Interpretive


Figure 4-3

D' D

quantity

price

106. Refer to Figure 4-3. The shift from D to D’ is called



107. Refer to Figure 4-3. The movement from D to D’ could be caused by

a. an increase in price. b. a decrease in the price of a complement. c. a technological advance. d. a decrease in the price of a substitute.

ANS: D DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Substitutes MSC: Interpretive

108. Refer to Figure 4-3. The movement from D’ to D could be caused by

a. a decrease in price. b. a decrease in income, assuming the good is inferior. c. buyers expecting the price of the good to fall in the near future. d. an increase in the price of a complement.

ANS: B DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Inferior goods MSC: Interpretive


109. Refer to Figure 4-3. If the demand curve shifts from D to D’, then

a. firms would be willing to supply less of the good than before at each possible price. b. people are willing to buy less of the good than before at each possible price. c. people’s incomes evidently have decreased. d. the price of the product has increased, causing consumers to buy less of the product.


Figure 4-4

Panel (a) Panel (b)

D

P'

P

Q' Q quantity

price

D' D

quantity

price

110. Refer to Figure 4-4. 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.

ANS: D DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Demand curve MSC: Applicative

111. Refer to Figure 4-4. 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.



112. Refer to Figure 4-4. The graphs show the demand for cigarettes. In Panel (b), the arrows are

consistent with which of the following events? a. The price of cigarettes increased. b. A tax was placed on cigarettes. c. The prohibition of cigarette advertisements on television. d. Tobacco and marijuana are complements and the price of marijuana decreased.


113. For the general population, a 10 percent increase in the price of cigarettes leads to a

a. 1 percent reduction in the quantity demanded of cigarettes. b. 4 percent reduction in the quantity demanded of cigarettes. c. 10 percent reduction in the quantity demanded of cigarettes. d. 12 percent reduction in the quantity demanded of cigarettes.

ANS: B DIF: 1 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Demand MSC: Definitional

114. For teenagers, a 10 percent increase in the price of cigarettes leads to a

a. 1 percent reduction in the quantity demanded of cigarettes. b. 4 percent reduction in the quantity demanded of cigarettes. c. 10 percent reduction in the quantity demanded of cigarettes. d. 12 percent reduction in the quantity demanded of cigarettes.

ANS: D DIF: 1 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Demand MSC: Definitional

115. Opponents of cigarette taxes often argue that tobacco and marijuana are substitutes so that high

cigarette prices a. encourage marijuana use, and the evidence supports this argument. b. encourage marijuana use, but the evidence does not support this argument. c. discourage marijuana use, and the evidence supports this argument. d. discourage marijuana use, but the evidence does not support this argument.

ANS: B DIF: 1 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Substitutes | Complements MSC: Definitional

116. The belief that tobacco is a “gateway drug” is consistent with

a. the idea that tobacco and marijuana are substitutes. b. the idea that an increase in income causes a decrease in the demand for tobacco and an

increase in the demand for marijuana. c. the idea that lower cigarette prices are associated with less use of marijuana. d. most of the available evidence.

ANS: D DIF: 2 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Complements MSC: Applicative


117. Most studies indicate that tobacco and marijuana tend to be

a. substitutes. b. complements. c. not related since one is legal and one is illegal. d. inferior goods.

ANS: B DIF: 1 REF: 4-2 NAT: Analytic LOC: Supply and demand TOP: Complements MSC: Definitional

Sec03 - The Market Forces of Supply and Demand - Supply

MULTIPLE CHOICE

1. The quantity supplied of a good is the amount that

a. buyers are willing and able to purchase. b. sellers are able to produce. c. buyers and sellers agree will be brought to market. d. sellers are willing and able to sell.

ANS: D DIF: 1 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Quantity supplied MSC: Definitional

2. If the price of a good is low,

a. firms would increase profit by increasing output. b. the quantity supplied of the good could be zero. c. the supply curve for the good will shift to the left. d. firms can and should raise the price of the product.

ANS: B DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Quantity supplied MSC: Interpretive

3. “Other things equal, when the price of a good rises, the quantity supplied of the good also rises, and

when the price falls, the quantity supplied falls as well.” This relationship between price and quantity supplied a. is referred to as the law of supply. b. applies only to a few goods in the economy. c. is represented by a downward-sloping supply curve. d. All of the above are correct.

ANS: A DIF: 1 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Law of supply MSC: Definitional


4. The law of supply states that, other things equal,

a. when the price of a good falls, the supply of the good rises. b. when the price of a good rises, the quantity supplied of the good rises. c. when the price of a good rises, the supply of the good falls. d. when the price of a good falls, the quantity supplied of the good rises.

ANS: B DIF: 1 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Law of supply MSC: Definitional

5. The law of supply states that, other things equal,

a. an increase in price causes quantity supplied to increase. b. an increase in price causes quantity supplied to decrease. c. an increase in quantity supplied causes price to increase. d. an increase in quantity supplied causes price to decrease.

ANS: A DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Law of supply MSC: Interpretive

6. Other things equal, when the price of a good falls, the

a. quantity demanded of the good decreases. b. supply decreases. c. quantity supplied of the good decreases. d. demand increases.

ANS: C DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Law of supply MSC: Interpretive

7. Which of these statements best represents the law of supply?

a. When input prices increase, sellers produce less of the good. b. When production technology improves, sellers produce less of the good. c. When the price of a good decreases, sellers produce less of the good. d. When sellers’ supplies of a good increase, the price of the good increases.

ANS: C DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Law of supply MSC: Interpretive

8. A supply curve slopes upward because

a. as more is produced, total cost of production falls. b. an increase in input prices increases supply. c. the quantity supplied of most goods and services increases over time. d. an increase in price gives producers an incentive to supply a larger quantity.

ANS: D DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Law of supply MSC: Interpretive


9. Which of the following demonstrates the law of supply?

a. When leather became more expensive, belt producers decreased their supply of belts. b. When car production technology improved, car producers increased their supply of cars. c. When sweater producers expected sweater prices to rise in the near future, they decreased

their current supply of sweaters. d. When ketchup prices rose, ketchup sellers increased their quantity supplied of ketchup.

ANS: D DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Law of supply MSC: Applicative

10. The following table contains a supply schedule for a good.

Price Quantity Supplied

$10 100

$20 ?

If the law of supply applies to this good, then “?” could be

a. 0. b. 50. c. 100. d. 150.


11. A supply schedule is a table that shows the relationship between

a. price and quantity supplied. b. input costs and quantity supplied. c. quantity demanded and quantity supplied. d. profit and quantity supplied.

ANS: A DIF: 1 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Supply schedule MSC: Definitional

12. Which of the following is not held constant in a supply schedule?

a. technology b. the price of the good c. the prices of inputs d. expectations

ANS: B DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Supply schedule MSC: Interpretive


13. The difference between a supply schedule and a supply curve is that

a. a supply schedule incorporates demand and a supply curve does not. b. a supply schedule incorporates profit and a supply curve does not. c. a supply schedule can shift, but a supply curve cannot shift. d. a supply schedule is a table and a supply curve is drawn on a graph.

ANS: D DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Supply schedule | Supply curve MSC: Interpretive

14. The supply curve for a good is

a. a line that relates profit and quantity supplied. b. a line that relates input prices and quantity supplied. c. a line that relates price and quantity supplied. d. a line that relates price and profit.

ANS: C DIF: 1 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Supply curve MSC: Definitional

15. The line that relates the price of a good and the quantity supplied of that good is called the

a. supply schedule, and it usually slopes upward. b. supply schedule, and it usually slopes downward. c. supply curve, and it usually slopes upward. d. supply curve, and it usually slopes downward.

ANS: C DIF: 1 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Supply curve MSC: Definitional

16. The sum of all the individual supply curves for a product is called

a. total supply. b. market supply. c. aggregate supply. d. total output.

ANS: B DIF: 1 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Market supply MSC: Definitional

17. The market supply curve

a. 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.

ANS: D DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Market supply MSC: Interpretive


18. In a market, to find the total amount supplied at a particular price,

a. we must add up all of the amounts that firms are willing and able to supply at that price. b. we must take the average of the amounts that firms are willing and able to supply at that

price. c. we must add all of the costs that firms incur to supply the product at that price. d. all determinants of demand must be taken into account.

ANS: A DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Market supply MSC: Interpretive

19. A market supply curve is determined by

a. vertically summing individual supply curves. b. horizontally summing individual supply curves. c. finding the average quantity supplied by sellers at each possible price. d. finding the average price at which sellers are willing and able to sell a particular quantity

of the good.

ANS: B DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Market supply MSC: Interpretive

20. A market supply curve shows

a. the total quantity supplied at all possible prices. b. the average quantity supplied by producers at all possible prices. c. how quantity supplied changes when the number of sellers changes. d. suppliers’ responses, in terms of the amounts they will supply, to the demands of buyers.

ANS: A DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Market supply MSC: Interpretive

21. A market supply curve shows how the total quantity supplied of a good varies as

a. technology varies. b. price varies. c. input prices vary. d. demand varies.

ANS: B DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Market supply MSC: Interpretive


Table 4-3

Price Firm A’s Quantity Supplied

Firm B’s Quantity Supplied

Firm C’s Quantity Supplied

Firm D’s Quantity Supplied

$0 10 0 0 0

$2 8 3 4 5

$4 6 6 8 10

$6 4 9 12 15

$8 2 12 8 20

$10 0 15 4 25

22. Refer to Table 4-3. Which supply schedules obey the law of supply?

a. Firm A’s only. b. Firm B’s, Firm C’s, and Firm D’s. c. Firm A’s and Firm C’s. d. Firm B’s and Firm D’s.


23. Refer to Table 4-3. If these are the only four sellers in the market, then the market quantity

supplied at a price of $4 is a. 4 units. b. 7.5 units. c. 10 units. d. 30 units.

ANS: D DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Market supply MSC: Applicative


supplied at a price of $10 is a. 3 units. b. 11 units. c. 25 units. d. 44 units.



25. Refer to Table 4-3. If these are the only four sellers in the market, then when the price increases

from $6 to $8, the market quantity supplied a. increases by 0.5 unit. b. increases by 2 units. c. decreases by 4 units. d. increases by 42 units.

ANS: B DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Market supply MSC: Applicative

Table 4-4

Price Firm A’s Quantity Supplied

Firm B’s Quantity Supplied

Firm C’s Quantity Supplied

Firm D’s Quantity Supplied

$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



ANS: C DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Market supply MSC: Applicative

27. Refer to Table 4-4. If these are the only four sellers in the market, then when the price decreases

from $10 to $8, the market quantity supplied a. decreases by 2.5 units. b. decreases by 4 units. c. decreases by 10 units. d. decreases by 50 units.

ANS: C DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Market supply MSC: Applicative


Figure 4-5 Firm A Firm B

S

2 4 6 8 10 12 14 16 18 20 quantity

2

4

6

8

10

12

14

16

18

20price

S

2 4 6 8 10 12 14 16 quantity

2

4

6

8

10

12

14

16

18

20price

28. Refer to Figure 4-5. If these are the only two sellers in the market, then the market quantity



29. When we move along a given supply curve,

a. only price is held constant. b. technology and price are held constant. c. all nonprice determinants of supply are held constant. d. all determinants of quantity supplied are held constant.

ANS: C DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Supply curve MSC: Interpretive

30. Once the supply curve for a product or service is drawn, it

a. 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.

ANS: B DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Supply curve MSC: Interpretive


31. If something happens to alter the quantity supplied at any given price, then

a. we move along the supply curve. b. the supply curve shifts. c. the supply curve becomes steeper. d. the supply curve becomes flatter.

ANS: B DIF: 1 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Supply curve MSC: Definitional

32. When quantity supplied decreases at every possible price, we know that the supply curve has

a. shifted to the left. b. shifted to the right. c. not shifted; rather, we have moved along the supply curve to a new point on the same

curve. d. not shifted; rather, the supply curve has become flatter.

ANS: A DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Supply curve MSC: Interpretive

33. When quantity supplied increases at every possible price, we know that the supply curve has

a. shifted to the left. b. shifted to the right. c. not shifted; rather, we have moved along the supply curve to a new point on the same

curve. d. not shifted; rather, the supply curve has become flatter.


34. An increase in supply is represented by

a. a movement downward and to the left along a supply curve. b. a movement upward and to the right along a supply curve. c. a rightward shift of a supply curve. d. a leftward shift of a supply curve.


35. A decrease in supply is represented by

a. a movement downward and to the left along a supply curve. b. a movement upward and to the right along a supply curve. c. a rightward shift of a supply curve. d. a leftward shift of a supply curve.

ANS: D DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Supply curve MSC: Interpretive


36. An increase in quantity supplied

a. results in a movement downward and to the left along a fixed supply curve. b. results in a movement upward and to the right along a fixed supply curve. c. shifts the supply curve to the left. d. shifts the supply curve to the right.


37. A decrease in quantity supplied

a. results in a movement downward and to the left along a fixed supply curve. b. results in a movement upward and to the right along a fixed supply curve. c. shifts the supply curve to the left. d. shifts the supply curve to the right.


38. A leftward shift of a supply curve is called

a. an increase in supply. b. a decrease in supply. c. a decrease in quantity supplied. d. an increase in quantity supplied.


39. A rightward shift of a supply curve is called



40. A movement upward and to the right along a supply curve is called




41. A movement downward and to the left along a supply curve is called



42. A decrease in the price of a good will

a. increase supply. b. decrease supply. c. increase quantity supplied. d. decrease quantity supplied.


43. An increase in the price of a good will

a. increase supply. b. decrease supply. c. increase quantity supplied. d. decrease quantity supplied.


44. When the price of a good or service changes,

a. the demand curve shifts in the opposite direction. b. the supply curve shifts in the opposite direction. c. the supply curve shifts in the same direction. d. there is a movement along a given supply curve.



45. The supply curve for coffee

a. shifts when the price of coffee changes because the price of coffee is measured on the vertical axis of the graph.

b. shifts when the price of coffee changes because the quantity supplied of coffee is measured on the horizontal axis of the graph.

c. does not shift when the price of coffee changes because the price of coffee is measured on the vertical axis of the graph.

d. does not shift when the price of coffee changes because the quantity supplied of coffee is measured on the horizontal axis of the graph.

ANS: C DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Supply curve MSC: Applicative

46. Which of the following changes would not shift the supply curve for a good or service?

a. a change in technology b. a change in the price of the good or service c. a change in expectations about the future price of the good or service d. a change in input prices


47. Which of the following would not shift the supply curve for mp3 players?

a. an increase in the price of mp3 players b. a decrease in the number of sellers of mp3 players c. an increase in the price of plastic, an input into the production of mp3 players d. an improvement in the technology used to produce mp3 players

ANS: A DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Supply curve MSC: Applicative

48. Which of the following events would cause a movement upward and to the right along the supply

curve for tomatoes? a. The number of sellers of tomatoes increases. b. There is an advance in technology that reduces the cost of producing tomatoes. c. The price of fertilizer decreases, and fertilizer is an input in the production of tomatoes. d. The price of tomatoes rises.

ANS: D DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Supply curve MSC: Applicative


49. A movement along the supply curve might be caused by a change in

a. technology. b. input prices. c. expectations about future prices. d. the price of the good or service that is being supplied.


50. Holding the nonprice determinants of supply constant, a change in price would

a. result in either a decrease in supply or an increase in supply. b. result in a movement along a stationary supply curve. c. result in a shift of demand. d. have no effect on the quantity supplied.


51. An increase in the price of a good would

a. increase the supply of the good. b. increase the amount purchased by buyers. c. give producers an incentive to produce more. d. decrease both the quantity demanded of the good and the quantity supplied of the good.


52. An increase in the price of oranges would lead to

a. an increased supply of oranges. b. a reduction in the prices of inputs used in orange production. c. an increased demand for oranges. d. a movement up and to the right along the supply curve for oranges.

ANS: D DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Supply curve MSC: Applicative

53. The supply curve for cookbooks shifts

a. when a determinant of the supply of cookbooks other than technology changes. b. when a determinant of the supply of cookbooks other than the price of cookbooks changes. c. when any determinant of the supply of cookbooks changes. d. only when the number of cookbook-sellers changes.

ANS: B DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Determinants of supply MSC: Applicative


54. Lead is an important input in the production of crystal. If the price of lead decreases, then we would

expect the supply of a. crystal to be unaffected. b. crystal to decrease. c. crystal to increase. d. lead to increase.

ANS: C DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Input prices MSC: Applicative

55. Suppose you make jewelry. If the price of gold falls, then we would expect you to

a. be willing and able to produce less jewelry than before at each possible price. b. be willing and able to produce more jewelry than before at each possible price. c. face a greater demand for your jewelry. d. face a weaker demand for your jewelry.

ANS: B DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Input prices MSC: Applicative

56. Workers at a bicycle assembly plant currently earn the mandatory minimum wage. If the federal

government increases the minimum wage by $1.00 per hour, then it is likely that the a. demand for bicycle assembly workers will increase. b. supply of bicycles will shift to the right. c. supply of bicycles will shift to the left. d. firm must increase output to maintain profit levels.


57. Suppose there is an increase in the price of steel. We would expect the supply curve for steel beams

a. to shift rightward. b. to shift leftward. c. to become flatter. d. to remain unchanged.

ANS: B DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Input prices MSC: Applicative

58. Wheat is the main input in the production of flour. If the price of wheat decreases, then we would

expect the a. demand for flour to increase. b. demand for flour to decrease. c. supply of flour to increase. d. supply of flour to decrease.



59. An increase in the price of rubber coincides with an advance in the technology of tire production.

As a result of these two events, a. the demand for tires decreases and the supply of tires increases. b. the demand for tires is unaffected and the supply of tires decreases. c. the demand for tires is unaffected and the supply of tires increases. d. None of the above is necessarily correct.

ANS: D DIF: 3 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Input prices | Technology MSC: Analytical

60. A technological advance will shift the

a. supply curve to the right. b. supply curve to the left. c. demand curve to the right. d. demand curve to the left.

ANS: A DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Technology MSC: Interpretive

61. An advance in production technology will

a. increase a firm's costs and increase its supply. b. increase a firm’s costs and decrease its supply. c. decrease a firm’s costs and increase its supply. d. decrease a firm’s costs and decrease its supply.

ANS: C DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Technology MSC: Interpretive

62. If car manufacturers begin utilizing new labor-saving technology on their assembly lines, we would

not expect a. a smaller quantity of labor to be used. b. the supply of cars to increase. c. the firms’ costs to fall. d. individual car manufacturers to move up and to the right along their individual supply

curves.

ANS: D DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Technology MSC: Applicative


63. Which of the following might cause the supply curve for an inferior good to shift to the right?

a. An increase in input prices. b. A decrease in consumer income. c. An improvement in production technology that makes production of the good more

profitable. d. A decrease in the number of sellers in the market.

ANS: C DIF: 3 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Technology MSC: Analytical

64. Today, producers changed their expectations about the future. This change

a. can cause a movement along a supply curve. b. can affect future supply, but not today’s supply. c. can affect today’s supply. d. cannot affect either today’s supply or future supply.

ANS: C DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Expectations MSC: Interpretive

65. If suppliers expect the price of their product to fall in the future, then they will

a. decrease supply now. b. increase supply now. c. decrease supply in the future but not now. d. increase supply in the future but not now.

ANS: B DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Expectations MSC: Interpretive

66. What will happen in the rice market now if sellers expect higher rice prices in the near future?

a. The supply of rice will increase. b. The supply of rice will decrease. c. The supply of rice will be unaffected. d. The demand for rice will decrease.


67. Today's supply curve for gasoline could shift in response to

a. a change in today's price of gasoline. b. a change in the expected future price of gasoline. c. a change in the number of buyers of gasoline. d. All of the above are correct.



68. A dress manufacturer recently has come to expect higher prices for dresses in the near future. We

would expect a. the dress manufacturer to supply more dresses now than it was supplying previously. b. the dress manufacturer to supply fewer dresses now than it was supplying previously. c. the demand for this manufacturer's dresses to fall. d. no change in the dress manufacturer's current supply; instead, future supply will be

affected.


69. Recent forest fires in the western states are expected to cause the price of lumber to rise in the next 6

months. As a result, we can expect the supply of lumber to a. fall in 6 months, but not now. b. increase in 6 months when the price goes up. c. fall now. d. increase now to meet as much demand as possible.

ANS: C DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Expectations MSC: Applicative

70. Funsters, Inc., the largest toy company in the country, sells its most popular doll for $15. It has just

learned that its leading competitor, Toysorama, is mass-producing an excellent copy and plans to flood the market with their $5 doll in 6 weeks. Funsters should a. “fight fire with fire” by decreasing supply of its doll for 6 weeks and then increasing the

supply. b. increase the supply of their doll now before the other doll hits the market. c. increase the price of their doll now. d. discontinue their doll.


71. Which of the following is a determinant of the market supply curve but not a determinant of an

individual seller’s supply? a. technology b. expectations c. input prices d. the number of sellers

ANS: D DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Number of sellers MSC: Interpretive


72. If the number of sellers in a market increases, then the

a. demand in that market will increase. b. supply in that market will increase. c. supply in that market will decrease. d. demand in that market will decrease.

ANS: B DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Number of sellers MSC: Interpretive

73. A decrease in the number of sellers in the market causes

a. the supply curve to shift to the left. b. the supply curve to shift to the right. c. a movement up and to the right along a stationary supply curve. d. a movement downward and to the left along a stationary supply curve.

ANS: A DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Number of sellers MSC: Interpretive

74. Which of the following would shift the supply curve for gasoline to the right?

a. An increase in the demand for gasoline. b. An increase in the price of gasoline. c. An increase in the number of producers of gasoline d. An increase in the price of oil, an input into the production of gasoline.

ANS: C DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Number of sellers MSC: Applicative

75. Which of the following events could cause an increase in the supply of ceiling fans?

a. The number of sellers of ceiling fans increases. b. There is an increase in the price of air conditioners, and consumers regard air conditioners

and ceiling fans as substitutes. c. There is an increase in the price of the motor that powers ceiling fans. d. All of the above are correct.

ANS: A DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Number of sellers MSC: Applicative


Figure 4-6

S

P

Q

A

P'

Q'

B

quantity

price

76. Refer to Figure 4-6. The movement from point A to point B on the graph is called

a. a decrease in supply. b. an increase in supply. c. an increase in the quantity supplied. d. a decrease in the quantity supplied.


77. Refer to Figure 4-6. The movement from point A to point B on the graph is caused by

a. a decrease in the price of the good. b. an increase in the price of the good. c. an advance in technology. d. a decrease in input prices.


78. Refer to Figure 4-6. The movement from point A to point B on the graph represents

a. an increased willingness and ability on the part of suppliers to supply the good at each possible price.

b. an increase in the number of suppliers. c. a decrease in the price of a relevant input. d. an increase in the price of the good that is being supplied and suppliers’ response to that

price change.



Figure 4-7

S S'

quantity

price

79. Refer to Figure 4-7. The shift from S to S’ is called

a. a decrease in supply. b. a decrease in quantity supplied. c. an increase in supply. d. an increase in quantity supplied.


80. Refer to Figure 4-7. The movement from S to S’ could be caused by

a. an increase in the price of the good. b. an improvement in technology. c. an increase in income. d. an increase in input prices.

ANS: B DIF: 2 REF: 4-3 NAT: Analytic LOC: Supply and demand TOP: Technology MSC: Interpretive

81. Refer to Figure 4-7. If the supply curves that are drawn represent supply curves for single-family

residential houses, then the movement from S to S’ could be caused by a. an increase in the price of apartments (a substitute for single-family houses for many

people looking for a place to live). b. a newly-formed expectation by house-builders that prices of houses will increase

significantly in the next six months. c. a decrease in the price of lumber. d. All of the above are correct.



Sec04 - The Market Forces of Supply and Demand - Supply and Demand Together

MULTIPLE CHOICE

1. The unique point at which the supply and demand curves intersect is called

a. market harmony. b. coincidence. c. equivalence. d. equilibrium.

ANS: D DIF: 1 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Equilibrium MSC: Definitional

2. The dictionary defines equilibrium as a situation in which forces

a. are in balance. b. are the same. c. clash. d. remain constant.

ANS: A DIF: 1 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Equilibrium MSC: Definitional

3. At the equilibrium price, the quantity of the good that buyers are willing and able to buy

a. is greater than the quantity that sellers are willing and able to sell. b. exactly equals the quantity that sellers are willing and able to sell. c. is less than the quantity that sellers are willing and able to sell. d. (a) and (c) could both be correct.

ANS: B DIF: 1 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Equilibrium MSC: Definitional

4. Another term for equilibrium price is

a. dynamic price. b. market-clearing price. c. quantity-defining price. d. balance price.


5. In a given market, how are the equilibrium price and the market-clearing price related?

a. There is no relationship. b. They are the same price. c. The market-clearing price exceeds the equilibrium price. d. The equilibrium price exceeds the market-clearing price.

ANS: B DIF: 2 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Equilibrium MSC: Interpretive


6. Buyers are able to buy all they want to buy and sellers are able to sell all they want to sell

a. at prices at and above the equilibrium price. b. at prices at and below the equilibrium price. c. at prices above and below the equilibrium price, but not at the equilibrium price. d. at the equilibrium price, but not above or below the equilibrium price.

ANS: D DIF: 2 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Equilibrium MSC: Interpretive

7. In markets, prices move toward equilibrium because of

a. the actions of buyers and sellers. b. government regulations placed on market participants. c. increased competition among sellers. d. buyers' ability to affect market outcomes.

ANS: A DIF: 1 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Equilibrium MSC: Definitional

8. When the price of a good is higher than the equilibrium price,

a. a shortage will exist. b. buyers desire to purchase more than is produced. c. sellers desire to produce and sell more than buyers wish to purchase. d. quantity demanded exceeds quantity supplied.

ANS: C DIF: 2 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Surplus MSC: Interpretive

9. A surplus exists in a market if

a. there is an excess demand for the good. b. the situation is such that the law of supply and demand would predict an increase in the

price of the good from its current level. c. the current price is above its equilibrium price. d. quantity demanded exceeds quantity supplied.


10. If a surplus exists in a market, then we know that the actual price is

a. above the equilibrium price and quantity supplied is greater than quantity demanded. b. above the equilibrium price and quantity demanded is greater than quantity supplied. c. below the equilibrium price and quantity demanded is greater than quantity supplied. d. below the equilibrium price and quantity supplied is greater than quantity demanded.

ANS: A DIF: 2 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Surplus MSC: Interpretive


11. If, at the current price, there is a surplus of a good, then

a. sellers are producing more than buyers wish to buy. b. the market must be in equilibrium. c. the price is below the equilibrium price. d. quantity demanded equals quantity supplied.

ANS: A DIF: 2 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Surplus MSC: Interpretive

12. Which of the following would cause price to decrease?

a. a decrease in supply b. an increase in demand c. a surplus of the good d. a shortage of the good


13. When a surplus exists in a market, sellers

a. raise price, which increases quantity demanded and decreases quantity supplied, until the surplus is eliminated.

b. raise price, which decreases quantity demanded and increases quantity supplied, until the surplus is eliminated.

c. lower price, which increases quantity demanded and decreases quantity supplied, until the surplus is eliminated.

d. lower price, which decreases quantity demanded and increases quantity supplied, until the surplus is eliminated.


14. Suppose roses are currently selling for $40 per dozen, but the equilibrium price of roses is $30 per

dozen. We would expect a a. shortage to exist and the market price of roses to increase. b. shortage to exist and the market price of roses to decrease. c. surplus to exist and the market price of roses to increase. d. surplus to exist and the market price of roses to decrease.

ANS: D DIF: 2 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Surplus MSC: Applicative

15. The current price of neckties is $30, but the equilibrium price of neckties is $25. As a result,

a. the quantity supplied of neckties exceeds the quantity demanded of neckties at the $30 price.

b. the equilibrium quantity of neckties exceeds the quantity demanded at the $30 price. c. there is a surplus of neckties at the $30 price. d. All of the above are correct.



16. A university's football stadium is never more than half-full during football games. This indicates

a. the ticket price is above the equilibrium price. b. the ticket price is below the equilibrium price. c. the ticket price is at the equilibrium price. d. nothing about the equilibrium price.

ANS: A DIF: 2 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Surplus MSC: Applicative

17. When the price of a good is lower than the equilibrium price,

a. a surplus will exist. b. buyers desire to purchase more than is produced. c. sellers desire to produce and sell more than buyers wish to purchase. d. quantity supplied exceeds quantity demanded.

ANS: B DIF: 2 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Shortage MSC: Interpretive

18. A shortage exists in a market if

a. there is an excess supply of the good. b. the situation is such that the law of supply and demand would predict a decrease in the

price of the good from its current level. c. the current price is below its equilibrium price. d. quantity supplied exceeds quantity demanded.

ANS: C DIF: 2 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Shortage MSC: Interpretive

19. If a shortage exists in a market, then we know that the actual price is

a. above the equilibrium price and quantity supplied is greater than quantity demanded. b. above the equilibrium price and quantity demanded is greater than quantity supplied. c. below the equilibrium price and quantity demanded is greater than quantity supplied. d. below the equilibrium price and quantity supplied is greater than quantity demanded.


20. If, at the current price, there is a shortage of a good, then

a. sellers are producing more than buyers wish to buy. b. the market must be in equilibrium. c. the price is below the equilibrium price. d. quantity demanded equals quantity supplied.



21. Which of the following would cause price to increase?

a. an increase in supply b. a decrease in demand c. a surplus of the good d. a shortage of the good

ANS: D DIF: 2 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Shortage MSC: Interpretive

22. When a shortage exists in a market, sellers

a. raise price, which increases quantity demanded and decreases quantity supplied, until the shortage is eliminated.

b. raise price, which decreases quantity demanded and increases quantity supplied, until the shortage is eliminated.

c. lower price, which increases quantity demanded and decreases quantity supplied, until the shortage is eliminated.

d. lower price, which decreases quantity demanded and increases quantity supplied, until the shortage is eliminated.

ANS: B DIF: 2 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Shortage MSC: Interpretive

23. If there is a shortage of farm laborers, we would expect

a. the wage of farm laborers to increase. b. the wage of farm laborers to decrease. c. the price of farm commodities to decrease. d. a decrease in the demand for substitutes for farm labor.

ANS: A DIF: 2 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Shortage MSC: Applicative

24. Suppose roses are currently selling for $20 per dozen, but the equilibrium price of roses is $30 per

dozen. We would expect a a. shortage to exist and the market price of roses to increase. b. shortage to exist and the market price of roses to decrease. c. surplus to exist and the market price of roses to increase. d. surplus to exist and the market price of roses to decrease.


25. Years ago, thousands of country music fans risked their lives by rushing to buy tickets for a Willie

Nelson concert at Carnegie Hall. This behavior indicates a. the ticket price was above the equilibrium price. b. the ticket price was below the equilibrium price. c. the ticket price was at the equilibrium price. d. nothing about the equilibrium price.

ANS: B DIF: 2 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Shortage MSC: Applicative


26. The law of supply and demand asserts that

a. demand curves and supply curves tend to shift to the right as time goes by. b. the price of a good will eventually rise in response to an excess demand for that good. c. when the supply curve for a good shifts, the demand curve for that good shifts in response. d. the equilibrium price of a good will be rising more often than it will be falling.

ANS: B DIF: 2 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Law of supply and demand MSC: Interpretive

27. Step one of the “Three Steps for Analyzing Changes in Equilibrium” is

a. decide which direction the curve shifts. b. decide whether the event shifts the supply or demand curve. c. use the supply-and-demand diagram to see how the shift changes the equilibrium. d. Any of these could be used first.


28. You have been asked by your economics professor to graph the market for lumber and then to

analyze the change that would occur in equilibrium price as a result of recent forest fires in the west. Your first step would be to a. decide which direction to shift the curve. b. decide whether the fires affected demand or supply. c. graph the shift to see the effect on equilibrium. d. None of the above are correct.

ANS: B DIF: 2 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Equilibrium MSC: Applicative

Table 4-5

Price Quantity Demanded

Quantity Supplied

$10 10 60

$8 20 45

$6 30 30

$4 40 15

$2 50 0

29. Refer to Table 4-5. The equilibrium price and quantity, respectively, are

a. $2 and 50. b. $6 and 30. c. $6 and 60. d. $12 and 30.



30. Refer to Table 4-5. If the price were $8, a

a. shortage of 20 units would exist and price would tend to rise. b. surplus of 25 units would exist and price would tend to fall. c. shortage of 25 units would exist and price would tend to rise. d. surplus of 45 units would exist and price would tend to fall.

ANS: B DIF: 2 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Surplus MSC: Applicative

31. Refer to Table 4-5. If the price were $4, a

a. surplus of 15 units would exist and price would tend to fall. b. shortage of 25 units would exist and price would tend to rise. c. surplus of 25 units would exist and price would tend to fall. d. shortage of 40 units would exist and price would tend to rise.


Table 4-6 A country club usually only allows members to purchase tickets for its celebrity golf tournament, but the club is considering allowing non-members to purchase tickets this year. The demand and supply schedules are as follows:

Price Quantity Demanded by Members

Quantity Demanded by Non-members

Quantity Supplied

$10 1000 500 600

$15 800 400 600

$20 600 300 600

$25 400 200 600

$30 200 100 600

32. Refer to Table 4-6. If only members are allowed to purchase tickets to this year's celebrity golf

tournament, then what will be the equilibrium price? a. $10 b. $15 c. $20 d. $25

ANS: C DIF: 2 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Equilibrium MSC: Applicative

33. Refer to Table 4-6. If both members and non-members are allowed to purchase tickets to this

year's celebrity golf tournament, then what will be the equilibrium price? a. $10 b. $15 c. $20 d. $25

ANS: D DIF: 2 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Equilibrium MSC: Applicative



year's celebrity golf tournament and the country club sets the ticket price at $30, then there will be a. a shortage of 300 tickets. b. a surplus of 300 tickets. c. 600 tickets sold. d. 600 tickets unsold.



year's celebrity golf tournament and the country club sets the ticket price at $20, then there will be a. a shortage of 300 tickets. b. a surplus of 300 tickets. c. 300 tickets sold. d. 600 tickets unsold.


Table 4-7

The demand schedule below pertains to sandwiches demanded per week.

Price Charlie’s Quantity

Demanded

Maxine’s Quantity

Demanded

Quinn’s Quantity

Demanded

$3 3 4 3

$5 1 2 x

36. Refer to Table 4-7. Regarding Charlie and Maxine, whose demand for sandwiches conforms to the

law of demand? a. only Charlie’s b. only Maxine’s c. both Charlie’s and Maxine’s d. neither Charlie’s nor Maxine’s


37. Refer to Table 4-7. Regarding Charlie and Maxine, for whom are sandwiches a normal good?

a. only for Charlie b. only for Maxine c. for Charlie and for Maxine d. This cannot be determined from the given information.

ANS: D DIF: 2 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Normal goods MSC: Applicative


38. Refer to Table 4-7. Suppose x = 1. Then it must be true that

a. Charlie and Quinn have the same income, which is lower than Maxine’s income. b. if sandwiches and potato chips are complements for Charlie, then those two goods are also

complements for Quinn. c. Charlie’s demand curve is identical to Quinn’s demand curve. d. All of the above are correct.


39. Refer to Table 4-7. Suppose x = 1. Then the slope of the market demand curve is

a. -3. b. -1/3. c. 1/3. d. 3.

ANS: B DIF: 3 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Market demand curve MSC: Analytical

40. Refer to Table 4-7. Suppose Charlie, Maxine, and Quinn are the only demanders of sandwiches.

Also suppose x = 2. Then a. the slope of Quinn’s demand curve is -1/2 and the slope of the market demand curve is -

5/2. b. the slope of Quinn’s demand curve is -1/2 and the slope of the market demand curve is -

2/5. c. the slope of Quinn’s demand curve is -2 and the slope of the market demand curve is -5/2. d. the slope of Quinn’s demand curve is -2 and the slope of the market demand curve is -2/5.

ANS: D DIF: 3 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Individual demand curve | Market demand curve MSC: Analytical

41. Refer to Table 4-7. Suppose Charlie, Maxine, and Quinn are the only demanders of sandwiches

and that the market demand violates the law of demand. Then, in the table, a. x 5. b. x 5. c. x 7. d. x 10.

ANS: C DIF: 3 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Market demand MSC: Analytical



Also suppose the following: • x = 2 • the current price of a sandwich is $5.00 • the market quantity supplied of sandwiches is 10 • the law of supply applies to the supply of sandwiches Then

a. there is a shortage of 5 sandwiches and the price would be expected to rise from its current level of $5.00.

b. there is a shortage of 5 sandwiches and the price would be expected to fall from its current level of $5.00.

c. there is a surplus of 5 sandwiches and the price would be expected to rise from its current level of $5.00.

d. there is a surplus of 5 sandwiches and the price would be expected to fall from its current level of $5.00.

ANS: D DIF: 3 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Surplus MSC: Analytical


Also suppose the following: • x = 2 • the current price of a sandwich is $3.00 • the market quantity supplied of sandwiches is 4 • the slope of the supply curve is 2 Then

a. there is currently a shortage of 6 sandwiches and the equilibrium price of a sandwich is less than $3.00.

b. there is currently a shortage of 6 sandwiches and the equilibrium price of a sandwich is $5.00.

c. there is currently a surplus of 6 sandwiches and the equilibrium price of a sandwich is less than $3.00.

d. there is currently a surplus of 6 sandwiches and the equilibrium price of a sandwich is $5.00.

ANS: B DIF: 3 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Shortage MSC: Analytical



Also suppose the following: • x = 2 • the current price of a sandwich is $3.00 • the market quantity supplied of sandwiches is 5 • the slope of the supply curve is 1 Then

a. there is currently a shortage of 5 sandwiches and the equilibrium price of a sandwich is between $3.00 and $5.00.

b. there is currently a shortage of 5 sandwiches and the equilibrium price of a sandwich is $5.00.

c. there is currently a surplus of 5 sandwiches and the equilibrium price of a sandwich is between $3.00 and $5.00.

d. there is currently a surplus of 5 sandwiches and the equilibrium price of a sandwich is $5.00.

ANS: A DIF: 3 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Shortage MSC: Analytical

Table 4-8

An Increase in Supply A Decrease in Supply

An Increase in Demand A B

A Decrease in Demand C D

45. Refer to Table 4-8. Which space represents an increase in equilibrium quantity and an

indeterminate change in equilibrium price? a. A b. B c. C d. D

ANS: A DIF: 2 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Equilibrium MSC: Interpretive

46. Refer to Table 4-8. Which space represents an increase in equilibrium price and an indeterminate

change in equilibrium quantity? a. A b. B c. C d. D



47. Refer to Table 4-8. Which space represents a decrease in equilibrium price and an indeterminate

change in equilibrium quantity? a. A b. B c. C d. D

ANS: C DIF: 2 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Equilibrium MSC: Interpretive

48. Refer to Table 4-8. Which space represents a decrease in equilibrium quantity and an

indeterminate change in equilibrium price? a. A b. B c. C d. D


Figure 4-8

S

D

100 200 300 400 500 600 700 800 quantity

5

10

15

20

25

30

35

40

45

50price

49. Refer to Figure 4-8. Equilibrium price and quantity are, respectively,




50. Refer to Figure 4-8. At the equilibrium price,

a. 200 units would be supplied and demanded. b. 400 units would be supplied and demanded. c. 600 units would be supplied and demanded. d. 600 units would be supplied, but only 200 would be demanded.


51. Refer to Figure 4-8. At a price of $35,

a. there would be a shortage of 400 units. b. there would be a surplus of 200 units. c. there would be a surplus of 400 units. d. there would be a surplus of 600 units.

ANS: C DIF: 2 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Surplus MSC: Applicative


a. a shortage would exist and the price would tend to rise from $35 to a higher price. b. a surplus would exist and the price would tend to rise from $35 to a higher price. c. an excess demand would exist and the price would tend to fall from $35 to a lower price. d. an excess supply would exist and the price would tend to fall from $35 to a lower price.


53. Refer to Figure 4-8. At what price would there be an excess supply of 200 units of the good?

a. $15 b. $20 c. $30 d. $35

ANS: C DIF: 2 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Surplus MSC: Applicative


a. there would be a surplus of 400 units. b. there would be a shortage of 200 units. c. there would be a shortage of 400 units. d. there would be a shortage of 600 units.

ANS: C DIF: 2 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Shortage MSC: Applicative



a. there would be a shortage and the law of supply and demand predicts that the price will fall from $20 to a lower price.

b. there would be a surplus and the law of supply and demand predicts that the price will rise from $20 to a higher price.

c. there would be an excess demand and the law of supply and demand predicts that the price will rise from $20 to a higher price.

d. there would be an excess supply and the law of supply and demand predicts that the price will fall from $20 to a lower price.


56. Refer to Figure 4-8. At what price would there be an excess demand of 200 units of the good?

a. $15 b. $20 c. $30 d. $35


Figure 4-9

S

D

10 20 30 40 50 60 70 80 90 quantity

2

4

6

8

10

12

14

16

18

20price

57. Refer to Figure 4-9. In this market, equilibrium price and quantity, respectively, are




58. Refer to Figure 4-9. If price in this market is currently $14, then there would be a(n)

a. surplus of 20 units and the law of supply and demand predicts that the price will rise from $14 to a higher price.

b. excess supply of 20 units and the law of supply and demand predicts that the price will fall from $14 to a lower price.

c. surplus of 40 units and the law of supply and demand predicts that the price will rise from $14 to a higher price.

d. excess supply of 40 units and the law of supply and demand predicts that the price will fall from $14 to a lower price.


59. Refer to Figure 4-9. If there is currently a shortage of 20 units of the good, then

a. the law of demand predicts that the price will rise by $2 to eliminate the shortage. b. the law of supply predicts that the price will rise by $2 to eliminate the shortage. c. the law of supply and demand predicts that the price will rise by $2 to eliminate the

shortage. d. the law of supply and demand predicts that the price will fall by $2 to eliminate the

shortage.

ANS: C DIF: 3 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Shortage MSC: Analytical

Figure 4-10

S

D

100 200 300 400 500 600 700 800 900 quantity

5

10

15

20

25

30

35

40

45

50price

60. Refer to Figure 4-10. In this market, equilibrium price and quantity, respectively, are




61. Refer to Figure 4-10. At a price of $20, which of the following statements is not correct?

a. The market is in equilibrium. b. Equilibrium price is equal to equilibrium quantity. c. There is no pressure for price to change. d. The quantity of the good that is bought and sold is 600.


62. Refer to Figure 4-10. If price is $25, then quantity demanded and quantity supplied, respectively,

are a. 500 and 500. b. 500 and 800. c. 600 and 600. d. 800 and 500.


63. Refer to Figure 4-10. If the price is $25, then there would be an

a. excess supply of 100 and price would fall. b. excess supply of 300 and price would fall. c. excess demand of 100 and price would fall. d. excess demand of 300 and price would fall.


64. Refer to Figure 4-10. If the price is $10, then there would be a

a. shortage of 400 and price would rise. b. surplus of 400 and price would rise. c. shortage of 600 and price would rise. d. surplus of 600 and price would rise.



a. quantity demanded exceeds quantity supplied. b. there is a shortage. c. there is an excess demand. d. All of the above are correct.

ANS: D DIF: 2 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Shortage MSC: Applicative


Figure 4-11

D

S

1 2 3 4 5 6 7 8 9 10 quantity

2

4

6

8

10

12

14

16

18

20price

66. Refer to Figure 4-11. What is the equilibrium price in this market?

a. $0 b. $5 c. $7.50 d. $10


67. Refer to Figure 4-11. What is the equilibrium quantity in this market?

a. 5 units b. 7.5 units c. 10 units d. The equilibrium quantity cannot be determined from this graph.

ANS: A DIF: 2 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Equilibrium MSC: Applicative

68. Refer to Figure 4-11. At a price of $12, which of the following is correct?

a. there is a surplus of 1 unit b. there is a surplus of 2 units c. there is a shortage of 1 unit d. there is a shortage of 2 units



69. Refer to Figure 4-11. At a price of $4, which of the following is correct?

a. there is a surplus of 3 units b. there is a surplus of 6 units c. there is a shortage of 3 units d. there is a shortage of 6 units

ANS: D DIF: 2 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Shortage MSC: Applicative

Figure 4-12

The diagram below pertains to the demand for turkey in the United States.

DB

DA

x

y

quantity

price

70. Refer to Figure 4-12. All else equal, an increase in the income of buyers who consider turkey to be

an inferior good would cause a move a. from DA to DB. b. from DB to DA. c. from x to y. d. from y to x.

ANS: A DIF: 2 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Inferior goods MSC: Applicative

71. Refer to Figure 4-12. All else equal, a sale on chicken would cause a move

a. from DA to DB. b. from DB to DA. c. from x to y. d. from y to x.

ANS: A DIF: 2 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Substitutes MSC: Applicative


72. Refer to Figure 4-12. All else equal, the approach of Thanksgiving would cause a move



73. Refer to Figure 4-12. All else equal, buyers expecting turkey to be more expensive in the future

would cause a current move a. from DA to DB. b. from DB to DA. c. from x to y. d. from y to x.


74. Refer to Figure 4-12. All else equal, a large number of people becoming vegetarians would cause a

move a. from DA to DB. b. from DB to DA. c. from x to y. d. from y to x.


75. Refer to Figure 4-12. All else equal, the destruction of thousands of turkeys would cause a move


ANS: C DIF: 3 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Productivity MSC: Analytical

76. Refer to Figure 4-12. All else equal, an increase in the productivity of turkey farmers would cause

a move a. from DA to DB. b. from DB to DA. c. from x to y. d. from y to x.

ANS: D DIF: 3 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Productivity MSC: Analytical


77. Refer to Figure 4-12. All else equal, a decrease in the price of the grain fed to turkeys would cause

a move a. from DA to DB. b. from DB to DA. c. from x to y. d. from y to x.

ANS: D DIF: 3 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Input prices MSC: Analytical

78. Refer to Figure 4-12. All else equal, sellers expecting the price of turkey to rise in the future would

cause a current move a. from DA to DB. b. from DB to DA. c. from x to y. d. from y to x.

ANS: C DIF: 3 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Expectations MSC: Analytical

Figure 4-13 The diagram below pertains to the supply of paper in university markets.

S

S

B

A

x

y

quantity

price

79. Refer to Figure 4-13. All else equal, an increase in the price of the pulp used in the paper

production process would cause a move a. from x to y. b. from y to x. c. from SA to SB. d. from SB to SA.

ANS: D DIF: 2 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Input prices MSC: Applicative


80. Refer to Figure 4-13. All else equal, sellers expecting the price of paper to decrease next month

when many college students leave campuses for the summer would cause a current move a. from x to y. b. from y to x. c. from SA to SB. d. from SB to SA.

ANS: C DIF: 2 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Expectations MSC: Applicative

81. Refer to Figure 4-13. All else equal, a major paper company being shut down for tax evasion

would cause a move a. from x to y. b. from y to x. c. from SA to SB. d. from SB to SA.

ANS: D DIF: 2 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Number of sellers MSC: Applicative

82. Refer to Figure 4-13. All else equal, an increase in the use of laptop computers for note-taking

would cause a move a. from x to y. b. from y to x. c. from SA to SB. d. from SB to SA.

ANS: B DIF: 3 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Tastes MSC: Analytical

83. Refer to Figure 4-13. All else equal, buyers expecting paper to be more expensive in the future

would cause a current move a. from x to y. b. from y to x. c. from SA to SB. d. from SB to SA.

ANS: A DIF: 3 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Expectations MSC: Analytical


84. Refer to Figure 4-13. All else equal, the return of college students to campus in the fall would

cause a move a. from x to y. b. from y to x. c. from SA to SB. d. from SB to SA.

ANS: A DIF: 3 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Number of buyers MSC: Analytical


Figure 4-14

Panel (a) Panel (b)

D D'

S

Pe'

Pe

Qe Qe' quantity

price

D' D

S

Pe

Pe'

Qe' Qe quantity

price

Panel (c) Panel (d)

D

S'S

Pe'

Pe

Qe Qe' quantity

price

D

SS'

Pe

Pe'

Qe' Qe quantity

price

85. Refer to Figure 4-14. Panel (a) shows which of the following?

a. an increase in demand and an increase in quantity supplied b. an increase in demand and an increase in supply c. an increase in quantity demanded and an increase in quantity supplied d. an increase in quantity demanded and an increase in supply

ANS: A DIF: 2 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Demand | Quantity supplied MSC: Applicative


86. Refer to Figure 4-14. Panel (b) shows which of the following?

a. a decrease in demand and a decrease in quantity supplied b. a decrease in demand and a decrease in supply c. a decrease in quantity demanded and a decrease in quantity supplied d. a decrease in quantity demanded and a decrease in supply

ANS: A DIF: 2 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Demand | Quantity supplied MSC: Applicative

87. Refer to Figure 4-14. Panel (c) shows which of the following?

a. an increase in demand and an increase in quantity supplied b. an increase in demand and an increase in supply c. an increase in quantity demanded and an increase in quantity supplied d. an increase in quantity demanded and an increase in supply

ANS: D DIF: 2 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Supply | Quantity demanded MSC: Applicative

88. Refer to Figure 4-14. Panel (d) shows which of the following?

a. a decrease in demand and a decrease in quantity supplied b. a decrease in demand and a decrease in supply c. a decrease in quantity demanded and a decrease in quantity supplied d. a decrease in quantity demanded and a decrease in supply

ANS: D DIF: 2 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Supply | Quantity demanded MSC: Applicative

89. Refer to Figure 4-14. Which of the four panels illustrates a decrease in quantity demanded?

a. Panel (a) b. Panel (b) c. Panel (c) d. Panel (d)

ANS: D DIF: 2 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Quantity demanded MSC: Applicative

90. Refer to Figure 4-14. Which of the four panels illustrates an increase in quantity demanded?


ANS: C DIF: 2 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Quantity demanded MSC: Applicative


91. Refer to Figure 4-14. Which of the four panels illustrates a decrease in quantity supplied?


ANS: B DIF: 2 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Quantity supplied MSC: Applicative

92. Refer to Figure 4-14. Which of the four panels illustrates an increase in quantity supplied?


ANS: A DIF: 2 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Quantity supplied MSC: Applicative

93. Refer to Figure 4-14. Which of the four panels represents the market for pizza delivery in a college

town as we go from summer to the beginning of the fall semester? a. Panel (a) b. Panel (b) c. Panel (c) d. Panel (d)


94. Refer to Figure 4-14. Which of the four panels represents the market for winter coats as we

progress from winter to spring? a. Panel (a) b. Panel (b) c. Panel (c) d. Panel (d)


95. Refer to Figure 4-14. Which of the four panels represents the market for cars as a result of the

adoption of new technology on assembly lines? a. Panel (a) b. Panel (b) c. Panel (c) d. Panel (d)

ANS: C DIF: 2 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Technology MSC: Applicative


96. Refer to Figure 4-14. Which of the four panels represents the market for peanut butter after a major

hurricane hits the peanut-growing south? a. Panel (a) b. Panel (b) c. Panel (c) d. Panel (d)

ANS: D DIF: 2 REF: 4-4 NAT: Analytic LOC: Supply and demand TOP: Input prices MSC: Applicative

97. If the demand for a product increases, then we would expect

a. equilibrium price to increase and equilibrium quantity to decrease. b. equilibrium price to decrease and equilibrium quantity to increase. c. equilibrium price and equilibrium quantity both to increase. d. equilibrium price and equilibrium quantity both to decrease.


98. If the demand for a product decreases, then we would expect

a. equilibrium price to increase and equilibrium quantity to decrease. b. equilibrium price to decrease and equilibrium quantity to increase. c. equilibrium price and equilibrium quantity to both increase. d. equilibrium price and equilibrium quantity to both decrease.


99. Suppose buyers of computers and printers regard those two goods as complements. Then an

increase in the price of computers will cause a. a decrease in the demand for printers and a decrease in the quantity supplied of printers. b. a decrease in the supply of printers and a decrease in the quantity demanded of printers. c. a decrease in the equilibrium price of printers and an increase in the equilibrium quantity

of printers. d. an increase in the equilibrium price of printers and a decrease in the equilibrium quantity

of printers.


100. Which of the following would increase in response to a decrease in the price of ironing boards?

a. the quantity of irons demanded at each possible price of irons b. the equilibrium quantity of irons c. the equilibrium price of irons d. All of the above are correct.



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

d. The demand curve for saddle shoes will shift right, which will create a surplus at the current price. That will decrease price, which will increase quantity demanded and decrease quantity supplied. The new market equilibrium will be at a lower price and higher quantity.

ANS: C DIF: 3 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Equilibrium MSC: Analytical

102. If the supply of a product increases, then we would expect



103. If the supply of a product decreases, then we would expect



104. A decrease in input costs to firms in a market will result in

a. a decrease in equilibrium price and an increase in equilibrium quantity. b. a decrease in equilibrium price and a decrease in equilibrium quantity. c. an increase in equilibrium price and a decrease in equilibrium quantity. d. an increase in equilibrium price and an increase in equilibrium quantity.



105. Suppose there is an earthquake that destroys several corn canneries. Which of the following would

not be a direct result of this event? a. Sellers would not be able to produce and sell as much as before at each relevant price. b. The supply would decrease. c. Buyers would not be willing to buy as much as before at each relevant price. d. The equilibrium price would rise.


106. An early frost in the vineyards of Napa Valley would cause

a. an increase in the demand for wine, increasing price. b. an increase in the supply of wine, decreasing price. c. a decrease in the demand for wine, decreasing price. d. a decrease in the supply of wine, increasing price.


107. The market for diamond rings is closely linked to the market for high-quality diamonds. If a large

quantity of high-quality diamonds enters the market, then a. the supply curve for diamond rings will shift right, which will create a shortage at the

current price. That will increase price, 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 diamond rings will shift right, which will create a surplus at the current price. That will decrease price, 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 diamond rings will shift right, which will create a shortage at the current price. That will increase price, which will decrease quantity demanded and increase quantity supplied. The new market equilibrium will be at a higher price and higher quantity.

d. the demand curve for diamond rings will shift right, which will create a surplus at the current price. That will decrease price, which will increase quantity demanded and decrease quantity supplied. The new market equilibrium will be at a lower price and higher quantity.

ANS: B DIF: 3 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Equilibrium MSC: Analytical

108. When supply and demand both increase, equilibrium

a. price will increase. b. price will decrease. c. quantity may increase, decrease, or remain unchanged. d. price may increase, decrease, or remain unchanged.



109. Suppose that demand for a good increases and, at the same time, supply of the good decreases.

What would happen in the market for the good? a. Equilibrium price would decrease, but the impact on equilibrium quantity would be

ambiguous. b. Equilibrium price would increase, but the impact on equilibrium quantity would be

ambiguous. c. Equilibrium quantity would decrease, but the impact on equilibrium price would be

ambiguous. d. Equilibrium quantity would increase, but the impact on equilibrium price would be

ambiguous.


110. A weaker demand together with a stronger supply would necessarily result in

a. a lower price. b. a higher price. c. an increase in equilibrium quantity. d. a decrease in equilibrium quantity.


111. Suppose that demand for a good decreases and, at the same time, supply of the good decreases.

What would happen in the market for the good? a. Equilibrium price would decrease, but the impact on equilibrium quantity would be




ambiguous.


112. Suppose the number of buyers in a market increases and a technological advancement occurs also.

What would we expect to happen in the market? a. Equilibrium price would decrease, but the impact on equilibrium quantity would be




ambiguous.



113. Suppose the incomes of buyers in a market for a particular normal good decrease and there is also a

reduction in input prices. What would we expect to occur in this market? a. Equilibrium price would decrease, but the impact on equilibrium quantity would be




ambiguous.


114. What would happen to the equilibrium price and quantity of coffee if the wages of coffee-bean

pickers fell and the price of tea fell? a. Price would fall and the effect on quantity would be ambiguous. b. Price would rise and the effect on quantity would be ambiguous. c. Quantity would fall and the effect on price would be ambiguous. d. Quantity would rise and the effect on price would be ambiguous.


115. Music compact discs are normal goods. What will happen to the equilibrium price and quantity of

music compact discs if musicians accept lower royalties, compact disc players become cheaper, more firms start producing music compact discs, and music lovers experience an increase in income? a. Price will fall and the effect on quantity is ambiguous. b. Price will rise and the effect on quantity is ambiguous. c. Quantity will fall and the effect on price is ambiguous. d. Quantity will rise and the effect on price is ambiguous.

ANS: D DIF: 3 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Equilibrium MSC: Analytical

116. What will happen to the equilibrium price of new textbooks if more students attend college, paper

becomes cheaper, textbook authors accept lower royalties, and fewer used textbooks are sold? a. Price will rise. b. Price will fall. c. Price will stay exactly the same. d. The price change will be ambiguous.



117. New oak tables are normal goods. What would happen to the equilibrium price and quantity in the

market for oak tables if the price of maple tables rises, the price of oak wood rises, more buyers enter the market for oak tables, and the price of wood saws increased? a. Price will fall and the effect on quantity is ambiguous. b. Price will rise and the effect on quantity is ambiguous. c. Quantity will fall and the effect on price is ambiguous. d. Quantity will rise and the effect on price is ambiguous.


118. What would happen to the equilibrium price and quantity of peanut butter if the price of peanuts

went up, the price of jelly fell, fewer firms decided to produce peanut butter, and health officials announced that eating peanut butter was good for you? a. Price will fall and the effect on quantity is ambiguous. b. Price will rise and the effect on quantity is ambiguous. c. Quantity will fall and the effect on price is ambiguous. d. Quantity will rise and the effect on price is ambiguous.


119. Pens are normal goods. What will happen to the equilibrium price of pens if the price of pencils

rises, consumers experience an increase in income, writing in ink becomes fashionable, people expect the price of pens to rise in the near future, the population increases, fewer firms manufacture pens, and the wages of pen-makers increase? a. Price will rise. b. Price will fall. c. Price will stay exactly the same. d. The price change will be ambiguous.

ANS: A DIF: 3 REF: 4-4 NAT: Analytic LOC: Equilibrium TOP: Equilibrium MSC: Analytical

120. What will happen to the equilibrium price and quantity of traditional camera film if traditional

cameras become more expensive, digital cameras become cheaper, the cost of the resources needed to manufacture traditional film falls, and more firms decide to manufacture traditional film? a. Price will fall and the effect on quantity is ambiguous. b. Price will rise and the effect on quantity is ambiguous. c. Quantity will fall and the effect on price is ambiguous. d. Quantity will rise and the effect on price is ambiguous.



121. New cars are normal goods. What will happen to the equilibrium price of new cars if the price of

gasoline rises, the price of steel falls, public transportation becomes cheaper and more comfortable, auto-workers accept lower wages, and automobile insurance becomes more expensive? a. Price will rise. b. Price will fall. c. Price will stay exactly the same. d. The price change will be ambiguous.


122. What will happen to the equilibrium price and quantity of new cars if the price of gasoline rises, the

price of steel rises, public transportation becomes cheaper and more comfortable, and auto-workers negotiate higher wages? a. Price will fall and the effect on quantity is ambiguous. b. Price will rise and the effect on quantity is ambiguous. c. Quantity will fall and the effect on price is ambiguous. d. Quantity will rise and the effect on price is ambiguous.


123. 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 we could safely conclude that the equilibrium price of a new DVD would a. rise. b. fall. c. stay the same. d. We couldn't be sure what it might do.


124. Which of the following events will definitely cause equilibrium quantity to fall?

a. demand increases and supply decreases b. demand and supply both decrease c. demand decreases and supply increases d. demand and supply both increase



125. Equilibrium quantity will unambiguously decrease when

a. demand increases and supply does not change, when demand does not change and supply decreases, and when both demand and supply decrease.

b. demand increases and supply does not change, when demand does not change and supply increases, and when both demand and supply decrease.

c. demand decreases and supply does not change, when demand does not change and supply increases, and when both demand and supply decrease.

d. demand decreases and supply does not change, when demand does not change and supply decreases, and when both demand and supply decrease.


126. Which of the following events will definitely cause equilibrium quantity to rise?



127. Equilibrium quantity will unambiguously increase when

a. demand increases and supply does not change, when demand does not change and supply increases, and when both demand and supply increase.

b. demand increases and supply does not change, when demand does not change and supply increases, and when both demand and supply decrease.

c. demand decreases and supply does not change, when demand does not change and supply decreases, and when both demand and supply increase.

d. demand decreases and supply does not change, when demand does not change and supply decreases, and when both demand and supply decrease.


128. Which of the following events will definitely cause equilibrium price to fall?




129. Equilibrium price will unambiguously decrease when

a. demand increases and supply does not change, when demand does not change and supply decreases, and when demand decreases and supply increases simultaneously.

b. demand increases and supply does not change, when demand does not change and supply decreases, and when demand increases and supply decreases simultaneously.

c. demand decreases and supply does not change, when demand does not change and supply increases, and when demand decreases and supply increases simultaneously.

d. demand decreases and supply does not change, when demand does not change and supply increases, and when demand increases and supply decreases simultaneously.


130. Which of the following events will definitely cause equilibrium price to rise?



131. Equilibrium price will unambiguously increase when

a. demand increases and supply does not change, when demand does not change and supply decreases, and when demand decreases and supply increases simultaneously.

b. demand increases and supply does not change, when demand does not change and supply decreases, and when demand increases and supply decreases simultaneously.

c. demand decreases and supply does not change, when demand does not change and supply increases, and when demand decreases and supply increases simultaneously.

d. demand decreases and supply does not change, when demand does not change and supply increases, and when demand increases and supply decreases simultaneously.


132. Which of the following events would cause both the equilibrium price and equilibrium quantity of

number two grade potatoes (an inferior good) to increase? a. an increase in consumer income b. a decrease in consumer income c. greater government restrictions on agricultural chemicals d. fewer government restrictions on agricultural chemicals



133. Beef is a normal good. You observe that both the equilibrium price and quantity of beef have fallen

over time. Which of the following explanations would be most consistent with this observation? a. Consumers have experienced an increase in income and beef-production technology has

improved. b. The price of chicken has risen and the price of steak sauce has fallen. c. New medical evidence has been released that indicates a negative correlation between a

person’s beef consumption and his or her longevity. d. The demand curve for beef must be positively sloped.


134. During the last few decades in the United States, health officials have argued that eating too much

beef might be harmful to human health. As a result, there has been a significant decrease in the amount of beef produced. Which of the following best explains the decrease in production? a. Beef producers, concerned about the health of their customers, decided to produce

relatively less beef. b. Government officials, concerned about consumer health, ordered beef producers to

produce relatively less beef. c. Individual consumers, concerned about their own health, decreased their demand for beef,

which lowered the equilibrium price of beef, making it less attractive to produce. d. Anti-beef protesters have made it difficult for both buyers and sellers of beef to meet in

the marketplace.


135. Which of the following events would unambiguously cause a decrease in the equilibrium price of

cotton shirts? a. an increase in the price of wool shirts and a decrease in the price of raw cotton b. a decrease in the price of wool shirts and a decrease in the price of raw cotton c. an increase in the price of wool shirts and an increase in the price of raw cotton d. a decrease in the price of wool shirts and an increase in the price of raw cotton


136. Which of the following events would cause the price of oranges to fall?

a. There is a shortage of oranges. b. An article is published in which it is claimed that tangerines cause a serious disease, and

oranges and tangerines are substitutes. c. The price of land throughout Florida decreases, and Florida produces a significant

proportion of the nation’s oranges. d. All of the above are correct.



137. Which of the following events would definitely result in a higher price in the market for Snickers?

a. Demand for Snickers increases and supply of Snickers decreases. b. Demand for Snickers and supply of Snickers both decrease. c. Demand for Snickers decreases and supply of Snickers increases. d. Demand for Snickers and supply of Snickers both increase


138. Which of the following sets of events would most likely cause an increase in the price of a new

house? a. higher wages for carpenters, higher wood prices, increases in consumer incomes, higher

apartment rents, increases in population, and expectations of higher house prices in the future

b. lower wages for carpenters, lower wood prices, increases in consumer incomes, higher apartment rents, increases in population and expectations of higher house prices in the future

c. lower wages for carpenters, higher wood prices, decreases in consumer incomes, higher apartment rents, decreases in population and expectations of higher house prices in the future

d. higher wages for carpenters, lower wood prices, decreases in consumer incomes, lower apartment rents, decreases in population and expectations of lower house prices in the future


Sec05 - The Market Forces of Supply and Demand - Conclusion: How Prices

Allocate Resources

MULTIPLE CHOICE

1. In any economic system, scarce resources have to be allocated among competing uses. Market

economies harness the forces of a. government to allocate scarce resources. b. supply and demand to allocate scarce resources. c. credit cards to allocate scarce resources. d. nature to allocate scarce resources.

ANS: B DIF: 1 REF: 4-5 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Market economies MSC: Definitional


2. The signals that guide the allocation of resources in a market economy are

a. surpluses and shortages. b. quantities. c. government policies. d. prices.


3. Who gets scarce resources in a market economy?

a. the government b. whoever the government decides gets them c. whoever wants them d. whoever is willing and able to pay the price


4. There is no shortage of scarce resources in a market economy because

a. the government makes shortages illegal. b. resources are abundant in market economies. c. prices adjust to eliminate shortages. d. quantity supplied is always greater than quantity demanded in market economies.

ANS: C DIF: 1 REF: 4-5 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Market economies MSC: Definitional

5. In a market economy, who or what determines who produces each good and how much is produced?

a. the government b. lawyers c. lotteries d. prices


6. Which of these statements does not apply to market economies?

a. Prices prevent decentralized decision making from degenerating into chaos. b. Prices coordinate the actions of millions of people with varying abilities and desires. c. Prices ensure that anyone who wants a product can get it. d. Prices ensure that what needs to get done does in fact get done.

ANS: C DIF: 2 REF: 4-5 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Market economies MSC: Interpretive

377

Chapter 5 Elasticity and Its Application

TRUE/FALSE

1. Elasticity measures how responsive quantity is to changes in price.

ANS: T DIF: 1 REF: 5-0 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Definitional

2. Measures of elasticity enhance our ability to study the magnitudes of changes.


3. The demand for bread is likely to be more elastic than the demand for solid-gold bread plates.

ANS: F DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Interpretive

4. In general, demand curves for necessities tend to be price elastic.


5. In general, demand curves for luxuries tend to be price elastic.

ANS: T DIF: 1 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Interpretive

6. Necessities tend to have inelastic demands, whereas luxuries have elastic demands.


7. Goods with close substitutes tend to have more elastic demands than do goods without close

substitutes.


8. The demand for Rice Krispies is more elastic than the demand for cereal in general.


378 Chapter 5 /Elasticity and Its Application

9. The demand for soap is more elastic than the demand for Dove soap.


10. The demand for gasoline will respond more to a change in price over a period of five weeks than

over a period of five years.


11. Even the demand for a necessity such as gasoline will respond to a change in price, especially over a

longer time horizon.


12. The price elasticity of demand is defined as the percentage change in quantity demanded divided by

the percentage change in price.


13. The price elasticity of demand is defined as the percentage change in price divided by the percentage

change in quantity demanded.

ANS: F DIF: 1 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Definitional

14. Suppose that when the price rises by 20% for a particular good, the quantity demanded of that good

falls by 10%. The price elasticity of demand for this good is equal to 2.0.

ANS: F DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Analytical

15. Suppose that when the price rises by 10% for a particular good, the quantity demanded of that good

falls by 20%. The price elasticity of demand for this good is equal to 2.0.

ANS: T DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Analytical

16. If the price of calculators increases by 15 percent and the quantity demanded per week falls by 45

percent as a result, then the price elasticity of demand is 3.

ANS: T DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Applicative

Chapter 5 /Elasticity and Its Application 379

17. Demand is inelastic if the price elasticity of demand is greater than 1.

ANS: F DIF: 1 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Inelastic demand MSC: Definitional

18. A linear, downward-sloping demand curve has a constant elasticity but a changing slope.


19. Price elasticity of demand along a linear, downward-sloping demand curve increases as price falls.


20. If the price elasticity of demand is equal to 0, then demand is unit elastic.

ANS: F DIF: 1 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Definitional

21. If the price elasticity of demand is equal to 1, then demand is unit elastic.


22. Demand for a good is said to be inelastic if the quantity demanded increases substantially when the

price falls by a small amount.

ANS: F DIF: 1 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Inelastic demand MSC: Definitional

23. The midpoint method is used to calculate elasticity between two points because it gives the same

answer regardless of the direction of the change.

ANS: T DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Midpoint method MSC: Interpretive

24. The flatter the demand curve that passes through a given point, the more inelastic the demand.


25. The flatter the demand curve that passes through a given point, the more elastic the demand.



26. If demand is perfectly inelastic, the demand curve is vertical, and the price elasticity of demand

equals 0.

ANS: T DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Perfectly inelastic demand MSC: Interpretive

27. If demand is perfectly elastic, the demand curve is horizontal, and the price elasticity of demand

equals 1.

ANS: F DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Perfectly elastic demand MSC: Interpretive

28. Along the elastic portion of a linear demand curve, total revenue rises as price rises.

ANS: F DIF: 3 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand MSC: Interpretive

29. If a firm is facing elastic demand, then the firm should decrease price to increase revenue.

ANS: T DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand MSC: Applicative

30. If a firm is facing inelastic demand, then the firm should decrease price to increase revenue.

ANS: F DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand MSC: Applicative

31. When demand is inelastic, a decrease in price increases total revenue.

ANS: F DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Inelastic demand | Total revenue MSC: Interpretive

32. The income elasticity of demand is defined as the percentage change in quantity demanded divided

by the percentage change in income.

ANS: T DIF: 1 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand MSC: Definitional

33. The income elasticity of demand is defined as the percentage change in quantity demanded divided

by the percentage change in price.

ANS: F DIF: 1 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand MSC: Definitional


34. Normal goods have negative income elasticities of demand, while inferior goods have positive

income elasticities of demand.

ANS: F DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand MSC: Interpretive

35. If the income elasticity of demand for a good is negative, then the good must be an inferior good.

ANS: T DIF: 1 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand MSC: Interpretive

36. If the cross-price elasticity of demand for two goods is negative, then the two goods are substitutes.

ANS: F DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Cross-price elasticity of demand MSC: Interpretive

37. If the cross-price elasticity of demand for two goods is negative, then the two goods are

complements.

ANS: T DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Cross-price elasticity of demand MSC: Interpretive

38. Cross-price elasticity of demand measures how the quantity demanded of one good changes as the

price of another good changes.

ANS: T DIF: 1 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Cross-price elasticity of demand MSC: Definitional

39. Cross-price elasticity is used to determine whether goods are inferior or normal goods.


40. Cross-price elasticity is used to determine whether goods are substitutes or complements.

ANS: T DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Cross-price elasticity of demand MSC: Interpretive

41. The cross-price elasticity of garlic salt and onion salt is -2, which indicates that garlic salt and onion

salt are substitutes.


42. Price elasticity of supply measures how much the quantity supplied responds to changes in the price.

ANS: T DIF: 1 REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply MSC: Definitional


43. Supply and demand both tend to be more elastic in the long run and more inelastic in the short run.

ANS: T DIF: 2 REF: 5-1 | 5-2 NAT: Analytic LOC: Elasticity TOP: Price elasticities of demand and supply MSC: Interpretive

44. If the price elasticity of supply is 2 and the quantity supplied decreases by 6%, then the price must

have decreased by 3%.

ANS: T DIF: 2 REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply MSC: Applicative

45. Supply is said to be inelastic if the quantity supplied responds substantially to changes in the price,

and elastic if the quantity supplied responds only slightly to price.

ANS: F DIF: 1 REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply MSC: Definitional

46. Supply tends to be more elastic in the short run and more inelastic in the long run.

ANS: F DIF: 2 REF: 5-2 NAT: Analytic TOP: Price elasticity of supply MSC: Interpretive

47. When the price of knee braces increased by 25 percent, the Brace Yourself Company increased its

quantity supplied of knee braces per week by 75 percent. BYC's price elasticity of supply of knee braces is 0.33.

ANS: F DIF: 2 REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply MSC: Applicative

48. If a supply curve is horizontal, then supply is said to be perfectly elastic, and the price elasticity of

supply approaches infinity.

ANS: T DIF: 2 REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Perfectly elastic supply MSC: Interpretive

49. A government program that reduces land under cultivation hurts farmers but helps consumers.

ANS: F DIF: 2 REF: 5-3 NAT: Analytic LOC: Elasticity TOP: Total revenue MSC: Applicative

50. OPEC failed to maintain a high price of oil in the long run, partly because both the supply of oil and

the demand for oil are more elastic in the long run than in the short run.

ANS: T DIF: 2 REF: 5-3 NAT: Analytic LOC: Elasticity TOP: OPEC | Price elasticity of demand | Price elasticity of supply MSC: Applicative


51. Drug interdiction, which reduces the supply of drugs, may decrease drug-related crime because the

demand for drugs is inelastic.

ANS: F DIF: 2 REF: 5-3 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Applicative

SHORT ANSWER

1. Consider the following pairs of goods. For which of the two goods would you expect the demand to

be more price elastic? Why? a. water or diamonds b. insulin or nasal decongestant spray c. food in general or breakfast cereal d. gasoline over the course of a week or gasoline over the course of a year e. personal computers or IBM personal computers

ANS:

a. Diamonds are luxuries, and water is a necessity. Therefore, diamonds have the more elastic demand.

b. Insulin has no close substitutes, but decongestant spray does. Therefore, nasal decongestant spray has the more elastic demand.

c. Breakfast cereal has more substitutes than does food in general. Therefore, breakfast cereal has the more elastic demand.

d. The longer the time period, the more elastic demand is. Therefore, gasoline over the course of a year has the more elastic demand.

e. There are more substitutes for IBM personal computers than there are for personal computers. Therefore, IBM personal computers have the more elastic demand.

DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Applicative


2. You own a small town movie theatre. You currently charge $5 per ticket for everyone who comes to

your movies. Your friend who took an economics course in college tells you that there may be a way to increase your total revenue. Given the demand curves shown, answer the following questions.

Adult Demand

10 20 30 40 50 60 70 80 90 100 Quantity

1

2

3

4

5

6

7

8

9

10Price

Child Demand

5 10 15 20 25 30 35 40 45 50 55 60 65 70 Quantity

1

2

3

4

5

6

7

8

9

10Price

a. What is your current total revenue for both groups? b. The elasticity of demand is more elastic in which market? c. Which market has the more inelastic demand? d. What is the elasticity of demand between the prices of $5 and $2 in the adult market? Is

this elastic or inelastic? e. What is the elasticity of demand between $5 and $2 in the children's market? Is this

elastic or inelastic? f. Given the graphs and what your friend knows about economics, he recommends you

increase the price of adult tickets to $8 each and lower the price of a child's ticket to $3. How much could you increase total revenue if you take his advice?

ANS:

a. Total revenue from children's tickets is $100 and from adult tickets is $250. Total revenue from all sales would be $350.

b. The demand for children's tickets is more elastic. c. The adult ticket market has the more inelastic demand.


d. The elasticity of demand between $5 and $2 is 0.26, which is inelastic. e. The elasticity of demand between $5 and $2 is 1.0, which is unit elastic. f. Total revenue in the adult market would be $320. Total revenue in the children’s market

would be $120, so total revenue for both groups would be $440. $440 - $350 is an increase in total revenue of $90.

DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand | Total revenue MSC: Applicative


3. Use the graph shown to answer the following questions. Put the correct letter(s) in the blank.

Demand

A

B

C Quantity

Price

a. The elastic section of the graph is represented by section from _______. b. The inelastic section of the graph is represented by section from _______. c. The unit elastic section of the graph is represented by section _______. d. The portion of the graph in which a decrease in price would cause total revenue to fall

would be from _________. e. The portion of the graph in which a decrease in price would cause total revenue to rise

would be from _________. f. The portion of the graph in which a decrease in price would not cause a change in total

revenue would be _________. g. The section of the graph in which total revenue would be at a maximum would be

_______. h. The section of the graph in which elasticity is greater than 1 is _______. i. The section of the graph in which elasticity is equal to 1 is ______. j. The section of the graph in which elasticity is less than 1 is _______.

ANS:

a. A to B b. B to C c. B d. B to C e. A to B f. B g. B h. A to B i. B j. B to C

DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand | Total revenue MSC: Applicative


4. Using the midpoint method, compute the elasticity of demand between points A and B. Is demand

along this portion of the curve elastic or inelastic? Interpret your answer with regard to price and quantity demanded. Now compute the elasticity of demand between points B and C. Is demand along this portion of the curve elastic or inelastic?

A

B

C

Demand

100 200 300 400 500 600 700 800 900 Quantity

2

4

6

8

10

12

14

16

18

20

22Price

ANS: In the section of the demand curve from A to B, the elasticity of demand would be 2.5. This would be an elastic portion of the curve. This would mean that for every 1 percent change in price, quantity demanded would change by 2.5 percent. In the section of the demand curve from B to C, the elasticity of demand would be .75. This would be an inelastic portion of the curve. This would mean that for every 1 percent change in price, quantity demanded would change by 0.75 percent.

DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Applicative

5. When the Shaffers had a monthly income of $4,000, they usually ate out 8 times a month. Now that

the couple makes $4,500 a month, they eat out 10 times a month. Compute the couple's income elasticity of demand using the midpoint method. Explain your answer. (Is a restaurant meal a normal or inferior good to the couple?)

ANS: The income elasticity of demand for the Shaffers is 1.89. Since the income elasticity of demand is positive, eating out would be interpreted as a normal good.

DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand MSC: Applicative


6. Recently, in Smalltown, the price of Twinkies fell from $0.80 to $0.70. As a result, the quantity

demanded of Ho-Ho's decreased from 120 to 100. What would be the appropriate elasticity to compute? Using the midpoint method, compute this elasticity. What does your answer tell you?

ANS: The appropriate elasticity to compute would be cross-price elasticity. The cross-price elasticity for this example would be 1.36. The two goods are substitutes because the cross-price elasticity is positive.

DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Cross-price elasticity of demand MSC: Applicative

Sec00 - Elasticity and Its Application

MULTIPLE CHOICE

1. In general, elasticity is a measure of

a. the extent to which advances in technology are adopted by producers. b. the extent to which a market is competitive. c. how firms’ profits respond to changes in market prices. d. how much buyers and sellers respond to changes in market conditions.

ANS: D DIF: 1 REF: 5-0 NAT: Analytic LOC: Elasticity TOP: Elasticity MSC: Definitional

2. Elasticity is

a. a measure of how much buyers and sellers respond to changes in market conditions. b. the study of how the allocation of resources affects economic well-being. c. the maximum amount that a buyer will pay for a good. d. the value of everything a seller must give up to produce a good.

ANS: A DIF: 1 REF: 5-0 NAT: Analytic LOC: Elasticity TOP: Elasticity MSC: Definitional

3. When studying how some event or policy affects a market, elasticity provides information on the

a. equity effects on the market by identifying the winners and losers. b. magnitude of the effect on the market. c. speed of adjustment of the market in response to the event or policy. d. number of market participants who are directly affected by the event or policy.

ANS: B DIF: 2 REF: 5-0 NAT: Analytic LOC: Elasticity TOP: Elasticity MSC: Interpretive


4. How does the concept of elasticity allow us to improve upon our understanding of supply and

demand? a. Elasticity allows us to analyze supply and demand with greater precision than would be

the case in the absence of the elasticity concept. b. Elasticity provides us with a better rationale for statements such as “an increase in x will

lead to a decrease in y” than we would have in the absence of the elasticity concept. c. Without elasticity, we would not be able to address the direction in which price is likely to

move in response to a surplus or a shortage. d. Without elasticity, it is very difficult to assess the degree of competition within a market.

ANS: A DIF: 2 REF: 5-0 NAT: Analytic LOC: Elasticity TOP: Elasticity MSC: Interpretive

5. When consumers face rising gasoline prices, they typically

a. reduce their quantity demanded more in the long run than in the short run. b. reduce their quantity demanded more in the short run than in the long run. c. do not reduce their quantity demanded in the short run or the long run. d. increase their quantity demanded in the short run but reduce their quantity demanded in

the long run.

ANS: A DIF: 2 REF: 5-0 NAT: Analytic LOC: Elasticity TOP: Elasticity MSC: Applicative

6. A 10 percent increase in gasoline prices reduces gasoline consumption by about

a. 6 percent after one year and 2.5 percent after five years. b. 2.5 percent after one year and 6 percent after five years. c. 10 percent after one year and 20 percent after five years. d. 0 percent after one year and 1 percent after five years.

ANS: B DIF: 2 REF: 5-0 NAT: Analytic LOC: Elasticity TOP: Elasticity MSC: Applicative

7. 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. 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. d. Because gasoline is a necessity, consumers do not decrease their quantity demanded in

either the short run or the long run.

ANS: C DIF: 2 REF: 5-0 NAT: Analytic LOC: Elasticity TOP: Elasticity MSC: Applicative


Sec01 - Elasticity and Its Application - The Elasticity of Demand

MULTIPLE CHOICE

1. The price elasticity of demand measures how much

a. quantity demanded responds to a change in price. b. quantity demanded responds to a change in income. c. price responds to a change in demand. d. demand responds to a change in supply.

ANS: A DIF: 1 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Definitional

2. The price elasticity of demand measures

a. buyers’ responsiveness to a change in the price of a good. b. the extent to which demand increases as additional buyers enter the market. c. how much more of a good consumers will demand when incomes rise. d. the movement along a supply curve when there is a change in demand.


3. The price elasticity of demand for a good measures the willingness of

a. consumers to buy less of the good as price rises. b. consumers to avoid monopolistic markets in favor of competitive markets. c. firms to produce more of a good as price rises. d. firms to cater to the tastes of consumers.

ANS: A DIF: 1 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Interpretive

4. Which of the following statements about the price elasticity of demand is correct?

a. The price elasticity of demand for a good measures the willingness of buyers of the good to buy less of the good as its price increases.

b. Price elasticity of demand reflects the many economic, psychological, and social forces that shape consumer tastes.

c. Other things equal, if good x has close substitutes and good y does not have close substitutes, then the demand for good x will be more elastic than the demand for good y.

d. All of the above are correct.

ANS: D DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Interpretive


5. For a good that is a necessity,

a. quantity demanded tends to respond substantially to a change in price. b. demand tends to be inelastic. c. the law of demand does not apply. d. All of the above are correct.

ANS: B DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Interpretive

6. Goods with many close substitutes tend to have

a. more elastic demands. b. less elastic demands. c. price elasticities of demand that are unit elastic. d. income elasticities of demand that are negative.


7. Which of the following is likely to have the most price inelastic demand?

a. mint-flavored toothpaste b. toothpaste c. Colgate mint-flavored toothpaste d. a generic mint-flavored toothpaste

ANS: B DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Applicative

8. Which of the following is likely to have the most price inelastic demand?

a. white chocolate chip with macadamia nut cookies b. Mrs. Field’s chocolate chip cookies c. milk chocolate chip cookies d. cookies

ANS: D DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Applicative

9. If the price of natural gas rises, when is the price elasticity of demand likely to be the highest?

a. immediately after the price increase b. one month after the price increase c. three months after the price increase d. one year after the price increase



10. If the price of milk rises, when is the price elasticity of demand likely to be the lowest?

a. immediately after the price increase b. one month after the price increase c. three months after the price increase d. one year after the price increase

ANS: A DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Applicative

11. For a good that is a luxury, demand

a. tends to be inelastic. b. tends to be elastic. c. has unit elasticity. d. cannot be represented by a demand curve in the usual way.


12. For a good that is a necessity, demand

a. tends to be inelastic. b. tends to be elastic. c. has unit elasticity. d. cannot be represented by a demand curve in the usual way.


13. A person who takes a prescription drug to control high cholesterol most likely has a demand for that

drug that is a. inelastic. b. unit elastic. c. elastic. d. highly responsive to changes in income.


14. The demand for Neapolitan ice cream is likely quite elastic because

a. ice cream must be eaten quickly. b. this particular flavor of ice cream is viewed as a necessity by many ice-cream lovers. c. the market is broadly defined. d. other flavors of ice cream are good substitutes for this particular flavor.



15. The demand for Werthers candy is likely

a. elastic because candy is expensive relative to other snacks. b. elastic because there are many close substitutes for Werthers. c. elastic because Werthers are regarded as a necessity by many people. d. inelastic because it is usually eaten quickly, making the relevant time horizon short.


16. There are very few, if any, good substitutes for motor oil. Therefore,

a. the demand for motor oil would tend to be inelastic. b. the demand for motor oil would tend to be elastic. c. the demand for motor oil would tend to respond strongly to changes in prices of other

goods. d. the supply of motor oil would tend to respond strongly to changes in people’s tastes for

large cars relative to their tastes for small cars.


17. Holding all other forces constant, when the price of gasoline rises, the number of gallons of gasoline

demanded would fall substantially over a ten-year period because a. buyers tend to be much less sensitive to a change in price when given more time to react. b. buyers tend to be much more sensitive to a change in price when given more time to react. c. buyers will have substantially more real income over a ten-year period. d. the quantity supplied of gasoline increases very little in response to an increase in the price

of gasoline.


18. A good will have a more inelastic demand,

a. the greater the availability of close substitutes. b. the broader the definition of the market. c. the longer the period of time. d. the more it is regarded as a luxury.



19. A good will have a more elastic demand,

a. the greater the availability of close substitutes. b. the more narrow the definition of the market. c. the shorter the period of time. d. the more it is regarded as a necessity.



a. The demand for flat-screen computer monitors is more elastic than the demand for monitors in general.

b. The demand for grandfather clocks is more elastic than the demand for clocks in general. c. The demand for cardboard is more elastic over a long period of time than over a short

period of time. d. All of the above are correct.



a. The demand for natural gas is more elastic over a short period of time than over a long period of time.

b. The demand for smoke alarms is more elastic than the demand for Persian rugs. c. The demand for bourbon whiskey is more elastic than the demand for alcoholic beverages

in general. d. All of the above are correct.

ANS: C DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Interpretive

22. Which of the following is not a determinant of the price elasticity of demand for a good?

a. the time horizon b. the steepness or flatness of the supply curve for the good c. the definition of the market for the good d. the availability of substitutes for the good



23. The greater the price elasticity of demand, the

a. 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.


24. The value of the price elasticity of demand for a good will be relatively large when

a. there are no good substitutes available for the good. b. the time period in question is relatively short. c. the good is a luxury as opposed to a necessity. d. All of the above are correct.


25. For which of the following goods would demand be most elastic?

a. clothing b. blue jeans c. Tommy Hilfiger jeans d. All three would have the same elasticity of demand since they are all related.

ANS: C DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Applicative

26. For which of the following goods would demand be most inelastic?

a. chocolate b. Godiva chocolate c. Hershey’s chocolate d. All three would have the same elasticity of demand since they are all related.


27. Whether a good is a luxury or necessity depends on

a. the price of the good. b. the preferences of the buyer. c. the intrinsic properties of the good. d. how scarce the good is.



28. The price elasticity of demand for bread

a. is computed as the percentage change in quantity demanded of bread divided by the percentage change in price of bread.

b. depends, in part, on the availability of close substitutes for bread. c. reflects the many economic, social, and psychological forces that influence consumers'

tastes for bread. d. All of the above are correct.


29. The price elasticity of demand for eggs

a. is computed as the percentage change in quantity demanded of eggs divided by the percentage change in price of eggs.

b. will be lower if there is a new invention that is a close substitute for eggs. c. will be higher if consumers consider eggs to be a luxury good. d. All of the above are correct.


30. Other things equal, the demand for a good tends to be more inelastic, the

a. 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.


31. Economists compute the price elasticity of demand as the

a. percentage change in price divided by the percentage change in quantity demanded. b. change in quantity demanded divided by the change in the price. c. percentage change in quantity demanded divided by the percentage change in price. d. percentage change in quantity demanded divided by the percentage change in income.

ANS: C DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Definitional


32. Suppose there is a 6 percent increase in the price of good X and a resulting 6 percent decrease in the

quantity of X demanded. Price elasticity of demand for X is a. 0. b. 1. c. 6. d. 36.


33. If the price elasticity of demand for a good is 4.0, then a 10 percent increase in price results in a

a. 0.4 percent decrease in the quantity demanded. b. 2.5 percent decrease in the quantity demanded. c. 4 percent decrease in the quantity demanded. d. 40 percent decrease in the quantity demanded.








36. If the price elasticity of demand for a good is 0.25, then a 20 percent decrease in price results in a

a. 0.0125 percent increase in the quantity demanded. b. 4 percent increase in the quantity demanded. c. 5 percent increase in the quantity demanded. d. 80 percent increase in the quantity demanded.



37. If the price elasticity of demand for a good is 1.5, then a 3 percent decrease in price results in a

a. 0.5 percent increase in the quantity demanded. b. 2 percent increase in the quantity demanded. c. 4.5 percent increase in the quantity demanded. d. 5 percent increase in the quantity demanded.


38. If the price elasticity of demand for a good is 0.8, then which of the following events is consistent

with a 4 percent decrease in the quantity of the good demanded? a. a 0.2 percent increase in the price of the good b. a 3.2 percent increase in the price of the good c. a 4.8 percent increase in the price of the good d. a 5 percent increase in the price of the good


39. For a particular good, a 2 percent increase in price causes a 12 percent decrease in quantity

demanded. Which of the following statements is most likely applicable to this good? a. There are no close substitutes for this good. b. The good is a luxury. c. The market for the good is broadly defined. d. The relevant time horizon is short.

ANS: B DIF: 3 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Analytical


demanded. Which of the following statements is most likely applicable to this good? a. There are many substitutes for this good. b. The good is a necessity. c. The market for the good is narrowly defined. d. The relevant time horizon is long.




demanded. Which of the following statements is most likely applicable to this good? a. The relevant time horizon is short. b. The good is a necessity. c. The market for the good is broadly defined. d. There are many close substitutes for this good.

ANS: D DIF: 3 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Analytical


demanded. Which of the following statements is most likely applicable to this good? a. The relevant time horizon is short. b. The good is a luxury. c. The market for the good is narrowly defined. d. There are many close substitutes for this good.

ANS: A DIF: 3 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Analytical

43. Demand is said to have unit elasticity if elasticity is

a. less than 1. b. greater than 1. c. equal to 1. d. equal to 0.

ANS: C DIF: 1 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Definitional

44. Demand is said to be unit elastic if

a. quantity demanded changes by the same percent as the price. b. quantity demanded changes by a larger percent than the price. c. the demand curve shifts by the same percentage amount as the price. d. quantity demanded does not respond to a change in price.


45. Elasticity of demand is closely related to the slope of the demand curve. The more responsive buyers

are to a change in price, the a. steeper the demand curve will be. b. flatter the demand curve will be. c. further to the right the demand curve will sit. d. closer to the vertical axis the demand curve will sit.



46. Elasticity of demand is closely related to the slope of the demand curve. The less responsive buyers

are to a change in price, the a. steeper the demand curve will be. b. flatter the demand curve will be. c. further to the right the demand curve will sit. d. closer to the vertical axis the demand curve will sit.


47. The flatter the demand curve through a given point, the

a. greater the price elasticity of demand at that point. b. smaller the price elasticity of demand at that point. c. closer the price elasticity of demand will be to the slope of the curve. d. greater the absolute value of the change in total revenue when there is a movement from

that point upward and to the left along the demand curve.


48. The smaller the price elasticity of demand, the

a. steeper the demand curve will be through a given point. b. flatter the demand curve will be through a given point. c. more strongly buyers respond to a change in price between any two prices P1 and P2. d. smaller the decrease in equilibrium price when the supply curve shifts rightward from S1

to S2.


49. When quantity moves proportionately the same amount as price, demand is

a. elastic, and the price elasticity of demand is 1. b. perfectly elastic, and the price elasticity of demand is infinitely large. c. perfectly inelastic, and the price elasticity of demand is 0. d. unit elastic, and the price elasticity of demand is 1.



50. Jean-Paul says that he will spend exactly 75 cents a day on M&Ms, regardless of the price of

M&Ms. Jean-Paul’s demand for M&Ms is a. perfectly elastic. b. unit elastic. c. perfectly inelastic. d. None of the above answers is correct.


51. As we move downward and to the right along a linear, downward-sloping demand curve,

a. slope and elasticity both remain constant. b. slope changes but elasticity remains constant. c. slope and elasticity both change. d. slope remains constant but elasticity changes.


52. When we move upward and to the left along a linear, downward-sloping demand curve, price

elasticity of demand a. first becomes smaller, then larger. b. always becomes larger. c. always becomes smaller. d. first becomes larger, then smaller.


53. The price elasticity of demand changes as we move along a

a. horizontal demand curve. b. vertical demand curve. c. linear, downward-sloping demand curve. d. All of the above are correct.


54. The difference between slope and elasticity is that

a. slope is a ratio of two changes, and elasticity is a ratio of two percentage changes. b. slope is a ratio of two percentage changes, and elasticity is a ratio of two changes. c. slope measures changes in quantity demanded more accurately than elasticity. d. none of the above; there is no difference between slope and elasticity.



55. According to a New York Times article published in November 2005, author Anna Bernasek asserts

that a 10 percent increase in the price of gasoline leads to a decline in the quantity demanded of about a. 0.01 percent. b. 2 percent. c. 20 percent. d. 200 percent.


56. According to a New York Times article published in November 2005, author Anna Bernasek asserts

that a 10 percent increase in the price of electricity leads to a decline in the quantity demanded of about a. 0.01 percent. b. 3 percent. c. 30 percent. d. 300 percent.


Figure 5-1

A

A

B

B

C

C

D D

Quantity

Price

57. Refer to Figure 5-1. The demand curve representing the demand for a luxury good with several

close substitutes is a. A. b. B. c. C. d. D.



58. Refer to Figure 5-1. Atog says he would buy one cup of coffee per day regardless of the price. If

this is true, then Atog's demand for coffee is represented by demand curve a. A. b. B. c. C. d. D.

ANS: A DIF: 3 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Perfectly inelastic demand MSC: Applicative

Figure 5-2

Pa

Pb

D1

D2D3

Quantity

Price

59. Refer to Figure 5-2. As price falls from Pa to Pb, which demand curve represents the most elastic

demand? a. D1 b. D2 c. D3 d. All of the above are equally elastic.


60. 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. D1 b. D2 c. D3 d. All of the above are equally elastic.



Table 5-1

Good Price Elasticity of Demand

A 1.3

B 2.1

61. Refer to Table 5-1. Which of the following is consistent with the elasticities given in Table 5-2?

a. A is a luxury and B is a necessity. b. A is a good several years after a price increase, and B is that same good several days after

the price increase. c. A is a Kit Kat bar and B is candy. d. A has fewer substitutes than B.


62. Refer to Table 5-1. Which of the following is consistent with the elasticities given in Table 5-2?

a. A is grapes and B is fruit. b. A is T-shirts and B is socks. c. A is train tickets before cars were invented, and B is train tickets after cars were invented. d. A is diamond necklaces and B is beds.

ANS: C DIF: 3 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Analytical

63. Studies indicate that the price elasticity of demand for cigarettes is about 0.4. A government policy

aimed at reducing smoking changed the price of a pack of cigarettes from $2 to $6. According to the midpoint method, the government policy should have reduced smoking by a. 30%. b. 40%. c. 80%. d. 250%.


64. If a 15% increase in price for a good results in a 20% decrease in quantity demanded, the price

elasticity of demand is a. 0.75. b. 1.25. c. 1.33. d. 1.60.

ANS: C DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Analytical


65. If a 20% increase in price for a good results in a 15% decrease in quantity demanded, the price

elasticity of demand is a. 0.75. b. 1.25. c. 1.33. d. 1.60.


66. If a 10% decrease in price for a good results in a 20% increase in quantity demanded, the price

elasticity of demand is a. 0.50. b. 1. c. 1.5. d. 2.


67. If a 6% decrease in price for a good results in a 2% increase in quantity demanded, the price

elasticity of demand is a. 0.02. b. 0.33. c. 3. d. 4.


68. Suppose that quantity demand rises by 10% as a result of a 15% decrease in price. The price

elasticity of demand for this good is a. inelastic and equal to 0.67. b. elastic and equal to 0.67. c. inelastic and equal to 1.50. d. elastic and equal to 1.50.



69. Suppose that quantity demand falls by 30% as a result of a 5% increase in price. The price elasticity

of demand for this good is a. inelastic and equal to 6. b. elastic and equal to 6. c. inelastic and equal to 0.17. d. elastic and equal to 0.17.


Table 5-2 The following table shows a portion of the demand schedule for a particular good at various levels of income.

Price

Quantity Demanded (Income = $5,000)



$24 2 3 4

$20 4 6 8

$16 6 9 12

$12 8 12 16

$8 10 15 20

$4 12 18 24

70. Refer to Table 5-2. Using the midpoint method, when income equals $7,500, what is the price

elasticity of demand between $16 and $20? a. 0.56 b. 0.75 c. 1.33 d. 1.80


71. Refer to Table 5-2. Using the midpoint method, when income equals $5,000, what is the price

elasticity of demand between $8 and $12? a. 0.56 b. 0.75 c. 1.33 d. 1.80



72. Refer to Table 5-2. Using the midpoint method, at a price of $16, what is the income elasticity of

demand when income rises from $5,000 to $10,000? a. 0.00 b. 0.50 c. 1.00 d. 1.50

ANS: C DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand MSC: Analytical







75. Demand is said to be price elastic if

a. the price of the good responds substantially to changes in demand. b. demand shifts substantially when income or the expected future price of the good changes. c. buyers do not respond much to changes in the price of the good. d. buyers respond substantially to changes in the price of the good.

ANS: D DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Elastic demand MSC: Definitional

76. When quantity demanded responds strongly to changes in price, demand is said to be

a. fluid. b. elastic. c. dynamic. d. highly variable.

ANS: B DIF: 1 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Elastic demand MSC: Definitional


77. Demand is elastic if elasticity is

a. less than 1. b. equal to 1. c. equal to 0. d. greater than 1.

ANS: D DIF: 1 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Elastic demand MSC: Definitional

78. For which of the following goods is demand probably most inelastic?

a. camcorders b. insulin c. apples d. devices that remove cores from apples

ANS: B DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Elastic demand MSC: Interpretive

79. Demand is said to be inelastic if

a. buyers respond substantially to changes in the price of the good. b. demand shifts only slightly when the price of the good changes. c. the quantity demanded changes only slightly when the price of the good changes. d. the price of the good responds only slightly to changes in demand.

ANS: C DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Inelastic demand MSC: Definitional

80. If demand is price inelastic, then

a. buyers do not respond much to a change in price. b. buyers respond substantially to a change in price, but the response is very slow. c. buyers do not alter their quantities demanded much in response to advertising, fads, or

general changes in tastes. d. the demand curve is very flat.

ANS: A DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Inelastic demand MSC: Definitional

81. If the quantity demanded of a certain good responds only slightly to a change in the price of the

good, then a. the demand for the good is said to be elastic. b. the demand for the good is said to be inelastic. c. the law of demand does not apply to the good. d. the demand curve for the good shifts only slightly in response to a change in price.

ANS: B DIF: 1 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Inelastic demand MSC: Definitional


82. Demand is inelastic if elasticity is

a. less than 1. b. equal to 1. c. greater than 1. d. equal to 0.

ANS: A DIF: 1 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Inelastic demand MSC: Definitional

83. Demand is said to be inelastic if the

a. quantity demanded changes proportionately more than price. b. price changes proportionately more than income. c. quantity demanded changes proportionately less than price. d. quantity demanded changes proportionately the same as price.

ANS: C DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Inelastic demand MSC: Definitional

84. If the price elasticity of demand is 1.5, regardless of which two points on the demand curve are used

to compute the elasticity, then a. demand is perfectly inelastic, and the demand curve is vertical. b. demand is elastic, and the demand curve is a straight, downward-sloping line. c. demand is perfectly elastic, and the demand curve is horizontal. d. demand is elastic, and the demand curve is something other than a straight, downward-

sloping line.



Table 5-3 The following table shows the demand schedule for a particular good.

Price Quantity

$15 0

$12 5

$9 10

$6 15

$3 20

$0 25

85. Refer to Table 5-3. Using the midpoint method, what is the price elasticity of demand when price

rises from $9 to $12? a. 0.43 b. 0.67 c. 1.50 d. 2.33

ANS: D DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of demand MSC: Analytical

86. Refer to Table 5-3. Using the midpoint method, when price rises from $6 to $9, the price elasticity

of demand is a. 0.43 b. 0.67 c. 1.00 d. 1.5

ANS: C DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of demand MSC: Analytical

87. Refer to Table 5-3. Using the midpoint method, when price falls from $6 to $3, the price elasticity

of demand is a. 0.43 b. 0.67 c. 1.50 d. 2.33

ANS: A DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of demand MSC: Analytical


88. When the price of bubble gum is $0.50, the quantity demanded is 400 packs per day. When the price

falls to $0.40, the quantity demanded increases to 600. Given this information and using the midpoint method, we know that the demand for bubble gum is a. inelastic. b. elastic. c. unit elastic. d. perfectly inelastic.

ANS: B DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of demand MSC: Applicative

89. The midpoint method is used to compute elasticity because it

a. automatically computes a positive number instead of a negative number. b. results in an elasticity that is the same as the slope of the demand curve. c. gives the same answer regardless of the direction of change. d. automatically rounds quantities to the nearest whole unit.

ANS: C DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of demand MSC: Interpretive

90. Suppose the price of Twinkies decreases from $1.45 to $1.25 and, as a result, the quantity of

Twinkies demanded increases from 2,000 to 2,200. Using the midpoint method, the price elasticity of demand for Twinkies in the given price range is a. 2.00. b. 1.55. c. 1.00. d. 0.64.

ANS: D DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of demand MSC: Applicative

91. Using the midpoint method, the price elasticity of demand for a good is computed to be

approximately 0.75. Which of the following events is consistent with a 10 percent decrease in the quantity of the good demanded? a. a 7.5 increase in the price of the good b. a 13.33 percent increase in the price of the good c. an increase in the price of the good from $7.50 to $10 d. an increase in the price of the good from $10 to $17.50



92. Using the midpoint method, the price elasticity of demand for a good is computed to be

approximately 2. Which of the following events is consistent with a 0.1 percent increase in the price of the good? a. The quantity of the good demanded decreases from 250 to 150. b. The quantity of the good demanded decreases from 200 to 100. c. The quantity of the good demanded decreases by 0.05 percent. d. The quantity of the good demanded decreases by 0.2 percent.


93. When the price of a good is $5, the quantity demanded is 100 units per month; when the price is $7,

the quantity demanded is 80 units per month. Using the midpoint method, the price elasticity of demand is about a. 0.22. b. 0.67. c. 1.33. d. 1.50.


94. When the price of a good is $5, the quantity demanded is 120 units per month; when the price is $7,

the quantity demanded is 100 units per month. Using the midpoint method, the price elasticity of demand is about a. 0.55. b. 1.83. c. 2. d. 10.

ANS: A DIF: 1 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of demand MSC: Applicative

95. When the price of a watch was $25 each, the jewelry shop sold 20 per month. When it raised the

price to $35 each, it sold 14 per month. The price elasticity of demand for watches is about a. 1.66. b. 1.06. c. 0.94. d. 0.60.



96. 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 = .


97. Which of the following expressions can be used to compute 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 = • .


98. Suppose that 50 candy bars are demanded at a particular price. If the price of candy bars rises from

that price by 4 percent, the number of candy bars demanded falls to 46. Using the midpoint approach to calculate the price elasticity of demand, it follows that the a. demand for candy bars in this price range is elastic. b. demand for candy bars in this price range is inelastic. c. demand for candy bars in this price range is unit elastic. d. price elasticity of demand for candy bars in this price range is 0.



99. When the rental price of DVD movies is $4, Denise rents five per month. When the price is $3, she

rents nine per month. Denise's demand for DVD rentals is a. elastic, and her demand curve would be relatively flat. b. elastic, and her demand curve would be relatively steep. c. inelastic, and her demand curve would be relatively flat. d. inelastic, and her demand curve would be relatively steep.


Figure 5-3

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

100. Refer to Figure 5-3. Between point A and point B,

a. the slope is equal to -1/4 and the price elasticity of demand is equal to 2/3. b. the slope is equal to -1/4 and the price elasticity of demand is equal to 3/2. c. the slope is equal to -3/2 and the price elasticity of demand is equal to 1/4. d. the slope is equal to -2/3 and the price elasticity of demand is equal to 3/2.


101. Refer to Figure 5-3. Between point A and point B on the graph, demand is

a. perfectly elastic. b. inelastic. c. unit elastic. d. elastic, but not perfectly elastic.



102. 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.

ANS: B DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of demand MSC: Interpretive

Table 5-4

Price Total Revenue

$10 $100

$12 $108

$14 $112

$16 $112

103. Refer to Table 5-4. As price rises from $10 to $12, the price elasticity of demand using the

midpoint method is approximately a. 0.08. b. 0.18. c. 0.42. d. 0.58.


104. Refer to Table 5-4. Demand is unit elastic when quantity demanded changes from

a. 10 to 9. b. 9 to 8. c. 8 to 7. d. There is not enough information given to determine the correct answer.


105. Refer to Table 5-4. When price is between $10 and $14, demand is

a. elastic. b. unit elastic. c. inelastic. d. There is not enough information given to determine whether demand is elastic, unit elastic,

or inelastic.



Figure 5-4

Demand

A

B

C Quantity

Price

106. Refer to Figure 5-4. Suppose the point labeled B is the “halfway point” on the demand curve and it

corresponds to a price of $5.00. Then, between prices of $4.99 and $5.01, the price elasticity of demand is a. less than 1 but greater than zero. b. equal to 1. c. greater than 1. d. equal to zero.

ANS: B DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of demand MSC: Interpretive

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

a. elastic section of the demand curve. b. inelastic section of the demand curve. c. unit elastic section of the demand curve. d. perfectly elastic section of the demand curve.


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




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



110. 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 proportionately more than the price. c. quantity demanded changes the same amount proportionately as price. d. the price elasticity of demand equals 1.

ANS: B DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Elastic demand MSC: Applicative

111. 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.

ANS: A DIF: 3 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Elastic demand MSC: Applicative

112. 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.

ANS: B DIF: 3 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Elastic demand MSC: Analytical

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

a. 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.

ANS: D DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Inelastic demand MSC: Interpretive


114. 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, a. quantity demanded changes proportionately less than the price. b. quantity demanded changes proportionately more than the price. c. quantity demanded changes the same amount proportionately as price. d. the price elasticity of demand equals zero.

ANS: A DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Inelastic demand MSC: Applicative

115. 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. Both of these points lie on section C of the demand curve. b. The vertical intercept of the demand curve is the point (Q = 0, P = $22). c. The horizontal intercept of the demand curve is the point (Q = 5,000, P = $0). d. Any of these scenarios is possible.

ANS: A DIF: 3 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Inelastic demand MSC: Analytical

116. 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 a. increase. b. stay the same. c. decrease. d. first decrease, then increase until total revenue is maximized.

ANS: A DIF: 3 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand MSC: Analytical

117. 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. decrease. d. first increase, then decrease until total revenue is maximized.

ANS: C DIF: 3 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand MSC: Analytical


118. 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.


119. 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 a. increase. b. stay the same. c. decrease. d. first decrease, then increase until total revenue is maximized.


Figure 5-5

Demand

3 6 9 12 15 18 21 24 27 30 33 Quantity

6

12

18

24

30

36

42

48

54

60Price

120. Refer to Figure 5-5. Demand is unit elastic between prices of

a. $18 and $24. b. $24 and $30. c. $24 and $36. d. $30 and $36.



121. Refer to Figure 5-5. Using the midpoint method, between prices of $12 and $18, price elasticity of

demand is a. 0.33. b. 0.67. c. 1.33. d. 1.89.



demand is about a. 0.92. b. 3.89. c. 4.33. d. 5.67.



demand is about a. 0.5. b. 0.82. c. 1.22. d. 2.


124. Refer to Figure 5-5. The maximum value of total revenue corresponds to a price of

a. $18. b. $30. c. $42. d. $48.

ANS: B DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand MSC: Applicative

125. Refer to Figure 5-5. At a price of $48 per unit, sellers' total revenue amounts to

a. $150. b. $200. c. $288. d. $364.

ANS: C DIF: 1 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand MSC: Definitional



a. $150. b. $200. c. $288. d. $364.

ANS: C DIF: 1 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand MSC: Definitional


a. $150. b. $200. c. $288. d. $450.

ANS: D DIF: 1 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand MSC: Definitional

Figure 5-6

A

B

C

Demand

100 200 300 400 500 600 700 800 900 Quantity

2

4

6

8

10

12

14

16

18

20

22Price

128. Refer to Figure 5-6. Using the midpoint method, the price elasticity of demand between point A

and point B is a. 1. b. 1.5. c. 2. d. 2.5.



129. Refer to Figure 5-6. Using the midpoint method, the price elasticity of demand between point B

and point C is a. 0.5. b. 0.75. c. 1.0. d. 1.3.


130. Refer to Figure 5-6. If the price decreased from $18 to $6,

a. total revenue would increase by $1,200, and demand is elastic between points A and C. b. total revenue would increase by $800, and demand is elastic between points A and C. c. total revenue would decrease by $1,200, and demand is inelastic between points A and C. d. total revenue would decrease by $800, and demand is inelastic between points A and C.

ANS: A DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand MSC: Applicative

131. Refer to Figure 5-6. Sellers’ total revenue would increase if the price

a. increased from $4 to $6. b. increased from $16 to $18. c. decreased from $8 to $6. d. All of the above are correct.


132. Refer to Figure 5-6. Sellers’ total revenue would increase if the price

a. increased from $6 to $8. b. decreased from $18 to $16. c. decreased from $16 to $15. d. All of the above are correct.

ANS: D DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand MSC: Applicative

133. Refer to Figure 5-6. Which of the following price changes would result in no change in sellers’

total revenue? a. The price increases from $6 to $9. b. The price increases from $9 to $15. c. The price decreases from $12 to $9. d. The price decreases from $9 to $5.

ANS: C DIF: 3 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand MSC: Applicative


134. Suppose demand is perfectly inelastic, and the supply of the good in question decreases. As a result,

a. the equilibrium quantity decreases, and the equilibrium price is unchanged. b. the equilibrium price increases, and the equilibrium quantity is unchanged. c. the equilibrium quantity and the equilibrium price both are unchanged. d. buyers’ total expenditure on the good is unchanged.

ANS: B DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Perfectly inelastic demand MSC: Applicative

135. Suppose demand is perfectly elastic, and the supply of the good in question decreases. As a result,

a. the equilibrium quantity decreases, and the equilibrium price is unchanged. b. the equilibrium price increases, and the equilibrium quantity is unchanged. c. the equilibrium quantity and the equilibrium price both are unchanged. d. buyers’ total expenditure on the good is unchanged.

ANS: A DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Perfectly elastic demand MSC: Applicative

136. A perfectly elastic demand implies that

a. buyers will not respond to any change in price. b. any rise in price above that represented by the demand curve will result in a quantity

demanded of zero. c. quantity demanded and price change by the same percent as we move along the demand

curve. d. price will rise by an infinite amount when there is a change in quantity demanded.

ANS: B DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Perfectly elastic demand MSC: Interpretive

137. The case of perfectly elastic demand is illustrated by a demand curve that is

a. vertical. b. horizontal. c. downward-sloping but relatively steep. d. downward-sloping but relatively flat.


138. When small changes in price lead to infinite changes in quantity demanded, demand is perfectly

a. elastic, and the demand curve will be horizontal. b. inelastic, and the demand curve will be horizontal. c. elastic, and the demand curve will be vertical. d. inelastic, and the demand curve will be vertical.

ANS: A DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Perfectly elastic demand MSC: Interpretive


139. For a horizontal demand curve,

a. slope is undefined, and price elasticity of demand is equal to 0. b. slope is equal to 0, and price elasticity of demand is undefined. c. slope and price elasticity of demand both are undefined. d. slope and price elasticity of demand both are equal to 0.


140. In the case of perfectly inelastic demand,

a. the change in quantity demanded equals the change in price. b. the percentage change in quantity demanded equals the percentage change in price. c. infinitely-large changes in quantity demanded result from very small changes in the price. d. quantity demanded stays the same whenever price changes.

ANS: D DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Perfectly inelastic demand MSC: Interpretive

141. When demand is perfectly inelastic, the demand curve will be

a. negatively sloped, because buyers decrease their purchases when the price rises. b. vertical, because buyers purchase the same amount as before whenever the price rises or

falls. c. positively sloped, because buyers increase their purchases when price rises. d. positively sloped, because buyers increase their total expenditures when price rises.

ANS: B DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Perfectly inelastic demand MSC: Interpretive

142. When demand is perfectly inelastic, the price elasticity of demand

a. is zero, and the demand curve is vertical. b. is zero, and the demand curve is horizontal. c. approaches infinity, and the demand curve is vertical. d. approaches infinity, and the demand curve is horizontal.

ANS: A DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Perfectly inelastic demand MSC: Interpretive

143. A perfectly inelastic demand implies that buyers

a. decrease their purchases when the price rises. b. purchase the same amount as before when the price rises or falls. c. increase their purchases only slightly when the price falls. d. respond substantially to an increase in price.



144. Alice says that she would buy one banana split a day regardless of the price. If she is telling the

truth, a. Alice's demand for banana splits is perfectly inelastic. b. Alice's price elasticity of demand for banana splits is 1. c. Alice's income elasticity of demand for banana splits is 0. d. None of the above answers is correct.


145. For a vertical demand curve,

a. slope is undefined, and price elasticity of demand is equal to 0. b. slope is equal to 0, and price elasticity of demand is undefined. c. slope and price elasticity of demand both are undefined. d. slope and price elasticity of demand both are equal to 0.


146. In which of these instances is demand said to be perfectly inelastic?

a. An increase in price of 2% causes a decrease in quantity demanded of 2%. b. A decrease in price of 2% causes an increase in quantity demanded of 0%. c. A decrease in price of 2% causes a decrease in total revenue of 0%. d. The demand curve is horizontal.


147. When the price of good A is $50, the quantity demanded of good A is 500 units. When the price of

good A rises to $70, the quantity demanded of good A falls to 400 units. Using the midpoint method, a. the price elasticity of demand for good A is 1.50, and an increase in price will result in an

increase in total revenue for good A. b. the price elasticity of demand for good A is 1.50, and an increase in price will result in a

decrease in total revenue for good A. c. the price elasticity of demand for good A is 0.67, and an increase in price will result in an

increase in total revenue for good A. d. the price elasticity of demand for good A is 0.67, and an increase in price will result in a

decrease in total revenue for good A.

ANS: C DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Midpoint method | Total revenue | Price elasticity of demand MSC: Analytical


148. Consider airfares on flights between New York and Minneapolis. When the airfare is $250, the

quantity demanded of tickets is 2,000 per week. When the airfare is $280, the quantity demanded of tickets is 1,700 per week. Using the midpoint method, a. the price elasticity of demand is about 1.43, and an increase in the airfare will cause

airlines' total revenue to decrease. b. the price elasticity of demand is about 1.43, and an increase in the airfare will cause

airlines' total revenue to increase. c. the price elasticity of demand is about 0.70, and an increase in the airfare will cause

airlines' total revenue to decrease. d. the price elasticity of demand is about 0.70, and an increase in the airfare will cause

airlines' total revenue to increase.

ANS: A DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Midpoint method | Total revenue | Price elasticity of demand MSC: Applicative

149. When the local used bookstore prices economics books at $15.00 each, it generally sells 70 books

per month. If it lowers the price to $7.00, sales increase to 90 books per month. Given this information, we know that the price elasticity of demand for economics books is about a. 2.91, and an increase in price from $7.00 to $15.00 results in an increase in total revenue. b. 2.91, and an increase in price from $7.00 to $15.00 results in a decrease in total revenue. c. 0.34, and an increase in price from $7.00 to $15.00 results in an increase in total revenue. d. 0.34, and an increase in price from $7.00 to $15.00 results in a decrease in total revenue.

ANS: C DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Midpoint method | Total revenue | Price elasticity of demand MSC: Applicative

150. Harry's Barber Shop increased its total monthly revenue from $1,500 to $1,800 when it raised the

price of a haircut from $5 to $9. The price elasticity of demand for Harry's Haircuts is a. 0.567. b. 0.700. c. 1.429. d. 2.200.

ANS: B DIF: 3 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Midpoint method | Total revenue | Price elasticity of demand MSC: Applicative


151. Barb's Bakery earned $200 in total revenue last month when it sold 100 loaves of bread. This month

it earned $300 in total revenue when it sold 60 loaves of bread. The price elasticity of demand for Barb's bread is a. 0.27. b. 0.58. c. 1.25. d. 1.71.

ANS: B DIF: 3 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Midpoint method | Total revenue | Price elasticity of demand MSC: Applicative

152. Suppose that when the price of corn is $2 per bushel, farmers can sell 10 million bushels. When the

price of corn is $3 per bushel, farmers can sell 8 million bushels. Which of the following statements is true? a. The demand for corn is income inelastic, and so an increase in the price of corn will

increase the total revenue of corn farmers. b. The demand for corn is income elastic, and so an increase in the price of corn will increase

the total revenue of corn farmers. c. The demand for corn is price inelastic, and so an increase in the price of corn will increase

the total revenue of corn farmers. d. The demand for corn is price elastic, and so an increase in the price of corn will increase

the total revenue of corn farmers.


153. Suppose that when the price of beer is $2 per bottle, firms can sell 4 million bottles. When the price

of beer is $3 per bottle, firms can sell 2 million bottles. Which of the following statements is true? a. The demand for beer is income inelastic, and so an increase in the price of beer will

increase the total revenue of beer producers. b. The demand for beer is income elastic, and so an increase in the price of beer will increase

the total revenue of beer producers. c. The demand for beer is price inelastic, and so an increase in the price of beer will increase

the total revenue of beer producers. d. The demand for beer is price elastic, and so an increase in the price of beer will increase

the total revenue of beer producers.

ANS: D DIF: 3 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Midpoint method | Total revenue | Price elasticity of demand MSC: Applicative



that price by 5 percent, the number of candy bars demanded falls to 48. Using the midpoint approach to calculate the price elasticity of demand, it follows that the a. demand for candy bars in this price range is unit elastic. b. price increase will decrease the total revenue of candy bar sellers. c. price elasticity of demand for candy bars in this price range is about 1.22. d. price elasticity of demand for candy bars in this price range is about 0.82.

ANS: D DIF: 3 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Midpoint method | Total revenue | Price elasticity of demand MSC: Applicative


that price by 10 percent, the number of candy bars demanded falls to 480. Using the midpoint approach to calculate the price elasticity of demand, it follows that the a. demand for candy bars in this price range is unit elastic. b. price increase will decrease the total revenue of candy bar sellers. c. price elasticity of demand for candy bars in this price range is about 0.41. d. price elasticity of demand for candy bars in this price range is about 0.24.


156. When demand is inelastic, a decrease in price will cause

a. an increase in total revenue. b. a decrease in total revenue. c. no change in total revenue, but an increase in quantity demanded. d. no change in total revenue, but a decrease in quantity demanded.


157. When demand is elastic, a decrease in price will cause




158. When demand is inelastic, an increase in price will cause



159. When demand is elastic, an increase in price will cause



160. Which of the following could be the price elasticity of demand for a good for which a decrease in

price would increase revenue? a. 0 b. 0.2 c. 1 d. 2.1

ANS: D DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand MSC: Interpretive

161. Which of the following could be the price elasticity of demand for a good for which an increase in

price would increase revenue? a. 0.2 b. 1 c. 1.5 d. All of the above could be correct.

ANS: A DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand MSC: Interpretive

162. Which of the following could be the price elasticity of demand for a good for which a decrease in

price would decrease revenue? a. 0.5 b. 1 c. 1.5 d. All of the above could be correct.



163. Which of the following could be the price elasticity of demand for a good for which an increase in

price would decrease revenue? a. 0 b. 0.5 c. 1 d. 1.5


164. Which of the following is not possible?

a. Demand is elastic, and a decrease in price causes an increase in revenue. b. Demand is unit elastic, and a decrease in price causes an increase in revenue. c. Demand is inelastic, and an increase in price causes an increase in revenue. d. Demand is perfectly inelastic, and an increase in price causes an increase in revenue.


165. If demand is price inelastic, then when price rises,

a. total revenue will fall. b. total revenue will rise. c. total revenue will remain unchanged. d. total revenue may rise, fall, or remain unchanged. More information is need to determine

the change in total revenue with certainty.

ANS: B DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand MSC: Analytical


Figure 5-7 The following graph shows the linear demand curve for a particular good.

D

2 4 6 8 10 12 14 16 Quantity

2

4

6

8

10

12

14

16

18

20Price

166. Refer to Figure 5-7. For prices above $8, demand is price

a. elastic, and total revenue will rise as price rises. b. inelastic, and total revenue will rise as price rises. c. elastic, and total revenue will fall as price rises. d. inelastic, and total revenue will fall as price rises.


167. Refer to Figure 5-7. For prices below $6, demand is price

a. elastic, and total revenue will rise as price rises. b. inelastic, and total revenue will rise as price rises. c. elastic, and total revenue will fall as price rises. d. inelastic, and total revenue will fall as price rises.



Figure 5-8

D

1 2 3 4 5 6 7 8 Quantity

1

2

3

4

5

6

7

8

9

10Price

168. Refer to Figure 5-8. For prices above $5, demand is price

a. elastic, and raising price will increase total revenue. b. inelastic, and raising price will increase total revenue. c. elastic, and lowering price will increase total revenue. d. inelastic, and lowering price will increase total revenue.

ANS: C DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand MSC: Interpretive

169. Refer to Figure 5-8. For prices below $5, demand is price

a. elastic, and raising price will increase total revenue. b. inelastic, and raising price will increase total revenue. c. elastic, and lowering price will increase total revenue. d. inelastic, and lowering price will increase total revenue.

ANS: B DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand MSC: Interpretive


Figure 5-9

Demand

1 2 3 4 5 6 7 8 9 10 11 12 Quantity

123456789

101112131415161718192021

Price

170. Refer to Figure 5-9. Suppose this demand curve is a straight, downward-sloping line all the way

from the horizontal intercept to the vertical intercept. We choose two prices, P1 and P2, and the corresponding quantities demanded, Q1 and Q2, for the purpose of calculating the price elasticity of demand. Also suppose P2 > P1. In which of the following cases could we possibly find that (i) demand is elastic and (ii) an increase in price from P1 to P2 causes an increase in total revenue? a. 0 < P1 < P2 < $10. b. $10 < P1 < P2 < $15. c. P1 > $15. d. None of the above is correct.

ANS: D DIF: 3 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand MSC: Analytical

171. Refer to Figure 5-9. If price increases from $10 to $15, total revenue will

a. increase by $20, so demand must be inelastic in this price range. b. increase by $5, so demand must be inelastic in this price range. c. decrease by $20, so demand must be elastic in this price range. d. decrease by $10, so demand must be elastic in this price range.



172. Refer to Figure 5-9. A decrease in price from $15 to $10 leads to

a. a decrease in total revenue of $10, so the price elasticity of demand is greater than 1 in this price range.

b. a decrease in total revenue of $10, so the price elasticity of demand is less than 1 in this price range.

c. a decrease in total revenue of $20, so the price elasticity of demand is less than 1 in this price range.

d. a decrease in total revenue of $20, so demand is elastic in this price range.


Figure 5-10

Demand

P2

P1

Q2 Q1

A

B

C

D

Quantity

Price

173. Refer to Figure 5-10. If rectangle D is larger than rectangle A, then

a. demand is elastic between prices P1 and P2. b. a decrease in price from P2 to P1 will cause an increase in total revenue. c. the magnitude of the percent change in price between P1 and P2 is smaller than the

magnitude of the corresponding percent change in quantity demanded. d. All of the above are correct.


174. Refer to Figure 5-10. Total revenue when the price is P1 is represented by the area(s)

a. B + D. b. A + B. c. C + D. d. D.



175. Refer to Figure 5-10. Total revenue when the price is P2 is represented by the area(s)

a. B + D. b. A + B. c. C + D. d. D.


176. If the price elasticity of demand for tuna is 0.7, then a 1.5% increase in the price of tuna will

decrease the quantity demanded of tuna by a. 1.05%, and tuna sellers' total revenue will increase as a result. b. 1.05%, and tuna sellers' total revenue will decrease as a result. c. 2.14%, and tuna sellers' total revenue will increase as a result. d. 2.14%, and tuna sellers' total revenue will decrease as a result.


177. If the price elasticity of demand for aluminum foil is 1.45, then a 2.4% decrease in the price of

aluminum foil will increase the quantity demanded of aluminum foil by a. 1.66%, and aluminum foil sellers' total revenue will increase as a result. b. 1.66%, and aluminum foil sellers' total revenue will decrease as a result. c. 3.48%, and aluminum foil sellers' total revenue will increase as a result. d. 3.48%, and aluminum foil sellers' total revenue will decrease as a result.


178. If a change in the price of a good results in no change in total revenue, then

a. the demand for the good must be elastic. b. the demand for the good must be inelastic. c. the demand for the good must be unit elastic. d. buyers must not respond very much to a change in price.


179. When demand is unit elastic, price elasticity of demand

a. equals 1, and total revenue and price move in the same direction. b. equals 1, and total revenue and price move in opposite directions. c. equals 1, and total revenue does not change when price changes. d. equals 0, and total revenue does not change when price changes.



180. If the demand curve is linear and downward sloping, which of the following statements is not

correct? a. Demand is more elastic on the lower part of the demand curve than on the upper part. b. Different pairs of points on the demand curve can result in different values of the price

elasticity of demand. c. Different pairs of points on the demand curve result in identical values of the slope of the

demand curve. d. Starting from a point on the upper part of the demand curve, an increase in price leads to a

decrease in total revenue.


181. Total revenue

a. always increases as price increases. b. increases as price increases, as long as demand is elastic. c. decreases as price increases, as long as demand is inelastic. d. remains unchanged as price increases when demand is unit elastic.


182. 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.


183. You have just been hired as a business consultant to determine what pricing policy would be

appropriate in order to increase the total revenue of a major shoe store. The first step you would take would be to a. increase the price of every shoe in the store. b. look for ways to cut costs and increase profit for the store. c. determine the price elasticity of demand for the store's products. d. determine the price elasticity of supply for the store’s products.



184. You are in charge of the local city-owned golf course. You need to increase the revenue generated

by the golf course in order to meet expenses. The mayor advises you to increase the price of a round of golf. The city manager recommends reducing the price of a round of golf. You realize that a. the mayor thinks demand is elastic, and the city manager thinks demand is inelastic. b. both the mayor and the city manager think that demand is elastic. c. both the mayor and the city manager think that demand is inelastic. d. the mayor thinks demand is inelastic, and the city manager thinks demand is elastic.


185. You are in charge of the local city-owned golf course. You need to increase the revenue generated

by the golf course in order to meet expenses. The mayor advises you to decrease the price of a round of golf. The city manager recommends increasing the price of a round of golf. You realize that a. the mayor thinks demand is elastic, and the city manager thinks demand is inelastic. b. both the mayor and the city manager think that demand is elastic. c. both the mayor and the city manager think that demand is inelastic. d. the mayor thinks demand is inelastic, and the city manager thinks demand is elastic.


186. Get Smart University is contemplating an increase in tuition to enhance revenue. If GSU feels that

raising tuition would enhance revenue, it is a. ignoring the law of demand. b. assuming that the demand for university education is elastic. c. assuming that the demand for university education is inelastic. d. assuming that the supply of university education is elastic.



Figure 5-11

Demand

50 100 150 200 250 300 350 400 450 500 550 Quantity

5

10

15

20

25

30

35

40

45

50

55

Price

187. Refer to Figure 5-11. When the price is $30, total revenue is

a. $3,000. b. $5,000. c. $7,000. d. $9,000.


188. Refer to Figure 5-11. When price falls from $50 to $40, it can be inferred that demand between

those two prices is a. inelastic, since total revenue decreases from $8,000 to $5,000. b. inelastic, since total revenue increases from $5,000 to $8,000. c. elastic, since total revenue increases from $5,000 to $8,000. d. unit elastic, since total revenue does not change.


189. Refer to Figure 5-11. An increase in price from $20 to $30 would

a. increase total revenue by $2,000. b. decrease total revenue by $2,000. c. increase total revenue by $1,000. d. decrease total revenue by $1,000.



190. Refer to Figure 5-11. An increase in price from $30 to $35 would

a. increase total revenue by $250 b. decrease total revenue by $250. c. increase total revenue by $500. d. decrease total revenue by $500.


191. If the demand for donuts is elastic, then a decrease in the price of donuts will

a. increase total revenue of donut sellers. b. decrease total revenue of donut sellers. c. not change total revenue of donut sellers. d. There is not enough information to answer this question.


192. If the demand for donuts is elastic, then an increase in the price of donuts will

a. increase total revenue of donut sellers. b. decrease total revenue of donut sellers. c. not change total revenue of donut sellers. d. There is not enough information to answer this question.


193. If the demand for textbooks is inelastic, then a decrease in the price of textbooks will

a. increase total revenue of textbook sellers. b. decrease total revenue of textbook sellers. c. not change total revenue of textbook sellers. d. There is not enough information to answer this question.


194. If the demand for textbooks is inelastic, then an increase in the price of textbooks will

a. increase total revenue of textbook sellers. b. decrease total revenue of textbook sellers. c. not change total revenue of textbook sellers. d. There is not enough information to answer this question.



195. Eric produces jewelry boxes. If the demand for jewelry boxes is elastic and Eric wants to increase

his total revenue, he should a. increase the price of his jewelry boxes. b. decrease the price of his jewelry boxes. c. not change the price of his jewelry boxes. d. None of the above answers is correct.


196. Holding all other forces constant, if increasing the price of a good leads to an increase in total

revenue, then the demand for the good must be a. unit elastic. b. inelastic. c. elastic. d. None of the above is correct, since a price increase always leads to an increase in total

revenue.


197. Holding all other forces constant, if increasing the price of a good leads to a decrease in total


revenue.


198. Holding all other forces constant, if decreasing the price of a good leads to an increase in total


revenue.



199. Holding all other forces constant, if decreasing the price of a good leads to a decrease in total


revenue.


200. Suppose you are in charge of setting prices at a local sandwich shop. The business needs to increase

its total revenue and your job is on the line. If the demand for sandwiches is elastic, you a. should increase the price of sandwiches. b. should decrease the price of sandwiches. c. should not change the price of sandwiches. d. could not determine what to do with price until you determine whether supply is elastic or

inelastic.


201. Suppose a producer is able to separate customers into two groups, one having an inelastic demand

and the other having an elastic demand. If the producer's objective is to increase total revenue, she should a. increase the price charged to customers with the elastic demand and decrease the price

charged to customers with the inelastic demand. b. decrease the price charged to customers with the elastic demand and increase the price

charged to customers with the inelastic demand. c. decrease the price to both groups of customers. d. increase the price for both groups of customers.

ANS: B DIF: 3 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand MSC: Analytical

202. Your younger sister needs $50 to buy a new bike. She has opened a lemonade stand to make the

money she needs. Your mother is paying for all of the ingredients. She currently is charging 25 cents per cup, but she wants to adjust her price to earn the $50 faster. If you know that the demand for lemonade is elastic, what is your advice to her? a. Leave the price at 25 cents and be patient. b. Raise the price to increase total revenue. c. Lower the price to increase total revenue. d. There isn't enough information given to answer this question.



203. An increase in price causes an increase in total revenue when

a. demand is elastic. b. demand is inelastic. c. demand is unit elastic. d. All of the above are possible.

ANS: B DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Total revenue MSC: Applicative

204. The local pizza restaurant makes such great bread sticks that consumers do not respond much at all

to a change in the price. If the owner is only interested in increasing revenue, he should a. lower the price of the bread sticks. b. leave the price of the bread sticks alone. c. raise the price of the bread sticks. d. reduce costs.

ANS: C DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Total revenue MSC: Interpretive

205. When demand is inelastic within a certain price range, then within that price range,

a. an increase in price would increase total revenue because the decrease in quantity demanded is proportionately less than the increase in price.

b. an increase in price would decrease total revenue because the decrease in quantity demanded is proportionately greater than the increase in price.

c. a decrease in price would increase total revenue because the increase in quantity demanded is proportionately smaller than the decrease in price.

d. a decrease in price would not affect total revenue.

ANS: A DIF: 3 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Total revenue MSC: Applicative

206. When demand is inelastic the price elasticity of demand is

a. less than 1, and price and total revenue will move in the same direction. b. less than 1, and price and total revenue will move in opposite directions. c. greater than 1, and price and total revenue will move in the same direction. d. greater than 1, and price and total revenue will move in opposite directions.

ANS: A DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Total revenue MSC: Applicative


207. 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 first increases, then decreases. d. It is unaffected by a movement along the demand curve.

ANS: C DIF: 3 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Total revenue MSC: Analytical

208. On a downward-sloping linear demand curve, total revenue reaches its maximum value at the

a. midpoint of the demand curve. b. lower end of the demand curve. c. upper end of the demand curve. d. It is impossible to tell without knowing prices and quantities demanded.

ANS: A DIF: 3 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Total revenue MSC: Analytical

209. Suppose the point (Q = 2,000, P = $60) is the midpoint on a certain downward-sloping, linear

demand curve. Then a. an increase in price from $40 to $42 will increase total revenue. b. a decrease in price from $61 to $59 will leave total revenue unchanged. c. the maximum value of total revenue is $120,000. d. All of the above are correct.


210. Moving downward and to the right along a linear demand curve, we know that total revenue

a. first increases, then decreases. b. first decreases, then increases. c. always increases. d. always decreases.


211. Total revenue will be at its largest value on a linear demand curve at

a. the top of the curve, where prices are highest. b. the midpoint of the curve. c. the low end of the curve, where quantity demanded is highest. d. None of the above is correct.



212. Last year, Sheila bought 6 pairs of shoes when her income was $40,000. This year, her income is

$50,000 and she purchased 10 pairs of shoes. Holding other factors constant, it follows that Sheila a. considers shoes to be a necessity. b. considers shoes to be an inferior good. c. considers shoes to be a normal good. d. has a low price elasticity of demand for shoes.

ANS: C DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand MSC: Interpretive

213. Last year, Sheila bought 6 pairs of shoes when her income was $40,000. This year, her income is

$52,000 and she purchased 7 pairs of shoes. Holding other factors constant and using the midpoint method, it follows that Sheila’s income elasticity of demand is about a. 0.59, and Sheila regards shoes as an inferior good. b. 0.59, and Sheila regards shoes as a normal good. c. 1.7, and Sheila regards shoes as an inferior good. d. 1.7, and Sheila regards shoes as a normal good.

ANS: B DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand MSC: Applicative

214. Necessities such as food and clothing tend to have

a. high price elasticities of demand and high income elasticities of demand. b. high price elasticities of demand and low income elasticities of demand. c. low price elasticities of demand and high income elasticities of demand. d. low price elasticities of demand and low income elasticities of demand.

ANS: D DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand MSC: Interpretive

215. Income elasticity of demand measures how

a. the quantity demanded changes as consumer income changes. b. consumer purchasing power is affected by a change in the price of a good. c. the price of a good is affected when there is a change in consumer income. d. many units of a good a consumer can buy given a certain income level.

ANS: A DIF: 1 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand MSC: Definitional


216. For Susie, a 7 percent increase in income results in a 12 percent increase in the quantity demanded

of pizza. For Susie, the income elasticity of demand for pizza is a. negative, and pizza is an normal good. b. negative, and pizza is a inferior good. c. positive, and pizza is an inferior good. d. positive, and pizza is a normal good.

ANS: D DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand MSC: Applicative

217. For which of the following goods is the income elasticity of demand likely highest?

a. water b. diamonds c. hamburgers d. housing

ANS: B DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand MSC: Interpretive

218. Last year, Joan bought 50 pounds of hamburger when her household’s income was $40,000. This

year, her household income was only $30,000 and Joan bought 60 pounds of hamburger. All else constant, Joan's income elasticity of demand for hamburger is a. positive, so Joan considers hamburger to be an inferior good. b. positive, so Joan considers hamburger to be a normal good and a necessity. c. negative, so Joan considers hamburger to be an inferior good. d. negative, so Joan considers hamburger to be a normal good but not a necessity.


219. If an increase in income results in a decrease in the quantity demanded of a good, then for that good,

the a. cross-price elasticity of demand is negative. b. price elasticity of demand is elastic. c. income elasticity of demand is negative. d. income elasticity of demand is positive.



220. To determine whether a good is considered normal or inferior, one could examine the value of the

a. income elasticity of demand for that good. b. price elasticity of demand for that good. c. price elasticity of supply for that good. d. cross-price elasticity of demand for that good.

ANS: A DIF: 1 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand MSC: Interpretive

221. You and your college roommate eat three packages of Ramen noodles each week. After graduation

last month, both of you were hired at several times your college income. You still enjoy Ramen noodles very much and buy even more, but your roommate plans to buy fewer Ramen noodles in favor of foods she prefers more. When looking at income elasticity of demand for Ramen noodles, a. yours would be negative and your roommate's would be positive. b. yours would be positive and your roommate's would be negative. c. yours would be zero and your roommate's would approach infinity. d. yours would approach infinity and your roommate's would be zero.


222. You and your college roommate eat three packages of Ramen noodles each week. After graduation

last month, both of you were hired at several times your college income. Your roommate still enjoys Ramen noodles very much and buys even more, but you plan to buy fewer Ramen noodles in favor of foods you prefer more. When looking at income elasticity of demand for Ramen noodles, a. yours would be negative and your roommate's would be positive. b. yours would be positive and your roommate's would be negative. c. yours would be zero and your roommate's would approach infinity. d. yours would approach infinity and your roommate's would be zero.

ANS: A DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand MSC: Interpretive

223. Suppose good X has a negative income elasticity of demand. This implies that good X is

a. a normal good. b. a necessity. c. an inferior good. d. a luxury.



224. For which of the following types of goods would the income elasticity of demand be positive and

relatively large? a. all inferior goods b. all normal goods c. goods for which there are many complements d. luxuries


225. Assume that a 4 percent increase in income results in a 2 percent increase in the quantity demanded

of a good. The income elasticity of demand for the good is a. negative and therefore the good is an inferior good. b. negative and therefore the good is a normal good. c. positive and therefore the good is a normal good. d. positive and therefore the good is an inferior good.

ANS: C DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand MSC: Applicative

226. Assume that a 4 percent decrease in income results in a 6 percent increase in the quantity demanded

of a good. The income elasticity of demand for the good is a. negative and therefore the good is an inferior good. b. negative and therefore the good is a normal good. c. positive and therefore the good is an inferior good. d. positive and therefore the good is a normal good.

ANS: A DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand MSC: Applicative

227. Muriel's income elasticity of demand for football tickets is 1.50. All else equal, this means that if her

income increases by 20 percent, she will buy a. 150 percent more football tickets. b. 50 percent more football tickets. c. 30 percent more football tickets. d. 20 percent more football tickets.



228. When her income increased from $10,000 to $20,000, Heather's consumption of macaroni decreased

from 10 pounds to 5 pounds and her consumption of soy-burgers increased from 2 pounds to 4 pounds. We can conclude that for Heather, a. macaroni and soy-burgers are both normal goods with income elasticities equal to 1. b. macaroni is an inferior good and soy-burgers are normal goods; both have income

elasticities of 1. c. macaroni is an inferior good with an income elasticity of -1 and soy-burgers are normal

goods with an income elasticity of 1. d. macaroni and soy-burgers are both inferior goods with income elasticities equal to -1.


229. Which of the following should be held constant when calculating an income elasticity of demand?

a. the quantity of the good demanded b. the price of the good c. income d. All of the above should be held constant.


230. Which of the following should be held constant when calculating an income elasticity of demand?

a. the price of the good b. prices of related goods c. tastes d. All of the above should be held constant.


Table 5-5

Income

Quantity of Good X Purchased

Quantity of Good Y Purchased

$30,000 2 20

$40,000 6 10

231. Refer to Table 5-5. Using the midpoint method, what is the income elasticity of demand for good

X? a. -3.5 b. -0.29 c. 0.29 d. 3.5

ANS: D DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand MSC: Applicative


232. Refer to Table 5-5. Using the midpoint method, the income elasticity of demand for good Y is

a. 2.33, and good Y is a normal good. b. -2.33, and good Y is an inferior good. c. -0.43, and good Y is a normal good. d. -0.43, and good Y is an inferior good.

ANS: B DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand MSC: Applicative

233. Food and clothing tend to have

a. small income elasticities because consumers, regardless of their incomes, choose to buy relatively constant quantities of these goods.

b. small income elasticities because consumers buy proportionately more of both goods at higher income levels than they buy at low income levels.

c. large income elasticities because they are necessities. d. large income elasticities because they are relatively inexpensive.

ANS: A DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand MSC: Applicative

234. The income elasticity of demand for caviar tends to be

a. high because caviar is relatively expensive. b. low because caviar is packaged in small containers. c. high because buyers generally feel that they can do without it. d. low because it is almost always in short supply.


235. Suppose goods A and B are substitutes for each other. We would expect the cross-price elasticity

between these two goods to be a. positive. b. negative. c. either positive or negative. It depends whether A and B are normal goods or inferior

goods. d. either positive or negative. It depends whether the current price level is on the elastic or

inelastic portion of the demand curve.

ANS: A DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Cross-price elasticity of demand MSC: Interpretive


236. Last month, sellers of good Y took in $100 in total revenue on sales of 50 units of good Y. This

month sellers of good Y raised their price and took in $120 in total revenue on sales of 40 units of good Y. At the same time, the price of good X stayed the same, but sales of good X increased from 20 units to 40 units. We can conclude that goods X and Y are a. substitutes, and have a cross-price elasticity of 0.60. b. complements, and have a cross-price elasticity of 0.60. c. substitutes, and have a cross-price elasticity of 1.67. d. complements, and have a cross-price elasticity of 1.67.

ANS: C DIF: 3 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Cross-price elasticity of demand MSC: Applicative

237. Which of the following could be the cross-price elasticity of demand for two goods that are

complements? a. -1.3 b. 0 c. 0.2 d. 1.4


238. Suppose that when the price of good X falls from $10 to $8, the quantity demanded of good Y rises

from 20 units to 25 units. Using the midpoint method, a. the cross-price elasticity of demand is -1.0, and X and Y are complements. b. the cross-price elasticity of demand is -1.0, and X and Y are substitutes. c. the cross-price elasticity of demand is 1.0, and X and Y are complements. d. the cross-price elasticity of demand is 1.0, and X and Y are substitutes.

ANS: A DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Cross-price elasticity of demand MSC: Applicative

239. Which of the following expressions represents a cross-price elasticity of demand?

a. percentage change in quantity demanded of bread divided by percentage change in quantity supplied of bread

b. percentage change in quantity demanded of bread divided by percentage change in price of butter

c. percentage change in price of bread divided by percentage change in quantity demanded of bread

d. percentage change in quantity demanded of bread divided by percentage change in income

ANS: B DIF: 1 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Cross-price elasticity of demand MSC: Definitional


240. Cross-price elasticity of demand measures how

a. the price of one good changes in response to a change in the price of another good. b. the quantity demanded of one good changes in response to a change in the quantity

demanded of another good. c. the quantity demanded of one good changes in response to a change in the price of another

good. d. strongly normal or inferior a good is.

ANS: C DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Cross-price elasticity of demand MSC: Definitional

241. The cross-price elasticity of demand can tell us whether goods are

a. normal or inferior. b. elastic or inelastic. c. luxuries or necessities. d. complements or substitutes.

ANS: D DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Cross-price elasticity of demand MSC: Interpretive

242. If the cross-price elasticity of two goods is negative, then those two goods are

a. necessities. b. complements. c. normal goods. d. inferior goods.

ANS: B DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Cross-price elasticity of demand MSC: Interpretive

243. If the cross-price elasticity of two goods is positive, then those two goods are

a. substitutes. b. complements. c. normal goods. d. inferior goods.


244. Suppose the cross-price elasticity of demand between hot dogs and mustard is -2.00. This implies

that a 20 percent increase in the price of hot dogs will cause the quantity of mustard purchased to a. fall by 200 percent. b. fall by 40 percent. c. rise by 200 percent. d. rise by 40 percent.

ANS: B DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Cross-price elasticity of demand MSC: Applicative


245. If two goods are substitutes, their cross-price elasticity will be

a. positive. b. negative. c. zero. d. equal to the difference between the income elasticities of demand for the two goods.


246. If two goods are complements, their cross-price elasticity will be

a. positive. b. negative. c. zero. d. equal to the difference between the income elasticities of demand for the two goods.


247. If, for two goods, the cross-price elasticity of demand is 1.25, then

a. the two goods are luxuries. b. the two goods are substitutes. c. one of the goods is normal and the other good is inferior. d. the demand for one of the goods conforms to the law of demand, but the demand for the

other good violates the law of demand.


Sec02 - Elasticity and Its Application - The Elasticity of Supply

MULTIPLE CHOICE

1. A key determinant of the price elasticity of supply is the

a. time horizon. b. income of consumers. c. price elasticity of demand. d. importance of the good in a consumer’s budget.

ANS: A DIF: 1 REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply MSC: Interpretive


2. A key determinant of the price elasticity of supply is the

a. number of close substitutes for the good in question. b. definition of the market. c. length of the time period. d. extent to which buyers alter their quantities demanded in response to changes in their

incomes.

ANS: C DIF: 2 REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply MSC: Interpretive

3. A key determinant of the price elasticity of supply is

a. the ability of sellers to change the price of the good they produce. b. the ability of sellers to change the amount of the good they produce. c. how responsive buyers are to changes in sellers' prices. d. the slope of the demand curve.

ANS: B DIF: 2 REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply MSC: Interpretive

4. The supply of a good will be more elastic, the

a. more the good is considered a luxury. b. broader is the definition of the market for the good. c. larger the number of close substitutes for the good. d. longer the time period being considered.

ANS: D DIF: 2 REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply MSC: Interpretive

5. The price elasticity of supply measures how much

a. the quantity supplied responds to changes in input prices. b. the quantity supplied responds to changes in the price of the good. c. the price of the good responds to changes in supply. d. sellers respond to changes in technology.

ANS: B DIF: 1 REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply MSC: Definitional

6. The price elasticity of supply measures how responsive

a. sellers are to a change in price. b. sellers are to a change in buyers' income. c. buyers are to a change in production costs. d. equilibrium price is to a change in supply.

ANS: A DIF: 1 REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply MSC: Definitional


7. The price elasticity of supply measures how responsive

a. equilibrium price is to equilibrium quantity. b. sellers are to a change in buyers' income. c. sellers are to a change in price. d. consumers are to the number of substitutes.

ANS: C DIF: 1 REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply MSC: Definitional

8. If the quantity supplied responds only slightly to changes in price, then

a. supply is said to be elastic. b. supply is said to be inelastic. c. an increase in price will not shift the supply curve very much. d. even a large decrease in demand will change the equilibrium price only slightly.


9. Frequently, in the short run, the quantity supplied of a good is

a. impossible, or nearly impossible, to measure. b. not very responsive to price changes. c. determined by the quantity demanded of the good. d. determined by psychological forces and other non-economic forces.


10. In the long run, the quantity supplied of most goods

a. will increase in almost all cases, regardless of what happens to price. b. cannot respond at all to a change in price. c. can respond to a change in price, but the change is almost always inconsequential. d. can respond substantially to a change in price.


11. When a supply curve is relatively flat,

a. sellers are not at all responsive to a change in price. b. the equilibrium price changes substantially when the demand for the good changes. c. the supply is relatively elastic. d. the supply is relatively inelastic.



12. When a supply curve is relatively flat,

a. sellers are not very responsive to changes in price. b. the supply is relatively inelastic. c. the supply is relatively elastic. d. Both a and b are correct.


13. If the price elasticity of supply for wheat is less than 1, then the supply of wheat is

a. inelastic. b. elastic. c. unit elastic. d. quite sensitive to changes in income.


14. A linear, upward-sloping supply curve has

a. a constant slope and a changing elasticity of supply. b. a changing slope and a constant elasticity of supply. c. both a constant slope and a constant elasticity of supply. d. both a changing slope and a changing elasticity of supply.


15. As price elasticity of supply increases, the supply curve

a. becomes flatter. b. becomes steeper. c. becomes downward sloping. d. shifts to the right.


16. A key determinant of the price elasticity of supply is the time period under consideration. Which of

the following statements best explains this fact? a. Supply curves are steeper over long periods of time than over short periods of time. b. Buyers of goods tend to be more responsive to price changes over long periods of time

than over short periods of time. c. The number of firms in a market tends to be more variable over long periods of time than

over short periods of time. d. Firms prefer to change their prices in the short run rather than in the long run.



17. Some firms eventually experience problems with their capacity to produce output as their output

levels increase. For these firms, a. market power is substantial. b. supply is perfectly inelastic. c. supply is more elastic at low levels of output and less elastic at high levels of output. d. supply is less elastic at low levels of output and more elastic at high levels of output.

ANS: C DIF: 3 REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply MSC: Applicative

18. Generally, a firm is more willing and able to increase quantity supplied in response to a price change

when a. the relevant time period is short rather than long. b. the relevant time period is long rather than short. c. supply is inelastic. d. the firm is experiencing capacity problems.

ANS: B DIF: 2 REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply MSC: Applicative

19. If two supply curves pass through the same point and one is steep and the other is flat, which of the

following statements is correct? a. The flatter supply curve represents a supply that is inelastic relative to the supply

represented by the steeper supply curve. b. The steeper supply curve represents a supply that is inelastic relative to the supply

represented by the flatter supply curve. c. Given two prices with which to calculate the price elasticity of supply, that elasticity is the

same for both curves. d. A decrease in demand will increase total revenue if the steeper supply curve is relevant,

while a decrease in demand will decrease total revenue if the flatter supply cure is relevant.



Scenario 5-1 The supply of aged cheddar cheese is inelastic and the supply of bread is elastic. Both goods are considered to be normal goods by a majority of consumers. Suppose that a large income tax increase decreases the demand for both goods by 10%.

20. Refer to Scenario 5-1. The price elasticity of supply for aged cheddar cheese could be

a. -1. b. 0. c. 0.5. d. 1.5.


21. Refer to Scenario 5-1. The price elasticity of supply for bread could be

a. -1. b. 0. c. 0.5. d. 1.5.


22. If a 25% change in price results in a 40% change in quantity supplied, then the price elasticity of

supply is a. 0.63, and supply is elastic. b. 0.63, and supply is inelastic. c. 1.60, and supply is elastic. d. 1.60, and supply is inelastic.

ANS: C DIF: 2 REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply MSC: Analytical

23. If a 40% change in price results in a 25% change in quantity supplied, then the price elasticity of

supply is a. 0.63, and supply is elastic. b. 0.63, and supply is inelastic. c. 1.60, and supply is elastic. d. 1.60, and supply is inelastic.

ANS: B DIF: 2 REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply MSC: Analytical


24. If the price elasticity of supply is 1.5, and a price increase led to a 1.8% increase in quantity

supplied, then the price increase amounted to a. 0.67%. b. 0.83%. c. 1.20%. d. 2.70%.


25. If the price elasticity of supply is 1.5, and a price increase led to a 3% increase in quantity supplied,

then the price increase amounted to a. 0.2%. b. 0.5%. c. 2%. d. 4.5%.


26. If a 30 percent change in price causes a 15 percent change in quantity supplied, then the price

elasticity of supply is a. 0.5, and supply is elastic. b. 0.5, and supply is inelastic. c. 2, and supply is inelastic. d. 2, and supply is elastic.

ANS: B DIF: 3 REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply MSC: Applicative

27. Suppose the price elasticity of supply for how-to books is 0.3 in the short run and 1.2 in the long

run. If an increase in the demand for how-to books causes the price of how-to books to increase by 36%, then the quantity supplied of how-to books will increase by a. 0.8% in the short run and 3.3% in the long run. b. 1.2% in the short run and 0.3% in the long run. c. 10.8% in the short run and 43.2% in the long run. d. 120% in the short run and 30% in the long run.




run. If an increase in the demand for how-to books causes the price of how-to books to increase by 20%, then the quantity supplied of how-to books will increase by a. 0.67% in the short run and 0.17% in the long run. b. 3% in the short run and 1.2% in the long run. c. 6% in the short run and 24% in the long run. d. 66.7% in the short run and 16.7% in the long run.



run. If an increase in the demand for how-to books causes the price of how-to books to increase by 5%, then the quantity supplied of how-to books will increase by a. 1.5% in the short run and 6% in the long run. b. 6% in the short run and 1.5% in the long run. c. 16.7% in the short run and 4.2% in the long run. d. 4.2% in the short run and 16.7% in the long run.

ANS: A DIF: 2 REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply MSC: Analytical

Figure 5-12 The following figure shows the supply curve for a particular good.

Supply

2

16

5

40

9

100

14

220

20

430

Quantity

Price

30. Refer to Figure 5-12. Over which range is the supply curve in this figure the most elastic?

a. Between $16 and $40 b. Between $40 and $100 c. Between $100 and $220 d. Between $220 and $430

ANS: A DIF: 2 REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply MSC: Applicative


31. Refer to Figure 5-12. Over which range is the supply curve in this figure the least elastic?

a. Between $16 and $40 b. Between $40 and $100 c. Between $100 and $220 d. Between $220 and $430

ANS: D DIF: 2 REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply MSC: Applicative

32. Refer to Figure 5-12. Using the midpoint method, what is the price elasticity of supply between

$16 and $40? a. 0.125 b. 0.86 c. 1.0 d. 2.5

ANS: C DIF: 2 REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of supply MSC: Analytical


$100 and $220? a. 0.58 b. 0.67 c. 1.00 d. 1.73

ANS: A DIF: 2 REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of supply MSC: Analytical


Figure 5-13

A

B

C

D

G

H

Supply

25 50 75 100 125 150 175 200 225 250 275 300 325 350 375 400 425 450 475 500 525 550 575 Quantity

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

Price

34. Refer to Figure 5-13. Along which of these segments of the supply curve is supply least elastic?

a. between G and H b. between C and D c. between A and C d. between A and B


35. Refer to Figure 5-13. Along which of these segments of the supply curve is supply most elastic?

a. between A and B b. between C and D c. between D and H d. between G and H




points A and B? a. 2.33 b. 1.0 c. 0.43 d. 0.1



points B and C? a. 1.67 b. 1.19 c. 0.84 d. 0.61

ANS: B DIF: 2 REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of supply MSC: Analytical


points D and G? a. 1.89 b. 1.26 c. 0.53 d. 0.34



Figure 5-14

Supply

5 10 15 20 25 30 35 40 Quantity

1

2

3

4

5

6

7

8

9

10Price

39. Refer to Figure 5-14. Using the midpoint method, what is the price elasticity of supply between $4

and $6? a. 0.75 b. 1.00 c. 1.20 d. 1.25

ANS: D DIF: 3 REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of supply MSC: Analytical

40. Refer to Figure 5-14. Using the midpoint method, what is the price elasticity of supply between $6

and $8? a. 0.86 b. 1.00 c. 1.17 d. 1.25



Figure 5-15

Supply

A

B

C

25 50 75 100 125 150 175 200 225 250 275 300 Quantity

2

4

6

8

Price


point A and point B? a. 0.58 b. 0.71 c. 1.06 d. 1.4



point B and point C? a. 1.44 b. 1.29 c. 0.96 d. 0.78



43. Refer to Figure 5-15. If, holding the supply curve fixed, there were an increase in demand that

caused the equilibrium price to increase from $6 to $8, then sellers’ total revenue would a. increase. b. decrease. c. remain unchanged. d. The effect on total revenue cannot be determined from the given information.

ANS: A DIF: 2 REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of supply MSC: Applicative

Table 5-6

Supply Curve A Supply Curve B Supply Curve C

Price $1.00 $2.00 $1.00 $3.00 $2.00 $5.00

Quantity Supplied

500

600

600

900

400

700

44. Refer to Table 5-6. Which of the three supply curves represents the least elastic supply?

a. supply curve A b. supply curve B c. supply curve C d. There is no difference in the elasticity of the three supply curves.

ANS: A DIF: 2 REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of supply MSC: Applicative

45. Refer to Table 5-6. Which of the three supply curves represents the most elastic supply?

a. supply curve A b. supply curve B c. supply curve C d. There is no difference in the elasticity of the three supply curves.

ANS: C DIF: 2 REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of supply MSC: Applicative

46. Refer to Table 5-6. Along which of the supply curves does quantity supplied move proportionately

more than the price? a. along supply curve B only b. along supply curves B and C c. along all three supply curves d. Quantity supplied moves proportionately more than the price along none of the three

supply curves.

ANS: D DIF: 3 REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of supply MSC: Applicative


47. At a price of $1.00, a local coffee shop is willing to supply 100 cinnamon rolls per day. At a price

of $1.20, the coffee shop would be willing to supply 150 cinnamon rolls per day. Using the midpoint method, the price elasticity of supply is a. 0.45 b. 0.90 c. 1.11 d. 2.20


48. At a price of $1.20, a local coffee shop is willing to supply 100 cinnamon rolls per day. At a price

of $1.40, the coffee shop would be willing to supply 150 cinnamon rolls per day. Using the midpoint method, the price elasticity of supply is a. 0.15 b. 0.375 c. 2.5 d. 2.60


49. On a certain supply curve, one point is (quantity supplied = 200, price = $4.00) and another point is

(quantity supplied = 250, price = $4.50). Using the midpoint method, the price elasticity of supply is about a. 0.22. b. 0.53. c. 1.00. d. 1.89.


50. On a certain supply curve, one point is (quantity supplied = 200, price = $2.00) and another point is

(quantity supplied = 250, price = $2.50). Using the midpoint method, the price elasticity of supply is about a. 0.2. b. 0.5. c. 1.0. d. 2.5.



51. Holding all other factors constant and using the midpoint method, if a pencil manufacturer increases

production by 20 percent when the market price of pencils increases from $0.50 to $0.60, then supply is a. inelastic, since the price elasticity of supply is equal to .91. b. inelastic, since the price elasticity of supply is equal to 1.1. c. elastic, since the price elasticity of supply is equal to 0.91. d. elastic, since the price elasticity of supply is equal to 1.1.


52. Holding all other factors constant and using the midpoint method, if a pencil manufacturer increases

production from 40 to 50 boxes when price increases by 20 percent, then supply is a. inelastic, since the price elasticity of supply is equal to .91. b. inelastic, since the price elasticity of supply is equal to 1.1. c. elastic, since the price elasticity of supply is equal to 0.91. d. elastic, since the price elasticity of supply is equal to 1.1.


53. Suppose that an increase in the price of carrots from $1.30 to $1.80 per pound increases the quantity

of carrots that carrot farmers produce from 1.2 million pounds to 1.6 million pounds. Using the midpoint method, what is the approximate value of the price elasticity of supply? a. 0.67 b. 0.89 c. 1.00 d. 1.13


54. An increase in the price of pure chocolate morsels from $2.25 to $2.45 causes suppliers of chocolate

morsels to increase their quantity supplied from 125 bags per minute to 145 bags per minute. Supply is a. elastic, and the price elasticity of supply is 1.74. b. elastic, and the price elasticity of supply is 0.57. c. inelastic, and the price elasticity of supply is 1.74. d. inelastic, and the price elasticity of supply is 0.57.



55. A bakery would be willing to supply 500 bagels per day at a price of $0.50 each. At a price of $0.80,

the bakery would be willing to supply 1,100 bagels. Using the midpoint method, the price elasticity of supply for bagels is a. 0.62. b. 0.77. c. 1.24. d. 1.63.


56. A bakery would be willing to supply 500 bagels per day at a price of $0.50 each. At a price of $0.80,

the bakery would be willing to supply 1,100 bagels. Using the midpoint method, the price elasticity of supply for bagels is a. 0.62, and supply is elastic. b. 0.62, and supply is inelastic. c. 1.63, and supply is elastic. d. 1.63, and supply is inelastic.


57. In January the price of widgets was $2.00, and Wendy's Widgets produced 80 widgets. In February

the price of widgets was $2.50, and Wendy's Widgets produced 110 widgets. In March the price of widgets was $3.00, and Wendy's Widgets produced 140 widgets. The price elasticity of supply of Wendy's Widgets was a. 0.70 when the price increased from $2.00 to $2.50 and 0.76 when the price increased from

$2.50 to $3.00. b. 0.88 when the price increased from $2.00 to $2.50 and 1.08 when the price increased from

$2.50 to $3.00. c. 1.42 when the price increased from $2.00 to $2.50 and 1.32 when the price increased from

$2.50 to $3.00. d. 1.50 when the price increased from $2.00 to $2.50 and 1.18 when the price increased from

$2.50 to $3.00.



58. In January the price of widgets was $1.00, and Wendy's Widgets produced 80 widgets. In February

the price of widgets was $1.50, and Wendy's Widgets produced 110 widgets. In March the price of widgets was $2.00, and Wendy's Widgets produced 140 widgets. The price elasticity of supply of Wendy's Widgets was a. 0.79 when the price increased from $1.00 to $1.50 and 0.84 when the price increased from

$1.50 to $2.00. b. 1.27 when the price increased from $1.00 to $1.50 and 1.19 when the price increased from

$1.50 to $2.00. c. 0.79 when the price increased from $1.00 to $1.50 and 1.19 when the price increased from

$1.50 to $2.00. d. 1.27 when the price increased from $1.00 to $1.50 and 0.84 when the price increased from

$1.50 to $2.00.


59. Which of the following statements is valid when the market supply curve is vertical?

a. Market quantity supplied does not change when the price changes. b. Supply is perfectly elastic. c. An increase in market demand will increase the equilibrium quantity. d. An increase in market demand will not increase the equilibrium price.

ANS: A DIF: 2 REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Perfectly inelastic supply MSC: Interpretive

60. Which of the following statements is not valid when the market supply curve is vertical?

a. Market quantity supplied does not change when the price changes. b. Supply is perfectly inelastic. c. An increase in market demand will increase the equilibrium quantity. d. An increase in market demand will increase the equilibrium price.

ANS: C DIF: 2 REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Perfectly inelastic supply MSC: Interpretive


61. Which of the following statements is valid when supply is perfectly elastic at a price of $4?

a. The elasticity of supply approaches infinity. b. The supply curve is vertical. c. At a price below $4, quantity supplied is infinite. d. At a price above $4, quantity supplied is zero.

ANS: A DIF: 3 REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Perfectly elastic supply KEY: Interpretive

62. Which of the following statements is not valid when supply is perfectly elastic?

a. The elasticity of supply approaches infinity. b. The supply curve is horizontal. c. Very small changes in price lead to large changes in quantity supplied. d. The time period under consideration is more likely a short period rather than a long period.

ANS: D DIF: 3 REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Perfectly elastic supply MSC: Interpretive

63. If the quantity supplied is the same regardless of price, then supply is

a. elastic. b. perfectly elastic. c. perfectly inelastic. d. inelastic.

ANS: C DIF: 2 REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Perfectly inelastic supply MSC: Definitional

64. When supply is perfectly elastic, the value of the price elasticity of supply is

a. 0. b. 1. c. greater than 0 and less than 1. d. infinity.

ANS: D DIF: 2 REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Perfectly elastic supply MSC: Interpretive

65. Which of the following would be true as the price elasticity of supply approaches infinity?

a. Very small changes in price lead to very large changes in quantity supplied. b. Very large changes in price lead to very small changes in quantity supplied. c. Very small changes in price lead to no change in quantity supplied. d. Very large changes in price lead to no change in quantity supplied.

ANS: A DIF: 2 REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Perfectly elastic supply MSC: Interpretive


Figure 5-16

Q1

P1

S1

S2

S3

Quantity

Price

66. Refer to Figure 5-16. Which supply curve represents perfectly inelastic supply?

a. S1 b. S2 c. S3 d. None of the supply curves is perfectly inelastic.

ANS: A DIF: 1 REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Perfectly inelastic supply MSC: Interpretive

67. Refer to Figure 5-16. Which supply curve is most likely relevant over a very long period of time?

a. S1 b. S2 c. S3 d. All of the above are equally likely to be relevant over a very long period of time.

ANS: C DIF: 2 REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Perfectly elastic supply MSC: Interpretive

68. If sellers do not adjust their quantities supplied at all in response to a change in price,

a. advances in technology must be prevalent. b. the time period under consideration must be very long. c. supply is perfectly elastic. d. supply is perfectly inelastic.

ANS: D DIF: 2 REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Perfectly inelastic supply MSC: Interpretive


69. If the price elasticity of supply is zero, then

a. supply is more elastic than it is in any other case. b. the supply curve is horizontal. c. the quantity supplied is the same, regardless of price. d. a change in demand will cause a relatively small change in the equilibrium price.

ANS: C DIF: 2 REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Perfectly inelastic supply MSC: Interpretive

70. If the price elasticity of supply for a good is equal to infinity, then

a. the supply curve is vertical. b. the supply curve is horizontal. c. the supply curve also has a slope equal to infinity. d. the quantity supplied is constant regardless of the price.

ANS: B DIF: 2 REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Perfectly elastic supply MSC: Interpretive


71. Which of the following is an illustration of the market for original paintings by deceased artist

Vincent Van Gogh? a.

S

D

Quantity

Price

b.

S

D

Quantity

Price

c.

S

D

Quantity

Price

d.

SD

Quantity

Price

a. A b. B c. C d. D

ANS: C DIF: 2 REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Perfectly inelastic supply MSC: Applicative

Sec03 - Elasticity and Its Application - Three Applications of Supply, Demand, and


Elasticity

MULTIPLE CHOICE

Scenario 5-2 The supply of aged cheddar cheese is inelastic, and the supply of bread is elastic. Both goods are considered to be normal goods by a majority of consumers. Suppose that a large income tax increase decreases the demand for both goods by 10%.

1. Refer to Scenario 5-2. The equilibrium price will

a. increase in the aged cheddar cheese market and increase in the bread market. b. increase in the aged cheddar cheese market and decrease in the bread market. c. decrease in the aged cheddar cheese market and increase in the bread market. d. decrease in the aged cheddar cheese market and decrease in the bread market.

ANS: D DIF: 2 REF: 5-3 NAT: Analytic LOC: Elasticity TOP: Equilibrium | Normal goods | Price elasticity of supply MSC: Applicative

2. Refer to Scenario 5-2. The equilibrium quantity will

a. increase in the aged cheddar cheese market and increase in the bread market. b. increase in the aged cheddar cheese market and decrease in the bread market. c. decrease in the aged cheddar cheese market and increase in the bread market. d. decrease in the aged cheddar cheese market and decrease in the bread market.

ANS: D DIF: 2 REF: 5-3 NAT: Analytic LOC: Elasticity TOP: Equilibrium | Normal goods | Price elasticity of supply MSC: Applicative

3. Refer to Scenario 5-2. The change in equilibrium price will be

a. greater in the aged cheddar cheese market than in the bread market. b. greater in the bread market than in the aged cheddar cheese market. c. the same in the aged cheddar cheese and bread markets. d. may be greater in either the aged cheddar cheese market or the bread market.

ANS: A DIF: 3 REF: 5-3 NAT: Analytic LOC: Elasticity TOP: Equilibrium | Price elasticity of supply MSC: Analytical

4. Refer to Scenario 5-2. The change in equilibrium quantity will be

a. greater in the aged cheddar cheese market than in the bread market. b. greater in the bread market than in the aged cheddar cheese market. c. the same in the aged cheddar cheese and bread markets. d. may be greater in either the aged cheddar cheese market or the bread market.

ANS: B DIF: 3 REF: 5-3 NAT: Analytic LOC: Elasticity TOP: Equilibrium | Price elasticity of supply MSC: Analytical


5. Refer to Scenario 5-2. Total consumer spending on aged cheddar cheese will

a. increase, and total consumer spending on bread will increase. b. increase, and total consumer spending on bread will decrease. c. decrease, and total consumer spending on bread will increase. d. decrease, and total consumer spending on bread will decrease.

ANS: D DIF: 3 REF: 5-3 NAT: Analytic LOC: Elasticity TOP: Equilibrium | Total consumer spending MSC: Analytical

Scenario 5-3 Milk 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.

6. Refer to Scenario 5-3. The equilibrium price will

a. increase in the milk market and increase in the beef market. 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 the milk market and decrease in the beef market.

ANS: A DIF: 2 REF: 5-3 NAT: Analytic LOC: Elasticity TOP: Equilibrium | Productivity | Price elasticity of demand MSC: Applicative

7. Refer to Scenario 5-3. The equilibrium quantity will

a. increase in the milk market and increase in the beef market. 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 the milk market and decrease in the beef market.

ANS: D DIF: 2 REF: 5-3 NAT: Analytic LOC: Elasticity TOP: Equilibrium | Productivity | Price elasticity of demand MSC: Applicative

8. Refer to Scenario 5-3. The change in equilibrium price will be

a. 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. may be greater in either the milk market or the beef market.

ANS: A DIF: 3 REF: 5-3 NAT: Analytic LOC: Elasticity TOP: Equilibrium | Price elasticity of demand MSC: Analytical


9. Refer to Scenario 5-3. The change in equilibrium quantity will be

a. 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. may be greater in either the milk market or the beef market.

ANS: B DIF: 3 REF: 5-3 NAT: Analytic LOC: Elasticity TOP: Equilibrium | Price elasticity of demand MSC: Analytical

10. Refer to Scenario 5-3. Total consumer spending on milk will

a. increase, and total consumer spending on beef will increase. b. increase, and total consumer spending on beef will decrease. c. decrease, and total consumer spending on beef will increase. d. decrease, and total consumer spending on beef will decrease.

ANS: B DIF: 3 REF: 5-3 NAT: Analytic LOC: Elasticity TOP: Equilibrium | Price elasticity of demand | Total consumer spending MSC: Analytical

11. The discovery of a new hybrid wheat would increase the supply of wheat. As a result, wheat farmers

would realize an increase in total revenue if a. the supply of wheat is elastic. b. the supply of wheat is inelastic. c. the demand for wheat is inelastic. d. the demand for wheat is elastic.

ANS: D DIF: 2 REF: 5-3 NAT: Analytic LOC: Elasticity TOP: Supply | Price elasticity of demand | Total revenue MSC: Applicative

12. Because the demand for wheat tends to be inelastic, the development of a new, more productive

hybrid wheat would tend to a. increase the total revenue of wheat farmers. b. decrease the total revenue of wheat farmers. c. decrease the demand for wheat. d. decrease the supply of wheat.

ANS: B DIF: 2 REF: 5-3 NAT: Analytic LOC: Elasticity TOP: Supply | Price elasticity of demand | Total revenue MSC: Applicative


13. Knowing that the demand for wheat is inelastic, if all farmers voluntarily did not plant wheat on 10

percent of their land, then a. consumers of wheat would buy more wheat. b. wheat farmers would suffer a reduction in their total revenue. c. wheat farmers would experience an increase in their total revenue. d. the demand for wheat would decrease.

ANS: C DIF: 2 REF: 5-3 NAT: Analytic LOC: Elasticity TOP: Supply | Price elasticity of demand | Total revenue MSC: Applicative

14. If corn farmers know that the demand for corn is inelastic, and they want to increase their total

revenue, they should all a. plant more corn so that they would be able to sell more each year. b. increase spending on fertilizer in an attempt to produce more corn on the acres they farm. c. reduce the number of acres they plant in corn. d. contribute to a fund that promotes technological advances in corn production.

ANS: C DIF: 2 REF: 5-3 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand | Total revenue MSC: Applicative

15. There are fewer farmers in the United States today than 200 years ago because of

a. increases in farm technology. b. increased government regulations in farming. c. an elastic demand for food. d. environmental programs designed to reduce soil erosion.

ANS: A DIF: 2 REF: 5-3 NAT: Analytic LOC: Elasticity TOP: Technology | Inelastic demand MSC: Applicative

16. How did the farm population in the United States change between 1950 and 2008?

a. It dropped from 10 million to fewer than 3 million people. b. It dropped from 20 million to fewer than 5 million people. c. It dropped from 30 million to just over 6 million people. d. It increased from 10 million to almost 13 million people.

ANS: A DIF: 1 REF: 5-3 NAT: Analytic LOC: Elasticity TOP: Population MSC: Definitional

17. Between 1950 and 2008 there was a

a. 20 percent drop in the number of farmers, but farm output more than tripled. b. 30 percent drop in the number of farmers, but farm output more than tripled. c. 50 percent drop in the number of farmers, but farm output more than doubled. d. 70 percent drop in the number of farmers, but farm output more than doubled.

ANS: D DIF: 2 REF: 5-3 NAT: Analytic LOC: Elasticity TOP: Population | Output MSC: Definitional


18. An advance in farm technology that results in an increased market supply is

a. good for farmers because it raises prices for their products but bad for consumers because it raises prices consumers pay for food.

b. bad for farmers because total revenue will fall but good for consumers because prices for food will fall.

c. good for farmers because it raises prices for their products and also good for consumers because more output is available for consumption.

d. bad for farmers because total revenue will fall and bad for consumers because farmers will raise the price of food to increase their total revenue.

ANS: B DIF: 2 REF: 5-3 NAT: Analytic LOC: Elasticity TOP: Technology | Supply MSC: Applicative

19. Farm programs that pay farmers not to plant crops on all their land

a. hurt farmers by lowering their total revenue and hurt consumers by causing shortages of some food items.

b. help farmers by cutting costs, which helps consumers by lowering food prices. c. help farmers by increasing total revenue in the market but hurt consumers by raising

prices. d. help farmers directly since they receive government payments but have no real effects on

consumers.

ANS: C DIF: 2 REF: 5-3 NAT: Analytic LOC: Elasticity TOP: Total revenue MSC: Applicative

20. 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.

ANS: D DIF: 2 REF: 5-3 NAT: Analytic LOC: Elasticity TOP: OPEC MSC: Applicative

21. OPEC successfully raised the world price of oil in the 1970s and early 1980s, primarily due to

a. an inelastic demand for oil and a reduction in the amount of oil supplied. b. a reduction in the amount of oil supplied and a world-wide oil embargo. c. a world-wide oil embargo and an elastic demand for oil. d. a reduction in the amount of oil supplied and an elastic demand for oil.

ANS: A DIF: 2 REF: 5-3 NAT: Analytic LOC: Elasticity TOP: OPEC MSC: Applicative


22. In the market for oil in the short run, demand

a. and supply are both elastic. b. and supply are both inelastic. c. is elastic and supply is inelastic. d. is inelastic and supply is elastic.

ANS: B DIF: 2 REF: 5-3 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand | Price elasticity of supply MSC: Interpretive

23. A decrease in supply will cause the largest increase in price when

a. both supply and demand are inelastic. b. both supply and demand are elastic. c. demand is elastic and supply is inelastic. d. demand is inelastic and supply is elastic.

ANS: A DIF: 3 REF: 5-3 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand | Price elasticity of supply MSC: Analytical

24. A decrease in supply will cause the smallest increase in price when

a. both supply and demand are inelastic. b. demand is elastic and supply is inelastic. c. both supply and demand are elastic. d. demand is inelastic and supply is elastic.

ANS: C DIF: 3 REF: 5-3 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand | Price elasticity of supply MSC: Analytical

25. 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.

ANS: D DIF: 2 REF: 5-3 NAT: Analytic LOC: Elasticity TOP: Government | Price elasticity of demand MSC: Applicative


26. Which of the following statements helps to explain why government drug interdiction increases

drug-related crime? a. The direct impact is on buyers, not sellers. b. Successful drug interdiction policies reduce the demand for illegal drugs. c. Drug addicts will have an even greater need for quick cash to support their habits. d. In the short run, both equilibrium quantities and prices will fall in the markets for illegal

drugs.

ANS: C DIF: 2 REF: 5-3 NAT: Analytic LOC: Elasticity TOP: Government | Price elasticity of demand MSC: Applicative

27. Which of the following statements is not correct concerning government attempts to reduce the flow

of illegal drugs into the country? a. Drug interdiction raises prices and total revenue in the drug market. b. Drug interdiction can increase drug-related crime. c. Drug interdiction shifts the demand curve for drugs to the left. d. Drug interdiction shifts the supply curve of drugs to the left.

ANS: C DIF: 2 REF: 5-3 NAT: Analytic LOC: Elasticity TOP: Government | Demand | Supply MSC: Applicative

28. Given the market for illegal drugs, when the government is successful in reducing the flow of drugs

into the United States, a. supply decreases, demand is unaffected, and price increases. b. demand decreases, supply is unaffected, and price decreases. c. demand and supply both decrease, leaving price essentially unchanged. d. supply decreases, demand increases, and price increases substantially as a result.

ANS: A DIF: 2 REF: 5-3 NAT: Analytic LOC: Elasticity TOP: Government | Demand | Supply MSC: Applicative

29. If marijuana were legalized, it is likely that there would be an increase in the supply of marijuana.

Advocates of marijuana legalization argue that this would significantly reduce the amount of revenue going to the criminal organizations that currently supply marijuana. These advocates believe that the a. supply for marijuana is elastic. b. demand for marijuana is elastic. c. supply for marijuana is inelastic. d. demand for marijuana is inelastic.

ANS: D DIF: 2 REF: 5-3 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand | Total revenue MSC: Applicative


30. Under which of the following conditions would the interdiction of illegal drugs result in a decrease

in the quantity of drugs sold and in a decrease in total spending on illegal drugs by drug users? a. The interdiction has the effect of shifting the demand curve for illegal drugs to the right. b. The price elasticity of demand for illegal drugs is 1.3. c. The price elasticity of supply for illegal drugs is 0.8. d. As a result of the interdiction, the price of illegal drugs increases by 20 percent and the

quantity of illegal drugs sold decreases by 16 percent.

ANS: B DIF: 2 REF: 5-3 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand | Total revenue MSC: Applicative

Scenario 5-4 Suppose the government is concerned about firms in the United States importing illegal caviar. As a result, the government increases border patrols to catch illegal shipments. U.S. Customs agents perform DNA testing on the caviar to determine if it comes from endangered species of fish. If so, the government destroys the caviar.

31. Refer to Scenario 5-4. What would we expect to observe in the caviar market?

a. Equilibrium prices and quantities will increase. b. Equilibrium prices will increase by more if the demand for caviar is elastic than if demand

is inelastic. c. Total revenues to caviar firms will increase if the demand for caviar is inelastic. d. All of the above are correct.

ANS: C DIF: 2 REF: 5-3 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand | Total revenue MSC: Applicative

Chapter 1 Ten Principles of Economics - … · Chapter 1 Ten Principles of Economics ... people respond to incentives, outline the possible outcome for teachers if the K-12 school

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