Microeconomics Practice Exam 1

When economists say a good is scarce, they mean
a. there are only a limited number of consumers who would be interested in purchasing the good.
b. the human desire for the good exceeds the amount freely available from nature.
c. most people in poorer countries do not have enough of the good.
d. the production of the good has no opportunity cost for society.

When a good is scarce,
a. this indicates that producers are withholding output so they can raise the price of the good.
b. some method must be used to allocate the good among users.
c. a choice must be made about how to use the good.
d. both b and c are correct.
e. all of the above are correct.

Which of the following is most consistent with economizing behavior?
a. If you derive the same satisfaction from eating pizza and walking in the woods, it makes no difference which one of the two you choose.
b. Before voting, you should invest the time and energy to become fully informed on all of the issues and candidates.
c. It never makes sense to hire someone to do something for you that you could do yourself.
d. If you get the same satisfaction from a steak sandwich and a fish sandwich, you should purchase the one that costs the least.

Which of the following is true?
a. Changes in personal costs and benefits will exert a predictable impact on the choices of human decision makers.
b. Only direct monetary costs matter in making decisions.
c. If a good is provided free to an individual, its production will not consume valuable scarce resources.
d. Secondary effects are seldom of importance in economics.

Based on our discussion of incentives, if the government imposed a $500 tax on owners of red automobiles,
a. fewer red automobiles would be produced and sold.
b. more red automobiles would be produced and sold.
c. there would be no change in the number of red automobiles produced and sold.
d. red automobiles would cease to exist.

Which of the following is consistent with the idea that information is costly to acquire?
a. Most people do not know the names of their legislators in the U.S. Congress, but those same individuals are likely to know the names of all the cast members on a popular TV show.
b. In considering purchases, people are more likely to purchase a consumer ratings magazine that reviews new automobiles before buying a car, but are unlikely to purchase a consumer ratings magazine that reviews pens and pencils before buying a pen or pencil.
c. When shopping for something like a new calculator, people will generally not spend the time to do price comparisons at all of the stores in town that sell calculators.
d. All of the above are consistent with the economic way of thinking.

(I) People in low income countries should not be allowed to work at jobs that pay less than $5 an hour.
(II) Internet music swapping software reduces the number of new CDs purchased at full price.

a. I is a positive economic statement; II is a normative statement.
b. I is a normative economic statement; II is a positive statement.
c. Both I and II are positive statements.
d. Both I and II are normative economic statements.

"After every fall election, the weather starts to turn cold, therefore elections cause cold weather." This statement
a. confuses positive and normative analysis.
b. commits the fallacy of composition.
c. fails to recognize that association is not causation.
d. confuses macroeconomics with microeconomics.

Retired persons travel by bus and automobile more frequently than do business executives, who more commonly use air travel. An economic explanation for this would be that
a. business executives have more time to travel.
b. it is more important for retired persons to save time.
c. business executives value their time more highly.
d. retired persons have more money than do business executives.

(I) The cavemen had the same natural resources at their disposal as we have today. The difference between their standard of living and ours is due to the difference between the knowledge they could bring to bear on those resources and the knowledge used today.
(II) Because economic goods are the result of human ingenuity and action, the size of the economic pie is variable not fixed.

a. I is true; II is false.
b. I is false; II is true.
c. Both I and II are true.
d. Both I and II are false.

Stan is an accountant that values his time at $20 per hour. It would take Stan 2 hours to cut his lawn. A neighbor tell Stan that his son would cut the grass for $30. Other things constant, which is the cheapest option given the information above?
a. Stan should cut the lawn himself.
b. Stan should pay the neighbor to cut the lawn.
c. The costs of the two options are equal.
d. None of the above

If a motorist is stranded in front of a pay phone and has only dollar bills, and he ends up buying a quarter from a passerby for $1,
a. the passerby was made better off at the expense of the stranded motorist.
b. economic theory cannot explain why the stranded motorist bought the quarter for $1.
c. the stranded motorist valued the quarter more than he valued the dollar bill and made an economically sound decision; both people are better off.
d. the stranded motorist clearly doesn't understand that four quarters are worth $1.

Middlemen are individuals who
a. add to the buyer's expense without performing a useful function.
b. add to the seller's cost without performing a useful function.
c. provide services that reduce the cost of transactions and help achieve additional gains from trade.
d. act as a middle person between the top management of a business firm and the hourly employees who actually produce the goods and services.

When private ownership of a resource is clearly defined and enforced, the private owner
a. has little incentive to consider the wishes of others when deciding how to employ the resource.
b. has little incentive to use the resource wisely.
c. has a strong incentive to consume the resource during the period rather than conserving it for the future.
d. has a strong incentive to use the resource wisely.

Which of the following is true about entrepreneurship and creative destruction?
a. Creative destruction refers to the fall in the overall level of standard of living that accompanies entrepreneurship.
b. Creative destruction refers to the technologically outdated industries and materials that are released to better uses that accompany entrepreneurship.
c. Creative destruction refers to the complete uselessness of technologically outdated industries and materials that accompanies entrepreneurship.
d. Creative destruction refers to the situation in which there is no change in previous industries when entrepreneurship occurs.

According to the law of comparative advantage,
a. individuals and nations gain when they specialize in producing those goods they consume.
b. individuals and nations gain when they specialize in producing goods they can produce at a high opportunity cost and can exchange for other desired goods they can produce cheaply.
c. individuals and nations gain when they specialize in producing those items for which they are the low opportunity cost producers and exchange for other desired goods they can't produce as cheaply.
d. all of the above are true.

In what way can capitalism potentially promote cooperation among individuals?
a. Individuals have the incentive to completely ignore the preferences of others in capitalism and still earn an income.
b. In order to acquire the goods and services that an individual wants, the individual must generally provide something that is of benefit to others in order to earn an income.
c. Planners in capitalism can better allocate workers to the jobs that they are good at, which promotes cooperation.
d. Capitalism does not promote cooperation in any way.

Which of the following are explanations for why planned economies struggle in terms of accomplishing economic goals?
a. Planned economies do not necessarily give individuals the incentive to be productive.
b. It is impossible for one individual or one group of individuals to plan an entire economy.
c. Planners may choose plans according to their personal goals as opposed to what is best for the entire country.
d. All of the above are true.

Which of the following is least likely to increase the demand for new tires?
a. a decrease in the price of tires
b. a decrease in the price of cars
c. an increase in consumer income
d. an increase in the number of miles people drive per year

Assuming Chinese food and Thai food are substitutes, if Lucy Ho's Chinese restaurant reduces its prices,
a. the demand for food at Lucy Ho's will increase.
b. the quantity demanded for food at Lucy Ho's will increase.
c. the demand facing the nearby Bahn Thai restaurant will decrease.
d. both b and c will happen.

Assume that milk and cookies are complements. If the price of milk goes up, what happens to the demand for cookies?
a. demand for cookies increases
b. demand for cookies decreases
c. demand for cookies remains unchanged
d. the shift in demand will depend on the original price of cookies

Which of the following would most likely cause a reduction in the supply of Microsoft X-Box 360 video game consoles?
a. an increase in the price of Microsoft X-Box 360 video game consoles
b. an increase in the price of the computer chips used to make Microsoft X-Box 360 video game consoles
c. an increase in the price of Sony Playstation 3 video game consoles, a substitute for the X-Box
d. a reduction in the price of the game CDs used with X-Box 360 console

If the demand for a good increased, what would be the effect on the equilibrium price and quantity?
a. Price would increase, and quantity would decrease.
b. Price would decrease, and quantity would decrease.
c. Price would increase, and quantity would increase.
d. Price would decrease, and quantity would increase.

Which of the following will most likely result from a destruction of half of the Florida orange crop due to a hard freeze?
a. a decrease in the demand for oranges
b. an increase in the supply of oranges
c. an increase in the quantity of oranges bought and sold
d. an increase in the price of oranges

(I) The demand curve indicates the quantity of a good that consumers are willing to purchase at different prices.
(II) The supply curve indicates the quantity of a good that producers are willing to supply at different prices.

a. Both I and II are true.
b. I is true; II is false.
c. I is false; II is true.
d. Both I and II are false.

Which of the following would occur following the imposition of a price ceiling that sets the price of a good (for example, rental housing) below the market equilibrium?
a. an improvement in the quality of the good
b. an increase in the amount of the good available
c. a shortage of the good
d. a surplus of the good

A legally mandated minimum wage is an example of
a. the invisible hand principle.
b. a price floor.
c. a price ceiling.
d. a fringe benefit.

To an economist, the term "demand" means
a. the amount people are willing to purchase at various prices.
b. those wants or needs that are urgent or pressing.
c. wants that are economic in character rather than social, cultural, or spiritual.
d. the desire of persons for a good, regardless of whether they are willing to pay the price necessary to purchase it.

When a reduction in the price of a good allows a consumer to purchase more of all goods, this effect is called the
a. income effect.
b. substitution effect.
c. elasticity effect.
d. monetary effect.

If a 20 percent reduction in the price of airline tickets between Chicago and New York leads to a 50 percent increase in the quantity of tickets purchased, the price elasticity of demand for the tickets is
a. -0.20.
b. -0.40.
c. -0.50.
d. -2.50.

If a Pizza Hut restaurant near campus increases its prices by 10 percent, and as a result, its quantity sold decreases by 3 percent, the price elasticity of demand for the services offered by the restaurant must be
a. elastic.
b. of unitary elasticity.
c. inelastic.
d. equal to 1

The price elasticity of demand for gasoline measures the
a. responsiveness of gasoline producers to changes in the quality of gasoline.
b. responsiveness of customers to changes in the price of gasoline.
c. responsiveness of consumer preferences to changes in the quality of gasoline.
d. both a and c above.

The demand for which one of the following goods is most likely to be quite inelastic (which would you expect to be the most inelastic)?
a. fresh green peas
b. provolone cheese
c. General Electric television sets
d. legal services

If you compared the short-run demand and long-run demand for education at your college, you would almost certainly find that
a. a tuition increase would reduce enrollment more in the short run than in the long run.
b. a tuition increase would reduce enrollment more in the long run than in the short run.
c. a reduction in tuition would increase enrollment in the short run but not in the long run.
d. none of the above

The price elasticity of demand for a commodity is determined primarily by the
a. size of the consumer surplus.
b. attractiveness of the substitutes for the good.
c. incomes of consumers.
d. availability of complementary goods.