question
1. 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.
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.
answer
C
question
2. Economics deals primarily with the concept of
a.
scarcity.
b.
money.
c.
poverty.
d.
banking.
a.
scarcity.
b.
money.
c.
poverty.
d.
banking.
answer
A
question
3. 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.
a.
resources are scarce.
b.
goods and services are not scarce.
c.
incomes fluctuate with business cycles.
d.
people, by nature, tend to disagree.
answer
A
question
4. 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.
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.
answer
D
question
5. The principle that "people face tradeoffs" applies to
a.
individuals.
b.
families.
c.
societies.
d.
All of the above are correct.
a.
individuals.
b.
families.
c.
societies.
d.
All of the above are correct.
answer
D
question
6. 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.
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.
answer
C
question
7. 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.
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.
answer
A
question
8. 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.
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.
answer
D
question
9. 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.
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.
answer
C
question
10. 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.
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.
answer
B
question
11. 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.
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.
answer
A
question
12. 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.
a.
the wages given up to attend school.
b.
tuition, fees, and books.
c.
room and board.
d.
transportation, parking, and entertainment.
answer
A
question
13. 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.
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.
answer
B
question
14. A rational decision maker
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.
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.
answer
C
question
15. 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.
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.
answer
B
question
16. Economists are particularly adept at understanding that people respond to
a.
laws.
b.
incentives.
c.
punishments more than rewards.
d.
rewards more than punishments.
a.
laws.
b.
incentives.
c.
punishments more than rewards.
d.
rewards more than punishments.
answer
B
question
17. 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.
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.
answer
D
question
18. 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.
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.
answer
A
question
19. 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.
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.
answer
D
question
20. 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.
a.
reduce both competition and specialization.
b.
reduce competition and increase specialization.
c.
increase competition and reduce specialization.
d.
increase both competition and specialization.
answer
D
question
21. 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.
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.
answer
C
question
22. In a market economy, economic activity is guided by
a.
the government.
b.
corporations.
c.
central planners.
d.
self-interest and prices.
a.
the government.
b.
corporations.
c.
central planners.
d.
self-interest and prices.
answer
D
question
23. For markets to work well, there must be
a.
market power.
b.
a central planner.
c.
property rights.
d.
abundant, not scarce, resources.
a.
market power.
b.
a central planner.
c.
property rights.
d.
abundant, not scarce, resources.
answer
C
question
24. 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.
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.
answer
B
question
25. 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.
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.
answer
D
question
26. 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
a.
to promote efficiency
b.
to promote equality
c.
to enforce property rights
d.
to protect an industry from foreign competition
answer
D
question
27. 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.
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.
answer
A
question
28. 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.
a.
competition.
b.
market power.
c.
an externality.
d.
a lack of property rights.
answer
B
question
29. 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
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
answer
D
question
30. 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.
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.
answer
A
question
31. 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
a.
the quantity of money
b.
the level of unemployment
c.
productivity
d.
equality
answer
C
question
32. 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.
a.
enhance productivity.
b.
enhance individuals' market power.
c.
result in a rapidly-growing quantity of money.
d.
All of the above are correct.
answer
A
question
33. 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.
a.
the income effect.
b.
inflation.
c.
deflation.
d.
the substitution effect.
answer
B
question
34. 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.
a.
excessive government spending.
b.
excessive growth in the quantity of money.
c.
foreign competition.
d.
higher-than-normal levels of productivity.
answer
B
question
35. 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.
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.
answer
D
question
36. 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.
a.
lower unemployment and lower inflation.
b.
lower unemployment and higher inflation.
c.
higher unemployment and lower inflation.
d.
higher unemployment and higher inflation.
answer
B
question
37. 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.
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.
answer
D
question
38. 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.
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.
answer
B
question
39. 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
a.
production of goods and services.
b.
number of people employed.
c.
the interest rate.
d.
both a and b
answer
D
question
40. 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.
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.
answer
D
question
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.
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.
answer
D
question
2. 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.
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.
answer
C
question
3. 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.
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.
answer
C
question
4. 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.
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.
answer
A
question
5. 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.
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.
answer
D
question
6. 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.
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.
answer
B
question
7. In building economic models, economists often omit
a.
assumptions.
b.
theories.
c.
details.
d.
equations.
a.
assumptions.
b.
theories.
c.
details.
d.
equations.
answer
C
question
8. 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
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
answer
B
question
9. 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.
a.
a laboratory experiment.
b.
an economic model.
c.
a mathematical model.
d.
All of the above are correct.
answer
B
question
10. 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.
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.
answer
A
question
11. 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.
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.
answer
D
question
12. Another term for factors of production is
a.
inputs.
b.
output.
c.
goods.
d.
services.
a.
inputs.
b.
output.
c.
goods.
d.
services.
answer
A
question
13. 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.
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.
answer
D
question
14. 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
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
answer
C
question
15. 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.
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.
answer
C
question
16. 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
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
answer
D
question
17. In the circular-flow diagram,
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.
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.
answer
C
question
18. 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.
a.
society's preferences.
b.
the available production technology.
c.
a fair distribution of the output.
d.
the available demand for the output.
answer
B
question
19. 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.
a.
should produce.
b.
wants to produce.
c.
can produce.
d.
demands.
answer
C
question
20. 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.
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.
answer
B
question
21. 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.
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.
answer
A
question
22. 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.
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.
answer
C
question
23. 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.
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.
answer
A
question
24. 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.
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.
answer
A
question
25. 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.
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.
answer
C
question
26. 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.
a.
never have a bowed shape.
b.
rarely have a bowed shape.
c.
often have a bowed shape.
d.
always have a bowed shape.
answer
C
question
27. 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.
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.
answer
B
question
28. 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.
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.
answer
A
question
29. 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.
a.
scarcity.
b.
opportunity cost.
c.
economic growth.
d.
All of the above are correct.
answer
D
question
36. 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.
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.
answer
A
question
37. 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.
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.
answer
D
question
38. 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.
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.
answer
A
question
39. 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.
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.
answer
C
question
40. 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.
a.
descriptive.
b.
claims about how the world should be.
c.
claims about how the world is.
d.
made by economists speaking as scientists.
answer
B
question
41. 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.
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.
answer
A
question
42. 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.
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.
answer
B
question
43. 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.
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.
answer
A
question
44. 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.
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.
answer
C
question
45. 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.
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.
answer
C
question
46. 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.
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.
answer
B
question
47. 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.
a.
opinions and education.
b.
opinions and values.
c.
scientific judgments and education.
d.
scientific judgments and values.
answer
D
question
48. 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.
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.
answer
C
question
49. 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.
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.
answer
A
question
50. 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.
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.
answer
D
question
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.
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.
answer
B
question
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.
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.
answer
D
question
3. 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.
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.
answer
C
question
4. 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.
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.
answer
C
question
5. 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.
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.
answer
C
question
6. 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.
a. out-of-pocket cost.
b. comparative worth.
c. opportunity cost.
d. absolute value.
answer
C
question
7. 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.
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.
answer
B
question
8. 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.
a. opportunity costs.
b. payments to land, labor, and capital.
c. input requirements per unit of output.
d. locational and logistical circumstances.
answer
C
question
9. 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.
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.
answer
C
question
10. 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.
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.
answer
A
question
11. 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.
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.
answer
B
question
12. 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
a. output per hour
b. opportunity cost
c. efficiency
d. bargaining strength in international trade
answer
B
question
13. 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.
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.
answer
A
question
14. 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.
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.
answer
A
question
15. 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?
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?
answer
C
question
16. 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.
a. absolute advantage.
b. comparative advantage.
c. gains to some traders that exactly offset losses to other traders.
d. shrinkage of the economic pie.
answer
B
question
17. 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.
advantage, total production in the economy
a. falls.
b. stays the same.
c. rises.
d. may fall, rise, or stay the same.
answer
C
question
18. 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.
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.
answer
B
question
19. 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.
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.
answer
C
question
20. 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.
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.
answer
B
question
21. Economists generally support
a. trade restrictions.
b. government management of trade.
c. export subsidies.
d. free international trade.
a. trade restrictions.
b. government management of trade.
c. export subsidies.
d. free international trade.
answer
D
question
22. 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.
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.
answer
D
question
23. 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.
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.
answer
D
question
24. 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.
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.
answer
A
question
25. 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.
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.
answer
D
question
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. coalition.
b. economy.
c. market.
d. competition.
answer
C
question
2. 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.
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.
answer
C
question
3. 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.
determined by
a. a single buyer.
b. a single seller.
c. one buyer and one seller working together.
d. all buyers and all sellers.
answer
D
question
4. 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.
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.
answer
D
question
5. The highest form of competition is called
a. absolute competition.
b. cutthroat competition.
c. perfect competition.
d. market competition.
a. absolute competition.
b. cutthroat competition.
c. perfect competition.
d. market competition.
answer
C
question
6. 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.
a. market pawns.
b. monopolists.
c. price takers.
d. price makers.
answer
C
question
7. 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.
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.
answer
B
question
8. 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.
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.
answer
B
question
9. 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.
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.
answer
B
question
10. 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.
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.
answer
A
question
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.
a. quantity demanded and quantity supplied.
b. income and quantity demanded.
c. price and quantity demanded.
d. price and income.
answer
C
question
12. 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.
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.
answer
D
question
13. 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.
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.
answer
D
question
14. 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.
a. income varies.
b. price varies.
c. the number of buyers varies.
d. supply varies.
answer
B
question
15. 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.
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.
answer
A
question
16. 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.
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.
answer
C
question
17. 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.
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.
answer
D
question
18. 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
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
answer
B
question
19. 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
a. the prices of related goods
b. income
c. tastes
d. the prices of the inputs used to produce the good
answer
D
question
20. Each of the following is a determinant of demand except
a. tastes.
b. technology.
c. expectations.
d. the prices of related goods.
a. tastes.
b. technology.
c. expectations.
d. the prices of related goods.
answer
B
question
21. 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.
a. a normal good.
b. a regular good.
c. a luxury good.
d. an inferior good.
answer
A
question
22. 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.
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.
answer
A
question
23. 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.
a. a substitute good.
b. a complementary good.
c. a normal good.
d. an inferior good.
answer
D
question
24. 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.
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.
answer
A
question
25. 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.
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.
answer
D
question
26. 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.
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.
answer
B
question
27. 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.
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.
answer
B
question
28. 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.
a. demand will increase.
b. demand will decrease.
c. supply will increase.
d. supply will decrease.
answer
B
question
34. 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.
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.
answer
D
question
35. "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.
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.
answer
A
question
36. 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.
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.
answer
D
question
37. 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.
a. total supply.
b. market supply.
c. aggregate supply.
d. total output.
answer
B
question
38. 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.
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.
answer
D
question
39. 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.
a. an increase in supply.
b. a decrease in supply.
c. a decrease in quantity supplied.
d. an increase in quantity supplied.
answer
B
question
40. 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.
a. technology.
b. input prices.
c. expectations about future prices.
d. the price of the good or service that is being supplied.
answer
D
question
41. 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.
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.
answer
C
question
42. 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.
a. supply curve to the right.
b. supply curve to the left.
c. demand curve to the right.
d. demand curve to the left.
answer
A
question
43. 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.
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.
answer
B
question
44. 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.
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.
answer
B
question
51. The unique point at which the supply and demand curves intersect is called
a. market harmony.
b. coincidence.
c. equivalence.
d. equilibrium.
a. market harmony.
b. coincidence.
c. equivalence.
d. equilibrium.
answer
D
question
52. 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.
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.
answer
C
question
53. 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.
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.
answer
C
question
57. 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.
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.
answer
C
question
58. If the supply of 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.
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.
answer
B
question
59. 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.
a. price will increase.
b. price will decrease.
c. quantity may increase, decrease, or remain unchanged.
d. price may increase, decrease, or remain unchanged.
answer
D
question
60. 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.
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.
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.
answer
C
question
61. 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.
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.
What would we expect to happen in the market?
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.
answer
D
question
1. 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.
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.
answer
A
question
2. 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.
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.
answer
B
question
3. 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.
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.
answer
B
question
4. 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.
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.
answer
A
question
5. 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.
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.
answer
B
question
6. 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 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.
answer
A
question
7. 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.
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.
answer
A
question
8. 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.
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.
answer
C
question
9. 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.
a.
less than 1.
b.
greater than 1.
c.
equal to 1.
d.
equal to 0.
answer
C
question
10. 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.
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.
answer
A
question
11. 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.
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.
answer
D
question
12. 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.
a.
horizontal demand curve.
b.
vertical demand curve.
c.
linear, downward-sloping demand curve.
d.
All of the above are correct.
answer
C
question
13. 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.
a.
0.50.
b.
1.
c.
1.5.
d.
2.
answer
D
question
14. 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.
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.
answer
D
question
15. 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.
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.
answer
A
question
16. 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.
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.
answer
B
question
17. 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.
a.
vertical.
b.
horizontal.
c.
downward-sloping but relatively steep.
d.
downward-sloping but relatively flat.
answer
B
question
18. 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.
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.
answer
B
question
19. 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.
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.
answer
B
question
20. When demand is elastic, 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.
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.
answer
A
question
21. 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.
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.
answer
A
question
22. 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.
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.
answer
A
question
23. 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.
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.
answer
A
question
24. 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.
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.
answer
C
question
25. 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.
a.
normal or inferior.
b.
elastic or inelastic.
c.
luxuries or necessities.
d.
complements or substitutes.
answer
D
question
26. 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.
a.
time horizon.
b.
income of consumers.
c.
price elasticity of demand.
d.
importance of the good in a consumer's budget.
answer
A
question
27. 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.
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.
answer
D
question
28. 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.
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.
answer
B
question
29. 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.
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.
answer
B
question
30. 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.
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.
answer
C
question
31. 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.
a.
inelastic.
b.
elastic.
c.
unit elastic.
d.
quite sensitive to changes in income.
answer
A
question
32. As price elasticity of supply increases, the supply curve
a.
becomes flatter.
b.
becomes steeper.
c.
becomes downward sloping.
d.
shifts to the right.
a.
becomes flatter.
b.
becomes steeper.
c.
becomes downward sloping.
d.
shifts to the right.
answer
A
question
35. 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.
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.
answer
A
question
36. If the quantity supplied is the same regardless of price, then supply is
a.
elastic.
b.
perfectly elastic.
c.
perfectly inelastic.
d.
inelastic.
a.
elastic.
b.
perfectly elastic.
c.
perfectly inelastic.
d.
inelastic.
answer
C
question
37. 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.
a.
0.
b.
1.
c.
greater than 0 and less than 1.
d.
infinity.
answer
D
question
Scarcity
answer
the limited nature of society's resources
question
Economics
answer
The study of how society manages its scarce resources
question
Efficiency
answer
The property of society getting the most it can from its scarce resources
question
Equality
answer
The property of distributing economic prosperity uniformly among the members of society
question
Opportunity cost
answer
Whatever must be given up to obtain some item
question
Rational people
answer
People who systematically and purposefully do the best they can to achieve their objectives given the available opportunities
question
Marginal change
answer
A small incremental adjustment to a plan of action
question
Incentive
answer
something that induces a person to act
question
Trade
answer
Allows each person to specialize in the activities she does best
question
Market economy
answer
An economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services
question
Property rights
answer
The ability of an individual to own and exercises control over scarce resources
question
Market failure
answer
A situation in which a market left on its own fails to allocate resources efficiently
question
Externality
answer
The impact of one person's actions on the well-being of a bystander
question
Market power
answer
The ability of a single economic actor (or small group of actors) to have a substantial influence on market prices
question
Productivity
answer
The quantity of goods and services produced from each unit of labor input
question
Inflation
answer
An increase in the overall level of prices in the economy
question
Business cycle
answer
Fluctuations in economic activity, such as employment and production
question
Circular-flow diagram
answer
A visual model of the economy that shows how dollars flow through markets among households and firms
question
Production possibilities frontier
answer
A graph that shows the combination of output that the economy can possibly produce given the available factors of production and the available production technology
question
Microeconomics
answer
The study of how households and firms make decisions and how they interact in markets
question
Macroeconomics
answer
The study of economy-wide phenomena, including inflation, unemployment, and economic growth
question
Positive statement
answer
Claims that attempt to describe the world as it is
question
Normative statements
answer
Claims that attempt to prescribe how the world should be
question
absolute advantage
answer
the ability to produce a good using fewer inputs than another producer
question
oppurtunity cost
answer
whatever must be given up to obatin some item
question
comparative advantage
answer
the ability to produce a good at a lower oppurtunity cost than another producer
question
imports
answer
good produced
question
market
answer
a group of buyers and sellers of a particular good or service
question
competitive market
answer
a market in which there are many buyers and many sellers so that each has anegligible impact on the market price
question
quantity demanded
answer
the amount of a good that buyers are willing and able to purchase
question
law of demand
answer
the claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises
question
demand schedule
answer
a table that shows the relationship between the price of a good and the quantity demanded, holding constant everything else that influences how much of the good consumers want to buy
question
demand curve
answer
a graph of the relatinoship between the price of a good and the quantity demanded along a line
question
market demand
answer
the sum of all the individual demands for a particular good or service
question
increase in deman
answer
any change that increases the quantity demanded at every price shifts the demand curve to the right and is called and increase in demand
question
key variables that SHIFT the demand curve
answer
income, price of realted goods, tastes, expectations, number of buyers,
question
normal good
answer
a good for which ,otbe , an increase in income leads to an increase in demand
question
inferior good
answer
a good fwotbe, an increase in income leads to a decrease in demand
question
subsitutes
answer
two goods for which an increas in the price of one leads to an increase in the demand for the other
question
complements
answer
two goods for which an increase in the price of one leads to a decrease in the demand for the other
question
quantity supplied
answer
the amount of a good that sellers are willing and able to sell
question
law of supply
answer
the claim fwotbe the quanity sup[plied of a good rises when the price of the good rises
question
supply schedule
answer
a table that shows the relationship b/w the price of a good and the quantity supplied
question
supply curve
answer
a graph of the relationship b/w the price of a good and the quantity supplied
question
equlibrium
answer
a situation in which the market price has reached the level at which quantity supplied equals quantity demanded
question
equilibrium price
answer
the price that balances quantity supplied and quantity demanded
question
equilibrium quantity
answer
the quantity supplied and the quantity demanded at the equilibrium price
question
surplus
answer
a situation in which quantity supplied is greater than quantity demanded
question
shortage
answer
siw quanity demanded is greater than quantity supplied
question
law of supply and demand
answer
the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance
question
3 steps for analyzing changes in equilibrum
answer
1 decided whether the event shifts the supply or demand curve (or both)
2 decide in which direction the curve shifts
3 use the supply and demand diagram to see how the shift changes the equilibrium price and quantity
2 decide in which direction the curve shifts
3 use the supply and demand diagram to see how the shift changes the equilibrium price and quantity
question
elastiticity
answer
a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants
question
price elasticity of demand
answer
a measure of how much the quantity demanded of a good responds o a change in the price of that good
question
general things that affect price elasticity of demand
answer
1 availability of close substitutes (goods with close subsituttes tend to have more elastic demand)
2necessitites versus luxeries (N=inelastic)
3defintion of market (food vs icecream)
4Time horizon (more time general = more elastic)
2necessitites versus luxeries (N=inelastic)
3defintion of market (food vs icecream)
4Time horizon (more time general = more elastic)
question
How to Compute the Price Elasticity of Demand
answer
PEOD = % change in quanity demanded / % change in price
question
midpoint method
answer
using the change as the average ex 5 instaed of 4 or 6
question
midpoint method formula for PEOD
answer
PEOD = [(Q2 - Q1)/(Q2 + Q1)/2] / [(P2-P1)/(P2+P1)/2
question
Inelastic demand is when PEOD is
answer
less then 1
question
elastic demand is when PEOD is
answer
more then 1
question
unit elasticity for demand is when PEOD is
answer
1
question
total revenue
answer
the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold
question
When demand is inelastic P and TR do what
answer
move in same direction
question
when demand is elastic P and TR move
answer
in oposite directions
question
if demand is unit elastic P and TR do what
answer
TR remains constant when P changes
question
Slope
answer
Rise over run
question
For a LINEAR demand curve points with a Low P and high S demand curve is
answer
inelastic
question
For a LINEAR demand curve points with a high P and low S the demand curve is
answer
elastic
question
income elasticity of demand
answer
a measure of how much the quantity demanded of a good respounds to a change in consumers income, computed as the percentage change in quanity demanded divided by the percentage change in income
question
Income Elasticity of demand formula
answer
IEOD = % chagne in quantity demanded / % change in income
question
Cross-price elasticity of demand
answer
a measure of how much the quantity demanded of one good responds to a change in the price of another good
question
Cross-price elasticity of demand formula
answer
CPEOD = % change in quantity demanded of good 1 / % change in the price of good 2
question
price elasticity of supply
answer
a measure of how much the quantity supplied of a good responds to a change in the price of that good
question
Price elasticity of supply formula
answer
PEOS= % chagne in quantity supplied / % change in price
question
whether total revenue rises or falls depends on the____
answer
elasticity of demand
question
when the demand curve is inelastic a decrease in p cause tr to
answer
fall
question
two roles of econonomists
answer
scientists and policy advisers
question
price ceiling
answer
a legal max on the price at which a good can be sold
question
price floor
answer
a legal min on the price at which a good can be sold
question
for a price ceiling to be not binding
answer
the curent price is below the ceiling
question
for a price celing to be binding
answer
the current price is above the price ceiling
question
generally a binding price ceiling means
answer
a shortage of good arises
question
both price floors and price ceilings are an attmept to
answer
maintain prices at other then equilibrium levels
question
tax incidence refers to
answer
how the burden of a tax is distributed among the various people who make up the economy
question
taxes on sellers affect the demand curve and can use what 3 steps
answer
same a supply and demand steps
1 affects supply or demand
2 shifts left or right
3find new equilibrium
1 affects supply or demand
2 shifts left or right
3find new equilibrium
question
taxes _____ market activity
answer
discourage
question
who shares the burden of taxes
answer
buyers and sellers
question
for a tax on sellers the buyers and sellers do what
answer
buyers pay more sellers receive less
question
the tax burden falls on what side based on elasticity
answer
the side that is less elastic
question
the economy is governed by what two kinds of laws
answer
the law of supply and demand
and the laws enacted by governments
and the laws enacted by governments
question
what are two ways governments affect the economy
answer
price controls and taxes
question
deadweight loss
answer
fall in total surplus that results from a market distortion (i.e. tax)
question
marginal tax rate
answer
tax on the last dollar of earnings
question
underground economy
answer
"under-the-table" work
question
Laffer curve
answer
how tax size affects revenue (graph)
question
supply side economics
answer
under Reagan and Laffer, cut in tax rates intended to encourage people to increase quantity of labor they supplied
question
inelastic supply
answer
harder for firms to leave the market when tax reduces price to seller. So the tax only reduces quantity a little and the deadweight loss is small
question
elastic supply
answer
easier for firms to leave the market when tax reduces price to seller. The greater the quantity falls below the surplus, maximizing quantity, the greater the deadweight loss
question
inelastic demand
answer
harder for consumers to leave the market when the tax raises the price to the buyer. So the tax only reduces quantity a little and the deadweight loss is small
question
elastic demand
answer
easier for buyers to leave the market when the tax increase price to buyer. The more the quantity falls below the surplus, maximizing quantity, the greater the deadweight loss.
question
scarcity
answer
the limited nature of society's resources
question
economics
answer
the study of how society manages its scarce resources
question
efficiency
answer
the property of society getting the most it can from its scarce resources
question
equality
answer
the property of distributing economic prosperity uniformly among the members of society
question
opportunity cost
answer
whatever must be given up to obtain some item
question
rational people
answer
people who systematically and purposefully do the best they can to achieve their objectives
question
marginal change
answer
a small incremental adjustment to a plan of action
question
incentive
answer
something that induces a person to act
question
market economy
answer
an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services
question
property rights
answer
the ability of an individual to own and exercise control over scarce resources
question
market failure
answer
a situation in which a market left on its own fails to allocate resources efficiently
question
externality
answer
the impact of one person's actions on the well being of a bystander
question
market power
answer
the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices
question
productivity
answer
the quantity of goods and services produced from each unit of labor input
question
inflation
answer
an increase in the overall level of prices in the economy
question
business cycle
answer
fluctuations in economic activity, such as employment and production
question
Ten Principles of Economics
answer
How People Make Decisions
1: People Face Trade-offs
2: The Cost of Something Is What You Give Up to Get It
3: Rational People Think at the Margin
4: People Respond to Incentives
How People Interact
5: Trade Can Make Everyone Better Off
6: Markets Are Usually a Good Way to Organize Economic Activity 7: Governments Can Sometimes Improve Market Outcomes
How the Economy as a Whole Works
8: Country's Standard of Living Depends on Its Ability to Produce Goods and Services
9: Prices Rise When the Government Prints Too Much Money
10: Society Faces a Short-Run Trade-off between Inflation and Unemployment
1: People Face Trade-offs
2: The Cost of Something Is What You Give Up to Get It
3: Rational People Think at the Margin
4: People Respond to Incentives
How People Interact
5: Trade Can Make Everyone Better Off
6: Markets Are Usually a Good Way to Organize Economic Activity 7: Governments Can Sometimes Improve Market Outcomes
How the Economy as a Whole Works
8: Country's Standard of Living Depends on Its Ability to Produce Goods and Services
9: Prices Rise When the Government Prints Too Much Money
10: Society Faces a Short-Run Trade-off between Inflation and Unemployment
question
circular-flow
answer
diagram a visual model of the economy that shows how dollars flow through markets among households and firms
question
production possibilities frontier
answer
a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology
question
microeconomics
answer
the study of how households and firms make decisions and how they interact in markets
question
macroeconomics
answer
the study of economywide phenomena, including inflation, unemployment, and economic growth
question
positive statements
answer
claims that attempt to describe the world as it is
question
normative statements
answer
claims that attempt to prescribe how the world should be
question
market
answer
a group of buyers and sellers of a particular good or service
question
competitive market
answer
a market in which there are many buyers and many sellers so that each has a negligible impact on the market price
question
quantity demanded
answer
the amount of a good that buyers are willing and able to purchase
question
law of demand
answer
the claim that, other things equal, the quantity demanded of a good falls when the price of the good rises
question
demand schedule
answer
a table that shows the relationship between the price of a good and the quantity demanded
question
demand curve
answer
a graph of the relationship between the price of a good and the quantity demanded
question
normal good
answer
a good for which, other things equal, an increase in income leads to an increase in demand
question
inferior good
answer
a good for which, other things equal, an increase in income leads to a decrease in demand
question
substitutes
answer
two goods for which an increase in the price of one leads to an increase in the demand for the other
question
complements
answer
two goods for which an increase in the price of one leads to a decrease in the demand for the other
question
quantity supplied
answer
the amount of a good that sellers are willing and able to sell
question
law of supply
answer
the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises
question
supply schedule
answer
a table that shows the relationship between the price of a good and the quantity supplied
question
supply curve
answer
a graph of the relationship between the price of a good and the quantity supplied
question
equilibrium
answer
a situation in which the market price has reached the level at which quantity supplied equals quantity demanded
question
equilibrium price
answer
the price that balances quantity supplied and quantity demanded
question
equilibrium quantity
answer
the quantity supplied and the quantity demanded at the equilibrium price
question
surplus
answer
a situation in which quantity supplied is greater than quantity demanded
question
shortage
answer
a situation in which quantity demanded is greater than quantity supplied
question
law of supply and demand
answer
the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance
question
Absolute advantage
answer
the ability to produce a good using fewer inputs than another producer
question
opportunity cost
answer
whatever must be given up to obtain some item
question
Comparative advantage
answer
the ability to produce a good at a lower opp cost than another producer
question
Imports
answer
goods produced abroad and sold domestically
question
Exports
answer
Goods produced domestically and sold abroad
question
monopoly
answer
a firm that is the sole seller of a product without close substitutes
question
natural monopoly
answer
a monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms
question
price discrimination
answer
the business practice of selling the same good at different prices to different customers
question
monopolistic competition
answer
a market structure in which many firms sell products that are similar but not identical
question
oligopoly
answer
a market structure in which only a few sellers offer similar or identical products
question
game theory
answer
the study of how people behave in strategic situations
question
collusion
answer
an agreement among firms in a market about quantities to produce or prices to charge
question
cartel
answer
a group of firms acting in unison
question
Nash equilibrium
answer
a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen
question
prisoners' dilemma
answer
a particular "game" between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial
question
dominant strategy
answer
a strategy that is best for a player in a game regardless of the strategies chosen by the other players
question
factors of production
answer
the inputs used to produce goods and services
question
production function
answer
the relationship between the quantity of inputs used to make a good and the quantity of output of that good
question
marginal product of labor
answer
the increase in the amount of output from an additional unit of labor
question
diminishing marginal product
answer
the property whereby the marginal product of an input declines as the quantity of the input increases
question
value of the marginal product
answer
the marginal product of an input times the price of the output
question
capital
answer
the equipment and structures used to produce goods and services
question
microeconomics
answer
the study of how households and firms make decisions and how they interact in markets
question
macroeconomics
answer
the study of economy-wide phenomena, including inflation, unemployment, and economic growth
question
gross domestic product (GDP)
answer
the market value of all final goods and services produced within a country in a given period of time
question
consumption
answer
spending by households on goods and services, with the exception of purchases of new housing
question
investment
answer
spending on capital equipment, inventories, and structures, including household purchases of new housing
question
government purchases
answer
spending on goods and services by local, state, and federal governments
question
net exports
answer
spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports)
question
nominal GDP
answer
the production of goods and services valued at current prices
question
real GDP
answer
the production of goods and services valued at constant prices
question
GDP deflator
answer
a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100
question
consumer price index (CPI)
answer
a measure of the overall cost of the goods and services bought by a typical consumer
question
inflation rate
answer
the percentage change in the price index from the preceding period
question
producer price index
answer
a measure of the cost of a basket of goods and services bought by firms
question
indexation
answer
the automatic correction by law or contract of a dollar amount for the effects of inflation
question
nominal interest rate
answer
the interest rate as usually reported without a correction for the effects of inflation
question
real interest rate
answer
the interest rate corrected for the effects of inflation
question
financial system
answer
the group of institutions in the economy that help to match one person's saving with another person's investment
question
financial markets
answer
financial institutions through which savers can directly provide funds to borrowers
question
bond
answer
a certificate of indebtedness
question
stock
answer
a claim to partial ownership in a firm
question
financial intermediaries
answer
financial institutions through which savers can indirectly provide funds to borrowers
question
mutual fund
answer
an institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds
question
national saving (saving)
answer
the total income in the economy that remains after paying for consumption and government purchases
question
private saving
answer
the income that households have left after paying for taxes and consumption
question
public saving
answer
the tax revenue that the government has left after paying for its spending
question
budget surplus
answer
an excess of tax revenue over government spending
question
budget deficit
answer
a shortfall of tax revenue from government spending
question
market for loanable funds
answer
the market in which those who want to save supply funds and those who want to borrow to invest demand funds
question
crowding out
answer
a decrease in investment that results from government borrowing
question
labor force
answer
the total number of workers, including both the employed and the unemployed
question
unemployment rate
answer
the percentage of the labor force that is unemployed
question
labor-force -participation rate
answer
the percentage of the adult population that is in the labor force
question
natural rate of unemployment
answer
the normal rate of unemployment around which the unemployment rate fluctuates
question
cyclical unemployment
answer
the deviation of unemployment from its natural rate
question
discouraged workers
answer
individuals who would like to work but have given up looking for a job
question
frictional unemployment
answer
unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills
question
structural unemployment
answer
unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one
question
job search
answer
the process by which workers find appropriate jobs given their tastes and skills
question
unemployment insurance
answer
a government program that partially protects workers' incomes when they become unemployed
question
union
answer
a worker association that bargains with employers over wages, benefits, and working conditions
question
collective bargaining
answer
the process by which unions and firms agree on the terms of employment
question
strike
answer
the organized withdrawal of labor from a firm by a union
question
efficiency wages
answer
above-equilibrium wages paid by firms to increase worker productivity
question
cross-price elasticity of demand
answer
a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second good
question
elasticity
answer
a measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants
question
income elasticity of demand
answer
a measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income
question
price elasticity of demand
answer
a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price
question
price elasticity of supply
answer
a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price
question
total revenue
answer
the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold
question
price ceiling
answer
a legal maximum on the price at which a good can be sold
question
price floor
answer
a legal minimum on the price at which a good can be sold
question
tax incidence
answer
the manner in which the burden of a tax is shared among participants in a market
question
consumer surplus
answer
the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it
question
cost
answer
the value of everything a seller must give up to produce a good
question
efficiency
answer
the property of a resource allocation of maximizing the total surplus received by all members of society
question
equality
answer
the property of distributing economic prosperity uniformly among the members of society
question
producer surplus
answer
the amount a seller is paid for a good minus the seller's cost of providing it
question
welfare economics
answer
the study of how the allocation of resources affects economic well-being
question
willingness to pay
answer
the maximum amount that a buyer will pay for a good
question
tariff
answer
a tax on goods produced abroad and sold domestically
question
world price
answer
the price of a good that prevails in the world market for that good
question
accounting profit
answer
total revenue minus total explicit cost
question
average fixed cost
answer
fixed cost divided by the quantity of output
question
average total cost
answer
total cost divided by the quantity of output
question
average variable cost
answer
variable cost divided by the quantity of output
question
constant returns to scale
answer
the property whereby long-run average total cost stays the same as the quantity of output changes
question
diminishing marginal product
answer
the property whereby the marginal product of an input declines as the quantity of the input increases
question
diseconomies of scale
answer
the property whereby long-run average total cost rises as the quantity of output increases
question
economic profit
answer
total revenue minus total cost, including both explicit and implicit costs
question
economies of scale
answer
the property whereby long-run average total cost falls as the quantity of output increases
question
efficient scale
answer
the quantity of output that minimizes average total cost
question
explicit costs
answer
input costs that require an outlay of money by the firm
question
fixed costs
answer
costs that do not vary with the quantity of output produced
question
implicit costs
answer
input costs that do not require an outlay of money by the firm
question
marginal cost
answer
the increase in total cost that arises from an extra unit of production
question
marginal product
answer
the increase in output that arises from an additional unit of input
question
production function
answer
the relationship between quantity of inputs used to make a good and the quantity of output of that good
question
profit
answer
total revenue minus total cost
question
total cost
answer
the market value of the inputs a firm uses in production
question
total revenue
answer
the amount a firm receives for the sale of its output
question
variable costs
answer
costs that vary with the quantity of output produced
question
competitive market
answer
a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker
question
average revenue
answer
total revenue divided by the quantity sold
question
marginal revenue
answer
the change in total revenue from an additional unit sold
question
sunk cost
answer
a cost that has already been committed and cannot be recovered
question
True or False: A marginal change is a small incremental adjustment to an existing plan of action.
answer
true
question
True or False: Because resources are scarce, a society cannot give all individuals the standard of living to which each aspires.
answer
true
question
True or False: Choosing not to attend a concert so that you can study for your exam is an example of a tradeoff.
answer
true
question
In economics, the cost of something is
answer
what you give up to get it.
question
True or False: Trade with any nation can be mutually beneficial.
answer
true
question
The term market failure refers to
answer
a situation in which the market on its own fails to allocate resources efficiently.
question
For markets to work well, there must be
answer
property rights.
question
Making rational decisions "at the margin" means that people
answer
compare the marginal costs and marginal benefits of each decision.
question
To promote good economic outcomes, policymakers should strive to enact policies that
answer
enhance individuals' market power.
question
US citizens have better nutrition, better healthcare, and a longer life expectancy than citizens of Ghana. Which of the following conclusions can be drawn from this statement?
answer
Productivity in the US is higher than productivity in Ghana.
Average income in the US is higher than the average income in Ghana.
The US has a higher standard of living than Ghana.
All of the above are correct.
Average income in the US is higher than the average income in Ghana.
The US has a higher standard of living than Ghana.
All of the above are correct.
question
True or False: Equality means distributing society's resources in the most efficient manner.
answer
false
question
True or False: Productivity is defined as the quantity of goods and services produced from each unit of labor input.
answer
true
question
True or False: Economics is the study of how evenly goods and services are distributed within society.
answer
false
question
True or False: Scarcity means that there is less of a good or resource available than people wish to have.
answer
true
question
Trade between countries tends to
answer
increase both competition and specialization.
question
The adage, "There is no such thing as a free lunch," is used to illustrate the principle that
answer
people face tradeoffs.
question
To increase living standards, public policy should
answer
ensure that workers are well educated and have the necessary tools and technology.
question
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
answer
efficiency and equality.
question
True or False: Efficiency means everyone in the economy should receive an equal share of the goods and services produced.
answer
false
question
True or False: To say people respond to incentives means that people may alter their decisions when the costs and benefits of an action change.
answer
true
question
True or False: Economists study how people make decisions
answer
true
question
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?
answer
both
question
A tradeoff exists between a clean environment and a higher level of income in that
answer
laws that reduce pollution raise costs of production and reduce incomes.
question
True or False: A rational decisionmaker takes an action if and only if the marginal cost exceeds the marginal benefit.
answer
false
question
A direct or positive relationship exists between a country's
answer
productivity and its standard of living.
question
Trade makes costs
answer
lower and raises the variety of goods and services available
question
Trade
answer
allows specialization, which reduces costs.
question
True or False: Market failure refers to a situation in which the market does not allocate resources efficiently.
answer
true
question
True or False: Using income tax revenue to fund the welfare system illustrates the conflict between efficiency and equality
answer
true
question
Economists use the word equality to describe a situation in which
answer
each member of society has the same income
question
Economics deals primarily with the concept of
answer
scarcity.
question
Chapter 2
answer
...
question
True or False: Economists devise theories, collect data, and then analyze these data in an attempt to verify or refute their theories.
answer
true
question
True or False: Economic growth causes a production possibilities frontier to shift outward.
answer
true
question
True or False: Economists usually have to make do with whatever data the world happens to give them.
answer
true
question
True or false: The trade-off between the production of one good and the production of another good can change over time because of technological advances.
answer
true
question
Normative conclusions
answer
involve value judgments.
question
In the simple circular-flow diagram, households
answer
own the factors of production.
question
Which of the following statements is correct about the roles of economists?
answer
In trying to explain the world, economists are scientists; in trying to improve the world, they are policy advisers.
question
Economic models
answer
can be useful, even if they are not particularly realistic
question
Which of the following is an example of a normative, as opposed to positive, statement?
answer
Reducing tax rates on the wealthy would benefit the nation.
question
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
answer
economists have not yet convinced the general public that the policies are undesirable.
question
True or False: Points inside the production possibilities frontier represent feasible levels of production.
answer
true
question
True or False: If a major union goes on strike, then the country would be operating inside its production possibilities frontier.
answer
true
question
True or False: A circular-flow diagram is a visual model of the economy.
answer
true
question
True or False: Historical episodes allow economists to illustrate and evaluate current economic theories.
answer
true
question
When an economy is operating at a point on its production possibilities frontier, then
answer
there is no way to produce more of one good without producing less of the other.
question
With respect to how economists study the economy, which of the following statements is most accurate?
answer
Economists devise theories, collect data, and analyze the data to test the theories.
question
Production possibilities frontiers are usually bowed outward. This is because
answer
resources are specialized; that is, some are better at producing particular goods rather than other goods.
question
Sometimes economists disagree because their scientific judgments differ. Which of the following instances best reflects this source of disagreement?
answer
One economist believes increases in the minimum wage increase unemployment; another economist believes increases in the minimum wage do not increase unemployment.
question
Macroeconomics is the study of
answer
economy-wide phenomena.
question
True or False: Microeconomics and macroeconomics are closely intertwined.
answer
true
question
The Federal Reserve
answer
sets the nation's monetary policy.
question
Which of the following is another example of a normative, as opposed to positive, statement?
answer
Universal health care would be good for U.S. citizens.
question
A statement describing how the world is
answer
is a positive statement.
question
True or False: Points inside the production possibilities frontier represent inefficient levels of production.
answer
true
question
The scientific method is
answer
the dispassionate development and testing of theories about how the world works.
question
Microeconomics is the study of
answer
how individual households and firms make decisions.
question
True or False: 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
answer
true
question
The production possibilities frontier provides an illustration of the principle that
answer
people face trade-offs
question
Economists sometimes give conflicting advice because
answer
economists have different values and scientific judgment.
question
Chapter 3
answer
...
question
True or False: Trade allows all countries to achieve greater prosperity
answer
true
question
True or False: Goods produced abroad and sold domestically are called exports and goods produced domestically and sold abroad are called imports.
answer
false
question
True or False: Production possibilities frontiers cannot be used to illustrate tradeoffs.
answer
false
question
True or False: Differences in opportunity cost allow for gains from trade.
answer
true
question
Adam Smith asserted that a person should never attempt to make at home
answer
what it will cost him more to make than to buy.
question
If Shawn can produce donuts at a lower opportunity cost than Sue, then
answer
Shawn has a comparative advantage in the production of donuts.
question
Trade can make everybody better off because it
answer
allows people to specialize according to comparative advantage.
question
Economists generally support
answer
free international trade.
question
An economy's production possibilities frontier is also its consumption possibilities frontier
answer
when the economy is self-sufficient.
question
Suppose there are only two people in the world. Each person's production possibilities frontier also represents his or her consumption possibilities when
answer
they choose not to trade with one another.
question
True or False: The production possibilities frontier shows the trade-offs that the producer faces but does not identify the choice the producer will make
answer
true
question
True or False: If a country has a lower opportunity cost than its potential trading partner, the country should decide to be self-sufficient.
answer
false
question
True or False: 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.
answer
true
question
True or False: If a person chooses self-sufficiency, then she can only consume what she produces.
answer
true
question
When describing the opportunity cost of two producers, economists use the term
answer
comparative advantage
question
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
answer
rely upon one another for the goods and services we consume.
question
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,
answer
an absolute advantage in the production of that good.
question
The most obvious benefit of specialization and trade is that they allow us to
answer
consume more goods than we otherwise would be able to consume.
question
When each person specializes in producing the good in which he or she has a comparative advantage, total production in the economy
answer
rises
question
True or False: Trade allows a country to consume outside its production possibilities frontier
answer
true
question
When two countries trade with one another, it is most likely because
answer
the two countries wish to take advantage of the principle of comparative advantage.
question
Suppose the United States has a comparative advantage over Mexico in producing pork. The principle of comparative advantage asserts that
answer
the United States should produce more pork than what it requires and export some of it to Mexico.
question
Trade between countries
answer
allows each country to consume at a point outside its production possibilities frontier.
question
True or False: Opportunity cost refers to how many inputs a producer requires to produce a good.
answer
false
question
True or False: Specialization and trade can make everyone better off if a person can obtain goods at prices that are less than that person's opportunity cost.
answer
true
question
True or False: Trade can benefit everyone in society because it allows people to specialize in activities in which they have a comparative advantage.
answer
true
question
True or False: For international trade to benefit a country, it must benefit all citizens of that country.
answer
false
question
If Iowa's opportunity cost of corn is lower than Oklahoma's opportunity cost of corn, then
answer
Iowa has a comparative advantage in the production of corn
question
By definition, imports are
answer
goods produced abroad and sold domestically.
question
Canada and the U.S. both produce wheat and computer software. Canada is said to have the comparative advantage in producing wheat if
answer
the opportunity cost of producing a bushel of wheat is lower for Canada than it is for the U.S.
question
True or False: A production possibilities frontier is a graph that shows the combination of outputs that an economy should produce.
answer
false
question
True or False: 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.
answer
true
question
person can benefit from specialization and trade by obtaining a good at a price that is
answer
lower than his or her opportunity cost of that good.
question
By definition, exports are
answer
goods produced domestically and sold abroad.
question
Which of the following is not an example of the principle that trade can make everyone better off?
answer
Americans buy tube socks from China.
Residents of Maine drink orange juice from Florida.
A homeowner hires the kid next door to mow the lawn.
All of the above are examples of the principle that trade can make everyone better off.
Residents of Maine drink orange juice from Florida.
A homeowner hires the kid next door to mow the lawn.
All of the above are examples of the principle that trade can make everyone better off.
question
scarcity
answer
the limited nature of society's resources
question
economics
answer
the study of how society manages its scarce resources
question
examples of economics
answer
-how people decide what to buy, how much to work, save, and spend
-how firms decide how much to produce, how many workers to hire
-how society decides how to divide its resources b/w national defense, consumer goods, protecting the environment, and other needs
-how firms decide how much to produce, how many workers to hire
-how society decides how to divide its resources b/w national defense, consumer goods, protecting the environment, and other needs
question
all decisions involve...
answer
tradeoffs
question
examples of tradeoffs
answer
-going to a party the night before your midterm leaves less time for studying
question
society faces an important tradeoff:
answer
efficiency vs. equality
question
efficiency
answer
when society gets the most from its scarce resources
question
equality
answer
when prosperity is distributed uniformly among society's members
question
efficiency vs. equality tradeoff
answer
to achieve greater equality, could redistribute income from wealthy to poor. but this reduces incentive to work and produce
question
are social justice and social product inevitably at war with one another?
answer
no.
- researchers discovered that when growth is looked at over the long term, the trade-off b/w efficiency and equality may not exist
-equality appears to be an important part of promoting and sustaining growth
- researchers discovered that when growth is looked at over the long term, the trade-off b/w efficiency and equality may not exist
-equality appears to be an important part of promoting and sustaining growth
question
countries may find that improving equality may also...
answer
improve efficiency
question
the cost of something is...
answer
what you give up to get it
question
opportunity cost
answer
the opportunity cost of any item is whatever must be given up to obtain it
-it is the relevant cost for decision making
-it is the relevant cost for decision making
question
examples of opportunity cost
answer
-going to college for a year is not just the tuition, books, and fees, but also the forgone wages
-seeing a movie is not just the price of the ticket, but the value of the time you spend in the theater
-seeing a movie is not just the price of the ticket, but the value of the time you spend in the theater
question
rational people think...
answer
at the margin
question
rational people:
answer
systematically and purposefully do the best they can to achieve their objectives
question
marginal changes
answer
rational people make decisions by evaluating costs and benefits of marginal changes, incremental adjustments to an existing plan
question
example of rational people think at the margin
answer
when a student considers whether to go to college for an additional year, he compares the fees and foregone wages to the extra income he could earn with the extra year of education
question
people respond to...
answer
incentives
question
incentive
answer
something that induces a person to act (the prospect of a reward or punishment)
question
examples of rational people respond to incentives
answer
-when gas prices rise, consumers buy more hybrid cars and fewer gas-guzzling SUV's
-when cigarette taxes increase, teen smoking falls
-when cigarette taxes increase, teen smoking falls
question
trade can make everyone..
answer
better off
-rather than being self-sufficient, people can specialize in producing one good or service and exchange it for other goods
-rather than being self-sufficient, people can specialize in producing one good or service and exchange it for other goods
question
ways that countries benefit from trade and specialization
answer
-get a better price for goods they produce,
-buy other goods more cheaply from abroad than could be produced at home
-buy other goods more cheaply from abroad than could be produced at home
question
markets are usually a good way to...
answer
organize economic activity
question
market:
answer
a group of buyers and sellers (need not be in a single location)
question
"organize economic activity" means determining:
answer
-what goods to produce
-how to produce them
-how much of each to produce
-who gets them
-how to produce them
-how much of each to produce
-who gets them
question
market economy
answer
allocates resources through the decentralized decisions of many households and firms as they interact in markets
question
famous insight by Adam Smith in 'The Wealth of Nations' (1776)
answer
each of these households and firms acts as if "led by an invisible hand" to promote general economic well-being
question
the invisible hand works through the price system:
answer
-the interaction of buyers and sellers determines prices
-each price reflects the good's value to buyers and the cost of producing the good
-prices guide self-interested households and firms to make decisions that, in many cases, maximize society's economic well-being
-each price reflects the good's value to buyers and the cost of producing the good
-prices guide self-interested households and firms to make decisions that, in many cases, maximize society's economic well-being
question
governments can sometimes improve...
answer
market outcomes
question
important role for government:
answer
enforce property rights (with police, courts)
question
people are less inclined to work, produce, invest, or purchase if
answer
there is a large risk of their property being stolen
question
market failure
answer
when the market fails to allocate society's resources efficiently
question
2 causes of market failure
answer
externalities and market power
question
externalities
answer
when the production or consumption of a good affects bystanders (ex: pollution)
question
market power
answer
a single buyer or seller has substantial influence on market price (ex: monopoly)
question
public policy may promote
answer
efficiency
question
government may alter market outcome to promote
answer
equity
question
if the market's distribution of economic well-being is not desirable,
answer
tax or welfare policies can change how the economic "pie" is divided
question
a country's standard of living depends on its ability to produce...
answer
goods and services
question
huge variation in living standards across countries over time:
answer
-average income in rich countries is more than ten times average income in poor countries
-the US standard of living today is about 8 times larger than 100 years ago
-the US standard of living today is about 8 times larger than 100 years ago
question
the most important determinant of living standards:
answer
productivity
question
productivity
answer
the amount of goods and services produced per unit of labor
question
productivity depends on
answer
the equipment, skills, and technology available to workers
question
prices rise when the government..
answer
prints too much money
question
inflation
answer
increases in the general level of prices
question
the faster to government creates money, the ______ the inflation rate
answer
greater
question
society faces a short-run tradeoff between...
answer
inflation and unemployment
question
economists play two roles:
answer
scientists and policy advisors
question
the economist as a scientist:
answer
-tries to explain the world
-employs the scientific method, the dispassionate development and testing of theories about how the world works
-employs the scientific method, the dispassionate development and testing of theories about how the world works
question
assumptions lead to
answer
models
question
assumptions
answer
simplify the complex world and make it easier to understand
question
example of an assumption
answer
to study international trade, assume there are only two countries and two goods
-unrealistic, but simple to learn and gives useful insights about the real world
-unrealistic, but simple to learn and gives useful insights about the real world
question
model
answer
a highly simplified representation of a more complicated reality
question
economists use models to study
answer
economic issues
question
examples of models
answer
-a road map
-a model of human anatomy from biology class
-a model airplane
-a model teeth at the dentist's office
-a model of human anatomy from biology class
-a model airplane
-a model teeth at the dentist's office
question
circular-flow diagram
answer
a visual model of the economy, shows how dollars and goods and services flow through markets among households and firms
question
two types of "actors" in the circular flow diagram
answer
households and firms
question
two markets in the circular flow diagram
answer
-the market for goods and services
-the market for "factors of production"
-the market for "factors of production"
question
factors of production
answer
the resources he economy uses to produce goods and services, including:
-labor
-land
-capital (buildings and machines used in production)
-labor
-land
-capital (buildings and machines used in production)
question
firms
answer
-buy/hire factors of production, use them to produce goods and services
-sell goods and services
-sell goods and services
question
households
answer
-own the factors of production, sell/rent them to firms for income
-buy and consume goods and services
-buy and consume goods and services
question
image of the circular flow diagram
answer
see notes
question
production possibilities frontier (PPF)
answer
a graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available technology
question
example of the PPF
answer
-two goods: computers and wheat
-one resource: labor (measured in hours)
-economy has 50,000 labor hours per month available for production
(see notes for charts)
-one resource: labor (measured in hours)
-economy has 50,000 labor hours per month available for production
(see notes for charts)
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points ON the PPF
answer
-possible
-efficient: all resources are fully utilized
-efficient: all resources are fully utilized
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points UNDER the PPF
answer
-possible
-not efficient: some resources underutilized (workers unemployed, factories idle)
-not efficient: some resources underutilized (workers unemployed, factories idle)
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points ABOVE the PPF
answer
not possible
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the PPF and opportunity cost
answer
-moving along a PPF involves shifting resources (ex: labor) from the production of one good to the other
-tradeoff: getting more of one good requires sacrificing some of the other
-tradeoff: getting more of one good requires sacrificing some of the other
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the slope of the PPF tells you
answer
the opportunity cost of one good in terms of the other
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the PPF and opportunity cost (slope)
answer
the slope of a line equals the "rise over the run," the amount the line rises when you move to the right by one unit
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economic growth and the PPF
answer
with additional resources or an improvement in technology, the economy can produce more computers, more wheat, or any combination in between
(see notes for graph)
(see notes for graph)
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shape of the PPF
answer
could be straight or bow-shaped
question
shape of the PPF depends on what happens to the _____ as economy shifts resources from one industry to another
answer
opportunity cost
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if opportunity cost remains constant, the PPF
answer
is a straight line
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if opportunity cost of a good rises as more of the good is produce, the PPF
answer
is bow-shaped
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why the PPF might be bow-shaped
answer
(see notes for picture)
-PPF is bow-shaped because when different workers have different skills, there are different opportunity costs of producing one good in terms of the other
-also bow-shaped when there is some other resource, or mix of resources with varying opportunity costs (ex: different types of land suited for different uses)
-PPF is bow-shaped because when different workers have different skills, there are different opportunity costs of producing one good in terms of the other
-also bow-shaped when there is some other resource, or mix of resources with varying opportunity costs (ex: different types of land suited for different uses)
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the PPF shows all combinations of two goods that an economy can possibly produce, given its
answer
resources and technology
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the PPF illustrates the concepts of
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tradeoff and opportunity cost, efficiency and inefficiency, unemployment, and economic growth
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a bow-shaped PPF illustrates the concept of
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increasing opportunity cost
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microeconomics
answer
the study of how households and firms make decisions and how they interact in markets
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macroeconomics
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the study of economy-wide phenomena, including inflation, unemployment, and economic growth
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positive statements
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-attempt to describe the world as it is
-statements that economists make as scientists
-statements that economists make as scientists
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normative statements
answer
-attempt to prescribe how the world should be
-statements that economists make as policy advisors
-statements that economists make as policy advisors
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statement that can be confirmed or refuted
answer
positive statement
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statement that cannot be confirmed or refuted
answer
normative statement
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why economists disagree
answer
-economists give conflicting policy advice
-they sometimes disagree about the validity of alternative positive theories about the world
-they may have different values and therefore different normative views about policies
-they sometimes disagree about the validity of alternative positive theories about the world
-they may have different values and therefore different normative views about policies
question
propositions about which most economists agree
answer
-a ceiling on rents reduces the quantity and quality of housing available (93%)
-tariffs and import quotas usually reduce general economic welfare (93%)
-tariffs and import quotas usually reduce general economic welfare (93%)
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interdependence
answer
-we rely on people from around the world to provide us goods and services
-comes from "trade can make everyone better off"
-comes from "trade can make everyone better off"
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interdependence example
answer
-two countries: US and Japan
-two goods: computers and wheat
-o
-two goods: computers and wheat
-o