Chapter 1—The Economic Approach

 

Review MULTIPLE CHOICE

 

        164.          Which of the following is true?

a.

Scarcity and poverty are basically the same thing.

b.

Poverty implies that some basic level of need has not been attained.

c.

Scarcity is the result of prices being set too high.

d.

All of the above are true.

 

 

ANS:    B                   

 

        165.          Economics is the study of how

a.

individuals make choices because of scarcity.

b.

to succeed in business.

c.

to make money in the stock market.

d.

the morals and values of people are formed.

 

 

ANS:    A                   

 

        166.          When an economist states a good is scarce, she means that

a.

production cannot expand the availability of the good.

b.

it is rare.

c.

desire for the good exceeds the amount that is freely available from nature.

d.

people would want to purchase more of the good at any price.

 

 

ANS:    C                   

 

        167.          When economists say an individual displays economizing behavior, they simply mean that the individual is

a.

making a lot of money.

b.

purchasing only those products that are cheap and of low quality.

c.

learning how to run a business more effectively.

d.

making choices to gain the maximum benefit at the least possible cost.

 

 

ANS:    D                   

 

        168.          The national debt is too large. The government must stop spending so much money. This statement is

a.

a normative statement.

b.

a positive statement.

c.

a testable hypothesis.

d.

both b and c.

 

 

ANS:    A                   

 

            171.      In economics, the statement, "There is no such thing as a free lunch," refers to which of the following?

a.

Individuals must always pay personally for the lunch they consume.

b.

Production of a good requires the use of scarce resources regardless of whether it is supplied free to the consumers.

c.

Restaurant owners would never give away free lunches.

d.

All good theories are testable.

 

 

ANS:    B                   

 

        172.          "If income were redistributed in favor of the poor, we would eliminate scarcity." The preceding statement is

a.

essentially correct.

b.

incorrect because shortages are always present.

c.

incorrect; it fails to recognize that poverty will be present as long as resources are scarce.

d.

incorrect; it confuses the elimination of poverty with elimination of the constraint imposed by scarcity.

 

 

ANS:    D                   

 

        173.          Which of the following is not scarce?

a.

an individual's time

b.

air

c.

pencils

d.

automobiles

 

 

ANS:    B                   

 

        174.          People make decisions at the margin. Thus, when deciding whether to purchase a second car, they would compare

a.

the total benefits expected from two cars with the costs of the two cars.

b.

the additional benefits expected from a second car with the total cost of the two cars.

c.

the dollar cost of the two cars with the potential income that the two cars will generate.

d.

the additional benefits of the second car with the additional costs of the second car.

 

 

ANS:    D                   

           

        176.          The highest valued alternative that must be given up in order to choose an action is called its

a.

opportunity cost.

b.

utility.

c.

scarcity.

d.

ceteris paribus.

 

 

ANS:    A                   

           

        179.          Positive economics differs from normative economics in that

a.

positive economics deals with how people react to changes in benefits, and normative economics deals with how people react to changes in costs.

b.

positive economic statements are testable, and normative statements are not.

c.

positive economic statements tell us what we should be doing, and normative economics tells us what we should have done.

d.

positive economic statements focus on the application of the theory, and normative economic statements are theoretical.

 

 

ANS:    B                   

 

        180.          Which of the following represents a normative statement?

a.

Incentives matter.

b.

The temperature in this room is 120 degrees.

c.

It is too hot in this room.

d.

People will buy less butter at $1.50 per pound than they will at $1.00 per pound.

 

 

ANS:    C                   

 

        181.          The economic way of thinking stresses that

a.

changes in personal costs and benefits will exert a predictable influence on the choices of human decision makers.

b.

only direct monetary costs matter in making decisions.

c.

if a good is provided free to an individual, its production will not consume valuable scarce resources.

d.

secondary effects are not important to consider when making decisions.

 

 

ANS:    A                   

 

        182.          Which of the following is a positive economic statement?

a.

The federal minimum wage should be raised $6.50 per hour.

b.

The United States spends too much on national defense.

c.

Higher rates of investment lead to higher rates of economic growth.

d.

Economics is more interesting to study than history.

 

 

ANS:    C                   

 

        183.          When economists use the term ceteris paribus, they indicate

a.

the causal relationship between two economic variables cannot be determined.

b.

the analysis is true for the individual but not for the economy as a whole.

c.

all other factors are assumed to be constant.

d.

their conclusions are based on normative economics rather than positive economic analysis.

 

 

ANS:    C                   

 

        184.          In economics, the benefit (or satisfaction) that an individual gets from an activity is called

a.

scarcity.

b.

utility.

c.

opportunity cost.

d.

ceteris paribus.

 

 

ANS:    B                   

 

 

 

Chapter 2—Some Tools of the Economist

 

        223.          The opportunity cost to the United States of placing a man on the moon was

a.

the loss of government revenues that were allocated to the mission.

b.

the cost of all production involved in the space program.

c.

the loss of utility from the highest valued bundle of products that had to be forgone because of the moon mission.

d.

less than zero, since the long-run benefit of the project will be greater than the cost.

 

 

ANS:    C                   

 

        224.          When Benjamin Franklin wrote, "Remember that time is money!" he understood

a.

the incentives created by property rights.

b.

the law of comparative advantage.

c.

the concept of opportunity cost.

d.

that watches cost money.

 

 

ANS:    C                   

 

        225.          An airline ticket from Seattle to Miami costs $525. A bus ticket is $325. Traveling by plane will take 5 hours, compared with 25 hours by bus. Thus, the plane costs $200 more but saves 20 hours of time (Hint: Note how we are "thinking at the margin" here by looking at the changes). Other things constant, an individual will gain by choosing air travel if, and only if, each hour of her time is valued at more than

a.

$10 per hour.

b.

$13 per hour.

c.

$20 per hour.

d.

$105 per hour.

 

 

ANS:    A                   

 

        226.          Which of the following best describes the implications of the law of comparative advantage? If each person sells goods for which he or she has the greatest comparative advantage in production and buys those for which his or her comparative advantage is least, the

a.

total output available to each person can be expanded by specialization and exchange.

b.

total output will fall.

c.

buyers of goods will gain at the expense of sellers.

d.

sellers of goods will gain at the expense of buyers.

 

 

ANS:    A                   

 

        227.          Keri decided to sleep in today rather than attend her 9 a.m. economics class. According to economic analysis, her choice was

a.

irrational, because economic analysis suggests you should always attend classes that you have already paid for.

b.

irrational, because oversleeping is not in Keri's self-interest.

c.

rational if Keri has not missed any other classes.

d.

rational if Keri values sleep more highly than the benefit she expects to receive from attending the class.

 

 

ANS:    D                   

 

        228.          Which of the following is not one of the basic economic questions that all economies must answer?

a.

What will be produced?

b.

To whom will the goods produced be allocated?

c.

How will goods be produced?

d.

Which government agency will set the prices of the goods produced?

 

 

ANS:    D                   

 

        229.          The owners of private property will

a.

use their property for selfish ends, taking no account of the impact their behavior has on others.

b.

use their property in ways that others value because the market will generally reward them with profits (or a higher selling price) if they do so.

c.

find very little incentive to take care of the property or conserve it for the future.

d.

lose profits when they take the wishes of others into consideration.

 

 

ANS:    B                   

 

            231.      When collective decision making (the political process) is used to resolve economic questions regarding the allocation of resources,

a.

decentralized decision making is present.

b.

central planning and political bargaining will replace market forces.

c.

individual preferences are of no importance.

d.

economic equality will result.

 

 

ANS:    B                   

 

        232.          The law of comparative advantage suggests that

a.

individuals, states, and nations can all benefit if they trade with others.

b.

free trade among nations is harmful to an economy.

c.

each economy should strive to be self-sufficient.

d.

each country should attempt to produce roughly equal amounts of all goods.

 

 

ANS:    A                   

 

        233.          When resources are being used wastefully or inefficiently, the

a.

production possibilities curve shifts inward.

b.

production possibilities curve shifts outward.

c.

economy is operating at a point inside its production possibilities constraint.

d.

economy is operating at a point outside its production possibilities constraint.

 

 

ANS:    C                   

 

 

        236.          Private property rights exist when property rights are

a.

exclusively controlled by the owner or owners.

b.

transferable to others.

c.

protected by legal enforcement.

d.

all of the above.

 

 

ANS:    D                   

 

        237.          When an economy is operating efficiently, the production of more of one good will result in the production of less of some other good because

a.

consumers do not want more of both goods.

b.

resources are limited (scarce) and efficiency implies that all are already in use.

c.

the production possibilities curve shifts inward as more of one good is produced.

d.

technological improvement can only improve the production of a single good.

 

 

ANS:    B                   

 

        238.          Which of the following would allow the production possibilities curve for an economy to shift outward?

a.

a better social organization of economic activity, such as conversion from socialism to capitalism

b.

an increase in the labor force or resource base

c.

more investment leading to better technology and more innovation

d.

all of the above

 

 

ANS:    D                   

 

        239.          "If I didn't have a date tonight, I would save $10 and spend the evening playing tennis." The opportunity cost of the date is

a.

the other things that could be purchased with the $10.

b.

the other things that could be purchased with the $10 plus the forgone value of a night of tennis.

c.

dependent upon how pleasant a time one has on the date.

d.

the forgone value of a night of tennis.

 

 

ANS:    B                   

 

Exhibit 2-6

 

 

        240.          Use Exhibit 2-6 to answer the following question: In the above figure showing the production possibilities curve,

a.

A is efficient.

b.

B is inefficient.

c.

C is unattainable.

d.

all of the above are true.

 

 

ANS:    D                   

 

        241.          Dr. Jones, a dentist, is choosing between driving and flying from Pittsburgh to New York City. If Jones drove, she would have to close her office four hours earlier than if she flew by airplane. Her expected income (after taxes) from her practice is $50 per hour. Assuming all other factors are equal, if Jones was a rational decision maker, she would drive if the price differential (air cost minus driving) was greater than

a.

$50.

b.

$100.

c.

$150.

d.

$200.

 

 

ANS:    D                   

 

        242.          According to the law of comparative advantage,

a.

each producer should strive toward self-sufficiency in order to maximize the total production of the economy.

b.

each product should be produced by the lowest opportunity cost producer in order to maximize output.

c.

one should never compare one's abilities with those of another.

d.

each product should be produced by the individual who can produce more of that product than any other individual.

 

 

ANS:    B                   

 

        243.          "The economic wealth of this country was built primarily by some individuals profiting from a transaction, whereas others were harmed by that transaction." This statement indicates the speaker

a.

fails to comprehend the idea that all voluntary trades benefit both parties involved.

b.

fails to comprehend the fallacy of composition.

c.

fails to understand the significance of the production possibilities curve.

d.

uses the economic way of thinking. The statement is essentially correct.

 

 

ANS:    A                   

 

Table 2-3

The next two questions relate to the material in the addendum to Chapter 2. Use the following production possibilities data for Lebos and Slavia to answer these questions.

 

Lebos

Slavia

Food

Clothing

Food

Clothing

0

8

0

8

2

6

1

6

4

4

2

4

6

2

3

2

8

0

4

0

 

 

        245.          Refer to Table 2-3. Which of the following is correct?

a.

In Lebos, the opportunity cost of producing one unit of food is equal to one unit of clothing.

b.

In Slavia, the opportunity cost of producing one unit of food is equal to two units of clothing.

c.

The opportunity cost of producing food in Lebos is less than the opportunity cost of producing food in Slavia.

d.

All of the above are correct.

 

 

ANS:    D                   

 

        246.          Refer to Table 2-3. Which of the following is correct?

a.

Lebos has the comparative advantage in both goods.

b.

Slavia has the comparative advantage in food.

c.

Lebos has the comparative advantage in food.

d.

Lebos has the comparative advantage in clothing.

 

 

ANS:    C                   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chapter 3—Supply, Demand, and the Market Process

 

        48.            If the price of tickets to the World Series were set below the equilibrium price,

a.

the quantity demanded would be smaller than the quantity supplied.

b.

the demand for World Series tickets would be highly responsive to the price.

c.

there would be no transactions between buyers and sellers of the tickets.

d.

the number of persons seeking to obtain tickets to World Series games would be greater than the number of tickets available.

 

 

ANS:    D                    TOP:   Coursebook

 

        49.            Which of the following would cause the price of automobiles to rise?

a.

a decrease in the wages of autoworkers

b.

a reduction in the price of bus travel

c.

an increase in the price of gasoline

d.

an increase in consumer income

 

 

ANS:    D                    TOP:   Coursebook

 

        51.            If cigars and cigarettes are substitute goods, an increase in the price of cigars would result in

a.

an increase in the demand for cigarettes.

b.

a decrease in the price of cigarettes.

c.

a decrease in the demand for cigarettes.

d.

a decrease in the demand for cigars.

 

 

ANS:    A                    TOP:   Coursebook

 

        52.            Which of the following would most likely cause the current demand for video cassette recorders (VCRs) to fall?

a.

an increase in consumer income

b.

an increase in the price of VCRs

c.

an increase in the price of laser disc players, a substitute good

d.

the expectation that the price of VCRs will decrease sharply during the next six months

 

 

ANS:    D                    TOP:   Coursebook

 

        53.            Which of the following would be most likely to cause the demand for Miller beer to increase?

a.

an increase in the price of Budweiser beer

b.

a decrease in consumer income

c.

a decrease in the price of barley used to make Miller beer

d.

a decrease in the price of Miller beer

 

 

ANS:    A                    TOP:   Coursebook

 

        55.            All things constant, a decrease in bus, train, and airplane fares will

a.

shift the demand curve for automobiles to the left.

b.

cause a movement along the demand curve for automobiles.

c.

shift the demand curve for automobiles to the right.

d.

have no impact on the demand curve for automobiles.

 

 

ANS:    A                    TOP:   Coursebook

 

        56.            If coffee and cream are complements, a decrease in the price of coffee will cause

a.

the demand for cream to decrease.

b.

the demand for cream to increase.

c.

the demand for coffee to increase.

d.

no change in the demand for cream; only quantity demanded would be affected.

 

 

ANS:    B                    TOP:   Coursebook

 

        57.            If the market price is above the equilibrium price, there will be a tendency for price to decrease, causing

a.

the quantity demanded to decrease and the quantity supplied to increase until they are equal.

b.

the quantity demanded to increase and the quantity supplied to decrease until they are equal.

c.

both quantity demanded and quantity supplied to decrease until they are equal.

d.

both quantity demanded and quantity supplied to increase until they are equal.

 

 

ANS:    B                    TOP:   Coursebook

 

        58.            According to the law of supply, as the price of a good decreases

a.

buyers will buy more of the good.

b.

sellers will produce more of the good.

c.

buyers will buy less of the good.

d.

sellers will produce less of the good.

 

 

ANS:    D                    TOP:   Coursebook

 

        60.            Economic efficiency requires that

a.

individuals take all actions within their power.

b.

only long-lasting, high-quality products be produced.

c.

income be distributed equally among individuals.

d.

all economic activity generating more benefits than costs to individuals in the economy be undertaken.

 

 

ANS:    D                    TOP:   Coursebook

 

        61.            If the demand for beer increased, what would be the effect on the equilibrium price and quantity of beer?

a.

price increases, quantity decreases

b.

price decreases, quantity decreases

c.

price increases, quantity increases

d.

price decreases, quantity increases

 

 

ANS:    C                    TOP:   Coursebook

 

        63.            "Falling consumer income from the recent recession has hurt automakers in more ways than one. Not only have sales of new cars fallen, but car prices have fallen as well. As a result, the major automakers have announced cutbacks in production and layoffs of workers." Which of the following places these statements in the proper economic terminology within the context of the supply and demand model? [Note: It may help to graph this first.]

a.

a decrease in demand and a decrease in supply

b.

a decrease in demand and a decrease in quantity supplied

c.

a decrease in quantity demanded and a decrease in quantity supplied

d.

a decrease in quantity demanded and a decrease in supply.

 

 

ANS:    B                    TOP:   Coursebook

 

        64.            "If gasoline were taxed, the price of gasoline would rise. Consequently, the demand for gasoline would fall, causing the price to fall to the original level." This statement is

a.

essentially correct.

b.

incorrect-after the demand falls, the price would fall but to some level higher than the original level.

c.

incorrect-demand and quantity demanded are confused. The price increase would reduce quantity demanded, not demand.

d.

incorrect-after the demand falls, the price would fall but to some level lower than the original level.

 

 

ANS:    C                    TOP:   Coursebook

 

        65.            Over the past 20 years both the quantity of health care provided and health care prices have been rising rapidly. Economic theory would suggest that the observed data could best be explained as

a.

an increase in supply, while demand remained relatively constant.

b.

a decrease in both supply and demand.

c.

an increase in demand, while supply remained relatively constant.

d.

a sharp increase in both supply and demand.

 

 

ANS:    C                    TOP:   Coursebook

 

        66.            A decrease in the supply of a good will

a.

decrease the demand for the good.

b.

cause the price of the good to fall.

c.

lead to an increase in the price of the good.

d.

increase the quantity of the good bought and sold.

 

 

ANS:    C                    TOP:   Coursebook

 

        67.            Which of the following would most likely decrease the price of beef?

a.

lower prices of grains used to produce cattle feed

b.

higher prices for chicken, a substitute for beef

c.

a cow disease that destroys millions of cattle (and makes their meat unfit for consumption) before they are ready for market

d.

an increase in consumer income

 

 

ANS:    A                    TOP:   Coursebook

 

        68.            The price of gasoline increases. Purchasers of gasoline will probably

a.

reduce their purchases more in the long run than in the short run.

b.

reduce their purchases more in the short run than in the long run.

c.

reduce their purchases equally in both the short and long run.

d.

increase their purchases, since the higher gasoline price will increase supply.

 

 

ANS:    A                    TOP:   Coursebook

 

        69.            When Adam Smith said economic activity was directed by an "invisible hand," he was referring to the fact that

a.

competitive markets motivate altruistic individuals to pursue productive activities that only serve their private interests.

b.

when economic activity is directed by competitive markets, the actions of self-interested individuals will generally serve the public interest.

c.

invisible forces will lead to economic chaos unless wise central planning directs economic activity.

d.

scarcity is largely the result of invisible forces that would be eliminated if individuals were free to pursue their own self-interests.

 

 

ANS:    B                    TOP:   Coursebook

 

        70.            A hurricane damaged much of the housing in Miami. Shortly thereafter, the price of plywood rose significantly. The events suggest that

a.

a decrease in the supply of plywood caused the price of plywood to rise.

b.

an increase in the supply of plywood caused the price of plywood to rise.

c.

a decrease in the demand for plywood caused the price of plywood to rise.

d.

an increase in the demand for plywood caused the price of plywood to rise.

 

 

ANS:    D                    TOP:   Coursebook

 

        71.            If the demand for a good increases, which of the following will generally occur in a market setting?

a.

The price of the good will decrease.

b.

The supply of the good will increase.

c.

The quantity supplied will increase.

d.

Producer profits will fall.

 

 

ANS:    C                    TOP:   Coursebook

 

 

Chapter 4—Supply and Demand: Applications and Extensions

 

        218.          An increase in the demand for a product will cause output to

a.

increase and both the demand for and prices of the resources used to produce the product to increase.

b.

increase and both the demand for and prices of the resources used to produce the product to decrease.

c.

decrease; the demand for the resources used to produce the product will remain constant.

d.

decrease; the price of resources used to produce the product will decrease.

 

 

ANS:    A                   

 

        219.          Suppose business decision makers become more optimistic about future economic conditions and desire additional funds to expand their plant capacity. What is the likely effect on the loanable funds market?

a.

The demand for loanable funds will rise and the interest rate will rise.

b.

The demand for loanable funds will fall and the interest rate will fall.

c.

The supply for loanable funds will rise and the interest rate will fall.

d.

The supply for loanable funds will fall and the interest rate will rise.

 

 

ANS:    A                   

 

        220.          An increase in the dollar price of the Mexican peso (an appreciation of the peso) would cause

a.

Mexico's imports to increase and exports to decline.

b.

Mexico's exports to increase and imports to decline.

c.

both Mexico's imports and exports to decline.

d.

both Mexico's imports and exports to rise.

 

 

ANS:    A                   

 

        221.          During the imposition of price controls in the 1970s, long gasoline lines were common. In the absence of price controls, markets would have eliminated such excess demand by

a.

allowing the price to rise, so gas was rationed to those willing to pay the most for it.

b.

increasing the gap between supply and demand.

c.

allowing price to decline, so the poor could afford to buy more gas.

d.

mandating a 50-mile-per-hour speed limit to reduce consumption.

 

 

ANS:    A                   

 

        222.          If an increase in the government-imposed minimum wage pushes the price (wage) of unskilled labor above market equilibrium, which of the following will most likely occur in the unskilled labor market?

a.

an increase in demand for unskilled labor

b.

a decrease in the supply of unskilled labor

c.

a shortage of unskilled labor

d.

a surplus of unskilled labor

 

 

ANS:    D                   

 

        223.          With a price ceiling above the equilibrium price,

a.

quantity demanded would exceed quantity supplied.

b.

quantity supplied would exceed quantity demanded.

c.

the market would be in equilibrium.

d.

the equilibrium price would be expected to fall over time.

 

 

ANS:    C                   

 

        224.          Rent controls generally fix the price of rental housing below market equilibrium. Economic analysis suggests these controls

a.

are effective in helping the poor find housing.

b.

improve the quality of housing available to consumers.

c.

create a surplus of rental housing.

d.

reduce the future supply of rental housing.

 

 

ANS:    D                   

 

        225.          Because illegal drug markets operate outside the legal system,

a.

the quality of these drugs has increased.

b.

the sellers of illegal drugs earn less money.

c.

there is less violence in these markets than if they were legal.

d.

none of the above.

 

 

ANS:    D                   

 

        226.          Currently, federal and state gasoline taxes (imposed statutorily on the sellers of gasoline) amount to about $.45 per gallon. Suppose the current price of gasoline is $1.20 per gallon, and that if the tax was not in place, the price would be only $.80.

a.

The full incidence of the tax is falling on consumers.

b.

The full incidence of the tax is falling on suppliers.

c.

A $.05 burden is being borne by sellers and $.40 by consumers.

d.

A $.05 burden is being borne by consumers and $.40 by sellers.

 

 

ANS:    C                   

 

           

 

 

        234.          A legal minimum wage is an example of

a.

the invisible hand principle.

b.

a price floor.

c.

a price ceiling.

d.

a fringe benefit.

 

 

ANS:    B                   

 

        235.          Both price floors and price ceilings, when effective, lead to

a.

shortages.

b.

surpluses.

c.

an increase in the quantity traded.

d.

a reduction in the quantity traded.

 

 

ANS:    D                   

 

        236.          If there was an increase in the excise tax on beer, what would be the effect on the equilibrium price and quantity of beer?

a.

price increases, quantity decreases

b.

price decreases, quantity decreases

c.

price increases, quantity increases

d.

price decreases, quantity increases

 

 

ANS:    A                   

 

        237.          The more elastic the supply of a product, the more likely it is that the burden of a tax will

a.

fall on sellers.

b.

fall on buyers.

c.

fall equally on both buyers and sellers.

d.

be borne by the public sector, and not by market participants.

 

 

ANS:    B