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1. Which product would be considered scarce?

a. Reebok shoes b. Da Vinci paintings
c. 1-carat diamonds d. All of the above are correct.
ANSWER: d. All of the above are correct.
2. The adage, There is no such thing as a free lunch, means
a. even people on welfare have to pay for food.
b. the cost of living is always increasing.
c. to get something we like, we usually have to give up another thing we like.
d. all costs are included in the price of a product.
ANSWER: c. to get something we like, we usually have to give up another thing we like.
3. Francis decides to spend the last two hours of the night before his economics exam studying instead of sleeping. For
Daniel, his tradeoff would be
a. nothing, since no dollar value can be put on sleep.
b. nothing, since studying would be more beneficial than sleep.
c. the six hours of sleep he could have had if he had gone to bed before midnight.
d. the two hours of rest he would have gotten.
ANSWER: d. the two hours of rest he would have gotten.
4. Which of the following best defines efficiency?
a. absolute fairness b. equal distribution
c. minimum waste d. consumer sovereignty
ANSWER: c. minimum waste
5. One definition of equity would be
a. equality. b. efficiency c. fairness. d.similarity.
ANSWER: c. fairness.
6. When the government redistributes income from the rich to the poor,
a. efficiency is improved, but equity is not.
b. both rich people and poor people benefit directly.
c. people work less and produce fewer goods and services.
d. rich people consume fewer goods , but poor people consume more goods, resulting in no real change.
ANSWER: c. people work less and produce fewer goods and services.
7. People make decisions at the margin by
a. following tradition. b. experience.
c. calculating dollar costs. d.comparing costs and benefits.
ANSWER: d. comparing costs and benefits.
8. Which of the following is the best example of a marginal change?
a. The price of housing rose in Seattle by 5% in last year.
b. Kim gets a big promotion at work. She also gets a raise from $25,000 per year to $40,000 per year.
c. Mark graduates from college and takes a job. His income increases from $10,000 per year to $50,000 per year.
d. A drought hits the upper Midwest and the price of wheat increases from $4.00 per bushel to $8.00 per bushel.
ANSWER: a. The price of housing rose in Seattle by 5% in last year.

9. A marginal change is illustrated by which of the following?

a. Nancy retires and takes a part-time job. She was working 40 hours per week and now works 10 hours per week.
b. State University has announced that due to state budget deficits, tuition must rise by 25% next year.
c. Ryan moved to a new apartment and now pays 40% more rent than before.
d. Arizona, which usually receives 10 inches of rain per year, received 11 inches last year.
ANSWER: d. Arizona, which usually receives 10 inches of rain per year, received 11 inches last year.
10. A donut shop sells fresh baked donuts from 5 a.m. until 3 p.m. every day but Sunday. The cost of making and selling a
dozen glazed donuts is $1.00. Since this shop does not sell day-old donuts the next day, what should the manager do if he still has
10 dozen left at 2:30 p.m.?
a. lower the price of the remaining donuts even if the price falls below $1.00
b. lower the price of the remaining donuts as long as its more than $1.00
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c. Lower the price on all donuts so they will all be sold earlier in the day
d. throw them away and produce 10 fewer dozen tomorrow
ANSWER: a. lower the price of the remaining donuts even if the price falls below $1.00
11. Which would NOT be true in a market economy?
a. Firms decide whom to hire and what to produce.
b. Government policies do not affect the decisions of firms and households.
c. Households decide which firms to work for and what to buy with their incomes.
d. Profit and self-interest guide the decisions of firms and households.
ANSWER: b. Government policies do not affect the decisions of firms and households.
12. In a market economy, prices reflect the
a. value of a good to society. b. cost to society of making the good.
c. quantity society will ultimately choose to produce. d. Both a and b are correct.
ANSWER: d. Both a and b are correct.
13. The invisible hands ability to coordinate the decisions of the firms and households in the economy can be hindered by
a. government actions that distort prices. b. increased competition in the market.
c. extended periods of unemployment. d. a dramatic reduction in consumer spending.
ANSWER: a. government actions that distort prices.
14. Taxes adversely affect the allocation of resources in society because
a. they do not always fall more heavily on the rich.
b. the taxes collected are not enough to finance government spending.
c. not everyone pays taxes.
d. they distort prices and thus the decisions of households and firms.
ANSWER: d. they distort prices and thus the decisions of households and firms.
15. The government enforces property rights by
a. requiring property owners to pay property taxes.
b. providing police and courts.
c. allowing people to decide whether or not they wish to own property.
d. providing a system of recording property deeds.
ANSWER: b. providing police and courts.
16. The term market failure refers to
a. a situation in which the market on its own fails to allocate resources efficiently.
b. an unsuccessful advertising campaign which reduces buyer demand.
c. a situation in which competition among firms becomes ruthless.
d. a firm which is forced out of business because of losses.
ANSWER: a. a situation in which the market on its own fails to allocate resources efficiently.
17. Two reasons for a government to intervene in a market are to
a. raise revenues and to promote stability. b. promote equity and to promote efficiency.
c. promote equity and to promote stability. d. promote efficiency and to promote stability.
ANSWER: b. promote equity and to promote efficiency.
18. An example of an externality is the impact of
a. bad weather on the income of farmers.
b. the personal income tax on a persons ability to purchase goods and services.
c. pollution from a factory on the health of people in the vicinity of the factory.
d. increases in health care costs on the health of individuals in society.
ANSWER: c. pollution from a factory on the health of people in the vicinity of the factory.
19. An example of a monopoly would be
a. a jewelry store in Miami, Florida.
b. a souvenir shop in Cancun, Mexico.
c. an electric company in Delight, Arkansas.
d. a doctor in Dallas, Texas.
ANSWER: c. an electric company in Delight, Arkansas.
20. The income of a typical worker in a country is most closely linked to which of the following?
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a. population b. productivity c. the number of labor unions d. government policies
ANSWER: b. productivity
21. Although the Phillips curve is controversial, most economists believe that
a. society faces a tradeoff between unemployment and inflation in the short run only.
b. society faces a tradeoff between unemployment and inflation in the long run only.
c. no tradeoff exists between unemployment and inflation.
d. society faces a continuous tradeoff between unemployment and inflation.
ANSWER: a. society faces a tradeoff between unemployment and inflation in the short run only.
22. Explain how an attempt by the government to lower inflation could cause unemployment to increase in the short-run.
ANSWER: To lower inflation, the government may choose to reduce the money supply in the economy. When the money supply is
reduced, prices dont adjust immediately. Lower spending combined with prices, which are too high, reduces sales and causes
workers to be laid off. Hence, the lower price level is associated with higher unemployment.

23. Which of the following cost curves is never 'U' shaped?

1. Average cost curve. 2. Marginal cost curve.
3. Average variable cost curve. 4. Average fixed cost curve.

AVERAGE FIXED COST CURVE

24. In the above figure, curves 1, 2, 3, and 4 represent the:

A. ATC, MC, AFC, and AVC curves respectively.
B. MC, AFC, AVC, and ATC curves respectively.
C. MC, ATC, AVC, and AFC curves respectively.
D. ATC, AVC, AFC, and MC curves respectively.
C. MC, ATC, AVC, an AFC curves respectively.

25. Refer to the above data. The total variable cost of producing 5 units is:
A. $61. B. $48. C. $37. D. $24.

26. Refer to the above data. The average total cost of producing 3 units of output is:
A. $14. B. $12. C. $13.50. D. $16.

27. Refer to the above data. The marginal cost of producing the sixth unit of output is:
A. $24. B. $12. C. $16. D. $8.

28. Which of the following will cause the average fixed cost curve of making cigarettes to shift?
a) A $5 million penalty charged to each cigarette maker.
b) A $1 per pack tax on cigarettes.
c) A $3 per hour wage increase in tobacco industry.
d) An increase in the demand for cigarettes.
29. A shoe factory has 500 employees and produces a thousand pairs of shoes per hour.
a. What is the shoe factorys productivity per worker per hour?

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b. The factory hires one new worker. Now, the factory produces 1,002 shoes per hour. Then the factory hires one more worker.
Production rises to 1,004 per hour. Does the factory have diminishing, constant, or increasing marginal returns
at this level of production?

30. The marginal cost curve represents

a. Variable costs plus fixed costs.
b. Fixed costs only.
c. The cost of producing the last unit at a given level of production.
d. Per-unit total costs.
e. Average costs at the margin.
31. Charlie initially leased a one-room space and started a small day care center with only 4 children and one staff member. But
he found that the costs per child were very high. When he leased a larger space, and expanded the center to have more children
and staff, the cost per child fell. Which of the following factors came into play when Charlie expanded the center?
a. economies of scale
b. diseconomies of scale
c. increasing returns to the labor inputs
d. decreasing returns to the labor inputs
e. input substitution
A ECONOMIES OF SCALE
32. The graph above shows the total cost curve for the alfalfa harvest on
Alfs Alfalfa Farm. ed on this graph, which of the
Which of the following statements about Alfs Alfalfa Farm must be false?
a. In region A, marginal costs are increasing.
b. In region B, marginal costs are constant.
c. Total costs increase as production rises.
d. The marginal cost curve is flat in region B.
e. In region A, the production function is characterized by increasing marginal
returns.

33. If the price of a complement increases, all else equal,

A) quantity demanded will increase.
B) quantity supplied will increase.
C) demand will increase.
D) demand will decrease.
E) supply will decrease.
34. The demand curve for a product will shift rightward when the price of a substitute decreases. True / False
35. Total Profit is maximised at the output where marginal revenue exactly equals marginal cost. True / False
36. Total Revenue is at maximum when marginal revenue is zero. True / False
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37.

38. Which of the following would lead to an INCREASE in the demand for golf balls?
A) An decrease in the price of golf balls.
B) An increase in the price of golf clubs.
C) A decrease in the cost of producing golf balls.
D) An increase in average household income when golf balls are a normal good.
E) none of the above
39. If input prices increase, all else equal,
A) quantity supplied will decrease. B) supply will increase.
C) supply will decrease. D) demand will decrease. E) None of the above
40. Which of the following would decrease the supply of wheat?
A) A decrease in the price of pesticides.
B) An increase in the demand for wheat.
C) A rise in the price of wheat.
D) An increase in the price of corn.
E) none of the above
41. Producers' total revenue will decrease if
A) the price rises and demand is inelastic.
B) income increases and the good is a normal good.
C) the price rises and demand is elastic.
D) income falls and the good is an inferior good.
42. The demand for a good is elastic if
A) a decrease in its price results in a decrease in total revenue.
B) the good is a necessity
C) an increase in its price results in an increase in total revenue.
D) an increase in its price results in a decrease in total revenue.
43. If a rise in the price of good B increases the quantity demanded of good A,
A) B is a substitute for A, but A is a complement to B.
B) A is a substitute for B, but B is a complement to A.
C) A and B are complements. D) A and B are substitutes.
44. Which would be an example of a government price ceiling?
A) limits on interest rates charged by credit card companies
B) subsidies for apartment rent in major cities
C) minimum-wage laws for unskilled workers
D) price supports for agricultural products
45. If buyers expect the price of a good to rise in the future, the result is ( d )
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a. a decrease in supply today
b. an increase in supply today
c. a decrease in quantity demanded today
d. an increase in demand today
e. an increase in quantity demanded today
46. An excess supply of rice in a competitive market would indicate that( e )
a. the problem of scarcity has been solved in that market
b. buyers want to purchase more rice at the current price than the sellers want to sell
c. the market will not be able to approach equilibrium
d. the entire supply curve must shift to the left in order to attain equilibrium
e. the current price exceeds the equilibrium price

47. If both the demand and supply curves for computers shift to the right, the price of computers may rise, fall, or remain
unchanged. True / False
48. When the minimum wage is set above the equilibrium market wage,( c )
a. there will be an excess demand for labor at the minimum wage
b. it will have no effect on the quantity of labor employed
c. the unemployment rate will rise
d. the quality of the labor force will rise
e. the unemployment rate will fall
49.

50. The price elasticity of demand measures the ( c )

a. responsiveness of a good's price to a change in quantity demanded
b. adaptability of suppliers when a change in demand alters the price of a good
c. responsiveness of quantity demanded to a change in a good's price
d. adaptability of buyers when there is a change in demand
e. responsiveness of quantity supplied to a change in quantity demanded

51. Which of the following will NOT cause a shift in the demand curve for compact discs?
a. A change in the price of pre-recorded cassette tapes. b. A change in income.
c. A change in the price of compact discs. d. A change in wealth.
52. A movement along the demand curve to the left may be caused by:
A. A decrease in supply. B. A rise in the price of inputs.
C. A fall in the number of substitute goods. D. A rise in income.

53. The firm's short-run marginal-cost curve is increasing when:

A) marginal product is increasing. C) total fixed cost is increasing.
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B) marginal product is decreasing. D) average fixed cost is decreasing.

54. A cost incurred in the past that cannot be changed by any future action is a (b)
a. opportunity cost b. sunk cost c. relevant cost d. avoidable cost
55. The ..........implies that the cost of production continues to be low till the firm reaches the optimum scale (Marginal cost =
Average cost). a. V-shape b. Q shape c. U shape d. All of these
56. A firm will shut down in the short run if:
a. Fixed costs exceed revenues. b. total costs exceed revenues.
c. it is suffering a loss. d. variable costs exceed revenues.
57. The U.S. Department of Agriculture reported that in 1997 each person in the United States consumed an average of 41 gallons
of soft drinks (nondiet) at an average price of $2 per gallon. Assume that, at a price of $1.50 per gallon, each individual consumer
would demand 50 gallons of soft drinks. The U.S. population in 1997 was 267 million. From this information about the individual
demand schedule, calculate the market demand schedule for soft drinks for the prices of $1.50 and $2 per gallon.

Answer to
Question:
The quantity demanded by an individual consumer at a price of $2 was 41 gallons, and there were 267 million consumers.
Multiplying the quantity demanded at that price by each individual consumer gives us the market quantity demanded at that
price: 267 million 41 gallons = 10.9 billion gallons.
Similarly, the market quantity demanded at a price of $1.50 would be 267 million 50 gallons = 13.4 billion gallons.

58. Coretta can build three chairs in her first week of work. In the second week, she starts to get tired and has to take time out to
clean the workshop, so she can only make two additional chairs. In the third week, she settles into a pattern of one additional
chair per week, which she can maintain for a fourth, fifth, and sixth week. In the seventh week, shes exhausted and can only
finish half an additional chair.
a. Make a table showing the number of weeks worked and the marginal and total number of chairs produced.

59. Using supply-and-demand diagrams, show the effect of the following events on the market for sweatshirts.
A hurricane in India damages cotton crops The price of leather jackets falls All schools and colleges require morning exercises
in proper attire New knitting machines are invented
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