Exam 1

Question 1

A point outside a production possibilities frontier indicates

Answer 1

an output combination that society cannot attain given its current level of resources and technology.

Question 2

opportunity cost is best defined as

Answer 2

the highest-valued alternative that is forgone when choosing among various alternatives

Question 3

a bowed outward production possibilities frontier occurs when

Answer 3

as more of a good is produced, producing additional units of it require greater reductions in the other good.

Question 4

As an economy’s capital stock increases, the economy

Answer 4

experiences economic growth.

Question 5

Comparative advantage is

Answer 5

the ability to perform an activity at a lower opportunity cost than anyone else.

Question 6

the law of demand most directly means that consumers buy

Answer 6

less of a good the higher its price, all else held constant.

Question 7

what happens to the demand for CDs if the price of CD player falls?

Answer 7

the demand for CDs increases because the price of a complement falls.

Question 8

Which of the following increases the demand for a normal good?

Answer 8

the price of the good is expected to increase in the future.

Question 9

which of the following shifts the supply curve for oranges?

Answer 9

disastrous weather that destroys about half of this year’s orange crop.

Question 10

which of the following would increase the equilibrium price and increase the equilibrium quantity of used cars?

Answer 10

a fall in income if used cars are an inferior good

Question 11

doctors find that one aspirin per day reduces the risk of heart attacks. demand for aspirin will

Answer 11

increase, so that equilibrium price and equilibrium quantity will increase.

Question 12

there is a technological advance in the production of ice cream. AS a result, the supply curve of ice cream shifts ____ and ____.

Answer 12

rightward; the equilibrium price and equilibrium quantity fall.

Question 13

an economy produces only food and shelter. there are two individuals in the economy: Bill and Mary. Mary’s opportunity cost of producing 1 unit of shelter is 4 units of food.

Answer 13

Mary has a comparative advantage over Bill in the production of shelter.

Question 14

Suppose that in an hour Joe can prepare 10 sandwiches or 5 pizzas. the opportunity cost of joe producing one sandwich is

Answer 14

1/2 pizza.

Question 15

During the last decade, the price of a computer fell every year and the quantity sold increased every year. This experience suggests that the

Answer 15

supply curve shifted rightward.

Question 16

the short run effect of a decrease in the supply of housing is a _____ in the rent and _____ in the quantity of housing units.

Answer 16

rise; a decrease

Question 17

Price ceilings

Answer 17

1. should be below equilibrium price.

2. cause shortages.

Question 18

a legal minimum on the price at which a good can be sold is called a

Answer 18

1. price floor
2. cause surpluses?
3. set higher than eq. price

Question 19

the government raises the sales tax on shirts. the tax is imposed on sellers. as a result, the

Answer 19

supply curve of shirts shifts leftward.

Question 20

suppose equilibrium wage is $10 an hour. a minimum wage is a ______ and affects employment if it is set at _____.

Answer 20

price floor; $12 an hour

Question 21

if a subsidy paid to producers of $1 per gallon of milk is introduced, how will that affect the market?

Answer 21

supply will increase.

Question 22

if a subsidy paid to producers of $1 per gallon of milk is introduced, what happens to quantity sold?

Answer 22

it increases above 300 million gallons.

Question 23

the price elasticity of demand is defined as the magnitude of the

Answer 23

percentage change in quantity demanded divided by the percentage change in price.

Question 24

elasticity generally measures the

Answer 24

responsiveness of a variable to a change in another variable.

Question 25

when the price of a movie ticket increases from $5 to $7, the quantity of tickets demanded decreases from 600 to 400 a day. What is the price elasticity of demand for movie tickets?

Answer 25

1.20

Question 26

the price elasticity of demand for new cars is 1.2 Hence, a 10 percent price increase will

Answer 26

decrease the quantity of new cars demanded by 12 percent.

Question 27

If a consumer is relatively insensitive to changes in the price of a good, then the consumer’s demand for the good is

Answer 27

inelastic

Question 28

demand is price elastic if a

Answer 28

relatively small price increase leads to a relatively large decrease in the quantity demanded.

Question 29

if the price elasticity of demand for gasoline is 0.8 and the price elasticity of demand for plane tickets is 2.2 then the demand for gasoline is _____ and the demand for plane tickets is _____.

Answer 29

inelastic; elastic

Question 30

If the demand for a electricity is perfectly inelastic over the price range of $.10 and $.20 per kilowatt hour, then the elasticity of demand for electricity over this price range is equal to

Answer 30

0

Question 31

Demand is inelastic when a price _____ results in total revenue ______.

Answer 31

rise, increasing

Question 32

if sam wants to increase her total revenue from her sales of flowers and she knows that the demand for flowers is price elastic, she should

Answer 32

lower her price because she knows that the percentage increase in the quantity demanded will be greater than the percentage decrease in price.

Question 33

if a product has very few substitutes, demand elasticity is likely to be

Answer 33

inelastic

Question 34

which of the following makes demand less elastic?

Answer 34

a short time elapsing since the product’s price changed

Question 35

which of the following statements is FALSE?

Answer 35

a narrowly defined good or service generally has a less elastic demand; its more elastic because it has more substitutes

Question 36

a determinant of the price elasticity of demand is

Answer 36

the proportion of the consumer’s total budget spent on the good.

Question 37

total revenue for skis is at a maximum when the price elasticity of demand is

Answer 37

1

Question 38

if a price floor is set in a market, then

Answer 38

sellers cannot sell all they want at the price floor.