Exam 1 Practice Questions

Question 1

1. What is a price?

(a) A price of a good is the ratio at which it can be exchanged with a good.
(b) A price of a good represents the total value of the good to consumers.
(c) A price of a good represents the marginal value of the good to consumers.
(d) None of the above.

Answer 1

Answer: (a) A price of a good is the ratio at which it can be exchanged with a good.

Explanation: The price reflects the exchange value of goods and is typically determined by the market, reflecting how much of one good or service can be exchanged for another.

Question 2

2. Fill in the blanks in the following statement: It is ________to change just one __________ .

(a) It is difficult to change just one behavior.
(b) It is beneficial to change just one price.
(c) It is impossible to change just one policy.
(d) It is impossible to change just one price.

Answer 2

Answer: (d) It is impossible to change just one price.

Explanation: This statement refers to the economic principle that prices are interconnected. Changing the price of one good or service often has ripple effects on the prices of others due to the interdependence in the market.

Question 3

3. What is the strongest statement that we should make in support of a theory?

(a) The theory predicts behavior well.
(b) Evidence has failed to disprove the theory.
(c) The theory is correct.
(d) The theory we’ve tested is the right theory.

Answer 3

Answer: (b) Evidence has failed to disprove the theory.

Explanation: Scientific theories cannot be conclusively proven; they can only be supported by evidence or disproven by counter-evidence. Saying that evidence has failed to disprove a theory is a strong, yet appropriately cautious, endorsement.

Question 4

4. If soda and US dollars exchange at a ratio of 1 bottle to $3 and beer and US dollars exchange at a ratio of 1 bottle to $5, what is the price of Beer in terms of soda?

(a) The price of beer is 3/5 bottles of soda.
(b) The price of beer is 5/3 bottles of soda.
(c) The price of beer is 5 bottles of soda.
(d) The price of beer is equal to $3 worth of soda.
(e) The price of beer cannot be determined without more information.

Answer 4

Answer: (b) The price of beer is 5/3 bottles of soda.

Explanation: If 1 bottle of soda is $3 and 1 bottle of beer is $5, the price of beer in terms of soda is $5/$3 = 5/3 bottles of soda.

Question 5

5. If the dollar-price of soda falls from US$3 per bottle to US$2 per bottle,

(a) the price of beer implicitly falls.
(b) the price of beer implicitly rises.
(c) the price of beer does not change.

Answer 5

Answer: (b) the price of beer implicitly rises

Question 6

6. If we increase the reward associated with completing task 1,

(a) we have at the same time increased the reward associated with task 1 quality.
(b) we have at the same time decreased the reward associated with completing all other tasks.
(c) we have also increased the reward associated with sabotaging others in their completion of task 1.
(d) None of the above.

Answer 6

Answer: (b) we have at the same time decreased the reward associated with completing all other tasks.

Explanation: Increasing the reward for one task can implicitly decrease the relative reward or attractiveness of other tasks due to opportunity cost considerations.

Question 7

7. The opportunity cost of reading a single chapter from a thirteen-chapter book

(a) has nothing to do with the price you paid for the book.
(b) is about 1/13th of the price you paid for the book.
(c) is zero, since you have already paid for the book.

Answer 7

Answer: (a) has nothing to do with the price you paid for the book.

Explanation: Opportunity cost refers to the value of the next best alternative foregone. It’s not related to the book’s purchase price but to what you could be doing instead of reading a chapter.

Question 8

8. A regulation is designed to alter the behavior of individuals

(a) by forcing them to cooperate with the regulation.
(b) by suppressing their desire for more, as more is assumed to be better.
(c) by creating externalities that are beneficial to society.
(d) by introducing a cost or benefit that encourages them to change their behavior in the intended way.
(e) None of the above.

Answer 8

Answer: (d) by introducing a cost or benefit that encourages them to change their behavior in the intended way.

Explanation: Regulations aim to modify behavior by creating incentives or disincentives (costs or benefits), encouraging individuals to behave in a way that aligns with the regulation’s objectives.

Question 9

9. An equilibrium price in a market is

(a) the price that all consumers are willing and able to pay.
(b) the price at which there is no excess supply or demand.
(c) the price at which people are happiest.
(d) Both b and c.

Answer 9

Answer: (b) the price at which there is no excess supply or demand.

Explanation: Market equilibrium is reached when supply equals demand, meaning there’s no surplus or shortage of goods at that price.

Question 10

10. At an equilibrium price and quantity,

(a) there is upward pressure on price, otherwise price would be falling.
(b) there is downward pressure on price.
(c) there is upward pressure on quantity.
(d) there is no pressure for quantity to change.
(e) None of the above.

Answer 10

Answer: (d) there is no pressure for quantity to change.

Explanation: In equilibrium, the quantity supplied equals the quantity demanded, so there’s no tendency for the quantity to increase or decrease.

Question 11

11. Where there is currently a shortage in a market

(a) one should expect prices to rise.
(b) one should expect prices to fall.

Answer 11

Answer: (a) one should expect prices to rise.

Explanation: Shortages typically lead to increased prices as demand exceeds supply, and suppliers can charge more due to the increased demand for the limited product.

Question 12

12. When someone is seen paying more for something because it saves time, we would predict that
    (a) the time saved, when used in the next-best alternative, is relatively more valuable to him.
    (b) the time saved, when used in the next-best alternative, is relatively less valuable to him.
    (c) More information is needed to answer this question.

Answer 12

(a) the time saved, when used in the next-best alternative, is relatively more valuable to him.

Question 12

13. The value of a good to someone is best thought of as
    (a) the price someone is observed paying to acquire the good.

(b) the cost to firms of producing the good in question.
(c) what someone is willing to give up to acquire the good.
(d) None of the above.

Answer 12

Answer: (c) what someone is willing to give up to acquire the good.

Explanation: The value of a good to an individual is determined by what they are willing to sacrifice or exchange to obtain that good, reflecting their personal valuation or utility.

Question 13

Below is a schedule relating marginal and total values to the number of units purchased by a typical consumer. The price of the product is $41 per unit. Use this information to answer questions 14 through 17.

14. The marginal value of the 3rd unit is
    (a) 80
    (b) 70
    (c) 60
    (d) 50
    (e) 40
15. The total value of 5 units is
    (a) 230
    (b) 280
    (c) 300
    (d) 310
    (e) None of the above.
16. How many units would this individual optimally purchase?(a) 2
    (b) 3
    (c) 4
    (d) 5
    (e) 6
17. By how much is the individual made better off when purchases are made optimally?

    (a) $117
    (b) $140
    (c) $240
    (d) $280
     (e) $300

Answer 13

The marginal value of the 3rd unit is

Answer: (c) 60

Explanation: The marginal value (MV) listed for the 3rd unit is 60.

The total value of 5 units is

Answer: (c) 300

Explanation: The total value (TV) for 5 units, as listed, is 300.

How many units would this individual optimally purchase?

Answer: (b) 3

Explanation: An individual would optimally purchase units up to the point where the marginal value (MV) is greater than or equal to the price per unit. Given the price per unit is $41, the individual would purchase up to the 3rd unit, where the MV is equal to the price.

240 - 123 = 117 (a) $117

Question 14

18. We learn that individuals value the Eugene Police department at roughly $230 million. We also learn that individuals value the Eugene public schools at $340 million. From this information, one can confidently conclude that

(a) new teachers will be paid more than new police officers.
(b) new police officers will be paid more than new teachers.
(c) None of the above.

Answer 14

We learn that individuals value the Eugene Police department at roughly $230 million. We also learn that individuals value the Eugene public schools at $340 million. From this information, one can confidently conclude that

Answer: (c) None of the above.

Explanation: Valuation of public services like police and education does not directly translate to individual salaries or compensation for new hires in those sectors. It’s more indicative of the overall budget or societal value placed on those services.

Question 15

19. All else equal, the more elastic is demand for a good

(a) the steeper is that good’s demand curve.
(b) the flatter is that good’s demand curve.

Answer 15

Answer: (b) the flatter is that good’s demand curve.

Explanation: A flatter demand curve indicates that consumers are more responsive to price changes, which is characteristic of elastic demand.

Question 16

20. How is the diamond-water paradox resolved?

(a) People are greedy.
(b) Prices are determined by marginal values and water’s marginal value is lower.
(c) The total value of diamonds exceeds that of water so people are willing to pay more for a diamond.
(d) None of the above.

Answer 16

Answer: (b) Prices are determined by marginal values and water’s marginal value is lower.

Explanation: Despite water being essential and diamonds being a luxury, diamonds command a higher price because the marginal value (value of one additional unit) of diamonds is higher than that of water, due to their scarcity relative to water.

Question 17

21. Are market equilibria, as we’ve described them, attractive?

(a) Yes.
(b) No.

Answer 17

Market equilibria, as described in the context of the consumer purchasing units based on marginal value and price, are generally considered attractive for the following reasons:

Efficient Allocation of Resources: Market equilibrium is reached when supply equals demand. At this point, resources are allocated efficiently as the quantity produced and consumed is optimal, leaving no room for wastage or unmet needs within the market.

Price Stability: In a market equilibrium, prices tend to be stable, benefiting both consumers and producers. Consumers can plan their expenditures, and producers can forecast their production and profit.

Maximization of Consumer and Producer Surplus: At equilibrium, the consumer surplus (difference between what consumers are willing to pay and what they actually pay) and producer surplus (difference between the market price and the minimum price at which producers are willing to sell) are maximized. This means that both consumers and producers are getting the maximum benefit from the market.

No Excess Demand or Supply: At equilibrium, the market clears, meaning there is no excess demand (shortage) or excess supply (surplus). Products do not go to waste, and there are typically enough products to satisfy consumers’ needs.

Question 18

22. We would expect the prices of normal goods to increase as the economy goes into a recession (e.g., as incomes fall).

(a) True
(b) False
(c) We need more information to answer this question.

Answer 18

Answer: (b) False

Explanation: Normal goods are those for which demand decreases as income falls. Therefore, in a recession, the demand for normal goods would decrease, potentially leading to a decrease in prices.

Question 19

23. The service you provide is a complement to an inferior good. If the economy goes into a recession (e.g., as incomes fall), we expect the revenue from selling this service to decrease.

(a) True
(b) False
(c) We need more information to answer this question.

Answer 19

Answer: (b) False

Explanation: If the service is a complement to an inferior good (a good whose demand increases as income falls), and the economy is going into a recession, the demand for the inferior good may increase, potentially leading to increased demand for the complementary service as well, not a decrease in revenue.