Midterm

Question 1

Foreign trade . . .

a. allows a country to have a greater variety of products at a lower cost than if it tried to produce everything at home.
b. allows a country to avoid trade-offs.
c. makes the members of a country more equal.
d. increases the scarcity of resources.
e. is none of the above.

Answer 1

a. allows a country to have a greater variety of products at a lower cost than if it tried to produce everything at home.

Question 2

Which of the following statements is true about a market economy?

a. With a large enough computer, central planners could guide production more efficiently than markets.
b. Taxes help prices communicate costs and benefits to producers and consumers.
c. The strength of a market system is that it tends to distribute resources evenly across consumers.
d. Market participants act as if guided by an “invisible hand” to produce outcomes that promote general economic well-being.

Answer 2

d. Market participants act as if guided by an “invisible hand” to produce outcomes that promote general economic well-being.

Question 3

Which of the following is not part of the opportunity cost of going on vacation?

a. the money you spent on food
b. the money you spent on a Broadway show
c. the money you spent on airline tickets
d. the money you could have made if you had stayed home and worked

Answer 3

a. the money you spent on food

Question 4

Points on the production possibilities frontier are

a. efficient.
b. inefficient.
c. unattainable.
d. normative.
e. none of the above.

Answer 4

a. efficient.

Question 5

Which of the following statements is normative?

a. People work harder if the wage is higher.
b. The unemployment rate should be lower.
c. Printing too much money causes inflation.
d. Large government deficits cause an economy to grow more slowly.

Answer 5

b. The unemployment rate should be lower.

Question 6

Positive statements are

a. macroeconomic.
b. statements of prescription that involve value judgments.
c. statements of description that can be tested.
d. microeconomic.

Answer 6

c. statements of description that can be tested.

Question 7

Suppose two economists are arguing about policies that deal with unemployment. One economist says, “The government could lower unemployment by one percentage point if it would just increase government spending by 50 billion dollars.” The other economist responds, “That’s ridiculous. If the government spent an additional 50 billion dollars, it would reduce unemployment by only one-tenth of 1 percent, and that effect would only be temporary!” These economists

a. disagree because they have different scientific judgments.
b. disagree because they have different values.
c. really don’t disagree at all. It just looks that way.
d. do none of the above.

Answer 7

a. disagree because they have different scientific judgments.

Question 8

If a nation has an absolute advantage in the production of a good,

a. it can produce that good at a lower opportunity cost than its trading partner.
b. it can produce that good using fewer resources than its trading partner.
c. it can benefit by restricting imports of that good.
d. it will specialize in the production of that good and export it.
e. none of the above is true.

Answer 8

b. it can produce that good using fewer resources than its trading partner.

Question 9

If a nation has a comparative advantage in the production of a good,

a. it can produce that good at a lower opportunity cost than its trading partner.
b. it can produce that good using fewer resources than its trading partner. c. it can benefit by restricting imports of that good.
d. it must be the only country with the ability to produce that good.
e. none of the above is true.

Answer 9

a. it can produce that good at a lower opportunity cost than its trading partner.

Question 10

According to the principle of comparative advantage,

a. countries should specialize in the production of goods for which they use fewer resources in production than their trading partners.
b. countries should specialize in the production of goods that they enjoy consuming.
c. countries with a comparative advantage in the production of every good need not specialize.
d. countries should specialize in the production of goods for which they have a lower opportunity cost of production than their trading partners.

Answer 10

d. countries should specialize in the production of goods for which they have a lower opportunity cost of production than their trading partners.

Question 11

The amount of money today needed to produce a particular sum in the future, given prevailing interest rates, is known as

a. future value.
b. compound value.
c. beginning value.
d. present value.
e. fair value.

Answer 11

d. present value.

Question 12

If two countries start with the same real GDP per person, and one country grows at 2 percent while the other grows at 4 percent,

a. the standard of living in the two countries will converge.
b. the standard of living in the country growing at 4 percent will start to accelerate away from the slower growing country due to compound growth.
c. one country will always have 2 percent more real GDP per person than the other.
d. next year the country growing at 4 percent will have twice the GDP per person as the country growing at 2 percent.

Answer 12

b. the standard of living in the country growing at 4 percent will start to accelerate away from the slower growing country due to compound growth.

Question 13

An inferior good is one for which an increase in income causes a(n)

a. increase in supply.
b. decrease in demand.
c. decrease in supply.
d. increase in demand.

Answer 13

b. decrease in demand.

Question 14

If a small percentage increase in the price of a good greatly reduces the quantity demanded for that good, the demand for that good is

a. unit price elastic.
b. income inelastic.
c. price inelastic.
d. income elastic.
e. price elastic.

Answer 14

e. price elastic.

Question 15

The price elasticity of demand is defined as

a. the percentage change in price of a good divided by the percentage change in the quantity demanded of that good.
b. the percentage change in income divided by the percentage change in the quantity demanded.
c. the percentage change in the quantity demanded of a good divided by the percentage change in the price of that good.
d. the percentage change in the quantity demanded divided by the percentage change in income.
e. none of the above.

Question 16

In general, a flatter demand curve is more likely to be

a. price elastic.
b. price inelastic.
c. unit price elastic.
d. none of the above.

Answer 16

a. price elastic.

Question 17

If the cross-price elasticity between two goods is negative, the two goods are likely to be

a. luxuries.
b. complements.
c. necessities.
d. substitutes.

Answer 17

b. complements.

Question 18

If demand is linear (a straight line), then price elasticity of demand is

a. elastic throughout.
b. constant along the demand curve.
c. inelastic in the upper portion and elastic in the lower portion.
d. elastic in the upper portion and inelastic in the lower portion.
e. inelastic throughout.

Answer 18

d. elastic in the upper portion and inelastic in the lower portion.

Question 19

f consumers think that there are very few substitutes for a good, then

a. supply would tend to be price elastic.
b. supply would tend to be price inelastic.
c. demand would tend to be price elastic.
d. demand would tend to be price inelastic.
e. none of the above is true.

Answer 19

d. demand would tend to be price inelastic.

Question 20

A price floor

a. always determines the price at which a good must be sold.
b. sets a legal minimum on the price at which a good can be sold.
c. sets a legal maximum on the price at which a good can be sold.
d. is not a binding constraint if it is set above the equilibrium price.

Answer 20

b. sets a legal minimum on the price at which a good can be sold.

Question 21

Studies show that a 10 percent increase in the minimum wage

a. increases teenage employment by about 10 to 15 percent.
b. decreases teenage employment by about 1 to 3 percent.
c. decreases teenage employment by about 10 to 15 percent.
d. increases teenage employment by about 1 to 3 percent.

Answer 21

b. decreases teenage employment by about 1 to 3 percent.

Question 22

Within the supply-and-demand model, a tax collected from the sellers of a good shifts the

a. supply curve upward by the size of the tax per unit.
b. demand curve upward by the size of the tax per unit.
c. demand curve downward by the size of the tax per unit.
d. supply curve downward by the size of the tax per unit.

Answer 22

a. supply curve upward by the size of the tax per unit.

Question 23

Producer surplus is the area

a. above the supply curve and below the price.
b. above the demand curve and below the price.
c. below the demand curve and above the price.
d. below the supply curve and above the price.
e. below the demand curve and above the supply curve.

Answer 23

e. below the demand curve and above the supply curve.

Question 24

Taxes on labor income tend to encourage

a. workers to work fewer hours.
b. second earners to stay home.
c. the elderly to retire early.
d. the unscrupulous to enter the underground economy.
e. all of the above.

Answer 24

e. all of the above.

Question 25

When a country allows trade and exports a good,

a. domestic producers are better off, domestic consumers are worse off, and the nation is worse off because the losses of the losers exceed the gains of the winners.
b. domestic consumers are better off, domestic producers are worse off, and the nation is better off because the gains of the winners exceed the losses of the losers.
c. domestic producers are better off, domestic consumers are worse off, and the nation is better off because the gains of the winners exceed the losses of the losers.
d. domestic consumers are better off, domestic producers are worse off, and the nation is worse off because the losses of the losers exceed the gains of the winners.

Answer 25

c. domestic producers are better off, domestic consumers are worse off, and the nation is better off because the gains of the winners exceed the losses of the losers.

Question 26

Which of the following statements about a tariff is true?

a. A tariff increases producer surplus, decreases consumer surplus, increases revenue to the government, and increases total surplus.
b. A tariff increases producer surplus, decreases consumer surplus, increases revenue to the government, and reduces total surplus.
c. A tariff increases consumer surplus, decreases producer surplus, increases revenue to the government, and reduces total surplus.
d. A tariff increases consumer surplus, decreases producer surplus, increases revenue to the government, and increases total surplus.

Answer 26

b. A tariff increases producer surplus, decreases consumer surplus, increases revenue to the government, and reduces total surplus.

Question 27

Which of the following statements about import quotas is true?

a. Voluntary quotas established by the exporting country generate no deadweight loss for the importing country.
b. For every tariff, there is an import quota that could have generated a similar result.
c. Import quotas are preferred to tariffs because they raise more revenue for the imposing government.
d. An import quota reduces the price to the domestic consumers.

Answer 27

b. For every tariff, there is an import quota that could have generated a similar result.

Question 28

Because producers are better able to organize than consumers are, we would expect there to be political pressure to create

a. free trade.
b. import restrictions.
c. export restrictions. d. none of the above.

Answer 28

b. import restrictions.

Question 29

A positive externality (that has not been internalized) causes the

a. equilibrium quantity to be either above or below the optimal quantity.
b. equilibrium quantity to equal the optimal quantity.
c. equilibrium quantity to exceed the optimal quantity.
d. optimal quantity to exceed the equilibrium quantity.

Answer 29

d. optimal quantity to exceed the equilibrium quantity.

Question 30

To internalize a negative externality, an appropriate public policy response would be to

a. ban the production of all goods creating negative externalities.
b. have the government take over the production of the good causing the externality.
c. tax the good.
d. subsidize the good.

Answer 30

c. tax the good.

Question 31

When an individual buys a car in a congested urban area, it generates

a. a technology spillover.
b. an efficient market outcome.
c. a positive externality.
d. a negative externality.

Answer 31

d. a negative externality.

Question 32

The most efficient pollution control system would ensure that

a. no pollution of the environment is tolerated.
b. the regulators decide how much each polluter should reduce its pollution.
c. each polluter reduce its pollution an equal amount.
d. the polluters with the lowest cost of reducing pollution reduce their pollution the greatest amount.

Answer 32

d. the polluters with the lowest cost of reducing pollution reduce their pollution the greatest amount.

Question 33

As we move from point A to point D,

a. the opportunity cost of eggs in terms of bacon rises.
b. the opportunity cost of eggs in terms of bacon is constant. c. the opportunity cost of eggs in terms of bacon falls.
d. the economy becomes less efficient.
e. the economy becomes more efficient.

Answer 33

a. the opportunity cost of eggs in terms of bacon rises.

Question 34

To internalize a positive externality, an appropriate public policy response would be to

a. have the government produce the good until the value of an additional unit is zero.
b. ban the good creating the externality.
c. subsidize the good.
d. tax the good.

Answer 34

c. subsidize the good.

Question 35

A firm whose average total cost continually declines at least to the quantity that could supply the entire market is known as a

a. regulated monopoly.
b. natural monopoly.
c. government monopoly. d. perfect competitor.

Answer 35

b. natural monopoly.

Question 36

If people are risk averse, then

a. they dislike bad things more than they like comparable good things.
b. their utility functions exhibit the property of diminishing marginal utility of wealth.
c. the utility they would lose from losing a $50 bet would exceed the utility they would gain from winning a $50 bet.
d. all of the above are true.
e. none of the above is true.

Answer 36

d. all of the above are true.

Question 37

The profit earned by the profit-maximizing monopolist is represented by the area

a. P4ABP2.
b. P4ACP1.
c. P4AQ10.
d. P3DQ20.
e. None of the above is correct.

Answer 37

b. P4ACP1.

Question 38

If the price is P4, a competitive firm will maximize profits if it produces

a. Q1.
b. Q2.
c. Q3.
d. Q4.
e. Q5.

Answer 38

c. Q3.

Question 39

n the short run, competitive firms will temporarily shut down production if the price falls below

a. P4.
b. P3.
c. P2.
d. P1.

Answer 39

d. P1.

Question 40

In the short run, the competitive firm’s supply curve is the

a. portion of the marginal-cost curve that lies above the average-variable-cost curve.
b. portion of the marginal-cost curve that lies above the average-total-cost curve. c. upward-sloping portion of the average-variable-cost curve.
d. upward-sloping portion of the average-total-cost curve.
e. entire marginal-cost curve.

Answer 40

a. portion of the marginal-cost curve that lies above the average-variable-cost curve.

Question 41

If all firms in a market have identical cost structures and if inputs used in the production of the good in that market are readily available, then the long-run market supply curve for that good should be

a. upward sloping.
b. perfectly inelastic.
c. downward sloping.
d. perfectly elastic.

Answer 41

d. perfectly elastic.

Question 42

A monopolist maximizes profit by producing the quantity at which

a. marginal revenue equals marginal cost.
b. marginal revenue equals price. c. marginal cost equals price.
d. marginal cost equals demand.
e. none of the above occurs.

Answer 42

a. marginal revenue equals marginal cost.

Question 43

Cengage Learning is a monopolist in the production of your textbook because

a. the government has granted Cengage Learning exclusive rights to produce this textbook.
b. Cengage Learning is a natural monopoly.
c. Cengage Learning owns a key resource in the production of textbooks.
d. Cengage Learning is a very large company.

Answer 43

a. the government has granted Cengage Learning exclusive rights to produce this textbook.

Question 44

The profit-maximizing monopolist will choose the price and quantity represented by point

a. A.
b. B.
c. C.
d. D.
e. None of the above is correct.

Answer 44

a. A.

Question 45

The monopolist’s supply curve

a. is the upward-sloping portion of the average variable cost.
b. is the marginal-cost curve above average variable cost.
c. does not exist.
d. is the marginal-cost curve above average total cost.
e. is the upward-sloping portion of the average-total-cost curve.

Answer 45

c. does not exist.

Question 46

A monopoly is able to continue to generate economic profits in the long run because

a. potential competitors sometimes don’t notice the profits.
b. there is some barrier to entry to that market.
c. the monopolist is financially powerful.
d. antitrust laws eliminate competitors for a specified number of years.
e. of all of the above.

Answer 46

b. there is some barrier to entry to that market.

Question 47

An example of a transfer payment is

a. government purchases.
b. rent.
c. wages.
d. unemployment benefits.
e. profit.

Answer 47

d. unemployment benefits.

Question 48

Which of the following would be excluded from 2019 GDP? The sale of

a. a 2019 Honda made in Tennessee.
b. a haircut.
c. a realtor’s services.
d. a home built in 2018 and first sold in 2019.
e. All of the above should be counted in 2019 GDP.

Answer 48

d. a home built in 2018 and first sold in 2019.

Question 49

Gross domestic product can be measured as the sum of

a. investment, wages, profits, and intermediate production.
b. consumption, transfer payments, wages, and profits.
c. consumption, investment, government purchases, and net exports.
d. final goods and services, intermediate goods, transfer payments, and rent.
e. net national product, gross national product, and disposable personal income.

Answer 49

c. consumption, investment, government purchases, and net exports.

Question 50

U.S. gross domestic product (in contrast to gross national product) measures the production and income of

a. Americans and their factories no matter where they are located in the world.
b. people and factories located within the borders of the United States.
c. the domestic service sector only.
d. the domestic manufacturing sector only.
e. none of the above.

Answer 50

b. people and factories located within the borders of the United States.

Question 51

Gross domestic product is the sum of the market value of the

a. normal goods and services.
b. inferior goods and services.
c. intermediate goods.
d. manufactured goods.
e. final goods and services.

Answer 51

e. final goods and services.

Question 52

Trade-offs are required because wants are unlimited and resources are

a. marginal.
b. economical.
c. scarce.
d. unlimited. e. efficient.

Answer 52

c. scarce.

Question 53

While pollution regulations yield the benefit of a cleaner environment and the improved health that comes with it, the regulations come at the cost of reducing the incomes of the regulated firms’ owners, workers, and customers. This statement illustrates the principle that

a. people respond to incentives.
b. people face tradeoffs.
c. rational people think at the margin.
d. trade can make everyone better off.

Answer 53

b. people face tradeoffs.

Question 54

Elena’s aunt gave her $100 for her birthday with the condition that Elena buys herself something. In deciding how to spend the money, Elena narrows her options down to four choices: Option A, Option B, Option C, and Option D. Each option costs $100. Finally, she decides on Option B. The opportunity cost of this decision is

a. $100.
b. the value to Elena of the option she would have chosen had Option B not been available.
c. the value to Elena of Options A, C, and D combined.
d. the average of the values to Elena of Options A, C, and D.

Answer 54

b. the value to Elena of the option she would have chosen had Option B not been available.

Question 55

Suppose the cost of flying a 200-seat plane for an airline is $100,000 and there are 10 empty seats on a flight. If the marginal cost of flying a passenger is $200 and a standby passenger is willing to pay $300, the airline should

a. not sell the ticket because the marginal benefit is less than the marginal cost.
b. sell the ticket because the marginal benefit exceeds the marginal cost.
c. not sell the ticket because the marginal benefit is less than the average cost.
d. sell the ticket because the marginal benefit exceeds the average cost.

Answer 55

b. sell the ticket because the marginal benefit exceeds the marginal cost.

Question 56

Because resources are scarce, a society cannot give all individuals the standard of living to which each aspires.

a. True
b. False

Answer 56

a. True

Question 57

With careful planning, we can usually get something that we like without having to give up something else that we like.

a. True
b. False

Answer 57

b. False

Question 58

Which of these activities will most likely result in an external benefit?

a. An elderly woman plants a flower garden on the vacant lot next to her house.
b. A college student buys a deck of cards to play solitaire in her dorm room.
c. A ten-year-old uses his allowance to buy new Nike shoes.
d. An executive purchases a book to read on a business trip.

Answer 58

a. An elderly woman plants a flower garden on the vacant lot next to her house.

Question 59

While the scientific method is applicable to studying natural sciences, it is not applicable to studying a nation’s economy.

a. True
b. False

Answer 59

b. False

Question 60

The slope of a line is the ratio of the vertical distance covered to the horizontal distance covered along the line.

a. True
b. False

Answer 60

a. True