Test 1 Practice Questions

Question 1

Economics is best defined as the study of

a. how society manages its scarce resources.
b. how to run a business most profitably.
c. how to predict inflation, unemployment, and stock prices.
d. how the government can stop the harm from unchecked self-interest.

Answer 1

how society manages its scarce resources

Question 2

Adam Smith’s “invisible hand” refers to

a. the subtle and often hidden methods that businesses use to profit at consumers’ expense.
b. the ability of free markets to reach desirable outcomes, despite the self-interest of market
participants.
c. the ability of government regulation to benefit consumers, even if the consumers are
unaware of the regulations.
d. the way in which producers or consumers in unregulated markets impose costs on
innocent bystanders.

Answer 2

the ability of free markets to reach desirable outcomes, despite the self-interest of market participants

Question 3

Your opportunity cost of going to a movie is

a. the price of the ticket.
b. the price of the ticket plus the cost of any soda and popcorn you buy at the theater.
c. the total cash expenditure needed to go to the movie plus the value of your time.
d. zero, as long as you enjoy the movie and consider it a worthwhile use of time and money.

Answer 3

the total cash expenditure needed to go to the movie plus the value of your time.

Question 4

Macroeconomics is best defined as

a. the study of economy-wide phenomena, including inflation, unemployment, and
economic growth
b. the study of how households and firms make decisions and how they interact in markets.
c. claims that attempt to prescribe how the world should be.
d. claims that attempt to describe the world as it is.

Answer 4

the study of economy-wide phenomena, including inflation, unemployment, and
economic growth

Question 5

Productivity is best defined as

a. a situation in which a market left on its own fails to allocate resources efficiently.
b. the impact of one person’s actions on the well-being of a bystander.
c. the quantity of goods and services produced from each unit of labor input.
d. the ability of an individual to own and exercise control over scarce resources.

Answer 5

the quantity of goods and services produced from each unit of labor input

Question 6

A point inside the production possibilities frontier is..

a. efficient, but not feasible.
b. feasible, but not efficient.
c. both efficient and feasible.
d. neither efficient nor feasible.

Answer 6

feasible, but not efficient

Question 7

Scarcity is best defined as

a. the limited nature of society’s resources.
b. something that induces a person to act.
c. the property of society getting the most it can from its scarce resources.
d. the property of distributing economic prosperity uniformly among the members of
society

Answer 7

the limited nature of society’s resources

Question 8

A point on the production possibilities frontier is

a. efficient, but not feasible.
b. feasible, but not efficient.
c. both efficient and feasible.
d. neither efficient nor feasible.

Answer 8

both efficient and feasible

Question 9

Positive Statements are best defined as

a. the study of economy-wide phenomena, including inflation, unemployment, and
economic growth
b. the study of how households and firms make decisions and how they interact in markets.
c. claims that attempt to prescribe how the world should be.
d. claims that attempt to describe the world as it is.

Answer 9

claims that attempt to describe the world as it is

Question 10

Incentive is best defined as

a. the limited nature of society’s resources.
b. something that induces a person to act.
c. the property of society getting the most it can from its scarce resources.
d. the property of distributing economic prosperity uniformly among the members of
society.

Answer 10

something that induces a person to act

Question 11

A point outside the production possibilities frontier is

a. efficient, but not feasible.
b. feasible, but not efficient.
c. both efficient and feasible.
d. neither efficient nor feasible.

Answer 11

efficient but not feasible

Question 12

Microeconomics is best described as

a. the study of economy-wide phenomena, including inflation, unemployment, and
economic growth
b. the study of how households and firms make decisions and how they interact in markets.
c. claims that attempt to prescribe how the world should be.
d. claims that attempt to describe the world as it is.

Answer 12

the study of how households and firms make decisions and how they interact in markets

Question 13

In an hour, Harry can wash 2 cars or mow 1 lawn, and Ron can wash 3 cars or mow 1 lawn.
Who has the absolute advantage in car washing, and who has the absolute advantage in lawn
mowing?

a. Harry in washing, Ron in mowing.
b. Ron in washing, Harry in mowing.
c. Harry in washing, neither in mowing.
d. Ron in washing, neither in mowing.

Answer 13

Ron in washing, neither in mowing

Question 14

In an hour, Harry can wash 2 cars or mow 1 lawn, and Ron can wash 3 cars or mow 1 lawn. Who has the comparative advantage in car washing, and who has the comparative advantage in lawn mowing?

a. Harry in washing, Ron in mowing.
b. Ron in washing, Harry in mowing.
c. Harry in washing, neither in mowing.
d. Ron in washing, neither in mowing

Answer 14

Ron in washing, Harry in mowing

Question 15

When two individuals produce efficiently and then make a mutually beneficial trade based on comparative advantage…

a. they both obtain consumption outside their production possibilities frontier.
b. they both obtain consumption inside their production possibilities frontier.
c. one individual consumes inside her production possibilities frontier, while the other
consumes outside hers.
d. each individual consumes a point on her own production possibilities frontier.

Answer 15

they both obtain consumption outside their production possibilities frontier

Question 16

Comparative advantage can be best defined as:

a. the ability to produce a good using fewer inputs than another producer.
b. whatever must be given up to obtain some item.
c. the ability to produce a good at a lower opportunity cost than another producer.
d. Hermione’s mastery of wizardry relative to Harry.

Answer 16

the ability to produce a good at a lower opportunity cost than another producer

Question 17

A change in which of the following will NOT shift the demand curve for hamburgers?

a. the price of hot dogs
b. the price of hamburgers
c. the price of hamburger buns
d. the income of hamburger consumers

Answer 17

the price of hamburgers

Question 18

If the actual price in this market were above the equilibrium price, what would drive the
market toward the equilibrium?

Answer 18

Consumers stop buying goods and firms start giving discounts, having sales, or permanently lower prices to sell off surplus

Question 19

If the actual price in this market were below the equilibrium price, what would drive the market toward the equilibrium?

Answer 19

Consistent shortages cause firms to raise prices

Question 20

complement or substitute?

DVDs and TV screens

Answer 20

complements

Question 21

complement or substitute?

DVDs and movie tickets

Answer 21

substitutes

Question 22

complement or substitute?

TV screens and movie tickets

Answer 22

substitutes

Question 23

complement or substitute?

TV screens and movie tickets

Answer 23

substitutes

Question 24

The price of a good rises from $8 to $12, and the quantity demanded falls from 110 to 90 units. Calculated with the midpoint method, the elasticity is…

a. 1/5
b. 1/2
c. 2
d. 5

Answer 24

1/2

Question 25

insert question 2 graph key 4

Suppose that business travelers and vacationers have the following demand for airline tickets
from New York to Boston:

As the price of tickets rises from $200 to $250, what is the price elasticity of demand for (i) business travelers and (ii) vacationers? (Hint: use the midpoint method in your calculations.)

Answer 25

insert pics of answers

Question 26

Why might vacationers have a different elasticity from business travelers?

Answer 26

Vacationers will hold travel as a luxury while for business travelers it is more of a necessity.

Question 27

In a market with a binding price ceiling, an increase in the ceiling will the quantity supplied, the quantity demanded, and reduce the..

a. increase, decrease, surplus
b. decrease, increase, surplus
c. increase, decrease, shortage
d. decrease, increase, shortage

Answer 27

increase, decrease, shortage

Question 28

insert graph from question 4 key 4

What are the equilibrium price and quantity of Frisbees?

Answer 28

P*=$8,

Q*=6 (million) frisbees

Question 29

insert graph from question 4 key 4

Frisbee manufacturers persuade the government that Frisbee production improves scientists’
understanding of aerodynamics and thus is important for national security. A concerned congress votes to impose a price floor $2 above the equilibrium price. What is the new market price? How many Frisbees are sold?

Answer 29

P=$10

Q=2(million) frisbees

Question 30

insert graph from question 4 key 4

Irate college students march on Washington and demand a reduction in the price of Frisbees. An even more concerned Congress votes to repeal the price floor and impose a price ceiling $1 below the former price floor. What is the new market price? How many frisbees are sold?

Answer 30

P*=$8

Q*=6 (million) frisbees

Question 31

insert graph from question 4 key 4

Irate college students march on Washington and demand a reduction in the price of Frisbees. An even more concerned Congress votes to repeal the price floor and impose a price ceiling $1 below the former price floor. What is the new market price? How many frisbees are sold?

Answer 31

P*=$8

Q*=6 (million) frisbees

Question 32

People in the U.S. state of Iowa eat both corn and potatoes. It is technically possible for farmers to grow both corn and potatoes in Iowa, yet almost no farmers grow potatoes. Instead, every year, Iowa exports corn and imports potatoes from the U.S. state of Idaho, where farmers specialize in potatoes. Which of the following principles of economic interaction best describes this scenario?

a. Trade can make everyone better off.
b. When markets do not achieve efficiency, government intervention can improve overall welfare.
c. All costs are opportunity costs.
d. There is a tradeoff between equality and efficiency.

Answer 32

a. trade can make everyone better off

Question 33

Bakers are much ________ likely to supply pastries to the market if property rights are enforced. In the presence of market failures, public policy can improve economic efficiency. When there is only one car dealership in a small town, giving the dealership the ability to influence the price of cars, market failure is due to ________. When a manufacturing plant dumps chemical waste into a nearby river, poisoning the water supply for a small town downstream, market failure is due to ________.

a. less; market power; externality
b. more; externality; market power
c. more; market power; externality
d. less; externality; market power

Answer 33

more; market power; externality

Question 34

Suppose that Shen, an economist from an AM talk radio program, and Valerie, an economist from a university in Massachusetts, are arguing over health insurance. The following dialogue shows an excerpt from their debate:

Valerie: “A popular topic for debate among politicians as well as economists is the idea of providing government assistance for health benefits.”
Shen: “I think it is oppressive for the government to tax people who take care of themselves in order to pay for health insurance for those who are obese.”
Valerie: “I disagree. I think government funding of health insurance is useful to ensure basic fairness.”

The disagreement between these economists is most likely due to…

a. differences in values
b. differences in scientific judgments
c. differences between perception versus reality
d. answers b and c

Answer 34

a. differences in values

Question 35

Jake is a hard-working college sophomore. One Saturday, he decides to work nonstop until he has answered 100 practice problems for his math course. He starts work at 8:00 AM and uses a table to keep track of his progress throughout the day. He notices that as he gets tired, it takes him longer to solve each problem.

Time            Total Problems Answered
8:00 AM	                      0
9:00 AM	                     40
10:00 AM	             70
11:00 AM	                     90
Noon	                    100

Use the table to help answer the following question.
Times	                    Marginal Gain
8:00 - 9:00	 
9:00 - 10:00	 
10:00 - 11:00	 
11:00 - Noon	 

Later, the teaching assistant in Jake’s math course gives him some advice. “Based on past experience,” the teaching assistant says, “working on 15 problems raises a student’s exam score by about the same amount as reading the textbook for 1 hour.” For simplicity, assume students always cover the same number of pages during each hour they spend reading.
Given this information, in order to use his 4 hours of study time to get the best exam score possible, how many hours should he have spent working on problems, and how many should he have spent reading?
Selected Answer:

a. 2 hours working on problems, 2 hours reading
b. 3 hours working on problems, 1 hour reading
c. 1 hour working on problems, 3 hours reading
d. 4 hours working on problems, 0 hours reading

Answer 35

b. 3 hours working on problems, 1 hour reading

Question 36

Despite their differences, with which proposition are two economists chosen at random most likely to agree?

a. Business managers can raise profit more easily by reducing costs than by raising revenue.
b. Central banks should focus more on maintaining low unemployment than on maintaining low inflation.
c. Employers should not be restricted from outsourcing work to foreign nations.
d. answers b and c

Answer 36

c. Employers should not be restricted from outsourcing work to foreign nations

Question 37

Determine whether each of the following topics would more likely be studied in microeconomics or macroeconomics:

• A consumer’s optimal choice when buying a flat-screen TV
• The government’s decision on how much to spend on public projects
• The effect of an increase in consumer income on demand for smart phones

Choose the answer that correctly describes the choices in order:

a. Microeconomics; Macroeconomics; Microeconomics
b. Macroeconomics; Macroeconomics; Microeconomics
c. Microeconomics; Microeconomics; Macroeconomics
d. Macroeconomics; Microeconomics; Macroeconomics

Answer 37

a. Microeconomics; Macroeconomics; Microeconomics

Question 38

The following diagram presents a circular-flow model of a simple economy. The outer set of arrows (shown in green) shows the flow of dollars, and the inner set of arrows (shown in red) shows the corresponding flow of inputs and outputs.
Circular Flow Diagram

Suppose Ana earns $900 per week working as a programmer for PC Pros. She uses $8 to order a mojito cocktail at Little Havana. Little Havana pays Yakov $350 per week to wait tables. Yakov uses $400 to purchase software from PC Pros.
Identify whether each of the following events in this scenario occurs in the factor market or the product market.
Yakov spends $400 to purchase software from PC Pros.
Yakov earns $350 per week working for Little Havana.
Ana spends $8 to order a mojito cocktail.

a. Factor Market; Product Market; Product Market
b. Product Market; Factor Market; Product Market
c. Factor Market; Product Market; Factor Market
d. Product Market; Factor Market; Factor Market

Answer 38

b. Product Market; Factor Market; Product Market

Question 39

Suppose an economist believes that the price level in the economy is directly related to the money supply, or the amount of money circulating in the economy. The economist proposes the following relationship:
P = A x M
-P = Price Level
-M = Money Supply
-A = A composite of other factors, including real GDP, that change very slowly over time
How might an economist gather empirical data to test the proposed relationship between money and the price level?

a. Unlike researchers in the hard sciences, economists cannot study complex relationships using data.
b. An economist would look for data on past changes in the money supply, and note the resulting changes in the price level
c. Economists do not usually develop theoretical models of the economy but only analyze summary statistics about the current state of the economy.
d. An economist would persuade the Federal Reserve to change the money supply to various levels, and observe the resulting changes in the price level.

Answer 39

b. An economist would look for data on past changes in the money supply, and note the resulting changes in the price level

Question 40

Which of the following factors played the biggest role in the slow growth of average incomes in the United States during the 1970s and 1980s?

a. Slow growth in productivity
b. Increased competition from Japan
c. Increased competition from India
d. Disinflation of the dollar

Answer 40

a. Slow growth in productivity

Question 41

Suppose the large number of auto accidents in a small town results in new legislation that requires all citizens of the town to install new anti-lock brakes on their cars. These new brakes cut the time it takes a car to stop by 50%, allowing drivers to avoid collisions with other cars and pedestrians more easily. The new brakes _________ the probability that a vehicle will collide with another vehicle but also give drivers an incentive to drive more _________, which could potentially __________ the number of car accidents.

Answers:

a. decrease; carefully; increase
b. decrease; recklessly; increase
c. increase; recklessly; increase
d. decrease; carefully; decrease

Answer 41

b. decrease; recklessly; increase

Question 42

Ana is training for a triathlon, a timed race that combines swimming, biking, and running.
Consider the following sentence: Because her pool sessions are helping her swim more quickly, Ana plans to reduce by 1 hour per week the time she spends training on the bike and increase by 1 hour the time she spends in the swimming pool; however, her husband says that she should stop doing any biking and running and spend all 20 hours per week in the pool.
Which basic principle of individual choice does Ana’s plan illustrate that her husband’s advice does not?

a. Resources are scarce.
b. All costs are opportunity costs.
c. Many decisions are made on the margin.
d. People usually exploit opportunities to make themselves better off.

Answer 42

c. Many decisions are made on the margin.

Question 43

You work as an assistant coach on the university basketball team and earn $15 per hour. One day, you decide to skip the hour-long practice and go to the county fair instead, which has an admission fee of $9.

The total cost (valued in dollars) of skipping practice and going to the fair (including the opportunity cost of time) is _________.

a. 9
b. 6
c. 15
d. 24

Answer 43

d. 24

Question 44

___________ is when economic benefits are distributed uniformly across society. ___________ is when a society gets the most it can from its scarce resources. All societies face a trade-off between equality and efficiency. If the United States government lowers the income taxes on the wealthiest Americans, while decreasing welfare payments to the poorest Americans, the result will likely be ___________ in efficiency and ___________ in equality in the United States.

a. Equality; Efficiency; a decrease; an increase
b. Equality; Efficiency; an increase; a decrease
c. Efficiency; Equality; a decrease; an increase
d. Efficiency; Equality; an increase; a decrease

Answer 44

b. Equality; Efficiency; an increase; a decrease

Question 45

chose the best response- normative or positive:

• Breast cancer is the fifth most common cause of cancer death.
• For women aged 60 to 69, breast cancer screening significantly reduces breast cancer mortality.
• Doctors should encourage women aged 60 to 69 to be screened for breast cancer.
• The government should force doctors to encourage women aged 60 to 69 to be screened for breast cancer.

a. Normative; Positive; Normative; Positive
b. Positive; Positive; Normative; Normative
c. Normative; Normative; Positive; Positive
d. Positive; Normative; Positive; Normative

Answer 45

b. Positive; Positive; Normative; Normative

Question 46

Suppose that, in an attempt to combat severe inflation, the government decides to decrease the amount of money in circulation in the economy. This monetary policy ________ the economy’s demand for goods and services, leading to _______ product prices. In the short run, the change in prices induces firms to produce ________ goods and services. This, in turn, leads to a ________ level of unemployment. In other words, the economy faces a trade-off between inflation and unemployment: Lower inflation leads to _______ unemployment.

a. decreases; lower; fewer; higher; higher
b. increases; higher; more; lower; lower
c. increases; higher; fewer; higher; higher
d. decreases; lower; more; lower; lower

Answer 46

a. decreases; lower; fewer; higher; higher

Question 47

Lorenzo and Neha are farmers. Each one owns a 12-acre plot of land. The following table shows the amount of corn and rye each farmer can produce per year on a given acre. Each farmer chooses whether to devote all acres to producing corn or rye or to produce corn on some of the land and rye on the rest.
Corn (Bushels per acre) Rye (Bushels per acre)
Lorenzo 40 8
Neha 28 7
Using the PPFs from questions 2 and 3, fill in the blanks in the correct order: *
___________ has an absolute advantage in the production of corn, and __________ has an absolute advantage in the production of rye.

a. Lorenzo; Lorenzo
b. Neha; Neha
c. Neha; Lorenzo
d. Lorenzo; Neha

Answer 47

Lorenzo; Lorenzo

Question 48

Lorenzo and Neha are farmers. Each one owns a 12-acre plot of land. The following table shows the amount of corn and rye each farmer can produce per year on a given acre. Each farmer chooses whether to devote all acres to producing corn or rye or to produce corn on some of the land and rye on the rest.

Corn (bushels per acre) Rye (bushels per acre)
Lorenzo 40 8
Neha 28 7

Loranzo’s opportunity cost of producing 1 bushel of rye is ___ bushels of corn, whereas Neha’s opportunity cost of producing 1 bushel of rye is ___ bushels of corn.

Answer 48

5; 4