Chapter 1 – The Ten Principles of Microeconomics

1. The business cycle refers to regular and predictable fluctuations in economic activity.
Answer: False

2. In 2008 and 2009, the U.S. economy experienced a deep economic downturn. If there is a short run trade-off between
inflation and unemployment, to combat the high unemployment, President Obama should have pursued an inflationary
policy such as a stimulus package of reduced taxes and increased government spending.
Answer: True

3. A society faces many decisions, but a household does not.

Answer: False

4. Public policies aimed at increasing the size of the economic pie also lead to a higher degree of equality.
Answer: False

5. You can stay home and study to do well on your exam or you can go to the movies with your friends, but not both. This
example illustrates
Answer: a. scarcity and tradeoffs.

6. Your opportunity cost of going to a Maroon 5 concert during your Spring Break is:
Answer: D. the price of the concert ticket, plus the cost of any beverages you buy at the concert, and the value of
your time.

7. Certain employees are eligible for unemployment compensation if they lose their jobs through no fault of their own. If Jim,
a factory worker, will receive compensation of half his regular pay for 52 weeks while he looks for a job, then:
Answer: D. the unemployment compensation most likely lowers Jim’s incentive to save while he is working.
Unemployment compensation most likely decreases Jim’s efforts to find a new job.

8. Micah has spent $30 for a taxi ride to a [end a Colts game. When he arrives at the stadium, he discovers that he le] his
ticket at home. He doesn’t have time to return home to get it. He paid $60 for his ticket, but can buy another one for $80.
In deciding whether he should buy another ticket Micah should compare the value he places on a[ending the game to

Answer: B. $80.

9. Trade between countries tends to

C. raises specialization and makes everyone better off.

10. Which of the following is the primary determinant of the standard of living?
Answer: B. productivity

11. As the manager at the local Save-a-lot, you are thinking of adding one more cashier that would increase sales revenues
by $400 per week. What is the most you can pay this new cashier and why?
Answer: B. $400 per week, because that is the marginal benefit of hiring the new cashier.

12. High inflation is

Answer: C. associated with high money supply growth rates. An increase in inflation temporarily reduces
unemployment.

13. Which of the following is not an incentive effect of higher gasoline prices?
Answer: D. Exxon-Mobile drills fewer oil wells.

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 14. Adam Smith would have loved Uber, the company providing an app for smartphones that connects passengers and
drivers, because:
Answer: C. the service increases consumer well-being.

Chapter 2 – Thinking Like an Economist

1. A production possibilities frontier that illustrates the production of cars and computers shows the opportunity cost of
computers measured in terms of cars
Answer: True

2. A circular flow diagram shows how dollars flow through financial markets among households and firms.
Answer: False

3. Positive statements are prescriptive and cannot be confirmed or refuted by examining the evidence.
Answer: False

4. In a circular flow diagram, decisions are made by

Answer: A. Households and firms. Firms are sellers in the markets for goods and services; households are buyers
in the markets for goods and services.

5. Which of the following examples does not correctly describe the movement of $10 through a circular flow diagram?
Answer: C. An individual buys one share of stock for $10. The firm that sold the stock uses the $10 to pay back
interest on a loan from the U.S. government’s Small Business Administration (SBA). The SBA uses the $10 to pay
one of its employees.

6. On the production possibilities graph, which points are efficient?

Answer: A.) A, B, and D

7. Fruit of the Loom’s production possibilities between “tighty-whities” (T-W's) and boxers: Refer to the Fruit of the Loom's
table above. What is the opportunity cost of increasing the production of T-W’s from 0 to 10?
Answer: B. 10 boxers

8. Fruit of the Loom’s production possibilities between “tighty-whities” (T-W's) and boxers: Refer to the Fruit of the Loom's
table above. What is the opportunity cost of increasing the production of T-W’s from 20 to 30?
Answer: C. 20 boxers

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 9. Fruit of the Loom’s production possibilities between “tighty-whities” (T-W's) and boxers: Refer to the Fruit of the Loom's
table above. What is the opportunity cost of increasing the production of boxers from 0 to 25?
Answer: B. 10 T-W’s

10. In the figure above, assume the economy is producing at point D; then a technological innovation is discovered that
reduces the production costs of pizza. As a result, the economy would be able to produce more.
Answer: C. more CDs and more pizzas.

11. For the production possibilities frontier above, identify which of the following statements is incorrect:
Answer: B. production points D and E are efficient

12. On a production possibilities frontier showing military goods and consumer goods, which of the following is most likely to
cause an inward shift of the PPF?
Answer: A. destruction of economic resources because of war

13. As we move to the right on a bowed outward production possibilities frontier, we see:
Answer: C. increasing opportunity cost

14. Which of the following topics falls within the study of macroeconomics?
Answer: C. the effects of borrowing by the federal government

15. Which of the following illustrates a positive statement followed by a normative statement?
Answer: C. The Earned Income Tax Credit benefits the working poor. The government should expand the Earned
Income Tax Credit.

16. “Laws that limit the resale of tickets for entertainment and sports events make potential audience members for those
events worse off on average.”
Answer: A. agree

Chapter 3 – Interdependence and the Gains from Trade

1. If a country has an absolute advantage in producing a good, than it must also have a comparative advantage in producing
that good.
Answer: False

2. If a country has comparative advantage in producing a good, then the other country has comparative advantage in
producing the other good.
Answer: True
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3. International trade can make some individuals worse off, even as it makes the country as a whole better off.
Answer: True

4. Countries specialize in the production of the good they can produce at the highest opportunity cost.
Answer: False

5. Refer to the figures above. What is the opportunity cost of a pound of cheese in Denmark?
Answer: D. 1/2 loaves of bread

6. Refer to the figures above. Which country has the absolute advantage in producing cheese and which has the
comparative advantage producing cheese?
Answer: A. Denmark, Denmark

7. Refer to the figures above. Suppose these two countries trade only with each other. With no trade restrictions in effect,
what kind of trade, if any, would occur?
Answer: C. Denmark would sell cheese to and buy bread from Finland.

8. Refer to the figures above. If these two countries were to trade, a possible exchange rate would be 1 loaf of bread for
Answer: B. 3/2 kilograms of cheese.

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 9. Refer to the table above. The opportunity cost of a pound of coffee in Argentina is
Answer: A. 3 bu. of wheat.

10. Refer to the table above. Which country has the absolute advantage in wheat and which has the Comparative advantage
in wheat?
Answer: B. Brazil has the absolute advantage, Argentina has the comparative advantage.

11. Refer to the table above. Suppose these two countries trade with each other but no other countries. With no trade
restric8ons in effect, what kind of trade if any would occur?
Answer: D. Argentina would import coffee and export wheat.

12. Refer to the table above. If these two countries were to trade, a possible exchange rate would be 1 lb. of coffee to
Answer: C. 5/2 bu. of wheat.

13. Suppose that France has a comparative advantage in the production of Camembert cheese and that Spain has a
comparative advantage in the production of oranges. If the two countries do not trade with any countries but then agree to
trade with each other, which of the following will be true concerning French and Spanish consumption possibilities?
Answer: D. France and Spain can each consume more cheese and more oranges.

14. “Trade with China makes most Americans better off because, among other advantages, they can buy goods that are
made or assembled more cheaply in China.”
Answer: A. agree

15. “Some Americans who work in the production of competing goods, such as clothing and furniture, are made worse off by
trade with China.”
Answer: A. agree

Chapter 4 – The Market Forces of Supply and Demand

1. Changes in the price of chocolate cake cause the demand curve for chocolate cake to shi6, whereas changes in income
cause a movement along the demand curve for chocolate cake.
Answer: B. False

2. A movement along the downward-sloping demand curve for frozen margaritas can be caused by a change in weather.
Answer: B. False

3. Changes in the price of cheese cause a movement along the supply of cheese, whereas changes in input prices cause
the supply of cheese to shift.
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 Answer: A. True

4. If demand decreases, both thee equilibrium price and quantity decrease.

Answer: A. True

5. A market is a
Answer: C. group of buyers and sellers of a particular good or service.

6. Assuming apricots and nectarines are substitutes for peaches. Which of the following would shift the demand curve for
peaches to the right?
Answer: A. an increase in the price of apricots

7. Which of the following is an example of the law of demand?

Answer: D. When tuition at State U rises, fewer students enroll in courses at State U.

8. In 1971 a pocket calculator cost more than $75. In 2015 a calculator of the same quality cost less than $10. Which of the
following explanations is most consistent with these facts?
Answer: B. a change in technology

9. This graph illustrates the market for fine wine. If the current price is $50 per bottle, we expect the
Answer: A. price to decrease due to the surplus of wine.

10. This graph illustrates the market for gluten free chocolate cake. If the current price is $30 per cake, we expect the
Answer: B. price to increase due to the shortage of cake.

11. An advance in technology would shift the

Answer: A. supply curve to the right.

12. Which of the following would shift the supply curve of iPhones to the right?
Answer: A. a decrease in wages paid to workers making the iPhones.

13. Suppose that cold temperatures cause a decrease in the supply of tea. What should happen in the market for coffee,
assuming tea and coffee are substitutes?
C. Both the equilibrium price and quantity will increase.
14. “Connecticut should pass its Senate Bill 60, which states that during a 'severe weather event emergency, no person within
the chain of distribution of consumer goods and services shall sell or offer to sell consumer goods or services for a price
that is unconscionably excessive.”
Answer: B. disagree

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Chapter 5 – Elasticity and Its Application
1. The price elasticity of supply measures how much the quantity supplied of good X responds to changes in the price of
good X.
Answer: A. True

2. If farmers become more productive in growing wheat, total revenue of wheat farmers will rise.
Answer: B. False

3. A demand curve with a price elasticity of zero is a horizontal line.

Answer: B. False

4. A vertical supply curve has a price elasticity of zero.

Answer: A. True

5. Which of the following goods would have the least elastic demand?
Answer: A. milk

6. Which of the following statements is correct?

Answer: C. the demand for Coca-Cola is more elastic than the demand for soda.

7. If the price of yachts were to decrease by 10%, we would expect the number of yachts purchased to
Answer: A. increase by more than 10%.

8. If the price elasticity of demand for beef is 1.6, then a 10% increase in the price of beef would be expected to result in a
Answer: D. 16% decrease in quantity demanded.

9. Suppose the price of a Snickers bar is reduced from $1.65 to $1.35, and as a result the quantity demanded increases
from 1,400 to 1,600. Using the midpoint method, the price elasticity of demand for Snickers in the given price range is
Answer: C. 2/3.

10. The athletic director of State U suggests that the university should reduce ticket prices to its football games in order to
increase both attendance and revenue from ticket sales. Economic theory predicts that, for a price elastic demand, this
price reduction would
Answer: C. increase attendance and increase revenue.

11. The price elasticity of demand for gasoline has been estimated to be 0.2 for a 3-month, me period. During that, me period,
how will an increase in the supply of gasoline affect the total revenues of sellers of gasoline?
Answer: B. Total revenues will fall.

12. Last year Ashley bought 6 pairs of shoes when her income was $40,000. This year her income is $50,000, and she
purchased 10 pairs of shoes. Ashley’s
Answer: A. income elasticity of shoes is positive.

13. The cross-price elasticity of demand between golf balls and golf clubs is
B. negative.

14. A combination of great weather and beneficial scientific discoveries lead to a doubling of the per acre yield in cotton fields.
Assume the demand for cotton is inelastic. Will the cotton farmers be better off?
Answer: B. No

Chapter 6 – Supply, Demand, and Government Policies

1. When the government imposes a binding price ceiling, it causes a surplus of the good.
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 Answer: B. False

2. A $2 tax levied on the producers of a good has the same effect on buyers and sellers as a $2 tax levied on the consumers
of the good.
Answer: A. True

3. Rent controls cause

Answer: D. shortages of apartments which are larger in the long run than in the short run.

4. Which of the following would not be a result of a binding price ceiling on child care?
Answer: C. an increase in the quantity of child care supplied

5. Refer to the labor market graph. The Imposition of an $8 minimum wage would cause
Answer: B. unemployment of 35 labor hours.

6. The market for gluten-free breakfast cereal is shown in the graph above. Suppose the government enacts a $2 tax per
unit, imposed on the sellers. The policy will cause:
Answer: C. buyers and sellers to each bear a $1 burden of the tax.

7. Suppose that the City of Bloomington imposes a $1 per-tire recycling fee on buyers whenever they purchase a new tire.
We can illustrate the tax on a graph by shifting the demand curve
Answer: C. down by $1; the price paid by buyers would rise by less than $1.

8. The market for gluten-free breakfast cereal is shown in the graph. The after-tax price paid by buyers and price received by
sellers are, respectively,
Answer: Price paid by buyers Price received by sellers
D. $6.00 $4.00

9. Assuming the graph is drawn to scale, which of the following is true regarding the burden of the tax in market above?
Answer: B. Sellers pay a larger share of the tax because supply is more inelastic than demand.

10. In 2015, the minimum wage according to federal law was $7.25 per hour. Increasing minimum wage to $8 per hour
(approximately a 10% increase) will probably lead to:
Answer: D. All of the above

11. “Local ordinances that limit rent increases for some rental housing units, such as in New York and San Francisco; have
had a positive impact over the past three decades on the amount and quality of broadly affordable rental housing in cities
that have used them.”
Answer: B. disagree

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12. “If the federal minimum wage is raised gradually to $15-per-hour by 2020, the employment rate for low-wage U.S. workers
will be substantially lower than it would be under the status quo.”
Answer: A. agree