1. The phenomenon of scarcity stems from the fact that a.

most economies production methods are not very good. b. in most economies, wealthy people consume disproportionate quantities of goods and services. c. governments restricts production of too many goods and services. d. resources are limited. ANS: D DIF: 2 REF: 1-0

TOP: Scarcity MSC: Interpretive

2. Which of the following is true? a. Efficiency refers to the size of the economic pie; equity refers to how the pie is divided. b. Government policies usually improve upon both equity and efficiency. c. As long as the economic pie continually gets larger, no one will have to go hungry. d. Efficiency and equity can both be achieved if the economic pie is cut into equal pieces. ANS: A DIF: 2 REF: 1-1 TOP: Efficiency, Equity MSC: Interpretive 3. Mallory decides to spend three hours working overtime rather than watching a video with her friends. She earns $8 an hour. Her opportunity cost of working is a. the $24 she earns working. b. the $24 minus the enjoyment she would have received from watching the video. c. the enjoyment she would have received had she watched the video. d. nothing, since she would have received less than $24 of enjoyment from the video. ANS: C DIF: 3 REF: 1-1 TOP: Opportunity cost MSC: Applicative 4. The term "productivity" a. means the same thing as "efficiency." b. is seldom used by economists, as its meaning is not precise. c. refers to the quantity of goods and services produced from each hour of a worker's time. d. refers to the variety of goods and services from which households can choose when they shop. ANS: C DIF: 1 REF: 1-3 TOP: Productivity MSC: Definitional 5. Economists make assumptions in order to a. mimic the methodologies employed by other scientists. b. minimize the number of experiments that yield no useful data. c. minimize the likelihood that some aspect of the problem at hand is being overlooked. d. focus their thinking on the essence of the problem at hand. ANS: D PTS: 1 DIF: 2 REF: 2-1 TOP: Assumptions MSC: Interpretive

Figure 1-1

6. Refer to Figure 1-1. Which arrow represents the flow of goods and services? a. A b. B c. C d. D ANS: B PTS: 1 DIF: 2 REF: 2-1 TOP: Circular-flow diagram MSC: Interpretive 7. Refer to Figure 1-1. Which arrow shows the flow of income payments? a. A b. B c. C d. D ANS: D PTS: 1 DIF: 2 REF: 2-1 TOP: Circular-flow diagram MSC: Interpretive 8. Refer to Figure 1-1. Juan buys a new pair of shoes at a shoe store. To which of the arrows does this purchase directly contribute? a. A only b. A and B c. C only d. C and D ANS: B PTS: 1 DIF: 2 REF: 2-1 TOP: Circular-flow diagram MSC: Applicative

Figure 1-2

9. Refer to Figure 1-2. What is the opportunity cost to society of the movement from point A to point C? a. 50 baseballs b. 100 baseballs c. 100 bananas d. 300 bananas ANS: B PTS: 1 DIF: 2 REF: 2-1 TOP: Production possibilities frontier | Opportunity cost MSC: Interpretive 10. Refer to Figure 1-2. If the economy moves from point C to point B, then which of the following statements is correct? a. The economy benefited from a technological advance in the production of baseballs. b. The opportunity cost of each additional baseball is 2 bananas. c. The opportunity cost of each additional banana is 2 baseballs. d. The move involves no opportunity cost; it simply reflects the desires of the economys citizens. ANS: B PTS: 1 DIF: 3 REF: 2-1 TOP: Production possibilities frontier MSC: Applicative 11. A production possibilities frontier can shift outward if a. government increases the amount of money in the economy. b. there is a technological improvement. c. resources are shifted from the production of one good to the production of the other good. d. the economy abandons inefficient production methods in favor of efficient production methods. ANS: B PTS: 1 DIF: 2 REF: 2-1 TOP: Production possibilities frontier MSC: Interpretive 12. Which of the following statements is correct? a. Microeconomics and macroeconomics are two separate divisions of economics, completely independent of each other. b. Microeconomists focus their attention on markets for small products, while macroeconomics focus their attention on markets for large products. c. Microeconomics and macroeconomics are two distinct but closely intertwined fields of economics. d. It is possible to understand macroeconomics without understanding microeconomics, but not vice versa. ANS: C PTS: 1 DIF: 2 REF: 2-1 TOP: Microeconomics | Macroeconomics MSC: Interpretive

13. A normative statement describes how the world a. was in the past. b. is in the present. c. will be in the future. d. ought to be. ANS: D PTS: 1 DIF: 1 REF: 2-2 TOP: Normative statements MSC: Definitional 14. The difference between production possibilities frontiers that are bowed out and those that are straight lines is that a. bowed-out production possibilities frontiers apply to economies that face tradeoffs, whereas straight-line production possibilities frontiers apply to economies that do not face tradeoffs. b. bowed-out production possibilities frontiers apply to economies in which resources are not specialized, whereas straight-line production possibilities frontiers apply to economies in which resources are specialized. c. bowed-out production possibilities frontiers illustrate increasing opportunity cost, whereas straight-line production possibilities frontiers illustrate constant opportunity cost. d. straight-line production possibilities frontiers illustrate real-world conditions, whereas bowed-out production possibilities frontiers illustrate more simplistic assumptions. ANS: C PTS: 1 DIF: 3 REF: 3-1 TOP: Production possibilities frontier | Opportunity cost MSC: Applicative

Figure 1-3

15. Refer to Figure 1-3. For Ben, the opportunity cost of 1 pound of ice cream is a. 1/14 pound of cones. b. 1/2 pound of cones. c. 2 pounds of cones. d. 4 pound of cones. ANS: D PTS: 1 DIF: 2 REF: 3-2 TOP: Opportunity cost MSC: Applicative 16. Refer to Figure 1-3. For Jerry, the opportunity cost of 1 pound of cones is a. 1/3 pound of ice cream. b. 2/3 pound of ice cream. c. 3/2 pounds of ice cream. d. 2 pounds of ice cream. ANS: B PTS: 1 DIF: 2 REF: 3-2 TOP: Opportunity cost MSC: Applicative

17. Refer to Figure 1-3. Ben has an absolute advantage in a. neither good and he has a comparative advantage in neither good. b. neither good and he has a comparative advantage in cones. c. cones and he has a comparative advantage in cones. d. ice cream and he has a comparative advantage in ice cream. ANS: C PTS: 1 DIF: 3 REF: 3-2 TOP: Absolute advantage | Comparative advantage MSC: Applicative

Table 1-1
Labor Hours Needed to Make One: Basket Birdhouse 6 2 3 1.5 Amount Produced in 24 Hours: Baskets Birdhouses 4 12 8 16

Montana Missouri

18. Refer to Table 1-1. The opportunity cost of 1 basket for Montana is a. 1/3 birdhouse. b. 1 birdhouse. c. 3 birdhouses. d. 4 birdhouses. ANS: C PTS: 1 DIF: 2 REF: 3-2 TOP: Opportunity cost MSC: Applicative 19. Refer to Table 1-1. The opportunity cost of 1 birdhouse for Missouri is a. 1/2 basket. b. 1 basket. c. 1 1/2 baskets. d. 2 baskets. ANS: A PTS: 1 DIF: 2 REF: 3-2 TOP: Opportunity cost MSC: Applicative 20. Refer to Table 1-1. Montana has an absolute advantage in a. birdhouses and Missouri has an absolute advantage in baskets. b. baskets and Missouri has an absolute advantage in birdhouses. c. neither good and Missouri has an absolute advantage in both goods. d. both goods and Missouri has an absolute advantage in neither good. ANS: C PTS: 1 DIF: 2 REF: 3-2 TOP: Absolute advantage MSC: Applicative 21. Refer to Table 1-1. Montana has a comparative advantage in a. baskets and Missouri has a comparative advantage in birdhouses. b. birdhouses and Missouri has a comparative advantage in baskets. c. neither good and Missouri has a comparative advantage in both goods. d. both goods and Missouri has a comparative advantage in neither good. ANS: B PTS: 1 DIF: 2 REF: 3-2 TOP: Comparative advantage MSC: Applicative 22. Refer to Table 1-1. If Montana and Missouri trade based on the principle of comparative advantage, Montana will export a. baskets and Missouri will export birdhouses. b. birdhouses and Missouri will export baskets. c. neither good and Missouri will export both goods. d. both goods and Missouri will export neither good. ANS: B PTS: 1 DIF: 2 REF: 3-2 TOP: Comparative advantage | Trade MSC: Applicative

23. A competitive market is one in which a. there is only one seller, but there are many buyers. b. there are many sellers and each seller has the ability to set the price of his product. c. there are many sellers and they compete with one another in such a way that some sellers are always being forced out of the market. d. there are so many buyers and so many sellers that each has a negligible impact on the price of the product. ANS: D PTS: 1 DIF: 2 REF: 4-1 TOP: Competitive markets MSC: Definitional 24. Currently you purchase 6 packages of hot dogs a month. You will graduate from college in December and you will start a new job in January. You have no plans to purchase hot dogs in January. For you, hot dogs are a. a substitute good. b. a normal good. c. an inferior good. d. a law-of-demand good. ANS: C PTS: 1 DIF: 2 REF: 4-2 TOP: Inferior goods MSC: Interpretive 25. Two goods are substitutes if a decrease in the price of one good a. decreases the demand for the other good. b. decreases the quantity demanded of the other good. c. increases the demand for the other good. d. increases the quantity demanded of the other good. ANS: A PTS: 1 DIF: 2 REF: 4-2 TOP: Substitutes MSC: Definitional 26. Which of the following demonstrates the law of demand? a. Relative to last month, Jon buys more pretzels at $1.50 per pretzel since he got a raise at work this month. b. Melissa buys fewer muffins at $0.75 per muffin than at $1 per muffin, other things equal. c. Dave buys more donuts at $0.25 per donut than at $0.50 per donut, other things equal. d. Kendra buys fewer Snickers at $0.60 per Snickers since the price of Milky Ways fell to $0.50 per Milky Way. ANS: C PTS: 1 DIF: 2 REF: 4-2 TOP: Law of demand MSC: Interpretive 27. Ford Motor Company announces that it will offer $3,000 rebates on new Mustangs starting next month. As a result of this information, todays demand curve for Mustangs a. shifts to the right. b. shifts to the left. c. shifts either to the right or to the left, but we cannot determine the direction of the shift from the given information. d. will not shift; rather, the demand curve for Mustangs will shift to the right next month. ANS: B PTS: 1 DIF: 2 REF: 4-2 TOP: Expectations MSC: Interpretive

28. A movement along the supply curve might be caused by a change in a. technology. b. input prices. c. expectations about future prices. d. the price of the good or service that is being supplied. ANS: D PTS: 1 DIF: 2 REF: 4-3 TOP: Supply MSC: Interpretive

Figure 1-4

29. Refer to Figure 1-4. Equilibrium price and quantity are, respectively, a. $35 and 200. b. $35 and 600. c. $25 and 400. d. $15 and 200. ANS: C PTS: 1 DIF: 1 REF: 4-4 TOP: Equilibrium MSC: Interpretive 30. Refer to Figure 1-4. At a price of $35, a. there would be a shortage of 400 units. b. there would be a surplus of 200 units. c. there would be a surplus of 400 units. d. there would be an excess supply of 200 units. ANS: C PTS: 1 DIF: 2 REF: 4-4 TOP: Surpluses MSC: Interpretive

Figure 1-5

31. Refer to Figure 1-5. If the government imposes a price ceiling in this market at a price of $5.00, the result would be a a. shortage of 20 units. b. shortage of 10 units. c. surplus of 20 units. d. surplus of 10 units. ANS: A PTS: 1 DIF: 2 REF: 6-1 TOP: Price ceilings | Shortages MSC: Applicative 32. Refer to Figure 1-5. For a price ceiling to be binding, it would have to be set at a. any price below $6.00. b. a price between $4.00 and $6.00. c. a price between $6.00 and $8.00. d. any price above $6.00. ANS: A PTS: 1 DIF: 2 REF: 6-1 TOP: Price ceilings MSC: Applicative 33. Refer to Figure 1-5. Which of the following price controls would cause a shortage of 10 units of the good? a. a price ceiling of $5.50 b. a price floor of $5.50 c. a price ceiling of $6.50 d. a price floor of $6.50 ANS: A PTS: 1 DIF: 2 REF: 6-1 TOP: Price ceilings MSC: Applicative 34. Refer to Figure 1-5. Suppose a price ceiling of $4.50 is imposed. As a result, a. there is a shortage of 15 units of the good. b. the demand curve will shift to the left so as to now pass through the point (Q = 35, P = $4.50). c. the situation is very much like the one created by a binding minimum wage. d. the quantity of the good that is bought and sold is the same as it would have been had a price floor of $7.50 been imposed. ANS: D PTS: 1 DIF: 3 REF: 6-1 TOP: Price ceilings MSC: Analytical

35. Which of the following characterizations is correct? a. Rent control and the minimum wage are both examples of price ceilings. b. Rent control is an example of a price ceiling and the minimum wage is an example of a price floor. c. Rent control is an example of a price floor and the minimum wage is an example of a price ceiling. d. Rent control and the minimum wage are both examples of price floors. ANS: B PTS: 1 DIF: 2 REF: 6-1 TOP: Rent control | Minimum wage MSC: Interpretive 36. A minimum wage that is set above a market's equilibrium wage will result in a. an excess demand for labor, that is, unemployment. b. an excess demand for labor, that is, a shortage of workers. c. an excess supply of labor, that is, unemployment. d. an excess supply of labor, that is, a shortage of workers. ANS: C PTS: 1 DIF: 2 REF: 6-1 TOP: Minimum wage | Unemployment MSC: Interpretive 37. The term tax incidence refers to the a. widespread view that taxes always will be a fact of life. b. ongoing debate about which types of taxes make the most economic sense. c. division of the tax burden between buyers and sellers. d. division of the tax burden between sales taxes and income taxes. ANS: C PTS: 1 DIF: 1 REF: 6-2 TOP: Tax incidence MSC: Definitional

Figure 1-6

38. Refer to Figure 1-6. The equilibrium price in the market before the tax is imposed is a. $8. b. $6. c. $5. d. $3. ANS: B PTS: 1 DIF: 1 REF: 6-2 TOP: Equilibrium price MSC: Applicative

39. Refer to Figure 1-6. As the figure is drawn, who sends the tax payments to the government? a. the buyers b. the sellers c. A portion of the tax payments is sent by the buyers and the remaining portion is sent by the sellers. d. The question of who sends the tax payments cannot be determined from the figure. ANS: A PTS: 1 DIF: 2 REF: 6-2 TOP: Tax MSC: Applicative 40. Refer to Figure 1-6. The effective price that buyers pay after the tax is imposed is a. $8. b. $6. c. $5. d. $3. ANS: A PTS: 1 DIF: 2 REF: 6-2 TOP: Tax | Equilibrium price MSC: Applicative 41. Refer to Figure 1-6. The price that sellers receive after the tax is imposed is a. $8. b. $6. c. $5. d. $3. ANS: C PTS: 1 DIF: 2 REF: 6-2 TOP: Tax | Equilibrium price MSC: Applicative 42. Refer to Figure 1-6. The amount of the tax per unit is a. $1. b. $2. c. $3. d. $5. ANS: C PTS: 1 DIF: 2 REF: 6-2 TOP: Tax MSC: Applicative 43. Refer to Figure 1-6. Suppose the same S and D curves apply, and a tax of the same amount per unit as shown here is imposed. Now, however, the sellers of the good, rather than the buyers, are required to pay the tax to the government. Now, relative to the case depicted in the figure, a. the burden on buyers will be larger and the burden on sellers will be smaller. b. the burden on buyers will be smaller and the burden on sellers will be larger. c. the burden on buyers will be the same and the burden on sellers will be the same. d. The relative burdens in the two cases cannot be determined without further information. ANS: C PTS: 1 DIF: 3 REF: 6-2 TOP: Tax burden MSC: Applicative 44. Welfare economics is the study of a. the well-being of less fortunate people. b. welfare programs in the United States. c. the effect of income redistribution on work effort. d. how the allocation of resources affects economic well-being. ANS: D PTS: 1 DIF: 1 REF: 7-0 TOP: Economic welfare MSC: Definitional

Figure 1-7. On the graph below, Q represents the quantity of the good and P represents the good's price.

45. Refer to Figure 1-7. At the equilibrium, consumer surplus is measured by the area a. ACG. b. AFG. c. DBG. d. CFG. ANS: B PTS: 1 DIF: 1 REF: 7-3 TOP: Consumer surplus MSC: Interpretive 46. Refer to Figure 1-7. At the equilibrium, producer surplus is measured by the area a. ACG. b. AFG. c. DBG. d. CFG. ANS: D PTS: 1 DIF: 1 REF: 7-3 TOP: Producer surplus MSC: Interpretive 47. Refer to Figure 1-7. At the equilibrium, consumer surplus amounts to a. $24. b. $36. c. $48. d. $72. ANS: B PTS: 1 DIF: 3 REF: 7-3 TOP: Consumer surplus MSC: Analytical 48. Refer to Figure 1-7. At the equilibrium, producer surplus amounts to a. $32. b. $48. c. $72. d. $144. ANS: C PTS: 1 DIF: 3 REF: 7-3 TOP: Producer surpluss MSC: Analytical

Figure 1-8

49. Refer to Figure 1-8. Buyers who value this good more than price are represented by which line segment? a. AC. b. CE. c. BC. d. CD. ANS: A PTS: 1 DIF: 1 REF: 7-3 TOP: Price | Value MSC: Interpretive 50. Refer to Figure 1-8. If the government mandated a price increase from Pe to a higher price, then a. total surplus would decrease. b. consumer surplus would increase. c. total surplus would increase, since producer surplus would increase. d. total surplus would remain unchanged. ANS: A PTS: 1 DIF: 2 REF: 7-3 TOP: Total surplus MSC: Interpretive

Exam 1 Answers 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. D A C C D B D B B B B C D C D B C C A C B B D C A C B D C C A A A D B C C B A A C C C D B D B C A A