1.    Which of the following is not a basic question that each economy must answer?

 [removed]A) Which resources are scarce?
[removed]B) For whom shall the goods be produced?
[removed]C) How shall goods be produced?
[removed]D) What goods shall be produced?

2.    If Kim can either wash 10 cars or wax 2 cars during a day, and Vince can either wash 17 cars or wax 2 cars during a day, then according to the law of comparative advantage,

3.    The following question(s) relate(s) to the material in the addendum to Chapter 2. Use the production possibilities data for Lebos and Slavia below to answer the question(s).

Table 2-4

Refer to Table 2-4. Which of the following is correct?

[removed]A) In Lebos, the opportunity cost of producing one unit of food is equal to one unit of clothing.
[removed]B) In Slavia, the opportunity cost of producing one unit of food is equal to two units of clothing.
[removed]C) The opportunity cost of producing food in Lebos is less than the opportunity cost of producing food in Slavia.
[removed]D) All of the above are correct.

4. Which of the following is NOT true of opportunity cost?

[removed]A) Opportunity costs are subjective because they depend upon how the decision-maker values his or her options.
[removed]B) Opportunity costs are only the monetary costs of lost options.
[removed]C) Opportunity costs are the highest-valued alternative sacrificed in order to choose an option.
[removed]D) Only the decision-maker can determine his or her opportunity costs for any particular action.

5.  Assume the demand curve for cookies is downward sloping. If the price of cookies falls from $1.50 to $1.25 per dozen,

[removed]A) the demand for cookies will fall.
[removed]B) the demand for cookies will rise.
[removed]C) a larger quantity of cookies will be demanded.
[removed]D) a smaller quantity of cookies will be demanded.

6. The price of a good will tend to rise when

[removed]A) there is excess demand for the good.
[removed]B) there is excess supply of the good.
[removed]C) demand for the good decreases.
[removed]D) the supply of the good increases.

7. If we observe an increase in the price of a good and a decrease in the amount of the good bought and sold, this could be explained by

[removed]A) an increase in the supply of the good.
[removed]B) an increase in the demand for the good.
[removed]C) a decrease in the demand for the good.
[removed]D) a decrease in the supply of the good.

8. Suppose demand increases and supply increases. Which of the following will happen?

[removed]A) Equilibrium price will rise, fall, or stay the same while equilibrium quantity will decrease.
[removed]B) Equilibrium price will rise, fall, or stay the same while equilibrium quantity will increase.
[removed]C) Equilibrium quantity will rise, fall, or stay the same and equilibrium price will increase.
[removed]D) Equilibrium quantity will rise, fall, or stay the same while equilibrium price will decrease.
[removed]E) The change in equilibrium price and quantity cannot be determined.

9. The invisible hand principle, as developed by Adam Smith in The Wealth of Nations, states that

[removed]A) government control over economic activity is essential for the talents of individuals to be directed toward their highest valued use.
[removed]B) the economic wealth of a nation is determined by a nation’s holdings of precious metals, such as gold and silver.
[removed]C) public policy should prohibit domestic producers from selling their goods to foreigners.
[removed]D) competitive markets will bring individual self-interest and the public interest into harmony.

Refer to Figure 3-18. Which area represents the increase in consumer surplus when the price falls from P₁ to P₂?

[removed]A) ABD
[removed]B) ACF
[removed]C) DEF
[removed]D) BCFD

11. According to the law of supply, as the price of a good decreases

[removed]A) buyers will buy more of the good.
[removed]B) sellers will produce more of the good.
[removed]C) buyers will buy less of the good.
[removed]D) sellers will produce less of the good.

12. If the demand for a good increases, which of the following will generally occur in a market setting?

[removed]A) The price of the good will decrease.
[removed]B) The supply of the good will increase.
[removed]C) The quantity supplied will increase.
[removed]D) Producer profits will fall.

13. Other things constant, as the price of a resource increases

[removed]A) the quantity of the resource demanded falls.
[removed]B) the quantity of the resource supplied falls.
[removed]C) the price of the product the resource helps to produce falls.
[removed]D) there is less of an incentive for users of the resource to find substitute resources.

14. If a government price control succeeds in affecting price, it can be expected to lead to a corresponding

[removed]A) decrease in the quantity of sales only if the price is forced down.
[removed]B) decrease in the quantity of sales if the price is forced down and an increase in the volume of sales if the price is forced up.
[removed]C) decrease in the quantity of sales whether the price is forced up or down.
[removed]D) increase in the quantity of sales whether the price is forced up or down.

15. When a price floor is imposed above the equilibrium price of a commodity,

[removed]A) quantity demanded will be greater than quantity supplied for the good.
[removed]B) the quantity demanded by consumers will be greater than at the equilibrium price.
[removed]C) a shortage of the good will develop.
[removed]D) a surplus of the good will develop.

16. If Heather’s tax liability increases from $10,000 to $13,500 when her income increases from $30,000 to $40,000, her marginal tax rate is

[removed]A) 33 percent.
[removed]B) 35 percent.
[removed]C) 50 percent.
[removed]D) 60 percent.

17. According to the Laffer curve,

[removed]A) an increase in tax rates will always cause tax revenues to increase.
[removed]B) when marginal tax rates are high, an increase in tax rates is likely to cause tax revenues to increase.
[removed]C) when marginal taxes are low, an increase in tax rates will probably cause tax revenues to decline.
[removed]D) when marginal tax rates are high, a reduction in tax rates may increase tax revenue.

18. When the government increased its involvement in rescue efforts on Mount McKinley (the tallest peak in North America), the number of mountain climbing deaths

[removed]A) decreased slightly.
[removed]B) decreased substantially.
[removed]C) remained the same.
[removed]D) increased.

19. Use the figure below to answer the following question(s).

Refer to Figure 4-7. The supply curve S1 and the demand curve D indicate initial conditions in the market for gasoline. A $.60-per-gallon excise tax on gasoline is levied, which shifts the supply curve from S1 to S2. Imposing the tax causes the equilibrium price of gasoline to increase from

[removed]A) $.80 to $1.40.
[removed]B) $.80 to $1.50.
[removed]C) $.90 to $1.50.
[removed]D) $.90 to $1.40.

20. Refer to Figure 4-7. The supply curve S₁ and the demand curve D indicate initial conditions in the market for gasoline. A $.60-per-gallon excise tax on gasoline is levied, which shifts the supply curve from S₁ to S₂. Which of the following states the actual burden of the tax?

[removed]A) $.50 for buyers and $.10 for sellers
[removed]B) $.50 for sellers and $.10 for buyers
[removed]C) The entire $.60 falls on sellers.
[removed]D) The entire $.60 falls on buyers.

21. Use the figure below to answer the following question(s).

Refer to Figure 4-9. The market for gasoline was initially in equilibrium at point b and a $.40 excise tax is illustrated. Which of the following states the actual burden of the tax?

[removed]A) $.20 for buyers and $.20 for sellers
[removed]B) $.30 for buyers and $.10 for sellers
[removed]C) The entire $.40 falls on sellers.
[removed]D) The entire $.40 falls on buyers.

22.

Refer to Figure 4-17. Suppose a price floor of $7.00 is imposed. As a result,

[removed]A) buyers’ total expenditure on the good decreases by $20.00.
[removed]B) the supply curve will shift to the left so as to now pass through the point (Q = 40, P = $7.00).
[removed]C) the quantity of the good demanded decreases by 20 units.
[removed]D) the price of the good continues to serve as the rationing mechanism.

23.

Refer to Figure 4-25. The equilibrium price before the tax is imposed is

[removed]A) P1
[removed]B) P2
[removed]C) P3
[removed]D) impossible to determine from the figure.

24. Black markets that operate outside the legal system are often characterized by

[removed]A) low profits for suppliers.
[removed]B) lower opportunity costs for suppliers and buyers.
[removed]C) decreased prices.
[removed]D) the use of violence as a means of settling disputes.

25. Suppose external costs are present in a market which results in the actual market price of $50 and market output of 800 units. How does this outcome compare to the efficient, ideal equilibrium?

[removed]A) The efficient outcome would be greater than 800 units.
[removed]B) The efficient outcome would be less than 800 units.
[removed]C) The efficient outcome would also be 800 units.
[removed]D) The efficient price would be less than $50.

26. Suppose external costs are present in a market which results in the actual market price of $84 and market output of 320 units. How does this outcome compare to the efficient, ideal equilibrium?

[removed]A) The efficient price would be higher than $84.
[removed]B) The efficient price would be lower than $84.
[removed]C) The efficient price would also be $84.
[removed]D) The efficient output would be greater than 320 units.

27. Compared to ideal economic efficiency, when the production of a good generates external benefits, competitive markets will likely result in an output that is too

[removed]A) large and a price that is too high.
[removed]B) large and a price that is too low.
[removed]C) small and a price that is too high.
[removed]D) small and a price that is too low.

28. A car sells at different prices at different dealerships in a local market. If a consumer has imperfect information about the price of a car at each dealership, he should

[removed]A) always gather all available information about prices.
[removed]B) gather information about prices until the expected marginal benefit of more information equals the marginal cost of gathering it.
[removed]C) gather information about prices only if it can be gathered without cost.
[removed]D) ignore information about prices because it is irrelevant to making an “optimally imperfect” decision.

29. The problem created when it is difficult to exclude nonpaying customers is called the

[removed]A) consumption-payment link problem.
[removed]B) free-rider problem.
[removed]C) public sector dilemma.
[removed]D) asymmetric information problem.

30. Which of the following provides the best summary of the basic idea of public choice analysis?

[removed]A) Public choice analysis applies the principles of economics to political science topics.
[removed]B) Public choice analysis takes the principles of political science and applies them to the traditional topics of economics.
[removed]C) Public choice analysis uses the principle of majority rule to determine the efficiency of an action.
[removed]D) Public choice analysis indicates there is a sharp distinction between economic and political topics.

31. In a representative democracy, government action results from the

[removed]A) choices of voters.
[removed]B) legislative decisions by politicians.
[removed]C) political action of organized interest groups.
[removed]D) complex interaction of all of the above.

[removed]A) logrolling and pork barrel legislation
[removed]B) the rational-ignorance effect
[removed]C) public goods
[removed]D) both a and b, but not c

33. Use the figure below to answer the following question(s).

Figure 6-1 illustrates the four possibilities of the distribution of costs and benefits among voters for a government project. For which type would the government most likely fail to undertake many projects that would be considered efficient or productive (in other words, do too few of them relative to economic efficiency)?

[removed]A) type A
[removed]B) type B
[removed]C) type C
[removed]D) type D

34. Despite many differences, the market and public sectors are similar in which one of the following respects?

[removed]A) In both sectors, income (or power) is distributed on the basis of the same criterion.
[removed]B) Consumers in the market sector and voters in the public sector are equally well informed.
[removed]C) Voluntary exchange, rather than compulsion, is characteristic of both sectors.
[removed]D) It will be costly to use scarce goods, whether through the private or the public sector.

35. Studies indicate that the demand for fresh tomatoes is much more elastic than the demand for salt. These findings reflect that

[removed]A) tomatoes are a necessity while salt is a luxury.
[removed]B) it takes longer for consumers to adjust to a change in the price of salt than to a change in the price of tomatoes.
[removed]C) salt will not spoil as easily as fresh tomatoes.
[removed]D) more good substitutes exist for fresh tomatoes than for salt.

36. The principle of diminishing marginal utility says that

[removed]A) as more of a good or service is consumed, demand will decrease.
[removed]B) as more of a good or service is consumed, the price will rise.
[removed]C) the marginal utility of additional units consumed will increase.
[removed]D) the marginal utility of additional units consumed will decline.

37. The demand curve for a good is very unlikely to be perfectly vertical because

[removed]A) scarcity and limited income restrict the ability of consumers to afford goods as they become very expensive.
[removed]B) as the price of a good rises to high enough levels, the incentive for other suppliers to invent new substitutes for the good increases.
[removed]C) consumers generally do not care about the price of the goods they consume.
[removed]D) both a and b are true.

38. As the period for firms to expand output is lengthened, the elasticity of the market supply curve will

[removed]A) approach zero.
[removed]B) increase.
[removed]C) decrease.
[removed]D) remain the same since time does not affect the elasticity of market supply.

39. The price elasticity of demand for automobiles measures the responsiveness of

[removed]A) consumer purchases to a change in the price of automobiles.
[removed]B) consumer purchases to a change in the quality of automobiles.
[removed]C) supplier production levels to a change in the price of automobiles.
[removed]D) consumer purchases of automobiles to a change in their income.

40. Which of the following is true regarding the price elasticity of demand?

[removed]A) Demand is generally more elastic in the long run than in the short run.
[removed]B) Along a single demand curve, demand elasticity decreases as you move down the curve (to lower prices).
[removed]C) A demand curve that is flatter (has a less steep slope) is relatively more elastic than a demand curve that has a steeper slope.
[removed]D) All of the above are true.

41. Essay (Answer ONE of the Following Question)

·         Economists maintain that the price of a product has no effect on demand. How can this be true?

·         National defense is considered a public good because there appears to be no limits to the nonrivalry-in-consumption characteristic, and exclusion of nonpayers is impossible. Are there any other goods that so perfectly meet both public goods criteria?

·         Congressman Localstuff always votes for a balanced budget amendment to the U.S. Constitution. He also always votes for spending bills supported by the leadership of his political party. Is this rational?