Problem set #1

1.
2.
3.
4.
5.
Problem 1.7 on page 79 in your book
Problem 1.8 on page 119 in your book
Problem 1.9 on page 119 in your book
Problem 2.7 on page 121 in your book
In economics, choices must be made because we live in a world of
A)

unemployment.
B)

unlimited resources.
C)

greed.
D)

scarcity.

6.

Which of the following statements is true about scarcity?

A)

Scarcity is not a problem for the wealthy.

B)

Scarcity arises when there is a wide disparity in income distribution.

C)

Scarcity refers to the situation in which unlimited wants exceed limited resources.
D)

Scarcity is only a problem when a country has too large a population.

7.

By definition, economics is the study of

A)
the choices people make to attain their goals, given their scarce resources.
B)

how to make money in a market economy.

C)

how to make money in the stock market.

D)

supply and demand.

8.

An economic ________ is a simplified version of some aspect of economic life used to analyze an economic issue.
A)

model
B)

market
C)

variable
D)

trade-off

9.

Where do economic agents such as individuals, firms and nations, interact with each other?
A)

in public locations monitored by the government

B)

in any arena that brings together buyers and sellers

C)

in any location where transactions can be monitored by consumer groups and taxed by the government
D)

in any physical location people where people can physically get together for selling goods, such as shopping malls

10.
The term ________ in economics refers to a group of buyers and sellers of a product and the arrangement by which they
come together to trade.
A)

market
B)

cooperative
C)

trade-off
D)

collective

11.

Economists assume that individuals

A)

will never take actions to help others.

B)

behave in unpredictable ways.

C)

prefer to live in a society that values fairness above all else.

D)

are rational and respond to incentives.

12.

Economists assume that rational people do all of the following except

A)

respond to economic incentives.

B)

weigh the benefits and costs of all possible alternative actions.

C)

use all available information as they act to achieve their goals.

 D)

undertake activities that benefit others and hurt themselves.

13.

Economics does not study correct or incorrect behaviors but rather it assumes that economic agents behave ________,
meaning they make the best decisions given their knowledge of the costs and benefits.
A)

rationally
B)

selfishly
C)

equitably
D)

emotionally

14.

Consider the following statements:

a. Car owners purchase more gasoline from a gas station that sells gasoline at a lower price than other rival gas stations
in the area.
b. Banks do not take steps to increase security since they believe it is less costly to allow some bank robberies than
to install expensive security monitoring equipment.
c. Firms produce more of a particular DVD when its selling price rises.

Which of the above statements demonstrates that economic agents respond to incentives?
A)

a only.
B)

b only.
C)

c only.
D)

a and b.
E)
a, b, and c.

15.

In economics, the term ________ means "additional" or "extra."

A)

optimal
B)

allocative
C)

marginal
D)

equity

16.

A grocery store sells a bag of potatoes at a fixed price of $2.30. Which of the following is a term used by economists to
describe the money received from the sale of an additional bag of potatoes?
A)

marginal revenue
B)

net benefit
C)

gross earnings
D)

pure profit
E)

marginal costs

17.

Marginal analysis involves undertaking an activity

A)

until its marginal benefits equal marginal costs.

 B)

only when its marginal benefits are positive.

C)

until its marginal costs start declining.

D)

only if its marginal costs are greater than its marginal benefits.

18.

The revenue received from the sale of ________ of a product is a marginal benefit to the firm.
A)

the total number of units

B)

only profitable units

C)

no units
D)

an additional unit

19.

Making optimal decisions "at the margin" requires

A)

weighing the costs and benefits of a decision before deciding if it should be pursued.
B)

making borderline decisions.

C)

making decisions according to one's whims and fancies.

D)

making consistently irrational decisions.

20.
Making "how much" decisions involve
A)

calculating the total costs of the activity and determining if you can afford to incur that expenditure.
B)

calculating the total benefits of the activity and determining if you are satisfied with that amount.
C)

determining the additional benefits and the additional costs of that activity.
D)

calculating the average benefit and the average cost of an activity to determine if it is worthwhile undertaking that
activity.

21.

DeShawn's Detailing is a service that details cars at the customers' homes or places of work. DeShawn's cost for a basic
detailing package is $40, and he charges $75 for this service. For a total price of $90, DeShawn will also detail the car's
engine, a service that adds an additional $20 to the total cost of the package. What is DeShawn's marginal benefit if he
sells a basic detailing package?
A)

$35
B)

$75
C)

He makes a marginal loss of $15, not a marginal benefit.

D)

The marginal benefit cannot be determined.

22.

DeShawn's Detailing is a service that details cars at the customers' homes or places of work. DeShawn's cost for a basic
detailing package is $40, and he charges $75 for this service. For a total price of $90, DeShawn will also detail the car's
engine, a service that adds an additional $20 to the total cost of the package. What is the marginal cost of adding the
engine detailing to the basic detailing package?
A)

$20
B)
$30
C)

$60
D)

$60 plus the value of his time

23.

DeShawn's Detailing is a service that details cars at the customers' homes or places of work. DeShawn's cost for a basic
detailing package is $40, and he charges $75 for this service. For a total price of $90, DeShawn will also detail the car's
engine, a service that adds an additional $20 to the total cost of the package. Should DeShawn continue to offer the
engine detailing service?
A)

More information is needed for DeShawn to make this decision.

B)

yes, he still makes a profit by selling the engine detailing service with the basic detailing package
C)

no, his marginal benefit is less than his marginal cost

D)

yes, but only if he raises the price of the basic detailing package

24.

The three fundamental questions that any economy must address are:
A)

How much will be saved; what will be produced; and how can these goods and services be fairly distributed?
B)

What will be the prices of goods and services; how will these goods and services be produced; and who will receive
them?
C)

Who gets jobs; what wages do workers earn; and who owns what property?
D)

What goods and services to produce; how will these goods and services be produced; and who receives them?
 25.

Which of the following is not an example of an economic trade-off that a firm has to make?
A)

whether it is to outsource the production of a good or service

B)

whether it should produce more of its product

C)

whether it is cheaper to produce with more machines or with more workers

D)

whether or not consumers will buy its products

26.

The Coffee Nook, a small cafe near campus, sells cappuccinos for $2.50 and Russian tea cakes for $1.00 each. What is the
opportunity cost of buying a cappuccino?
A)

2 1/2 Russian tea cakes

B)

$1.00
C)

$2.50
D)

2/5 of a Russian tea cake

27.

Arlene quits her $125,000-a-year job to take care of her ailing parents. What is the opportunity cost of her decision?
A)

at least $125,000
B)

zero, since she will no longer be earning a salary

 C)

It depends on the "going rate" for home-care providers.

D)

the value she attributes to the satisfaction she receives from taking care of her parents

28.

The decision about what goods and services will be produced made in a market economy is made by
A)

producers deciding what society wants most.

B)

consumers and firms choosing which goods and services to buy or produce.
C)

workers deciding to produce only what the boss says must be produced.
D)

consumers dictating to firms what they need most.

E)

lawmakers in the government voting on what will be produced.

29.

________ is a situation in which a good or service is produced at the lowest possible cost.
A)

Allocative efficiency
B)

Equity
C)

Optimal marginalism
D)

Productive efficiency
 30.

Allocative efficiency is achieved when firms produce goods and services

A)

that consumers value most.

B)

at a marginal cost of zero.

C)

at the lowest opportunity cost.

D)

at the lowest possible cost.

31.

Which of the following statements is true about competition in a market?

A)

Competition forces firms to outsource the production of their labor-intensive products.

B)

Competition forces firms to add only low profit margins to their costs of production.
C)

Competition forces firms to produce and sell products as long as the marginal benefit to consumers exceeds the marginal
cost of production.
D)

Competition forces firms to undercut their selling price, thus benefiting consumers who will be able to purchase products
at the lowest price possible.

32.

In economics, the term "equity" means

A)

economic benefits are distributed fairly.

B)

only elected officials have high standards of living.

C)
everyone has an equal standard of living.
D)

the hardest working individuals consume all they want.

33.

Which of the following is a positive economic statement?

A)

Foreign workers should not be allowed to work for lower wages than the citizens of a country.
B)

People should not buy SUVs.

C)

Scarcity necessitates that people make trade-offs.

D)

The government should mandate electric automobiles.

34.

Microeconomics is the study of

A)

the economy as a whole.

B)

topics such as unemployment, inflation, and economic growth.

C)

the global economy.

D)

how households and firms make choices.

35.

Microeconomics is the study of

A)

the economy as a whole.

B)
topics such as unemployment, inflation, and economic growth.
C)

the global economy.

D)

how households and firms make choices.

36.

The production possibilities frontier shows the ________ combinations of two products that may be produced in a
particular time period with available resources.
A)

equitable
B)

only
C)

minimum attainable
D)

maximum attainable

37.

A production possibilities frontier with a bowed outward shape indicates

A)

constant opportunity costs as more and more of one good is produced.

B)

increasing opportunity costs as more and more of one good is produced.

C)

decreasing opportunity costs as more and more of one good is produced.

D)

the possibility of inefficient production.

38.

Economic decline (negative growth) is represented on a production possibilities frontier model by the production
possibility frontier
A)

shifting inward.
B)

becoming steeper.
C)

shifting outward.
D)

becoming flatter.
Figure 2-4

Figure 2-4 shows various points on three different production possibilities frontiers for a nation.

39.

Refer to Figure 2-4. A movement from X to Y

A)

is the result of advancements in plastic production technology only, with no change in food production technology.
B)

could occur because of an influx of immigrant labor.

C)

could be due to a change in consumers' tastes and preferences.

D)

is the result of advancements in food production technology only, with no change in the technology for plastic
production.

40.

Refer to Figure 2-4. A movement from Y to Z

A)

represents an increase in the demand for plastic products.

B)

is the result of advancements in plastic production technology.

C)
is the result of advancements in food production technology.
D)

could occur because of general technological advancements.

41.

Refer to Figure 2-4. Consider the following events:

a. an increase in the unemployment rate
b. a decrease in a nation's money supply
c. a war that kills a significant portion of a nation's population

Which of the events listed above could cause a movement from Y to W ?

A)

c only
B)

a and c only
C)

a and b only
D)

a, b and c
E)

a only

42.

Refer to Figure 2-4. Consider the following movements:

a. from point V to point W
b. from point W to point Y
c. from point Y to point Z

Which of the movements listed above represents economic growth?

A)

b and c only
B)

a only
C)

b only
D)
a, b, and c

43.

Refer to Figure 2-4. Consider the following events:

a. a decrease in the unemployment rate
b. general technological advancement
c. an increase in consumer wealth

Which of the events listed above could cause a movement from V to W ?

A)

a and b only
B)

a only
C)

a, b, and c
D)

b and c only

44.

Refer to Figure 2-4. Consider the following events:

a. a reduction in the patent protection period to no more than 2 years
b. a war that destroys a substantial portion of a nation's capital stock
c. the lack of secure and enforceable property rights system

Which of the events listed above could cause a movement from W to V?

A)

a and c only
B)

a only
C)

b and c only
D)

a, b, and c
E)

a and b only
 45.

Comparative advantage means the ability to produce a good or service

A)

at a lower selling price than any other producer.

B)

of a higher quality than any other producer.

C)

at a lower opportunity cost than any other producer.

D)

at a higher profit level than any other producer.

46.

Specializing in the production of a good or service in which one has a comparative advantage enables a country to do all
of the following except
A)

engage in mutually beneficial trade with other nations.

B)

consume a combination of goods that lies outside its own production possibilities frontier.
C)

increase the variety of products that it can consume with no increase in resources.
D)
produce a combination of goods that lies outside its own production possibilities frontier.
 Problem set 2

1. Problem 3.5 on page 153 in your book

2. Problem 4.7 on page 154 in your book
3. Problem 4.14 on page 154 in your book
4. Problem 3.14 on page 183 in your book
5.

Which of the following is not a factor of production?

A)

$1,000 in cash
B)

a drill press in a machine shop

C)

the manager of the local tire shop

D)

an acre of farmland

6.

An example of a factor of production is

A)

the computers exported by Dell.

B)

a worker hired by Dell.

C)

a computer produced by an Dell.

D)

stock issued by Dell.

7.

When you purchase a new pair of jeans you do so in the

A)

product market.
B)
resource market.
C)

factor market.
D)

input market.

8.

Which of the following statements about an entrepreneur is false?

A)

organizes the other factors of production into a working unit

B)

develops the vision for the firm and funds the producing unit
C)

risks the personal funds provided

D)

sells his entrepreneurial services in the output market

9.

Households
A)

have no influence on the circular flow in a market economy.

B)

sell goods in the product market.

C)

sell resources in the factor market.

D)

purchase resources in the factor market.

10.

In the circular flow model, producers

A)
sell goods and services in the input market.
B)

spend earnings from resource sales on goods and services in the product market.
C)

and households spend earnings from resource sales on goods and services in the factor market.
D)

hire resources sold by households in the factor market.

Figure 2-8

11.

Refer to Figure 2-8. One segment of the circular flow diagram in the figure shows the flow of labor services from market
K to economic agents J. What is market K and who are economic agents J?
A)

K = product markets; J = firms

B)

K = product markets; J = households

C)
K = factor markets; J = households
D)

K = factor markets; J = firms

12.

Refer to Figure 2-8. One segment of the circular flow diagram in the figure shows the flow of wages and salaries from
market K to economic agents M. What is market K and who are economic agents M?
A)

K = product markets; M = firms

B)

K = product markets; M = households

C)

K = factor markets; M = households

D)

K = factor markets; M = firms

Figure 2-11

13.

Refer to Figure 2-11. Which two arrows in the diagram depict the following transaction: LaDonna sells 20 pairs of
sunglasses at the Oakley store.
A)

K and M
B)

J and M
C)
K and G
D)

J and G

14.

Refer to Figure 2-11. Which two arrows in the diagram depict the following transaction: Dorian Gray hires "Wild Oscar",
a professional portrait artist, to paint his picture.
A)

J and M
B)

K and G
C)

J and G
D)

K and M

15.

Refer to Figure 2-11. Which two arrows in the diagram depict the following transaction: Barney earns $250 for selling
scissors and razors to Floyd's Barber Shop.
A)

J and G
B)

K and M
C)

J and M
D)

K and G

16.

Adam Smith's invisible hand refers to

A)
the government's unobtrusive role in ensuring that the economy functions efficiently.
B)

the process by which individuals acting in their own self-interest bring about a market outcome that benefits society as a
whole.
C)

property ownership laws and the rule of the court system.

D)

the laws of nature that influence economics decisions.

17.

All of the following are critical functions of the government in facilitating the operation of a market economy except
A)

protecting private property.

B)

ensuring an equal distribution of income to all citizens.

C)

enforcing property rights.

D)

enforcing contracts.

18.

What is the difference between an "increase in demand" and an "increase in quantity demanded"?
A)

An "increase in demand" is represented by a rightward shift of the demand curve while an "increase in quantity
demanded" is represented by a movement along a given demand curve.
B)

There is no difference between the two terms; they both refer to a movement downward along a given demand curve.
C)

There is no difference between the two terms; they both refer to a shift of the demand curve.
D)
An "increase in demand" is represented by a movement along a given demand curve, while an "increase in quantity
demanded" is represented by a rightward shift of the demand curve.

19.

The law of demand implies, holding everything else constant, that

A)

as the price of bagels increases, the quantity of bagels demanded will decrease.
B)

as the price of bagels increases, the quantity of bagels demanded will increase.
C)

as the price of bagels increases, the demand for bagels will decrease.
D)

as the price of bagels increases, the demand for bagels will increase.

20.

Which of the following will shift the demand curve for a good?
A)

a decrease in the price of a complementary good

B)

an increase in the price of the good

C)

a change in the technology used to produce the good

D)

a decrease in the price of the good

21.

A movement along the demand curve for toothpaste would be caused by

A)

a change in population.
B)

a change in consumer income.

C)
a change in the price of toothbrushes.
D)

a change in the price of toothpaste.

22.

If the price of grapefruit rises, the substitution effect due to the price change will cause
A)

a decrease in the demand for oranges, a substitute for grapefruit.

B)

a decrease in the quantity demanded of grapefruit.

C)

a decrease in the demand for grapefruit.

D)

a decrease in the quantity supplied of grapefruit.

Figure 3-1

23.

Refer to Figure 3-1. An increase in population would be represented by a movement from

A)

A to B.
B)

D2 to D1.
C)

D1 to D2.
 D)

B to A.

24.

Refer to Figure 3-1. A decrease in taste or preference would be represented by a movement from
A)

D1 to D2.
B)

B to A.
C)

A to B.
D)

D2 to D1.

25.

Refer to Figure 3-1. If the product represented is an inferior good, an increase in income would be represented by a
movement from
A)

D1 to D2.
B)

A to B.
C)

B to A.
D)

D2 to D1.

26.

Refer to Figure 3-1. A decrease in the price of the product would be represented by a movement from
A)

D2 to D1.
 B)

A to B.
C)

D1 to D2.
D)

B to A.

27.

If in the market for peaches, the supply curve has shifted to the left,
A)

the quantity of peaches supplied has increased.

B)

the quantity of peaches supplied has decreased.

C)

the supply of peaches has decreased.

D)

the supply of peaches has increased.

28.

One would speak of a change in the quantity of a good supplied, rather than a change in supply, if
A)

prices of substitutes in production change.

B)

supplier expectations about future prices change.

C)

the cost of producing the good changes.

D)

the price of the good changes.

29.
Which of the following would cause a decrease in the supply of milk?
A)

an increase in the price of cookies (assuming that milk and cookies are complements)
B)

an increase in the number of firms that produce milk

C)

a decrease in the price of milk

D)

an increase the price of a product that producers sell instead of milk

Figure 3-2

30.

Refer to Figure 3-2. An increase in price of inputs would be represented by a movement from
A)

S1 to S2.
B)

B to A.
C)

S2 to S1.
D)

A to B.

31.

Refer to Figure 3-2. An increase in the number of firms in the market would be represented by a movement from
 A)

S1 to S2.
B)

S2 to S1.
C)

B to A.
D)

A to B.

32.

Refer to Figure 3-2. An increase in the price of substitutes in production would be represented by a movement from
A)

B to A.
B)

S1 to S2.
C)

A to B.
D)

S2 to S1.

33.

Refer to Figure 3-2. A decrease in the price of the product would be represented by a movement from
A)

S1 to S2.
B)

B to A.
C)

A to B.
D)
S2 to S1.

34.

Which of the following is the correct way to describe equilibrium in a market?

A)

At equilibrium, scarcity is eliminated.

B)

At equilibrium, demand equals supply.

C)

At equilibrium, quantity demanded equals quantity supplied.

D)

At equilibrium, market forces no longer apply.

Figure 3-3

35.

Refer to Figure 3-3. The figure above shows the supply and demand curves for two markets: the market for original
Picasso paintings and the market for designer jeans. Which graph most likely represents which market?
A)

Graph A represents both the market for original Picasso paintings and designer jeans.
B)

Graph B represents the market for original Picasso paintings and Graph A represents the market for designer jeans.
C)

Graph A represents the market for original Picasso paintings and Graph B represents the market for designer jeans.
D)
Graph B represents both the market for original Picasso paintings and designer jeans.
Figure 3-6

36.

Refer to Figure 3-6. The figure above represents the market for canvas tote bags. Assume that the market price is $35.
Which of the following statement is true?
A)

There will be a surplus that will cause the price to decrease; demand will then increase and supply will decrease until the
price equals $25.
B)

There is a surplus that will cause the price to increase; quantity demanded will then decrease and quantity supplied will
increase until the price equals $25.
C)

There is a surplus that will cause the price to decrease; quantity demanded will then increase and quantity supplied will
decrease until the price equals $25.
D)

There is a surplus that will cause the price to decrease; quantity supplied will then increase and quantity demanded will
decrease until the price equals $25.

37.

Refer to Figure 3-6. The figure above represents the market for canvas tote bags. Assume that the price of tote bags is $15.
At this price:
A)

the demand exceeds the supply of tote bags by 55. Some consumers will have an incentive to offer to buy tote bags at a
higher price.
B)

the quantity demanded exceeds the quantity supplied of tote bags by 75. The price will eventually rise to $25 where
quantity demanded will equal quantity supplied.
C)

there is a shortage equal to 55 tote bags; the price of tote bags will rise until demand is equal to supply.
D)

there is a shortage, equal to 55 tote bags, that will be eliminated when the price rises to $25.

38.

Refer to Figure 3-6. The figure above represents the market for canvas tote bags. Compare the conditions in the market
when the price is $50 and when the price is $35. Which of the following describes how the market differs at these prices?
A)

The difference between quantity supplied and quantity demanded is greater at $50 than at $35.
B)

At each price there is a surplus; firms will lower the equilibrium price in order to eliminate the surplus.
C)

At each price the supply of tote bags exceeds that demand for tote bags.
D)

At each price there is a surplus; the surplus is greater at $35 than at $50.