Practice Problems – Midterm1

Decisions about how to allocate resources are made by:

A. individuals.
B. businesses.
C. governments.
D. Decision about resource allocation are made by all of the above

Which of the following is considered a microeconomic issue?

A. The unemployment rate in the US from 1980-2014.
B. Apple releases a new version of the iPhone.
C. France’s growth rate in the last year.
D. All of these are examples of microeconomic issues.

The assumption of rational behavior:

A. offers a perfect framework for how people actually behave.
B. helps economists explain about how people behave in a way that will best achieve their goals.
C. explains why people voluntarily engage in decisions for which costs exceed benefits.
D. is best applied to psychology and should not be used in the science of economics.

Which of the following is a question that an economist would use to break down a problem?
A. Will the average income per person for the society increase?
B. Does the decision maker have a track record of being rational?
C. Is there a scarce resource that will be allocated?
D. How might one person feel about the solution to the problem?

Which of the following is a not direct result of scarcity?

A. Buildings in New York City are taller than buildings in Greenville, SC due to fewer acres of land per
person.
B. Due to high gas prices, Shana decides to trade her Chevy Tahoe for a Honda Accord.
C. A college student misses a test review in order to sleep in.
D. The total amount of air we can breathe as others draw breaths from that same air space.

"There is no such thing as a free lunch." This is an example of which economic concept?
A. Maximization
B. Trade-offs
C. Basic necessities
D. Income effect

You decide to drive your car on a long road trip of 1,500 miles. The opportunity cost of driving your car:
A. is the amount of money spent on gas.
B. is zero because the car is paid for.
C. includes lost wages you could have earned instead of driving.
D. the total expenses of the trip in the end.

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Your sister always brags about how savvy of a grocery shopper she is. She believes that she saves lots
of money by paying with coupons and making her grocery purchases at multiple stores to get the lowest
prices on all goods. She may overestimate her savings because:
A. she does not count the value of the time it took to sort and clip coupons as a cost.
B. she does not count the cost of the gas used driving extra miles to multiple grocery stores.
C. she does not count the value of the extra time it takes to stand in multiple lines at multiple stores and
use multiple coupons compared to a trip to one store with no coupons.
D. All of these.

Saturday afternoon you can either attend a street festival, work and earn $100, or study for your midterm
exam. You flip a coin between the street festival and studying, but did not really consider working. The
coin flip determined that you would stay home and study. The opportunity cost of the time spent studying
includes:
A. the loss of $100 worth of wages and going to the street festival.
B. earning a high score on your midterm.
C. the benefit that could have been received at the street festival.
D. The time you spent deciding upon using a coin flip to determine your Saturday afternoon activity.

A college student decides to spend the afternoon watching three movies rented from Red Box. The cost
of each movie is $1. The student was willing to pay $4 to rent each of the first two movies and $2 to rent
the third movie. What was the marginal benefit received by the student when renting the 2nd movie?
A. $1
B. $8
C. $4
D. $2

A movie costs you and your friend $15 each. After one hour of watching the movie, you have struggled to
stay awake while your friend has been on Facebook and is also bored with the movie. You suggest that
you and your friend leave the movie and go to the park. Your friend responds by stating that he is not
going to waste his $15 that was previously spent on the movie. Your friend is considering:
A. an opportunity cost of the movie.
B. the sunk cost.
C. the marginal benefit.
D. Total costs

A production possibilities frontier is a line or curve that:

A. shows all the possible combinations of outputs that can be produced using all available resources.
B. shows what can be produced when all available resources are efficiently used.
C. shows the best combinations of outputs that can be produced using all available resources.
D. explains why societies make the choices they do.

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Consider the production possibilities frontier displayed in the figure shown. Which points are efficient and
attainable with existing resources?
A. Only point B.
B. Only point A.
C. Points A and D.
D. Points A, C, and D.

The slope of a production possibilities frontier measures:

A. the opportunity cost of producing one good in terms of the other good.
B. the trade-off in the consumption of one good versus the other good
C. how much of the resources must be used in order to produce one the goods.
D. inefficient production of a good.

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Consider the production possibilities frontier displayed in the figure shown. The opportunity cost of one
watermelon is:
A. 10 bushels of apples.
B. 20 bushels of apples.
C. 30 bushels of apples.
D. 40 bushels of apples.

The production possibilities frontier:

A. can show all possible combinations of goods but not tell us which combination society should choose.
B. can show the best combination of goods which society should choose.
C. cannot show all possible combinations of goods because society is typically inefficient.
D. can show us which possible combinations of goods society should choose, but cannot tell us which
points will be inefficient.

If society were to experience an increase in its available resources its production possibilities frontier
would:
A. shift out.
B. shift in.
C. not move.
D. become convex.

Hurricane Katrina destroyed much of New Orleans and other parts of the South. Which of the following
statements is true? The hurricane:
A. caused the production possibilities frontier of the United States to shift in.
B. caused the production possibilities to increase, since it created a lot of work to rebuild the city affected
areas.
C. caused the production possibilities frontier of the United States to shift.
D. didn’t change the production possibilities frontier, but moved from a point on the frontier to a point
inside the frontier.

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When nations trade the result would most likely be:
A. increase in total production, which can benefit every nation involved.
B. increase in total production, which would benefit only the wealthier nation.
C. decrease in total production across nations but increases it for some.
D. decrease in total production across all nations but benefits every nation because they are individually
more productive.

Refer to the figure shown, which represents the production possibilities frontiers for Countries A and B.
The slope of Country A's production possibilities frontier is _______, and Country B's is __________.
A. 5; 3
B. 30; 3
C. 1/5; 1/3
D. 1/5; 1/3

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Refer to the figure shown, which represents the production possibilities frontiers for Countries A and B.
Which of the following statements can be said of Country A? Country A:
A. has the comparative advantage in car production only.
B. has the comparative advantage in truck production only.
C. has the comparative advantage in car and truck production.
D. does not possess the comparative advantage in either good.

Suppose an American worker can make 20 pairs of shoes or grow 100 apples per day. On the other
hand, a Canadian worker can produce 10 pairs of shoes or grow 20 apples per day. When trade opens
up, the United States should produce:
A. both goods, since they have an absolute advantage in both goods, and not trade.
B. only shoes, since they have a comparative advantage in the production of shoes, and not trade.
C. apples, since they have a comparative advantage in the production of apples, and not trade.
D. only apples, since they have a comparative advantage in the production of apples, and trade for shoes.

Suppose that a worker in Country A can make either 10 iPods or 5 tablets each year. Country A has 100
workers. Suppose a worker in Country B can make either 2 iPods or 10 tablets each year. Country B has
200 workers. Country B has the _______________ advantage in the production of tablets, which means
they should specialize in __________________.
A. comparative; tablets
B. absolute; tablets
C. comparative; iPods
D. absolute; iPods

The amount of a particular good or service that buyers in a market will purchase at a given price during a
specified period is called:

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A. quantity demanded.
B. quantity supplied.
C. demand.
D. supply.

For almost all goods, the:

A. lower the price goes, the higher the quantity demanded.
B. higher the price goes, the more luxurious it is.
C. lower the price goes, the higher demand is.
D. higher the price goes, the higher the quantity demanded.

Some nonprice determinants of demand are:

A. consumer preferences, expectations of future prices, and the number of buyers in the market.
B. consumer preferences, the price of the good, and incomes.
C. incomes, expectations of future prices, and the number of sellers in the market.
D. prices of related goods, knowledge of past prices, and the number of buyers in the market.

An increase in the price of Heinz ketchup is likely to cause:

A. an increase in the demand for Hunt's ketchup, due to a change in preferences.
B. an increase in the demand for Hunt's ketchup, due to a change in the price of a substitute good.
C. a decrease in the demand for Hunt's ketchup, due to a change in preferences.
D. an increase in the demand for Hunt's ketchup, due to a change in the price of a complementary good.

After getting a raise at work, Jennie now regularly buys steak instead of hamburger. Based on this
behavior, we can assume:
A. steak is a normal good, and hamburger is an inferior good for Jennie.
B. steak is an inferior good, and hamburger is a normal good for Jennie.
C. steak and hamburger are complementary goods for Jennie.
D. steak and hamburger are normal goods for Jennie.

This graph depicts the demand for a normal good.

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A shift from A to B in the graph shown for a normal good might be caused by:
A. an increase in price.
B. a decrease in price.
C. an increase in income.
D. a decrease in income.

This table shows individual demand schedules for a market.

Price of Barney's Betty's

Good Demand Demand
$0.00 20 23
$0.50 18 18
$1.00 16 11
$1.50 14 8
$2.00 12 6
$2.50 10 5

According to the table shown, if the price were $0.50, what will total demand by Betty and Barney be?

A. 18
B. 36
C. 75
D. 47
For almost all goods, the:

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A. lower the price goes, the higher the quantity supplied.
B. higher the price goes, the more luxurious it is.
C. lower the price goes, the more luxurious it is.
D. higher the price goes, the higher the quantity supplied.

Irregular weather patterns caused very poor yields for orange farmers. Which factor of supply would this
change in the market for orange juice?
A. Technology
B. Price of input
C. Number of sellers
D. Price of related good

The term "surplus" refers to a:

A. situation in which the quantity supplied is less than the quantity demanded.
B. situation in which the quantity demanded is less than the quantity supplied.
C. market that sells secondary goods.
D. signal that producers need to increase the price of the good.

This table shows the demand and supply schedule of a good.

Price of
Good QDemand Qsupply
$0.00 50 25
$0.50 40 26
$1.00 35 28
$1.50 31 31
$2.00 28 35
$2.50 27 40

According to the table shown, at a price of $1.00:

A. a shortage will exist.

B. a surplus will exist.
C. more is being supplied than demanded.
D. the market is in equilibrium.

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According to the graph shown, the equilibrium price is:
A. $5
B. $10
C. $15
D. $20

According to the graph shown, if the price were $15, a:

A. shortage would exist, signaling sellers to raise their price.
B. shortage would exist, signaling buyers to leave the market.
C. surplus would exist, signaling sellers to drop their price.
D. surplus would exist, signaling buyers to bid up the price.

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Assume the graph shown represents the market for pizzas sold in an hour. If the original equilibrium was
D and S1. Which of the following is true when S1 shifted to S2?

A. Equilibrium price decreased by $5.

B. Equilibrium quantity increased by 20.
C. Equilibrium price increased by $5.
D. Equilibrium quantity increased by 30.

Consider the market for ride-on lawn mowers and the recent increases in the price of oil. The recent
increase in the price of oil makes it more expensive to manufacture ride-on lawn mowers. An increase in
the price of oil also makes it more expensive to run a ride-on mower. What is likely to happen to
equilibrium price and quantity of lawn mowers as a result in the changing price of oil? Supply and demand
will both:
A. increase, increasing equilibrium quantity and having an indeterminate effect on price.
B. decrease, decreasing equilibrium quantity and having an indeterminate effect on price.
C. increase, increasing equilibrium price and having an indeterminate effect on quantity.
D. decrease, increasing equilibrium price and having an indeterminate effect on quantity.

Different measurements of elasticity include:

A. income elasticity of demand, income elasticity of supply.
B. price elasticity of demand, price elasticity of supply.
C. cross-price elasticity of demand, income elasticity of supply.
D. preference elasticity of demand, cross-price elasticity of supply.

The price elasticity of demand for eggs is 0.27. Thus, 0.27 is the:
A. percentage change in the quantity demanded of eggs when the price of eggs increases by one
percent.
B. size of the shift in the demand for eggs when the price of eggs changes by one percent.
C. size of the percentage change in the quantity supplied of eggs when the demand for eggs changes
due to a price change.
D. percentage change in the price of eggs when the quantity demanded of eggs increases by one
percent.

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If a good has an elastic demand, then:
A. a small percentage change in price will cause a larger percentage change in quantity demanded.
B. a small percentage change in price will cause virtually no change in quantity demanded.
C. a large percentage change in price will cause a smaller change in quantity demanded.
D. any percentage change in price will cause an almost immediate response in quantity demanded.

Suppose a decrease in price increases quantity demanded from 8 to 12. Using the mid-point formula, the
percentage change in quantity demanded is:
A. 0.1, and is elastic.
B. 40 = 400 percent.
C. 0.40 = 40 percent.
D. 0.40 = 40 percent.

Suppose when the price of movie tickets is $7.50, the quantity demanded is 550, and when the price is
$8.50, the quantity demanded is 450. Using the mid-point method, the price elasticity of demand is:
A. -0.625
B. 0.625
C. -1.6
D. 1.6

When a good has many close substitutes available, it is likely to be:

A. less price elastic than are goods without close substitutes available.
B. more price elastic than are goods with many complement goods available.
C. less price elastic than are goods with many complement goods available.
D. more price elastic than are goods without close substitutes available.

A perfectly inelastic demand:

A. means people will quickly change the quantity they purchase when price changes.
B. means people will not respond to any change in price.
C. is demonstrated by a perfectly horizontal demand curve.
D. has an absolute value greater than 1.

In general, the more elastic a demand curve is the:

A. flatter it will be.
B. steeper it will be.
C. more bowed-in it will be.
D. faster it will shift when price changes.

YOU CAN EXPECT SIMILAR QUESTIONS ABOUT PRICE ELASTICITY OF SUPPLY

Knowing the price elasticity of demand is important in business because it allows a manager to determine
whether:
A. a price increase will cause total revenue to rise or fall.
B. an increase in supply will cause total profit to rise or fall.
C. a price increase will cause the quantity demanded to rise or fall.
D. a price increase will cause the demand to rise or fall.

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A price increase will cause an increase in total revenue when:
A. the price effect outweighs the quantity effect.
B. the quantity effect outweighs the price effect.
C. demand is perfectly elastic.
D. demand is unit elastic.

Demand for a good is inelastic if:

A. total revenue decreases when price decreases.
B. the quantity effect outweighs the price effect of a price increase.
C. the absolute value of price elasticity is greater than 1.
D. None of these is true.

When price was 5, quantity demanded was 10. When price increased to 6, quantity demanded decreased
to 9. Therefore, when price increased, total revenue
A. decreased from 54 to 50, indicating that demand is inelastic.
B. decreased from 54 to 50, indicating that demand is elastic.
C. increased from 50 to 54, indicating that demand is inelastic.
D. increased from 50 to 54, indicating that demand is elastic.

For many consumers, bacon and eggs are complements. Therefore, egg producers monitor the price of
bacon because the cross elasticity between bacon and eggs is
A. negative, and a decrease in the price of bacon will decrease the demand for eggs.
B. positive, and a decrease in the price of bacon will increase the demand for eggs.
C. negative, and a decrease in the price of bacon will increase the demand for eggs.
D. positive, and an increase in the price of bacon will increase the demand for eggs.

If two goods are substitutes, then their cross-price elasticity of demand is

A. positive.
B. negative.
C. zero.
D. between zero and minus one.

When consumers' incomes decline during a recession, they increase their consumption of instant coffee
and reduce their consumption of other beverages. Therefore, instant coffee:
A. is a necessity because consumers buy more during a recession.
B. has a negative income elasticity of demand.
C. has an income elasticity of demand greater than zero but less than one.
D. is normal.

A good with an income elasticity of 2.3 is:

A. a luxury.
B. inferior.
C. a necessity.

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D. a complement.

The maximum price that a buyer would be willing to pay for a good or service is also called:
A. the reservation price.
B. the buyer-max price.
C. the reserved max price.
D. the opportunity cost.

Which of the following prices could represent Sally's willingness to pay for a pair of shoes if she bought
them for $45?
A. $15.00
B. $25.00
C. $44.99
D. $55.00

At prices below a consumer's willingness to pay:

A. the buyer will participate in the market because the opportunity cost is less than the benefit from
consuming the good.
B. the buyer will participate in the market because the opportunity cost is more than the benefit from
consuming the good.
C. the buyer will not participate in the market because the opportunity cost is less than the benefit from
consuming the good.
D. the buyer will not participate in the market because the opportunity cost is more than the benefit from
consuming the good.

When someone's willingness to pay is the same as the actual price paid for an item:
A. the individual will not purchase the item.
B. the individual's surplus is zero.
C. surplus cannot be maximized.
D. All of these are true.

A market has four individuals, each considering buying a grill for his backyard. Assume that grills come in
only one size and model. Abe considers himself a grill-master, and finds a grill a necessity, so he is willing
to pay $400 for a grill. Butch is a meat-lover, honing his grilling skills, and is willing to pay $350 for a grill.
Collin just met the girl of his dreams, and she loves a good grilled steak, so in his effort to impress her he
is willing to pay $320 for a grill. Daniel loves grilled shrimp and thinks it might be cheaper in the long run if
he buys a grill instead of eating out every time he wants grilled shrimp, so he is willing to pay $200 for a
grill.

If the market price of grills is $350, given the scenario described, total consumer surplus would be:
A. $750.
B. $400.
C. $50.
D. $870.

Given the scenario described, if the market price of grills is $300, who participates in the market?

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A. Only Abe, Butch, and Collin participate.
B. Only Collin and Daniel participate.
C. Only Abe and Butch participate.
D. Only Daniel participates.

Assume there are three hardware stores, each willing to sell one standard model hammer in a given time
period. House Depot can offer this hammer for a minimum of $7. Lace Hardware can offer the hammer for
a minimum of $10. Bob's Hardware store can offer the hammer at a minimum price of $13.

Given the scenario described, if the market price of hammers was $13, then total producer surplus would
be:

A. $9.
B. $30.
C. $17.
D. $7.

Given the scenario described, if the market price of hammers decreased from $13 to $11:

A. total producer surplus would decrease from $9 to $5.

B. total producer surplus would increase from $5 to $9.
C. total producer surplus would decrease from $30 to $17.
D. total producer surplus would remain unchanged.

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Assume the market in the graph shown with demand D and supply S1 is in equilibrium at a quantity of 5
units. Consumer surplus is:

A. $5.
B. $10.
C. $45.
D. $9.

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According to the graph shown, if the market is in equilibrium, producer surplus is:

A. $30.
B. $20.
C. $50.
D. $60.

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Assuming the market is in equilibrium in the graph shown with demand D and supply S1, consumer
surplus is:

A. greater than consumer surplus when market is in equilibrium at D and S2.

B. less than consumer surplus when market is in equilibrium at D and S2.
C. the same as consumer surplus when market is in equilibrium at D and S2.
D. zero.

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According to the graph shown, consumer surplus is area:

A. A + B + C.
B. B.
C. A.
D. A + B.

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According to the graph shown, total surplus is:

A. $25.
B. $90.
C. $50.
D. $130.

The above answer is incorrect. Below is the correct calculation.

Consumer surplus = (1/2) * 6 * 12 = $36

Producer Surplus = (1/2) * 6 * 12 = $36

Total surplus = Consumer surplus + Producer Surplus = $72.

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Assuming the market is in equilibrium in the graph shown with demand D and supply S2 at a quantity of 8,
producer surplus is:

A. 28
B. less than the consumer surplus.
C. 16
D. $32.

The market to buy and sell organs:

A. would increase the well-being of those who interacted in it.
B. would not be considered "missing," since surplus could be gained from it.
C. would create negative surplus in those who could not afford an organ, but needed one.
D. would never exist because it is unfair.

Creating a market that was previously "missing":

A. redistributes surplus from buyer to seller.
B. creates more total surplus.
C. redistributes surplus from seller to buyer.
D. redistributes surplus from one market to the one that was previously missing.

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Consider the hypothetical supply and demand of Kidneys.

Initially, Kidney exchanges are regulated to donations only. This means kidneys can only be exchanged
at a price of zero. What is the deadweight loss from this restriction?

A. $0
B. $825,000
C. $1,350,000
D. $1200

Markets can be missing:

A. because a market is taxed.
B. when the sale of a particular service is banned.
C. when miscommunication of information between buyers and sellers leads to the wrong equilibrium
price.
D. All of these are true.

When the quantity of a good bought and sold is below the market equilibrium quantity, the loss of total
surplus that results is called:
A. deadweight loss.
B. producer surplus.
C. consumer surplus.
D. total surplus.

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 According to the graph shown, if the
market goes from equilibrium to
having its price set at $10:
A. deadweight loss will occur.
B. seven fewer units will be
exchanged.
C. consumer surplus will decrease.
D. All of these are true

According to the graph shown, if the

market goes from equilibrium to
having its price set at $10 then:
A. the market ceases to be efficient.
B. total surplus will decline.
C. deadweight loss will occur.
D. All of these are true.

According to the graph shown, if the market goes from equilibrium to having its price set at $10 then:
A. area (C + E) is deadweight loss.
B. area B is transferred surplus from consumers to producers.
C. $12 of surplus gets transferred from consumers to producers.
D. All of these are true.

According to the graph shown, if the market goes from equilibrium to having its price set at $10 then:
A. producer surplus will change from (D + E) to (D + E + B + C).
B. producer surplus will change from (B + C + D + E) to D only.
C. producer surplus will change from (D + E) to (D + B).
D. producer surplus will change from (D + B) to (D + E).

According to the graph shown, if the market is in equilibrium, total surplus is area(s):
A. A.
B. A + B + C.
C. A + B + C + D + E.
D. D + E.

total surplus is:

A. $30.
B. $20.
C. $50.
D. $60.

Assume a market that has an equilibrium price of $8. If the market price is set at $7, consumer surplus:
A. rises for some because of the decreased price.
B. decreases for some because of fewer transactions taking place.
C. Both of these statements are true.
D. Neither of these statements is true.

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Assume a market that has an equilibrium price of $7. If the market price is set at $3, which of the following
is true?
A. Some surplus is transferred from consumers to producers, but total surplus falls.
B. All surplus is transferred from producers to consumers, and total surplus stays the same.
C. Some surplus is transferred from producers to consumers, but total surplus falls.
D. Some surplus is transferred from consumers to producers, causing total surplus to increase.

Assume a market price gets set artificially high-that is, it gets set above the equilibrium price. This change
means:
A. Every consumer loses surplus, and it all gets transferred to producers.
B. Every producer gains surplus, due to the higher price now being charged.
C. Some consumers drop out of the market, and those left lose some surplus.
D. None of these is true.

According to the graph shown, if the market price decreases (all else staying the same):

A. producer surplus would increase.

B. producer surplus would decrease.
C. total surplus would increase.
D. quantity would increase.

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