Part 1: Multiple Choice
Chapter 1
1. Opportunity cost can best be defined as the
a. value of what must be given up in order to acquire an item.
b. money cost to the buyer to acquire a good or service.
c. total value of all the other items that otherwise could be acquired.
d. cost to the seller to produce an item.
e. time cost to obtain the money to buy an item.
2. Which of the following is an example of an externality?
a. Drug abuse affecting David's health.
b. Sara taking a break from work.
c. A transaction between two parties, affecting them alone.
d. Tom's smoking affecting his roommate's health.
3. If an economic curve has a negative slope, then one variable
a. falls as the other rises.
b. changes at a slower rate than another.
c. has a smaller value than another.
d. changes after another variable.
Chapter 2
4. Inputs, or factors of production, include
a. labor.
b. machinery.
c. natural resources.
d. all of the above.
5. An industry can be defined as
a. the group of all firms that sell a product.
b. any company that produces and sells something.
c. the set of buyers of a particular good or service.
d. the top companies that sell something.
All of the above
6. When government defines and enforces property rights, this is an example of government as
a. referee.
b. regulator of business.
c. buyer of goods and services.
d. tax collector.
e. redistributor.
Chapter 3
7. When a firm or economy is operating efficiently, it is operating
a. outside its production possibilities frontier.
b. inside its production possibilities frontier.
c. on its production possibilities frontier.
d. at the intersection of the production possibilities frontier and the vertical axis.
e. at the intersection of the production possibilities frontier and the horizontal axis.
8. Some authors claim that any point not on the frontier cannot be best. What is their reasoning to support this?
a. A point inside the frontier implies that society is not facing up to the problem of scarcity.
b. A point inside the frontier limits growth, and growth is always a goal worth pursuing.
c. A point inside the frontier represents inflation, and inflation is a dangerous situation.
d. A point inside the frontier results in fewer goods, and more is always better.
e. A point inside the frontier is inefficient, and represents wasted resources.
9. A market system solves the
a. "what" and "how" decisions but not the "to whom."
b. "what" and "to whom" decisions but not the "how."
c. "how" and "to whom" decisions but not the "what."
d. "what," "how," and "to whom" decisions.
Chapter 4
10. A demand schedule is a table showing how the ____ of some product during a specified period of time changes as ____ changes, holding all other determinants of quantity demanded constant.
a. demand; the price of its complement
b. demand; the quantity supplied
c. quantity demanded; the price of its substitute
d. quantity demanded; the price of that product
11. Assume the demand schedule for cookies is downward sloping. If the price of cookies falls from $1.50 to $1.25 per dozen,
a. the demand for cookies will fall.
b. the demand for cookies will rise.
c. a larger quantity of cookies will be demanded.
d. a smaller quantity of cookies will be demanded.
12. Which of the following would be most likely to cause an outward shift of the demand curve for electricity?
a. a decrease in the price of electricity
b. an increase in the price of air conditioners
c. an increase in the price of heating oil
d. a decrease in the price of natural gas
13. If orange juice prices double next year, there will be a
a. rightward shift in the demand for grapefruit juice.
b. rightward shift in the supply of grapefruit juice.
c. leftward shift in the supply of grapefruit juice.
d. leftward shift in the demand for grapefruit juice.
14. A severe freeze has once again damaged the Florida orange crop. The impact on the market for oranges will be a leftward shift in
a. demand as consumers try to economize because of the shortage.
b. both the supply and demand curves.
c. the supply curve.
d. the supply curve and a rightward shift in the demand curve, which will result in a higher price.
15. The drug BGH (bovine growth hormone) dramatically increases the milk output of dairy cows. Farmers in Wisconsin, a big dairy state, vigorously oppose licensing the drug, fearing that excess supply and a consumer reaction on the purity of food issue will put many of them out of business. Which graph in Figure 4-13 best illustrates the farmers' fears?
a. 1
b. 2
c. 3
d. 4
16. Which of the following is the correct way to describe equilibrium in a market?
a. At equilibrium, demand equals supply.
b. At equilibrium, quantity demanded equals quantity supplied.
c. At equilibrium, market forces are no longer at work.
d. Equilibrium is a tendency, a state of perpetual motion.
e. Equilibrium is the best combination of price and quantity.
17. A government policy that prevents the price of a good or service from falling below a specified level is called a price floor and usually results in
a. a shortage.
b. a surplus.
c. a black market.
d. fewer producers of the good or service.
e. a decrease in demand.
Chapter 5
18. Total utility can be thought of as the
a. total satisfaction derived from a bundle of goods.
b. minimum amount of money a consumer is willing to spend on a bundle of goods.
c. additional satisfaction a consumer receives from the marginal unit of a good.
d. willingness to pay for the marginal unit of a good.
19. Total utility will be at its maximum when
a. marginal utility is negative.
b. marginal utility is positive.
c. marginal utility is maximized.
d. marginal utility is zero.
20. Consumer's surplus is a measure of how much
a. less than his income a consumer spends on goods.
b. more utility a consumer receives from his purchases than he has to pay for them.
c. a consumer's marginal utility differs from his total utility.
d. a change in price induces a consumer to substitute other goods.
Part 2: Problems and Graphs (7 points each, 35 points total)
1. Graph the supply and demand model to show the change in the price (up or down) of bread and the quantity sold, when these events occur:
(hint: one of the curves will shift, should have 3 graphs one for each event, maker sure to label all axis and curves)
a) The population grows.
b) People's incomes fall and unemployment increases in a recession.
c) The price of wheat used to make bread falls.
2. These are the supply and demand schedules for good X:
Quantity Quantity
Price Supplied Demanded
$10 18 3
9 16 4
8 14 5
7 12 6
6 10 7
5 8 8
4 6 9
3 4 10
2 2 11
1 0 12
a) What is the equilibrium price and quantity?
b) If the government sets a price of $8 for X quantity be
c) Will there be a shortage or surplus of X based on the situation decribed in b) government set price of $8?
3. If the price of whole chickens varied between $2 and $6, Dan and Chris would purchase the following number this year:
Dan's Chris' Market
Price Quantity Quantity Quantiy
$6 4 6
5 5 7
4 7 8
3 11 9
2 20 10
a) If Dan and Chris are the only two buyers, calculate the market demand curve by filling in chart above.
b) Draw the demand curves for Dan, for Chris, and for the market, make sure to label all axis and curves. (hint there will be 3 demand curves one for Dan, Chris and one for the Market)
4. The demand and supply schedules for simple calculators and for T-shirts are as follows:
Calculators T-shirts
Price Demand Supply Demand Supply
$16 600 800 400 800
15 625 775 475 775
14 650 750 550 750
13 675 725 625 725
12 700 700 700 700
11 725 675 775 675
10 750 650 850 650
9 775 625 925 625
8 800 600 1000 600
a) What are the equilibrium prices and quantities in the two markets? Draw supply and demand curve diagrams showing this. (hint 2 different graphs!)
5. Complete the table below and answer the following:
a) What is the marginal utility of the 3rd unit of Good Y?
b) What is the marginal utility of the 4th unit of Good Z?
c) Assuming that the price of both goods is $5 per unit and that Consumer has $15 to spend, what is the utility-maximizing combination of Goods Y and Z?
Good Y Good Z
Units Total Marginal Units Total Marginal
of Y Utility Utility of Z Utility Utility
0 0 X 0 0 X
1 20 20 1 10 10
2 36 __ 2 18 __
3 48 __ 3 24 __
4 56 __ 4 28 __
5 60 __ 5 30 __
6 60 __ 6 30 __
Part 3: Short Answers:
1. What is the fundamental Economic Problem?
2. What 3 things must every society figure out?
3. What does it mean to be producing on the PPF curve?
4. What 4 things did we discuss that shift the Demand curve?
5. Typical results of a price ceiling?