Assignment:
Multiple Choice Questions
1. Which of the following responsibilities of our government derives directly from the U.S. Constitution?
a) federal provision of highways and bridges.
b) the social safety net, including payments for medical care.
c) protection of the environment through regulation of business.
d) Federal Reserve actions to maintain full employment and stable prices.
2. Total annual expenditures by the U.S. federal government:
a) are more than 40 percent of GDP in most years.
b) have been falling on a per capita basis since the year 2000.
c) are larger than the combined spending of all state and local government.
d) must be less than federal revenue collected, due to balance budget laws.
3. A curve that represents all combinations of market baskets that provide the same level of utility to a consumer is called:
a) a budget line.
b) an isoquant.
c) an indifference curve.
d) a demand curve.
4. Which of the following will decrease a consumer's purchasing power?
a) A decrease in the consumer's income
b) An increase in the price of the good on the vertical axis
c) An increase in the price of the good on the horizontal axis
d) all of the above
5. When a person consumes two goods (A and B), that person's utility is maximized when the budget is allocated such that:
a) the marginal utility of A equals the marginal utility of B.
b) the marginal utility of A times the price of A equals the marginal utility of B times the price of B
c) the ratio of total utility of A to the price of A equals the ratio of the marginal utility of B to the price of A.
d) the ratio of the marginal utility of A to the price of A equals the ratio of the marginal utility of B to the price of B.
6. The area below the demand curve and above the price line measures
a) consumer surplus.
b) economic profit.
c) elasticity of demand.
d) the total value obtained from consuming the good or service
7. Which of the following is true about the income effect of a price decrease?
a) It will lead to an increase in consumption only for a normal good.
b) It always will lead to an increase in consumption.
c) It will lead to an increase in consumption only for an inferior good.
d) It will lead to an increase in consumption only for a low-priced good.
8. The change in the quantity demanded of a good resulting from a change in relative price with level of satisfaction held constant is called the ____ effect.
a) nominal price
b) real price
c) income
d) substitution
9. If a market basket is changed by adding more of at least one good, then rational consumers will:
a) rank the market basket more highly after the change.
b) more likely prefer a different market basket.
c) rank the market basket as being just as desirable as before.
d) be unable to decide which of the market baskets is preferred.
10. Suppose that the prices of good A and good B were to suddenly double. If good A is plotted along the horizontal axis,
a) the budget line will become steeper.
b) the budget line will become flatter.
c) the slope of the budget line will not change.
d) the slope of the budget line will change, but in an indeterminate way.
11. Consider the following three market baskets:
If preferences satisfy all of the basic assumptions:
a) A is on the same indifference curve as B.
b) B is on the same indifference curve as C.
c) A is preferred to C.
d) B is preferred to A.
12. When a good is price inelastic, consumer expenditures on the good
a) increase when price increases.
b) decrease when price increases.
c) do not change when price increases.
d) are not related to price elasticity of demand.
13. Plastic and steel are substitutes in the production of body panels for certain automobiles. If the price of plastic increases, with other things remaining the same, we would expect:
a) the price of steel to fall.
b) the demand curve for steel to shift to the right.
c) the demand curve for plastic to shift to the left.
d) nothing to happen to steel because it is only a substitute for plastic.
14. When the average product is decreasing, marginal product
a) is increasing.
b) exceeds average product.
c) is decreasing.
d) is less than average product.
15. A curve showing all combinations of capital and labor that produce the same level of output is called a(n):
a) production function.
b) isocost line.
c) expansion path.
d) isoquant.
16. If the marginal benefit of a good exceeds the marginal cost at the current level of output, then:
a) it is not possible to increase total surplus without harming some buyers.
b) it is not possible to increase total surplus without harming some sellers.
c) a reduction in quantity exchanged will increase total surplus.
d) an increase in quantity exchanged will increase total surplus.
17. Positive economics:
a) makes recommendations designed to achieve certain goals.
b) is based on value judgments.
c) involves statements that can be proven true or false.
d) can never be used to make predictions.
18. Which of the following is a normative statement?
a) When interest rates rise, the quantity of loanable funds will decline.
b) To improve the functioning of our economy, governments should prevent monopolies and outlaw price discrimination.
c) Unemployment decreases during a recession.
d) When governments increase income tax rates, people work fewer hours.
19. If an efficient quantity of soybeans are produced and sold in the US market, then the market price of soybeans will be equal to:
a) the marginal social benefit of soybean consumption.
b) the marginal cost of soybean production.
c) the total social benefit of soybean consumption.
d) A and B are both correct.
20. When the minimum wage increased in Seattle from $11 to $13, which of the following would have happened to Seattle employers?
a) the slope of their isocost lines decreased, inducing them to use more labor and less capital.
b) the slope of their isocost lines increased, inducing them to use more capital and less labor.
c) their isoquants moved further away from the origin.
d) their isoquants moved closer to the origin.
Essay Question
Comment briefly on the dilemma between economic efficiency and equity/equality. If you believe efficiency should be the primary motivator of government action, what steps can be taken to address concerns related to equity? If equity should be the primary driver, how can government ensure that markets remain fairly efficient?