Drawing a production possibilities frontier

Question

Problem 1. When economic choice involves an adjustment to an existing situation, marginal analysis 

• has no practical applications or real-world uses
• eliminates incorrect decisions and bad choices
• involves comparing the additional costs and additional benefits of an activity before deciding
• involves examining only the total costs and total benefits of an activity before deciding

Problem 2. Macroeconomics is the study of

• the behavior of large firms in the marketplace
• the economic behavior of individual decision makers
• the behavior of the economy as a whole
• how to use the fewest natural resources to produce goods and services

Problem 3. Economic theory

• expresses normative values
• invents imaginative and interesting stories
• predicts the behavior of a specific economic decision maker after an economic change
• predicts the average behavior of a group of similar economic decision makers after an economic change

Problem 4. One might commit the fallacy of composition by concluding that

• statements that are true during prosperity are necessarily true during depression
• what is good for the individual is necessarily good for the group
• an event that precedes another is necessarily the cause of the latter
• intentions need not coincide with actions

Problem 5. Someone who commits the fallacy of composition is likely to assume that

• the simplest model is the best predictor
• event B, which follows event A, was caused by event A
• event B, which follows event A, was not necessarily caused by event A
• what is true for the individual is also true for the group

Problem 6. The opportunity cost of an activity is

• zero if you choose the activity voluntarily
• the amount of money spent on the activity
• the value of the best alternative not chosen
• the sum of benefits from all of the sacrificed alternatives
• the difference between the benefits and the costs of that activity

Problem 7. Division of labor increases productivity because

• tasks can be assigned according to individual tastes and abilities
• workers who repeatedly perform the same tasks become bored
• each worker must learn each of the numerous tasks in the total production process
• specialization of labor allows for the introduction of cheaper, less sophisticated production techniques
• managers can force workers to produce goods that are valued more highly than the costs of producing them.

Problem 8. When drawing a production possibilities frontier, all of the following are usually assumed except one. Which is the exception?

• The quantity of resources is rapidly growing.
• Technology is fixed.
• Resources can be shifted between production of the two goods.
• The production possibilities frontier is drawn for a particular time period.
• Resources are fully and efficiently employed.

Problem 9. The production possibilities frontier can be used to show all of the following except one. Which is the exception?

• scarcity
• opportunity cost
• the law of increasing opportunity cost
• efficiency
• the best combination of goods and services for an economy

Problem 10. The economic question of what will be produced is

• primarily answered by the government in a system of pure capitalism
• primarily answered by markets in a command economy
• faced by all economies regardless of their wealth
• does not have to be answered by economies possessing great wealth
• cannot be illustrated by the economic concept of the production possibilities frontier

Problem 11. Households act as demanders when they demand

• that corporate executives and government officials be held accountable for their actions
• dividends from the stocks they hold
• interest and capital gains from the bonds they hold
• goods and services from firms and the government

Problem 12. Which component of U.S. household spending has grown the most over the past ten years?

• taxes
• savings
• spending on services
• spending on nondurable goods

Problem 13. Owners of corporations are referred to most frequently as

• entrepreneurs
• limited partners
• managers
• stockholders

Problem 14. Externalities are defined as

• any transaction external to the firm
• costs or benefits that fall on third parties
• policies that firms undertake to sell products outside the country
• managers' dealings with stockholders outside the firm

Problem 15. Market activity differs from government activity because

• markets generally force prices to below-cost levels
• governments never charge for the services they provide
• markets do not use voluntary exchange mechanisms
• markets provide a direct link between benefits and costs

Problem 16. The effect of a decrease in the price of personal computers, other things constant, is likely to be best represented by which of the following?

• a leftward shift of the demand curve
• a movement leftward along the demand curve
• a rightward shift of the demand curve
• a movement rightward along the demand curve

Problem 17. A decrease in demand for a good could mean that

• consumers are willing to buy larger quantities of the good at each price
• the demand curve has shifted to the left
• consumers are willing to pay a higher price for each quantity of the good
• the demand curve has undergone a parallel shift to the right

Problem 18. Which of the following will cause the demand curve for a good to shift to the left?

• an increase in the price of the good
• a decrease in the price of the good
• a decrease in the price of a complementary good
• an expectation of a future price decline

Problem 19. If a certain type of clothing becomes more fashionable, we would expect that its price

• will increase and quantity will decrease
• will decrease and quantity will remain constant
• and quantity will both decrease
• and quantity will both increase

Problem 20. A surplus occurs whenever

• current price is greater than equilibrium price
• quantity supplied exceeds quantity demanded at the equilibrium price
• quantity demanded is greater than quantity supplied
• the problem of scarcity of a good is solved
• some buyers would be willing and able to pay even more for it than they have to at equilibrium

Problem 21. Economists

• believe that tastes are the major influence on consumers' income expectations
• have observed that tastes vary with changes in the number of consumers
• recognize that tastes have an important impact on demand
• can say a great deal about the origin of tastes

Problem 22. Elasticity measures

• whether a price increase causes quantity demanded to increase or decrease
• the strength of an economy's tendency to recover from recession
• the responsiveness of decision makers to changes in prices, income, or other variables
• the profitability of investment in an industry

Problem 23. Demand is unit elastic whenever

• price elasticity has an absolute value of 1
• price elasticity has an absolute value greater than 1
• price elasticity has an absolute value less than 1
• price elasticity is negative

Problem 24. If the demand for swordfish is price elastic and the price of swordfish increases, then

• the quantity of swordfish demanded will increase
• the total revenue from swordfish sales will decrease
• the total revenue from swordfish sales will increase
• the total revenue from swordfish sales will not change

Problem 25. The more broadly a good is defined,

• the more substitutes it has so the more elastic is its demand
• the fewer substitutes it has so the more elastic is its demand
• the more substitutes it has so the less elastic is its demand
• the fewer substitutes it has so the less elastic is its demand

Problem 26. Which of the following tends to make demand for a good more elastic?

• A reduction in the number of substitutes for the good.
• Consumers have a long time to adjust to a price change.
• The amount spent on the good is a small proportion of the consumer's budget.
• The good is broadly defined.

Problem 27. For which of the following goods is the value of income elasticity most likely to be negative?

• macaroni and cheese
• champagne
• airline tickets
• clothes

Problem 28. When a firm is experiencing diminishing marginal returns, marginal cost is

• rising
• falling
• constant
• rising at first, then falling

Problem 29. If labor is a firm's only variable input, marginal cost ultimately depends on

• fixed cost
• how much profit is made
• the price of the good produced
• how much output each worker produces

Problem 30. If a firm shuts down in the short run and produces no output, its total cost will be

• zero
• equal to total variable cost
• equal to total fixed cost
• equal to explicit costs only

Problem 31. The short-run average variable cost curve

• is always downward-sloping
• is a horizontal line intersecting the vertical axis
• slopes downward at low rates of output, then slopes upward at higher rates of output
• starts above the origin and always slopes upward

Problem 32. Economies of scale occur where

• long-run average cost falls as new firms enter the industry
• short-run average cost falls as new firms enter the industry
• long-run average cost falls as one firm expands plant size
• short-run average cost falls as one firm expands plant size

Problem 33. Which of the following is not characteristic of perfect competition?

• many buyers and sellers
• brand name advertising
• standardized products
• fully informed buyers and sellers

Problem 34. For a perfectly competitive firm operating at the profit-maximizing output level in the short run,

• MR = TR
• MC = price
• MC = ATC
• MC = AVC

Problem 35. The short-run supply curve of a perfectly competitive firm is

• its average fixed cost curve
• the part of its marginal cost curve rising above the average variable cost curve
• the part of its marginal cost curve below the average variable cost curve
• marginal product curve

Problem 36. The entry of new firms into a competitive industry in the long run has the effect of

• driving up long-run equilibrium price
• eliminating economic profits
• reducing equilibrium quantity
• making the demand curve facing each firm more inelastic

Problem 37. Long-run equilibrium for a perfectly competitive firm occurs when

• P = MC = MR = ATC
• MC = MR = AFC = ATC
• MC = MR = P > ATC
• P > MC > MR > ATC

Problem 38. A constant-cost industry is one

• that faces constant average costs in the short run
• that experiences economies of scale
• that experiences stable demand
• whose cost curves do not change as new firms enter

Problem 39. As a monopolist increases the quantity of output produced, what happens to price (P) and marginal revenue (MR)?

• P decreases, but MR is constant
• both P and MR decrease, but P falls faster than MR
• both P and MR decrease, but MR falls faster than P
• P is constant, but MR decreases

Problem 40. A monopolist

• can charge whatever price it wants
• charges more than almost any consumer is willing to pay
• is constrained by marginal cost in setting price
• is constrained by demand in setting price

Problem 41. For a monopolist that produces in the short run and does not price discriminate, price always has to be

• equal to marginal cost at the profit-maximizing quantity
• equal to marginal revenue at the profit-maximizing quantity
• greater than marginal cost at the profit-maximizing quantity
• less than marginal cost at the profit-maximizing quantity

Problem 42. An important difference between a perfectly competitive firm and a monopolist is that

• the perfectly competitive firm tends to be larger
• only the monopolist attempts to maximize profit
• only the perfectly competitive firm maximizes profit
• the perfectly competitive firm faces a horizontal demand curve and the monopolist faces a downward-sloping demand curve

Problem 43. Unlike firms in a perfectly competitive industry, monopolists have control over

• the price they charge for the product
• the quantity of output they produce
• the prices they pay for resources
• the quantities of various resources which are used
• improvements in technology

Problem 44. A monopolist is

• a single seller of a product with no close substitutes
• a single seller of a product with many close substitutes
• one of a large number of small firms that produce a homogeneous good
• one of a small number of large firms that produce a differentiated good

Problem 45. The term monopolistic competition

• denotes an industry with one seller of many differentiated products
• is an alternate expression for monopoly
• denotes an industry with many sellers of homogeneous products
• denotes an industry with many sellers of differentiated products

Problem 46. Which of the following characteristics distinguishes oligopoly from other market structures?

• production of differentiated outputs
• interdependence among firms in the industry
• a downward-sloping demand curve
• production of homogeneous outputs

Problem 47. Interdependent decision making on price, quality, or advertising is characteristic of

• perfect competition
• monopolies
• oligopolies
• monopolistic competition

Problem 48. Collusion occurs when

• a firm chooses a level of output to maximize its own profit
• firms get together to maximize joint profits
• firms refuse to follow their price leaders
• firms petition their U.S. senators for favors

Problem 49. The term strategy in terms of game theory refers to

• the relationship between price and marginal cost
• the relationship between individual firm demand curves and the market demand curve
• each firm's game plan in making decisions
• the interrelationship between price and marginal revenue

Problem 50. Which oligopoly model was developed to explain price wars in an industry?

• natural oligopolies
• cartels
• price leadership by a dominant firm
• game theory

Problem 51. Resource owners will supply additional units of a resource as long as doing so

• decreases their opportunity cost
• increases their income
• increases their utility
• decreases their income taxes

Problem 52. Resource price differentials that do not trigger the reallocation of resources are known as

• temporary differentials
• market differentials
• conditional differentials
• permanent differentials

Problem 53. If a firm is experiencing diminishing marginal returns,

• total output decreases as all resources are increased
• total output decreases as all resources are decreased
• total output decreases as one variable resource is increased, other things constant
• additional increments of output diminish as one variable resource is increased, other things constant

Problem 54. If the wage is below the marginal revenue product, then a profit-maximizing firm will

• employ more workers
• employ fewer workers
• see an increase in its demand for labor
• see an increase in its supply of labor

Problem 55. The difference between the average earnings of eye surgeons and those of janitors is an example of

• a temporary differential
• a permanent differential
• a resource price difference that will cause a reallocation of resources to different uses
• a temporary difference that will be eliminated through the reallocation of resources to different uses

Problem 56. Market work includes activities such as

• practicing your golf game
• studying for an economics exam
• teaching a college economics course
• picking up empty cans for the bottle deposit

Problem 57. Which of the following suggests that people have no control over the number of hours they work?

• Most workdays last from 8 a.m. to 5 p.m.
• People make use of the opportunity for overtime.
• People make use of the opportunity to moonlight.
• People make use of early retirement options.

Problem 58. Other things equal, the supply of labor will be greater to a job that

• requires advanced education and training
• requires most working hours be on weekends
• requires hard physical labor
• allows the employee greater discretion in the use of time

Problem 59. A labor union is a group of

• employees who join together to improve their working conditions
• firms that join together to hire workers
• firms that work together to negotiate better prices in the market
• farmers who work together to receive better prices for their agricultural products

Problem 60. An appeal to consumers to purchase union-made products represents an attempt to

• increase the supply of union labor
• increase the demand for union labor
• decrease the supply of union labor
• decrease the quantity demanded of union labor

Problem 61. If a regulator sets the price equal to the natural monopolist's marginal cost,

• the monopoly will experience a loss
• the monopoly will earn a profit
• the monopoly will earn zero profit
• consumers will be worse off than they would be if the firm's profit maximization activities were unregulated

Problem 62. Which act of Congress declared tying contracts, exclusive dealing, and price discrimination illegal?

• the Wheeler-Kefauver Act
• the Sherman Antitrust Act
• the Clayton Act
• the Wheeler-Lea Act

Problem 63. Which of the following most accurately describes the type of mergers that the antitrust laws are intended to prohibit?

• mergers that tend to reduce competition
• horizontal mergers
• both vertical and horizontal mergers
• conglomerate mergers

Problem 64. Because of the rise of global competition and free trade,

• antitrust policy serves no purpose
• antitrust policy may be less necessary than previously thought
• U.S. industrial concentration poses more of a threat to consumers
• U.S. markets are becoming less contestable

Problem 65. A good that is nonrival but exclusive is called

• a private good
• a public good
• a quasi-private good
• an external good

Problem 66. Competing-interest legislation involves

• concentrated costs and widespread benefits
• both widespread costs and widespread benefits
• both concentrated costs and concentrated benefits
• widespread costs and concentrated benefits

Problem 67. Attempts by special-interest groups to gain favorable treatment from government are called

• utility maximizing
• profit seeking
• rent seeking
• profit maximizing

Problem 68. Rent seeking

• is the attempt to find apartments in a rent-controlled city
• only makes sense in a monopolistically competitive industry
• is a zero-sum game because the public's loss is the rent seeker's gain
• is the expenditure of resources to obtain favorable treatment from government

Problem 69. When consumption of a good or service produces benefits or costs that are not reflected in the market price for the good, this is known as a(n)

• externality
• common pool problem
• nonexcludable resource
• public good

Problem 70. Pollution and other negative externalities arise because

• there are no enforceable property rights to open-access resources
• legislators cannot agree on what to do about them
• they are the price consumers are willing to pay for production of goods and services
• private property rights to pollute are controlled by businesses

Problem 71. In the U.S., people tend to discard items rather than repair them because

• Americans are lazy
• of the high opportunity cost of time
• it is costly to use land for waste disposal
• high wages in the waste disposal industry discourages repairs

Problem 72. If education creates positive externalities,

• private markets provide less than the socially optimal quantity of education
• private markets provide more than the socially optimal quantity of education
• the marginal private benefit curve is higher than the marginal social benefit curve
• the marginal private cost curve is higher than the marginal social cost curve

Problem 73. If firms expect greater demand for their products, invest in more capital and hire more labor,

• there will likely be an increase in inflation and a rise in taxation
• the business cycle is likely to be moving from peak to trough
• their behavior may encourage the very prosperity that they expect
• government will probably have to spend more and tax less to offset the economic impacts of these business decisions

Problem 74. The aggregate supply curve has

• a negative slope
• a positive slope
• a zero slope (a horizontal line)
• an infinite slope (a vertical line)

Problem 75. An increase in government spending, other things constant, would cause a

• leftward shift of the aggregate supply curve
• rightward shift of the aggregate supply curve
• leftward shift of the aggregate demand curve
• rightward shift of the aggregate demand curve

Problem 76. Stagflation refers to

• a simultaneous reduction in output and the price level
• a simultaneous increase in output and the price level
• a decline in the price level accompanied by increases in real output and employment
• an increase in the price level accompanied by decreases in real output and employment

Problem 77. Supply-side economists argue that a cut in personal income tax rates would

• decrease government revenues
• increase government revenues
• have no impact on government revenues
• increase unemployment

Problem 78. Which of the following does not contribute to an improved standard of living?

• increases in the amount and quality of available resources
• better technology
• lower prices for the necessities of life
• improvements in the "rules of the game"

Problem 79. Long-term growth in production can be explained by

• an improvement in the quality of resources available
• a gradual but consistent rise in the price level
• a rapid and accelerating increase in the price level
• a trade surplus that leads to the accumulation of gold

Problem 80. Which of the following would increase labor productivity?

• a decrease in amount of capital per unit of labor
• technological change
• a decrease in the unemployment rate
• an increase in the number of inexperienced workers entering the labor force

Problem 81. Applied research

• is designed to answer particular questions
• is more open-ended than basic research
• contributes less to visible output changes than does basic research
• is research done by a firm to market a good

Problem 82. In GDP measurement, consumer spending includes

• spending by businesses on labor resources
• spending by government on office buildings
• spending by individual households on automobiles and durables
• exchanges in business inventories

Problem 83. Which of the following statements about exports and imports is true?

• Both imports and exports are added to a nation's GDP.
• Both imports and exports are subtracted from a nation's GDP.
• Imports are added to a nation's GDP; exports are subtracted.
• Exports are added to a nation's GDP; imports are subtracted.

Problem 84. Aggregate income is defined as

• the sum of income earned by all laborers in the world economy
• the sum of income earned by all workers in the private sector
• the total income of all individuals who contribute resources to the market production of output
• total income after all income taxes but before paying other payroll taxes

Problem 85. Which of the following is a leakage from the circular flow?

• investment
• imports
• government purchases
• government borrowing

Problem 86. To accurately measure the growth rate of output between two years, one should use

• gross domestic product
• net domestic product
• real net investment
• real gross domestic product

Problem 87. The labor force consists of all

• the people in the economy who are not retired
• people in the economy over 16 years of age
• the adults in the economy between 18 and 65 years old who are able to work
• the noninstitutionalized population over 16 in the economy who hold jobs or are looking for them

Problem 88. People who are not currently employed, but say they want a job, are counted as unemployed only if they

• have previously held a job
• are actively seeking employment
• are willing to accept a reasonable offer
• are between 16 and 65 years of age

Problem 89. Suppose U = the number of adults who are unemployed; E = the number of adults who are employed; and NLF = the number of adults not in the labor force. Which expression would equal the unemployment rate?

• U/(E + NLF)
• U/E
• U/(U + E)
• U/(E + NLF)

Problem 90. Which of the following is true regarding labor force participation rates in the United States since the 1950s?

• The rates for both men and women have risen.
• The rate for women has fallen; that for men has risen.
• The rate for men has fallen; that for women has increased.
• The rates for both men and women have fallen.

Problem 91. When workers are over-qualified for their current jobs or can find only part-time work, we say they are

• discouraged workers
• not in the labor force
• overemployed
• underemployed

Problem 92. Federal spending (including transfer payments), as a percent of GDP,

• has remained largely unchanged over the last 50 years
• has exceeded 10 percent only in wartime periods
• is less than half of state and local government spending
• has increased since 1921

Problem 93. Because of automatic stabilizers, government budget deficits are

• positive during both expansions and contractions
• negative during both expansions and contractions
• smaller during expansions and larger during contractions
• zero if averaged out over the entire business cycle

Problem 94. One explanation for persistent federal budget deficits is that officials are not required to

• honor the Constitution
• balance the budget
• raise taxes
• run for reelection

Problem 95. The equilibrium interest rate is determined by

• the supply of money alone
• both the supply of and demand for money
• the demand for money alone
• Congress

Problem 96. If there is a decrease in the supply of money, which one of the following is most likely to happen?

• the demand for money will increase
• planned investment spending will increase
• interest rates will rise
• aggregate expenditure will increase

Problem 97. If the Fed sells government securities to banks, eventually we expect

• short-run aggregate supply to increase
• interest rates to increase
• the price level to increase
• aggregate demand to increase

Problem 98. International trade is most likely to occur whenever

• one of the trading nations is self-sufficient
• all of the trading nations are self-sufficient
• one of the trading nations gains from trade
• each of the trading nations gains from trade

Problem 99. Which of the following factors is the most significant in determining the pattern of international trade?

• absolute advantage
• diplomatic expertise
• comparative advantage
• overpowering military strength

Problem 100. The world price of a good is

• the price paid by consumers in all nations
• the price at which it is traded internationally
• the price paid in U.S. dollars
• the price paid in foreign currency