ID: A
Practice test 1(midterm exam)
Answer Section
TRUE/FALSE
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
F
F
F
F
T
T
F
F
F
F
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
1
1
1
1
1
1
1
1
1
1
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
1
1
1
1
1
1
1
1
1
1
MULTIPLE CHOICE
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
D
D
B
D
E
B
A
A
B
C
SHORT ANSWER
21. ANS:
This is a normative statement. The key is the inclusion of the word "should" in the statement. It is a value
judgment, although one that is shared by many people.
PTS: 1
22. ANS:
Gasoline is least elastic, since there are few substitutes for it available to power automobiles. Shell gas at a
particular station is most elastic, since one can substitute other Shell stations or other brands of gas.
PTS: 1
23. ANS:
Microeconomic topics: a, e, and f
Macroeconomic topics: b, c, and d
PTS: 1
1
ID: A
24. ANS:
Statement I is an example of the fallacy of composition.
Statement II is an example of confusing association with causation.
PTS: 1
25. ANS:
People living in poverty have access to few resources, which limits the goods and services that can be
consumed. When an individual faces scarcity it means not having enough resources to consume all that is
desired (necessitating that choices be made). While not everyone lives in poverty, everyone does face
scarcity. Even the rich face scarcity (since as wealth increases, so do human wants).
PTS: 1
26. ANS:
Economic growth depends on a country's willingness to sacrifice current consumption and invest in
physical and/or human capital goods. Expanding the country's capital stock or improving the quality of its
labor force allows it to produce more goods and services. Closing all of the schools will mean sacrificing
investment in human capital in favor of current consumption. Likewise, choosing to spend half of
available income on military goods will leave fewer resources for investment in nonmilitary physical or
human capital.
PTS: 1
27. ANS:
The side that is arguing that revenues will decline as a result of an increase in the price of mass transit
tickets is assuming that the demand is elastic. Those that argue that an increase in price will result in
greater revenues believe that the price elasticity of demand for mass transit systems is inelastic. You might
advise an increase in the price of transportation fares in order to identify whether demand is elastic or
inelastic.
PTS: 1
28. ANS:
Elasticity of demand = Percentage change in quantity demanded/Percentage change in price. Using the
average quantities and average prices to calculate elasticity, we obtain:
Q D / Q D 1,000 / 2,500

 1.6
P/P
$2 / $8
PTS: 1
29. ANS:
The second pizza gives less marginal utility than the first. The pizza parlor is trying to encourage
consumers to buy the second pizza by charging a price that reflects its relatively lower marginal utility. If
price is set equal to $9 per pizza, some consumers with low marginal valuations for a second pizza might
elect not to purchase a second one. If enough customers elect not to purchase a second pizza at a price of
$9, the pizza parlor might be worse off than when employing the "buy one for $12, get the second pizza
for $6" strategy.
PTS: 1
30. ANS:
If the government's goal is to increase tax revenue, then the best markets to tax are those in which demand
is most inelastic, such as for alcohol and gasoline. When the government imposes a tax in markets where
demand is relatively inelastic, the quantity demanded will not decrease significantly.
PTS: 1
2