Fall 2013: Mercer University
Econ 151: Principles of Macroeconomics
Exam 1: Answers
1) Economic choice and competitive behavior are the result of
a. basic human greed.
b. poverty.
c. private ownership of resources.
d. scarcity.
ANS: D
2) In economics, the term marginal refers to
a. the change or difference between two alternatives.
b. man-made resources as opposed to natural resources.
c. the satisfaction a consumer receives from a good.
d. holding everything else constant in the analysis.
ANS: A
3) The Secretary of Labor states that wage rates in the country have risen by 2 percent this past year. The head of
a local labor union states that wage gains should have been higher. The Secretary's statement is a(n) ____
economic statement, and the labor head's statement is a(n) ____ economic statement.
a. normative; normative
b. normative; positive
c. positive; normative
d. positive; positive
e. proper; improper
4) The fallacy of composition is the incorrect view that
a. everything else is always held constant when a change occurs.
b. a small change in an economic variable will have unrecognizable but significant
consequences on the economy.
c. when two events are associated, the one observed first must have caused the second.
d. if something is true for an individual, then it must also be true for the group.
ANS: D
5) The basic difference between macroeconomics and microeconomics is that
a. microeconomics is concerned with aggregate markets and the entire economy, while
macroeconomics is concerned with specific individual markets.
b. macroeconomics is concerned with policy decisions, while microeconomics applies only
to theory.
c. microeconomics is concerned with individual markets and the behavior of people and
firms, while macroeconomics is concerned with aggregate markets and the entire
economy.
d. macroeconomics is concerned with positive economics, while microeconomics is
concerned with normative economics.
ANS: C
6) An airline ticket from Seattle to Miami costs $760. A bus ticket costs $360. Traveling by plane will take 6
hours, compared with 26 hours by bus. Other things constant, the minimum value of one's time that would
induce a rational individual to fly rather than drive would be
a. $18 per hour.
b. $20 per hour.
c. $38 per hour.
d. $44 per hour.
ANS: B
7) Three basic decisions must be made by all economies. What are they?
a. how much will be produced, when it will be produced, and how much it will cost
b. what the price of each good will be, who will produce each good, and who will consume
each good
c. what will be produced, how goods will be produced, and for whom goods will be
produced
d. how the opportunity cost principle will be applied, if and how the law of comparative
advantage will be utilized, and whether the production possibilities constraint will apply
ANS: C
8) Hutch Technology makes computer monitors, which sell for $500 each. What is the opportunity cost of
producing ten monitors?
a. $5,000
b. the other goods that could be produced with the resources that produce the ten monitors
c. the profits that Hutch earns when it sells the ten monitors
d. the profits that Hutch loses if it does not produce the monitors
e. All of the above are correct.
ANS: B
Figure 1
9) In Figure 1, which shows the production possibilities curve,
a. A is efficient.
b. B is inefficient.
c. C is unattainable.
d. all of the above are true.
ANS: D
10) A production possibilities curve indicates that when resources are being used efficiently,
a. you can only produce more of one good only if you lower its price.
b. you can only produce more of one good only if you produce more of another good.
c. you can only produce more of one good only if you produce less of another good.
d. it is impossible to expand the total output of goods over time.
ANS: C
11) Which of the following will most likely cause an outward shift in the production possibilities curve?
a. a reduction in the man-made productive resources available to the economy as the result of
a decline in investment
b. an increase in government payments to farmers for taking land out of production
c. an increase from 40 to 50 hours in the average number of hours worked per week
d. None of the above would cause an outward shift in the production possibilities curve.
ANS: C
12) Using a production possibilities curve, a technological advance that increases the amount of output for the
same amount of inputs would be illustrated as
a. an inward shift of the curve.
b. a movement from one point to another point along the curve.
c. an outward shift of the curve.
d. a movement from a point on the curve to a point inside the curve.
ANS: C
13) Suppose that country A produces mostly consumption goods and few investment goods, while country B
produces mostly investment goods with few consumption goods. Other things constant, which of the
following is most likely to happen in the future?
a. The per capita income of country A will grow more rapidly than country B.
b. The population of country B will grow more rapidly than country A.
c. The production possibilities curve (PPC) of country B will shift out more rapidly than the
PPC of country A.
d. The production possibilities curve (PPC) of country A will shift out more rapidly than the
PPC of country B.
ANS: C
14) When collective decision making is utilized to resolve economic questions regarding the allocation of
resources,
a. the role of markets will be replaced by political decision making.
b. centralized decision making in all areas is inevitable.
c. the preferences of individuals are of no importance.
d. economic efficiency will be assured.
ANS: A
Figure 2
15) Points A and B in Figure 2 indicate consumption and investment for two economies. Other things constant,
which of the economies is likely to grow more rapidly in the future?
a. economy A
b. economy B
c. They can be expected to grow at the same rate.
d. This is uncertain since growth is not influenced by the factors indicated in this example.
ANS: B
16) Assume the demand curve 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.
ANS: C
17) Consumer surplus
a. is the difference between total willingness to pay and the total amount actually paid.
b. guarantees that the market value of a good in money is equal to the total economic value
of the good.
c. is always negative because of diminishing marginal utility.
d. is the total area under a consumer's demand curve.
ANS: A
18) Suppose Katie, Kendra, and Kristen each purchase a particular type of cell phone at a price of $80. Katie's
willingness to pay was $100, Kendra's willingness to pay was $95, and Kristen's willingness to pay was
$80. Consumer surplus for the three individuals is
a. $15.
b. $20.
c. $35.
d. $80.
ANS: C
19) If a large percentage increase in the price of a good results in a small percentage reduction in the quantity
demanded of the good, demand is said to be
a. horizontal.
b. relatively inelastic.
c. relatively elastic.
d. None of the above.
ANS: B
20) Which of the following would lead to an increase in the demand for computer software?
a. a decrease in the price of computer software
b. a decrease in the price of personal computers
c. an decrease in the cost of producing computer software
d. an decrease in personal income
ANS: B
Figure 3
21) Refer to Figure 3. Which area represents producer surplus when the price is P1?
a. BCE
b. ACF
c. ABED
d. DEF
ANS: A
22 Which of the following will lead to a decrease in supply of a good?
a. an increase in the price of the good
b. an increase in consumer incomes
c. an increase in the price of an important resource used to produce the good
d. a technological advance that lowers the cost of producing the good
ANS: C
23) Which of the following occurs when a shortage occurs in the market for a good?
a. Quantity demanded exceeds quantity supplied and the market mechanism pushes the price
up, which in turn encourages more production and less consumption.
b. Quantity supplied exceeds quantity demanded and the price falls, which encourages more
production and less consumption.
c. Quantity demanded exceeds quantity supplied and the market mechanism pushes the price
down, which encourages more production and less consumption.
d. Quantity supplied exceeds quantity demanded and the price rises, which encourages more
production and less consumption.
ANS: A
24) The Red Jacket Mountain View Inn in New Hampshire charges $150 per room in the winter ski season and
$90 during the summer months. The number of rooms and operating costs are constant year round. These
prices indicate
a. a rightward shift in the demand in the summer.
b. a rightward shift in demand in the winter.
c. a leftward shift in the supply curve in the summer.
d. a leftward shift in demand in the winter.
ANS: B
Figure 4
25) Refer to Figure 4. The market for margarine was initially in equilibrium at point e. Other things constant, an
increase in the price of soybean oil, an important ingredient used to produce margarine, would likely
move the equilibrium in this market toward point
a. r.
b. s.
c. t.
d. u.
ANS: D
26) Gross domestic product is
a. the market value of all goods and services exchanged within a country during a time
period.
b. the market value of all domestic assets, regardless of whether they are owned by citizens
or foreigners.
c. the compensation received during a period for labor services plus interest, rents, and
corporate profits.
d. the market value of final goods and services produced within a country during a time
period.
ANS: D
27) Which of the following does not contribute to GDP?
a. You lose $50 playing cards with friends.
b. You pay a doctor $200 to treat an arm that you broke in an accident.
c. You pay $300 for this month's rent on your apartment.
d. Your economics textbook is revised, and you buy the new edition.
ANS: A
28) If a used car dealer purchases a used car for $3,000, refurbishes it, and sells it for $8,000, the
a. dealer contributes value added equal to $5,000, but nothing is added to GDP.
b. dealer contributes value added equal to $5,000, and consequently $5,000 is added to GDP.
c. dealer contributes nothing to production because only existing goods are involved.
d. dealer contributes value added equal to $8,000, but only $5,000 is added to GDP.
ANS: B
29) Which of the following would not be included in GDP?
a. the real estate commission on the sale of a used home
b. an attorney's fee for handling the sale of a used home
c. the value of a used home, at its sale price
d. fees paid to have the house cleaned
ANS: C
30) Which of the following events will leave GDP unchanged?
a. You purchase 100 shares of Wal-Mart stock.
b. You pay $500 to repair the damage done to your car by an uninsured motorist.
c. You decide to work five more hours per week at your job to pay for the repairs performed
on your car.
d. You purchase a new car at an auction.
ANS: A