Chapter 1 - Economics—The Science of Choice and Exchange
Answer: d
1. A situation where people have unlimited wants but face limited
resources is known as _____________.
a) Economic efficiency
b) Factors of production
c) Macroeconomics
d) Scarcity
Answer: c
2. The branch of economics that focuses on the study of output,
inflation, and unemployment is known as __________.
a) Capital
b) Labor
c) Macroeconomics
d) Microeconomics
Answer: a
3. Which of the following describes a situation most closely
related to microeconomics?
a) A business firm decides to purchase new computers for its
employees.
b) The government reports that unemployment has increased
over the past year.
c) Research finds that inflation has slowed over the past
decade.
d) The government decides to cut taxes during a period of high
unemployment.
Answer: b
4. A newspaper report that unemployment has risen over the past
year deals with which branch of economics?
a) Inflation
b) Macroeconomics
c) Microeconomics
d) Scarcity
5. Which of the following factors of production is a natural
resource?
a) Labor
b) Equipment
c) Farmland
d)
Buildings
Answer: c
Answer: c
6. Which of the following factors of production used in making a
textbook is an example of capital?
a) The printing press used to print the book
b) The lumber used to make the paper
c) The worker in charge of operating the printing press
d) The author of the textbook
Answer: a
7. Opportunity cost is
a) the cost of a good or service measured in terms of what it
would cost to pursue the next best alternative using these
resources.
b) the price of a good or service.
c) the cost of the factors of production used to make the good
or service.
d) the losses a business incurs when it produces a good or
provides a service.
Answer: c
8. Suppose you are choosing between attending college and going to
work full time. Which of the following would be the opportunity
cost of a college education?
a) Meals
b) Clothing
c) Forgone income
d) All of the above
Answer: d
9. Which of the following would be considered an out-of-pocket
cost of a college education, assuming you are paying from money
you have previously saved?
a) Room and board cost in a college dormitory
b) Textbooks
c) Income you could have earned if you were not studying
d) Both a and b, but not c
Answer: b
10. Investment
a) is the act of increasing the economy’s stock of labor.
b) involves a trade-off between today’s consumption and future
consumption.
c) includes the invention of new technology.
d) is difficult to measure because it includes intangibles.
Answer: b
11. The process of seeking new technology and new forms of
organization is known as ________.
a) Capital
b) Entrepreneurship
c) Labor
d) Natural resource
12. Janet is said to have a comparative advantage in software
design compared with Miguel if
a) she can produce software code faster than Miguel.
b) she can produce software code at a lower opportunity cost
than Miguel.
c) when their skills cannot be compared.
d) when their skills are about the same.
Answer: b
Answer: a
13. For what is David Ricardo known?
a) Applying the concept of comparative advantage to
international trade
b) Suggesting that countries should restrict trade to improve
economic conditions
c) Claiming that economic growth would continue indefinitely
d) All of the above
Answer: a
14. Efficiency in distribution means that goods and services are
allocated
a) so that it is not possible to make someone better off
without causing someone else’s wants to be less satisfied. to
the poorest individuals first.
b) to individuals equally.
c) according to what is fair.
d) All the above
Answer: c
15. On what doesositive economics focus?
a) How to fairly allocated goods and services in the economy
b) Whether conservative or liberal policies are more consistent
with a nation’s basic values
c) Observed facts and the relationship between them
d) All of the above
Answer: d
Answer: d
Answer: c
16. Which of the following is a normative statement?
a) The unemployment rate is currently 6%.
b) Widgets, Inc. earned $2.5 million in profits last year.
c) Pro-union policies in Europe are unfair to people who depend
on investment income for retirement.
d) American companies often save labor costs by outsourcing to
China.
17. A market
a) is any arrangement people have for trading with one another.
b) provides information that helps to coordinate decisions.
c) provides incentives for people to participate in trading.
d) All of the above
18. In a market economy, the coordinating mechanism of hierarchy
is usually used to
a) decide how much will be produced.
b) decide how goods will be allocated among individuals.
c) establish laws and regulations that firms must follow when
operating within markets.
d) All of the above.
Answer: b
19. According to Adam Smith, the wealth of a nation depends most
on which of the following?
a) The amount of gold and silver accumulated by the treasury
b) The activities of individuals interacting in free markets
c) The role of the government in providing services to the
general public
d) The organization of a specific plan forwarded by the
government
Answer: d
20. An economic model
a) is a way of representing a theory.
b) often involves the use of a graph or mathematical
expression.
c) is used to explain the relationship among observed facts.
d) All of the above
Figure 1.1
Police Stations
Answer: b
A
B
C
D
Hospitals
21. Figure 1.1 shows the production possibilities for a city deciding
how to allocate resources between police stations and hospitals.
According to the figure, which production possibility requires
more resources than the city has as its disposal?
a) Point A
b) Point B
c) Point C
d) Point D
Answer: d
22. Figure 1.1 shows the production possibilities for a city deciding
how to allocate resources between police stations and hospitals.
According to the figure, which points are both possible and
efficient?
a) Points A, B, and C
b) Points A, B, and D
c) Points A and B
d) Points A and D
Answer: a
23. Figure 1.1 shows the production possibilities for a city deciding
how to allocate resources between police stations and hospitals.
According to the figure, the opportunity cost of hospitals is
lowest at which of the following efficient production points?
a) Point A
b) Point B
c) Point C
d) Point D
Answer: c
24. Empirical evidence refers to which of the following?
a) Predictions from economic models
b) Normative economic statements
c) Observations of actual economic outcomes
d) Graphs or mathematical expressions used to illustrate
economic theory
Answer: b
25. Which of the following is an example of a conditional forecast?
a) Too much money is always bad for the economy.
b) If the rate of growth of money increases over the coming
year, we can expect inflation to increase.
c) Inflation will increase next year - that’s for sure!
d) Under no conditions can we expect that the rate of inflation
has anything to do with money.
Chapter 2 - Supply and Demand: The Basics
Answer: c
1. According to the law of demand, which of the following is true
regarding the price of a good?
a) As the price increases, the quantity demanded tends to
increase.
b) As price decreases, the quantity demanded tends to
decrease.
c) As price increases, the quantity demanded tends to
decrease.
d) As price decreases the quantity demanded tends to remain
unchanged.
Answer: a
2. If the price of a good rises, what are people likely to do?
a) Substitute a less expensive good
b) Buy more of the good
c) Buy more of all goods because of added buying power
d) All of the above
Answer: d
3. The demand curve shows that as the price of a good increases,
a) people tend to buy more of this good.
b) the quantity demanded for this good increases.
c) the demand curve for this good shifts to the right.
d) None of the above
Answer: c
Price of MP3 Players
(Dollars player)
Figure 2.1
$400
$300
A
$200
$100
B
1
2
3
4
Quantity of MP3 Players
(Thousands per Year)
4. Figure 2.1 shows the market for MP3 players. According to the
diagram, how much are people willing to pay per unit when the
quantity sold is 1,000?
a) $100
b) $200
c) $300
d) $400
Answer: c
5. Figure 2.1 shows the market for MP3 players. According to the
diagram, what is the quantity demanded for MP3 players if the
price of MP3 players is $100?
a) 1 thousand
b) 2 thousand
c) 3 thousand
d) 4 thousand
Answer: d
6. If hot dogs and hamburgers are substitutes and the price of
hot dogs increases, what do we expect?
a) An increase in the quantity of hot dogs demanded
b) The demand curve for hot dogs to shift to the left
c) The demand curve for hot dogs to shift to the right
d) The demand curve for hamburgers to shift to the right
Answer: d
7. If bagels and cream cheese are complements and the price of
cream cheese increases, what do we expect?
a) An increase in the quantity of cream cheese demanded
b) The demand curve for cream cheese to shift to the left
c) The demand curve for cream cheese to shift to the right
d) The demand curve for bagels to shift to the right
Answer: b
8. If an increase in income leads to an increase in the demand for
beef, what do we conclude?
a) The price of beef has decreased.
b) Beef is a normal good.
c) Beef is an inferior good.
d) Tastes have shifted toward beef.
Answer: c
Price of Beef
(Dollars pound of beef)
Figure 2.2
$4.00
$3.00
$2.00
$1.00
D1
D2
1
2
3
4
Quantity of Beef
(Thousands pounds per year)
9. The change in demand illustrated in Figure 2.2 is consistent with
which of the following?
a) Beef is a normal good and income has increased.
b) The price of chicken (a substitute for beef) has increased.
c) People expect the price of beef to fall in the near future.
d) A government report shows that beef has health benefits
that were previously unknown.
Answer: a
10. According to the law of supply, which of the following happens
based on the price of a good?
a) As price increases, the quantity supplied tends to increase.
b) As price decreases, the quantity supplied tends to increase.
c) As price increases, the quantity supplied tends to decrease.
d) As price decreases, the quantity supplied tends to remain
unchanged.
Answer: a
11. A positively sloped supply curve suggests that as the quantity of
a good supplied increases,
a) the opportunity cost of producing more of this good
increases.
b) the price of the good decreases.
c) the supply curve for good shifts to the right.
d) None of the above
Answer: c
Price of MP3 Players
(Dollars player)
Figure 2.3
$400
A
$300
$200
$100
1
2
3
4
Quantity of MP3 Players
(Thousands per Year)
12. Figure 2.3 shows the market for MP3 players. According to this
diagram, how many MP3 players are sellers willing to sell at a
price of $300?
a) 1 thousand
b) 2 thousand
c) 3 thousand
d) 4 thousand
Answer: b
13. Other things being equal, a decrease in the cost of producing a
good will cause which of the following?
a) An increase in the opportunity tangency of producing the
good
b) A rightward shift in the supply curve
c) A decrease in the quantity supplied
d) An increase in the price of the good
Answer: a
14. A strike by workers at an automobile plant that leads to an
increase in wages will cause which of the following?
a) An increase in the opportunity cost of producing the good
b) A rightward shift in the supply curve
c) An increase in the quantity of the good supplied
d) A decrease in the price of the good
Answer: c
Price of MP3 Players
(Dollars player)
Figure 2.4
S1
$400
S2
$300
$200
$100
1
2
3
4
Quantity of MP3 Players
(Thousands per Year)
15. The shift in the supply curve shown in Figure 2.3 is consistent
with which of the following?
a) A decision by makers of MP3 players to shift resources to
production of DVD players
b) An increase in price of materials used to make MP3 players
c) A reduction in the opportunity cost of producing MP3
players
d) Any one, or all, of the above could be true.
Answer: b
Figure 2.5
Price of Beef
(Dollars per pound)
$4.00
S
$3.00
$2.00
$1.00
D
1
2
3
4
Quantity of Beef
(Thousands pounds per year)
16. According to Figure 2.5, what is the equilibrium price of beef?
a) $1.00
b) $2.00
c) $3.00
d) $4.00
Answer: c
17. According to Figure 2.5, how many pounds of beef will be sold
when the market is in equilibrium?
a) 4 thousand
b) 3 thousand
c) 2 thousand
d) 1 thousand
Answer: b
18. According to Figure 2.5, if the price of beef is $1.00, there will
be a
a) 1,000-pound shortage of beef.
b) 2,000- pound shortage of beef.
c) 1,000-pound surplus of beef.
d) 2,000-pound surplus of beef.
Answer: d
19. According to Figure 2.5, if the price of beef is $3.00, what will
happen?
a) There will be a shortage of beef.
b) The quantity of beef demanded will exceed the quantity
supplied.
c) There will soon be an increase in the demand for beef.
d) The price will soon fall.
Answer: a
20. What will be the result be if the price of a good is lower than
the equilibrium price?
a) A shortage
b) A surplus
c) Excess supply
d) Both b) and c)
Answer: d
21. If hot dogs and hamburgers are substitutes, an increase in the
price of hot dogs will cause which of the following?
a) An increase in the demand for hamburgers
b) An increase in the equilibrium price of hamburgers
c) An increase in the number of hamburgers sold
d) All of the above.
Answer: a
22. If the wages of automobile workers increase, we expect which
of the following?
a) An increase in the equilibrium price of automobiles
b) A decrease in the demand for automobiles
c) An increase in the supply of automobiles
d) All of the above
Answer: c
23. The ability of markets to move toward a new equilibrium
following a disturbance is an example of economic coordination
through which of the following?
a) Central planning
b) Government policy
c) Spontaneous order
d) Price floor
Answer: d
24. Which of the following is an example of a price floor?
a) Rent controls
b) Minimum wages
c) Agricultural price supports
d) Both b and c
Answer: b
25. Which of the following is an unintended consequence of rent
controls?
a) Lower rent for tenants
b) A shortage of rent-controlled apartments
c) A surplus of rent-controlled apartments
d) All of the above
Chapter 3 - Supply, Demand, and Elasticity
Answer: a
1. The measure of the percentage change in one variable to a
percentage change in another variable is known as ______.
a) Elasticity
b) Price
c) Quantity demanded
d) Revenue
Answer: b
2. The ratio of the percentage change in the quantity
demanded of a good to a given percentage change in its
price is known as ______________.
a) Cross-elasticity of demand
b) Price elasticity of demand
c) Price elasticity of supply
d) Income elasticity of demand
Answer: d
3. If the price of hamburgers increases by 1% and the
quantity demanded falls by 2%, then there will be
a) an increase in the price elasticity of demand.
b) an increase in the price elasticity of supply.
c) a shift in the demand curve.
d) a decrease in revenue.
Answer: a
4. If an increase in the price of a good leads to a decrease in
revenue, then the demand for the good is ________.
a) elastic
b) inelastic
c) perfectly inelastic
d) zero
Answer: a
5. Figure 3.1 shows the demand curve for potatoes. According
to the diagram, which of the following is true?
a) Demand is unit elastic at all points.
b) Demand is more elastic at point a than at point b.
c) Demand is more elastic at point b than at point a.
d) Demand is equally elastic at points a and b..
Answer: a
Answer: d
6. If an increase in the price of a good leads to no change in
the quantity demanded, then the demand for this good is
a) perfectly inelastic
b) perfectly elastic
c) elastic
d) unit elastic
Figure 3.2
Price of Milk
(Dollars per gallon)
7. Figure 3.2 shows the market for milk. According to this
$4.00
diagram, what happens to revenue when the price of milk
A
falls from $3.00 to $1.00?
$3.00
a) Revenue falls from $3,000 to $1,000.
b) Revenue
rises from $1,000 to $3,000.
$2.00
c) Revenue remains unchanged at $1,000.
d) Revenue
remains unchanged atB$3,000.
$1.00
Answer: c
D
2 for3 milk.4 According to this
8. Figure 3.2 shows the1market
Quantity
Milk
diagram, the demand for
milk isof__________.
(Thousands gallons per year)
a) perfectly elastic
b) perfectly inelastic
c) unit elastic
d) income elastic
Answer: d
Figure 3.3
Price of Bread
(Dollars per loaf)
$2.00
$1.50
$1.00
$0.50
D
4
8
12
16
Quantity of Bread
(Thousands loaves per year)
9. Figure 3.3 shows demand for bread. Using the
midpoint formula, the price elasticity of demand over
the range from $1.00 to $1.50 is closest to which of
the following?
a) -0.50
b) -0.60
c) -1.45
d) -1.67
Answer: b
10. Figure 3.3 shows demand for bread. Using the midpoint
formula, the price elasticity of demand over the range
from $0.50 to $1.00 is closest to which of the following?
a) -0.50
b) -0.60
c) -1.45
d) -1.67
Answer: d
11. Figure 3.3 shows demand for bread. According to the
diagram, the demand for bread
a) is unit elastic at all prices.
b) perfectly inelastic at all prices.
c) perfectly elastic at all prices.
d) varies along the demand curve depending on the price.
Answer: a
12. Figure 3.3 shows the market for bread. According to this
diagram, the demand for bread is
a) more elastic at higher prices of bread.
b) less elastic at higher prices of bread.
c) always unit elastic.
d) always perfectly elastic.
Answer: b
13. Other things being equal, the fewer substitutes a good
has, the more its demand will tend to be __________.
a) elastic
b) inelastic
c) unit elastic
d) income elastic
Answer: a
14. Other things being equal, narrowly defined goods tend to
be less elastic because they
a) have fewer substitutes.
b) have more complements.
c) are more difficulty to find.
d) have higher prices.
Answer: b
15. Why does price elasticity of demand tend to be more
elastic over longer time horizons?
a) People find fewer and fewer substitutes over longer
periods of time.
b) Over time, an increase in price may lead to development
of new substitutes.
c) Once people have made quick adjustments in the
quantities of other goods that they buy, they tend to
stay with those decisions.
d) Consumer tastes tend to adjust quickly over time.
Answer: b
16. An inferior good necessarily has
a) a positive price elasticity of demand.
b) a negative income elasticity of demand.
c) a negative cross-elasticity of demand.
d) a negative price elasticity of supply.
Answer: c
17. Suppose that when your income is $1,000 a month, you
consume 20 packages of noodle soup, and when your income
is $2,000, you consume 10 packages of noodle soup. Using
the midpoint formula, the income elasticity of demand is
____.
a) -0.5
b) 0.5
c) -1.0
d) 2.0
Answer: d
18. Which of the following would indicate whether two goods
are substitutes or complements?
a) Price elasticity of demand
b) Price elasticity of supply
c) Income elasticity of demand
d) Cross elasticity of demand
Answer: b
Figure 3.4
S
Price of Bread
(Dollars per loaf)
$2.00
$1.50
$1.00
$0.50
4
8
12
16
Quantity of Bread
(Thousands loaves per year)
19. Figure 3.4 shows the supply of bread. Using the midpoint
formula, the price elasticity of supply over the range of
$2.00 to $1.00 is _____.
a) 0.5
b) 0.75
c) 1
d) 1.6
Answer: a
Answer: c
20. If the price elasticity of supply for milk is equal to 0.5,
then a 1% increase in the price of milk will cause a
a) 0.5% increase in the quantity of milk supplied.
b) 0.5% decrease in the quantity of milk supplied.
c) 2% increase in the quantity of milk supplied.
d) 2% decrease in the quantity of milk supplied.
Figure 3.5
D
S2
Price of Cigarettes
(Dollars per pack)
$2.00
S1
$1.50
E2
$1.00
E1
$0.50
2
4
6
8
Quantity of Cigarettes
(Thousands of packs per year)
21. Figure 3.5 shows the effect of a cigarette tax levied on
the sellers of cigarettes. If E1 is the equilibrium before
the tax, and E2 is the equilibrium after the tax, what do
we conclude?
a) The tax rate is $0.75 per pack.
b) The sellers bear a larger share of the burden of the
tax than the buyers.
c) The tax revenue collected by the government is a total
of $5,000.
d) All of the above
Answer: c
22. When would the share of the burden of a sales tax that is
borne by the buyers tend to be greater, other things being
equal?
a) Buyers, instead of sellers, make the actual tax
payments to the government.
b) The demand for the good is elastic
c) The demand for the good is inelastic.
d) The good has many substitutes.
Answer: b
23. When would the passage of a law prohibiting the purchase
of a drug likely to be most effective at reducing the use of
the drug?
a) The drug has few substitutes.
b) The demand for the drug is elastic.
c) The demand for the drug is inelastic.
d) The cost of supplying the drug remains low, despite the
passage of the law.
Answer: a
24. When does the passage of a law prohibiting the use of a
drug lead to an increase in expenditure on that drug?
a) The demand for the drug is inelastic.
b) The demand for the drug is elastic.
c) The demand curve is a horizontal line.
d) The prohibition has no effect at all on the price of the
drug.
Answer: b
25. A potential unintended consequence of prohibiting sale of
a good whose demand is inelastic is
a) a decrease in the consumption of the good.
b) a decrease in the quantity supplied of the good.
c) an increase in expenditure on the good.
d) a decrease in the price elasticity of demand.