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Answer all 30 multiple-choice questions in this test. Each question is worth 1 point. 1.

Which of the following is the most accurate statement about the production possibilities curve (PPC)? a. An economy can produce at any point inside or outside its PPC. b. An economy can produce only on its PPC. c. An economy can produce at any point on or inside its PPC, but not outside the PPC. d. An economy can produce at any point inside its PPC but not on or outside the PPC. !. A PPC will shift outward for all of the following reasons e"cept when a. There is an increase in unemployment o labor. b. #here is an increase in population. c. #here is an improvement in technology. d. #here is an increase in rate of savings and investment. $. %f a country invests and adds to its capital stoc& with the result that wor&er productivity rises a. The PPC will shi t outward. b. #he PPC will shift inward. c. #he country ends up producing at a point inside the PPC. d. #he production of goods moves from one point on the PPC to another along the curve. '. Assume a demand curve for tofu. %n reference to a change in (uantity demanded along the demand curve for tofu which one refers to the substitution effect?

a. When there is an increase in the price of a substitute of tofu the demand curve for tofu shifts to the left. b. !hen the price o to u increases, quantity demanded o to u decreases as consumers see" cheaper substitutes. c. When the price of tofu increases (uantity demanded of tofu increases as consumers substitute away from cheaper substitutes. d. #here is no such thing as substitution effect to e"plain a change in (uantity demanded. ). Assume a demand curve for gasoline. %n reference to a change in (uantity demanded along the demand curve for gasoline which one refers to the income effect? a. When there is an increase in income the demand curve shifts to the left. b. When the price of gasoline increases consumers have less purchasing power to buy gasoline leading to a decrease in the demand for gasoline. c. !hen the price o #asoline increases, quantity demanded or #asoline decreases as consumers ha$e less purchasin# power to buy #asoline. d. #here is no such thing as income effect to e"plain a change in (uantity demanded. *. #he price elasticity of demand measures a. The chan#e in quantity demanded o a #ood in response to a chan#e in its price. b. #he change in price of a good in response to a change in (uantity demanded of its substitute. c. #he change in (uantity demanded of a good in response to a change in price of its substitute. d. #he change in (uantity demanded of a good in response to a change in consumer income.

+. %ncome elasticity of a normal good such as mil& a. Will have a negative value. b. !ill ha$e a positi$e $alue. c. ,ay have a negative or positive value. d. %s not defined. -. Which is true of an inferior good? a. As income increases we purchase more of the good and income elasticity is negative. b. As income increases we purchase less o the #ood, and income elasticity is ne#ati$e. c. As income increases we purchase more of the good and income elasticity is positive. d. As income increases we purchase less of the good and income elasticity is positive. .. Computers and computer software (complements) will have a cross/price elasticity that is a. positive as the price of computers decreases the demand for software will also decrease. b. Positive as the price of computers decreases the demand for software will increase. c. 0egative as the price of computers decreases the demand for software will also decrease. d. %e#ati$e, as the price o computers decreases, the demand or so tware will increase. 11. As a result of agricultural price supports (price floor) a. the mar&et would be in e(uilibrium with (uantity demanded e(ual to (uantity supplied.

b. #here will be a shortage with (uantity demanded e"ceeding (uantity supplied. c. There will be a surplus, with quantity supplied e&ceedin# quantity demanded. d. %t is indeterminate as to whether there would be a shortage or surplus. 11. When the demand curve shifts to the right but supply does not change a. both the mar"et price and quantity will rise. b. 2oth the mar&et price and (uantity will fall. c. #he mar&et price will fall and (uantity will rise. d. #he mar&et price will rise and (uantity will fall. %f oil prices increase (oil is used to produce gasoline) there will be 1!.%f oil prices increase (oil is used to produce gasoline) there will be a. a rightward shift in gasoline supply curve and a decrease in gasoline prices. b. A le tward shi t in #asoline supply cur$e and an increase in #asoline prices. c. A rightward shift in gasoline demand curve and an increase in gasoline prices. d. A leftward shift in gasoline demand curve and a decrease in gasoline prices 1$. 3asoline is a normal good. When consumer income increases there will be a. a rightward shift in gasoline supply curve and a decrease in gasoline prices. b. A leftward shift in gasoline supply curve and an increase in gasoline prices. c. A ri#htward shi t in #asoline demand cur$e and an increase in #asoline prices.

d. A leftward shift in gasoline demand curve and a decrease in gasoline prices. 1'. Consider two competing gas stations located on opposite corners of a road crossing4 #e"aco and Conoco. %f #e"aco lowers its selling price of gas the effect on Conoco is a. a rightward shift in Conoco5s supply curve and a lower price for Conoco5s gas. b. A decrease in the (uantity demanded of Conoco5s gas and a higher price for Conoco5s gas. c. A le tward shi t in demand or Conoco's #as and a lower price or Conoco's #as. d. A rightward shift in demand for Conoco5s gas and a higher price for Conoco5s gas. 1). 6uppose that the point price elasticity of demand for a product is ' and that there is a !1 percent increase in (uantity demanded. Which correctly reflects the price change to cause the change in (uantity demanded? a( ) percent decrease in price b) ) percent increase in price c) -1 percent decrease in price d) -1 percent increase in price 1*. What is the arc price elasticity of supply if 111 units are sold at a price of 71 per unit and 1)1 units are sold when price increases to 7! per unit. a. 18! or 1.) b. 3*) or 0.+ c. ! d. )8$ or 1.*+ 1+. 9pportunity cost of an activity can best be defined as a. the $alue o the ne&t best alternati$e acti$ity that is #i$en up. b. the money e"penditure on the activity. c. the time incurred on the activity. d. the monetary benefits of the activity. 5

1-. Choose the correct statement. a. A straight line PPC implies nonhomogeneous resources and constant opportunity cost. b. A straight line PPC implies homogeneous resources and increasing opportunity cost. c. A bowed/out PPC implies homogeneous resources and constant opportunity cost. d. A bowed-out PPC implies nonhomo#eneous resources and increasin# opportunity cost. 1.. When price of yogurt increases a. demand or ice creams ,substitutes( increases. b. demand for yogurt decreases. c. both a and b happen. d. none of the above is li&ely to happen. !1. Which of the following would most li&ely cause the price of California oranges to decline? a. An increase in the price of :lorida oranges (substitutes). b. A decline in supply of :lorida oranges (substitutes). c. An increase in the price of insecticides that are sprayed to protect orange crop from diseases. d. A decline in arm labor wa#e in Cali ornia !1. Which states the law of demand? a. As price increases, quantity demanded decreases. b. As price increases (uantity supplied increases. c. As price increases demand decreases. d. All of the above

P S a b c D Q Figure 1 !!. :igure 1 shows demand and supply of a good. Which area in the figure is the total surplus or the total net benefits from production and consumption of the good? a. a b. b c. a-b d. a;b;c !$. <conomi=ing behavior is best described as a. spending the least amount of money. b. %nvesting in stoc& mar&et. c. !ei#hin# bene its o each alternati$e a#ainst its costs and choosin# the alternati$e that ma&imi.es the net bene its. d. Choosing irrationally from among alternatives. !'. According to the principle of diminishing marginal returns or marginal benefits a. the hi#her the le$el o consumption, the lower the mar#inal bene its. b. #he lower the level of consumption the lower the marginal benefits. 7

c. #he marginal benefit diminishes with time. d. #he higher the price the lower the marginal benefits. !). What range of price elasticity of demand would you e"pect above the mid/ point of a linear demand curve? a. unit elastic b. inelastic c. elastic d. =ero elasticity !*. %f the price elasticity of demand for a product were 1.*' would the sales revenue increase by increasing the sales price of the product? a( /es, sales re$enue will increase. b) 0o sales revenue will decrease. c) 0o sales revenue will remain the same. d) %t is indeterminate what happens to sales revenue. !+. Which is an e"ample of price ceiling? a) federal minimum wage b) agricultural price supports c( rent control d) all of the above !-. When a sales ta" is imposed on sales of a product and demand is more inelastic than supply a) ta" incidence is larger on suppliers compared to incidence on consumers. b) Ta& incidence is lar#er on consumers, compared to incidence on suppliers. c) #a" incidence is e(ual on both consumers and suppliers. d) #he entire ta" incidence is on consumers there is no ta" incidence on suppliers.

P $6 $5

S+T

D $2 0 100 150 Figure 2 Q, units

!.. %n :igure ! 6 is the original supply curve and (6;#) the supply curve when a sales ta" 7' per unit is imposed. > is the demand curve. Who shares how much of this ta"? a( Consumers share 0)1, i.e., 21 per unit o ta&. b) Consumers share )1? i.e. 7! per unit of ta". c) Consumers share +)? i.e. 7$ per unit of ta". d) Consumers share 111? i.e. 7' per unit of ta". $1. :rom :igure ! calculate the total sales ta" revenue of the government. a) 7!11 b( 2300 c) 7)11 d) 7*11 Answer 4ey 1c !a $a 'b )c *a +b -b .d 11c 11a 1!b 1$c 1'c 1)a 1*b 1+a 1-d 1.a !1d !1a !!c !$c !'a !)c !*a !+c !-b !.a $1b