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Study/sample questions for Exam 2, CHAPTERS 5,6,7,9 AND 10 Date: April_3, 2015

Note: there will be short open-ended or graph questions on the exam.

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1. CHAPTER 5
A binding price ceiling is designed to:
keep prices low.
increase the quality of the good.
prevent shortages.
increase efficiency.
2. Rapidly increasing health costs have been a major political concern since at least 1992.
Suppose the government sets the maximum price for a normal doctor's visit at $20 to
control rising health costs but the current market price is $40. What will happen?
More people will try to visit the doctor, but there will be fewer doctors willing to see
patients at that price.
The same number of people will try to visit the doctor, and the same number of doctors are
willing to see patients at that price.
More people will be able to see the doctor, since the price is lower.
Fewer people will try to see the doctor, and fewer doctors are willing to see patients at that
price.
3. Rent controls set a price ceiling below the equilibrium price and therefore:
quantity supplied exceeds the quantity demanded.
quantity demanded exceeds the quantity supplied.
a surplus of rental units will result.
all poor people will be helped.

Use the following to answer question 4:


Table: Market for Apartments

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B)
C)
D)

A)
B)
C)
D)

A)
B)
C)
D)

4. (Table: Market for Apartments) Look at the table Market for Apartments. If a
government price ceiling of $700 is imposed on this market, an inefficiency will result
in the form of a:
surplus of 0.6 million apartments.
shortage of 0.6 million apartments.
surplus of 0.2 million apartments.
shortage of 0.2 million apartments.
5. Suppose the Jamaican government sets coffee prices at $1 per pound, when the market
price is $10. The government's actions will:
improve efficiency, since the low prices will force producers to find cheaper production
methods.
result in coffee surpluses even in a coffee-rich country.
cause coffee shortages even in a coffee-rich country.
improve equality between rich and poor, since the poor can now afford coffee.
6. The government decides to impose a price ceiling on a good because it thinks the
market-determined price is too high. If it imposes the price ceiling above the
equilibrium price:
consumers will respond to the higher price and therefore wish to purchase less of the good
than at the equilibrium price.
producers will respond to the higher price and therefore offer fewer units for sale.
consumers will purchase less of the good after the price ceiling is imposed.
neither producers nor consumers will change their behavior.

Use the following to answer question 7:


Figure: The Market for Hybrid Cars

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B)
C)
D)

7. (Figure: The Market for Hybrid Cars) Look at the figure The Market for Hybrid Cars. If
there were a binding price ceiling in the market for hybrid cars, one possible price
would be equal to ________, consumers would demand ________, and producers would
supply ________.
P1; Q1; Q3
P2; Q2; Q2
P1; Q3; Q1
P3; Q3; Q1

A)
B)
C)
D)

8. The Atlanta Symphony wants to make sure that its concerts are affordable for all
residents of Atlanta and therefore prices all its tickets at $25 each. However, outside
Symphony Hall, people can sell the same tickets for $75 or more. The true cost to the
concertgoer of a ticket to the symphony is at least:
$25.
$50.
$75.
$100.

A)
B)
C)
D)

9. Black markets may develop with price controls because:


price controls increase efficiency.
quantity demanded equals quantity supplied at the mandated price.
individuals cannot profit by illegal exchanges.
individuals can profit by illegal exchanges.

10. Which of the following is an example of a black market?


A) a tenant in a rent-controlled apartment subletting at a higher rent
B) the purchase of an inferior radio at a department store
C) waiting in line during the gasoline shortages of the 1970s
D) the oil market
11. Each of the following is a source of inefficiency from a rent-control price ceiling
except:
A) inefficiently low quantity of the good exchanged.
B) wasted resources of consumers searching for the good.
C) inefficient allocation of the good to consumers.
D) inefficiently high quality of the good being sold.

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12. Governments continue to impose price controls. Which of the following is not a valid
reason for this?
A) Some people do benefit from such price controls.
B) People fear that prices will change dramatically if the price controls were removed.
C) It is politically expedient to enact regulations that benefit influential voting groups.
D) Price controls are always effective.
13. The United States and the European Union impose price floors on many agricultural
products. These price floors lead to unwanted surpluses. To deal with a surplus:
A) the U.S. government typically pays farmers to produce as much as possible.
B) the U.S. government in some cases has destroyed the surplus production.
C) the European Union pays farm exporters to sell products for a profit overseas.
D) the U.S. government holds auctions to sell the surplus to the highest bidder.
14. All else equal, if a price floor that is above the equilibrium price is imposed on a market
and the government buys the surplus, what will happen to consumer and producer
surplus?
A) Consumer surplus will fall and producer surplus will rise.
B) Consumer surplus will fall and producer surplus will fall.
C) Consumer surplus will rise and producer surplus will fall.
D) Consumer surplus will rise and producer surplus will rise.

A)
B)
C)
D)

15. When the minimum wage increases:


unemployment among skilled workers decreases.
fewer workers are willing to work off the books.
employment of unskilled workers increases.
unemployment among unskilled workers increases.

A)
B)
C)
D)

16. The likely result of a price floor is:


a surplus of the good at a price above the market equilibrium price.
a shortage of the good at a price below the market equilibrium price.
a surplus of the good at a price below the market equilibrium price.
a shortage of the good at a price above the market equilibrium price.

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Use the following to answer question 17:


Figure: Supply and Demand in Agriculture

17. (Figure: Supply and Demand in Agriculture) Look at the figure Supply and Demand in
Agriculture. If a price floor at P4 is set to help improve farm incomes and the
government wants to assure farmers that their output will be purchased, the government
would have to purchase an amount of output equal to:
A) Q3 Q0.
B) Q3 Q1.
C) Q2 Q1.
D) Q1 Q3.
18. The persistent unwanted surplus that results from a price floor creates inefficiencies that
include all of the following except:
A) inefficiently low quality.
B) inefficient allocation of sales among sellers.
C) wasted resources.
D) the temptation to break the law by selling below the legal price.
19. The system of taxicab medallions in New York City is an example of a
A) price ceiling.
B) nonbinding price ceiling.
C) price floor.
D) quantity control.

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20. A quota is
A) a lower limit on the quantity of a good that can be bought or sold.
B) an upper limit on the quantity of a good that can be bought or sold.
C) a maximum price at which a good can be bought or sold.
D) a minimum price at which a good can be bought or sold.
21. The total amount of the good that can be transacted under a quantity control is called the
A) ceiling price.
B) demand price.
C) quota limit.
D) supply price.
22. If New York City had no medallion system for taxicabs, the price of a taxicab ride
would:
A) increase because of the higher safety hazards.
B) not change from its current level.
C) decrease.
D) increase, but only slightly.
23. The quota rent refers to:
A) the difference between the demand price and the supply price at the quota limit.
B) the rent received by landlords who own rent-controlled apartments.
C) the opportunity cost of using a quota-controlled service or of buying a good that is subject
to an import quota.
D) the minimum rent that the owner of a building must receive before he or she is willing to
rent out the building.
Use the following to answer question 24:

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24. (Table: Market for Fried Twinkies) Look at the table Market for Fried Twinkies. Using
the table, if the government imposes a quota on the fried Twinkie market of 5,000, the
quota rent (per fried Twinkie) collected by the fried Twinkie producers will be:
A) $1.20.
B) $0.30.
C) $1.50.
D) $1.00.
25. Quota limits cause:
A) the demand price to be greater than the supply price.
B) the quantity demanded to be greater than the quantity supplied.
C) the quantity demanded to be less than the quantity supplied.
D) the demand price to be less than the supply price.
26. Quantity controls set below the equilibrium quantity cause all of the following except:
A) incentives for illegal activities.
B) missed opportunities in the form of mutually beneficial transactions that don't occur.
C) the supply price of the quantity transacted exceeding the demand price of the quantity
transacted.
D) quota rents.
Use the following to answer question 27:
Figure: The Market for Round-Trip Airline Flights

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27. (Figure: The Market for Round-Trip Airline Flights) Look at the figure The Market for
Round-Trip Airline Flights. The supply and demand graph represents the market for
round-trip airline flights between Boston and New York. Suppose the mayor of New
York decides to limit the number of flights to Q1 to reduce air pollution. What area or
areas represent consumer surplus after the quota is in place?
A) a
B) a + b + c
C) c + e
D) b + d + f
Use the following to answer question 28:
Figure: The Market for Sandwiches

28. (Figure: The Market for Sandwiches) Look again at the figure The Market for
Sandwiches. How much total surplus would be lost if there were a quota of only eight
sandwiches that could be legally exchanged at a price of $5?
A) $3
B) $72
C) $27
D) $32
29. How does an effective price ceiling affect buyers and sellers in a competitive market?
30. How could a minimum wage create an incentive for illegal hiring practices?

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31. CHAPTER 6
The price elasticity of demand measures the responsiveness of the change in the:
A) quantity demanded to a change in the price.
B) price to a change in the quantity demanded.
C) slope of the demand curve to a change in the price.
D) slope of the demand curve to a change in the quantity demanded.
32. Gas prices recently increased by 25%. In response, purchases of gasoline decreased by
5%. Based on this data, the price elasticity of demand for gas is:
A) 5.
B) 2.
C) 0.2.
D) 0.5.
33. If your purchases of shoes increase from 9 pairs per year to 11 pairs per year when your
income increases from $19,000 to $21,000 a year, other things equal, for you, shoes are
considered:
A) a normal good.
B) an inferior good.
C) a complementary good.
D) a substitute good.
34. The price of gasoline rises 5% and the quantity of gasoline purchased falls 1%. The
price elasticity of demand is equal to ________ and demand is described as ________.
A) 0.2; inelastic
B) 5; inelastic
C) 0.2; elastic
D) 5; elastic
35. You manage a popular nightclub and lately revenues have been disappointing. Your
bouncer suggests that raising drink prices will increase revenues, but your bartender
suggests that decreasing drink prices will increase revenues. You aren't sure who is right,
but you do know that:
A) your bouncer thinks the demand for drinks is elastic, while your bartender thinks the
demand for drinks is inelastic.
B) your bouncer thinks the demand for drinks is inelastic, while your bartender thinks the
demand for drinks is elastic.
C) both the bouncer and bartender think the demand for drinks is elastic.
D) both the bouncer and bartender think the demand for drinks is inelastic.

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36. If the demand for golf is price-inelastic and your local public golf course increases the
greens fees for using the course, you would expect:
A) a decrease in total revenue received by the course.
B) an increase in total revenue received by the course.
C) an increase in the amount of golf played on the course.
D) no change in the amount of golf played on the course.
Use the following to answer question 37:
Figure: The Demand Curve for Bridge Crossings

37. (Figure: The Demand Curve for Bridge Crossings) Look again at the figure The
Demand Curve for Bridge Crossings. Demand is price________ between $0.90 and
$1.10, since total revenue ________ when the price ________.
A) elastic; increases; decreases
B) inelastic; stays the same; decreases
C) unit-elastic; stays the same; increases
D) inelastic; increases; increases
38. Yovanka has diabetes and she will pay any amount of money to buy the insulin she
needs to stay alive. Yovanka's demand for insulin is:
A) price-inelastic.
B) price-elastic.
C) perfectly price-inelastic.
D) perfectly price-elastic.

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39. Nico rents 10% more DVDs when his income increases by 20%. Based on this
information, we know that:
A) DVDs are a normal good.
B) DVDs are an inferior good.
C) DVDs have many substitutes.
D) the price of DVDs has decreased.
40. Since the price of walnuts increases as the demand for cashews increases, we can
assume that these two goods are:
A) unrelated goods.
B) superior goods.
C) inferior goods.
D) substitute goods.
41. The price elasticity of demand for gasoline in the short run has been estimated to be 0.1.
If a war in the Middle East causes the price of oil (from which gasoline is made) to
increase, how will that affect total expenditures on gasoline in the short run, all other
things equal?
A) Demand will stay the same, but total expenditures will fall.
B) Demand will decrease, but total expenditures will rise.
C) Total expenditures will remain unchanged.
D) Demand will not change much, but total expenditures will rise.

A)
B)
C)
D)

42. The income elasticity of demand of a normal good is:


between 1 and 0.
less than 0.
equal to 0.
greater than 0.

Use the following to answer question 43:


Figure: Demand Curves

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43. (Figure: Demand Curves) Look again at the figure Demand Curves. Which graph shows
a perfectly inelastic demand curve?
A) A
B) B
C) C
D) D
44. If the price of a good increases by 20% and the quantity demanded changes by 15%,
then the price elasticity of demand is equal to:
A) 0.75.
B) approximately 0.33.
C) approximately 1.33.
D) 1.

A)
B)
C)
D)

45. If two goods are substitutes, their cross-price elasticity of demand should be:
less than 0.
negative yet almost equal to 0.
equal to 0.
greater than 0.

Use the following to answer question 46:

46. (Table: Johnson's Income and Expenditures) Look again at the table Johnson's Income
and Expenditures. Johnson's income elasticity of demand for movies is:
A) infinite.
B) 1.
C) 0.
D) 1.

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Use the following to answer question 47:


Figure: The Demand for Shirts

47. (Figure: The Demand for Shirts) Look at the figure The Demand for Shirts. The price
elasticity of demand, using the midpoint method, for the segment FG is:
A) 0.
B) 0.09.
C) 0.5.
D) greater than 1.
48. A rancher in Oklahoma decides to raise the price of her beef by 19% over the prevailing
market price. If the demand for beef is perfectly elastic, this rancher's quantity
demanded will:
A) fall to 0.
B) not change.
C) fall slightly.
D) increase slightly.
49. Suppose that an increase in the price of a good leads to an increase in total revenue.
Ignoring other factors (like supply), at its current price the good must be:
A) price-inelastic.
B) price-elastic.
C) perfectly price-elastic.
D) inferior.

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50. Goods are ________ when the cross-price elasticity of demand is positive and ________
when the cross-price elasticity of demand is negative.
A) substitutes; complements
B) complements; substitutes
C) elastic; inelastic
D) inelastic; elastic
51. CHAPTER 7
If an excise tax is imposed on beer and collected from the producers, the ________
curve will shift ________ by the amount of the tax.
A) demand; upward
B) demand; downward
C) supply; upward
D) supply; downward
Use the following to answer question 52:
Figure: The Market for Yachts

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52. (Figure: The Market for Yachts) Look at the figure The Market for Yachts. If the
government imposes a $60,000 tax on yachts (collected from the producers), consumers
will pay ________ of the tax and producers will pay ________.
A) $30,000; $30,000
B) $40,000; $20,000
C) $20,000; $40,000
D) $10,000; $50,000
To answer this question, start from the original equilibrium choose a vertical distance of
60,000 and mark it. Now shift the supply curve so that the new supply curve will pass
through the 180,000 price and is parallel to the original supply curve.
now mark the new equilibrium as the intersection between the new supply curve and the
demand curve. Note the the new equilibrium price.
Difference between the original equilibrium price and the new equilibrium price would be
the part of the tax paid by the consumer. Rest of the tax amount is paid by the producer.
53. Suppose an income tax is levied on 0% of the first $1,000, 10% of the next $9,000, and
20% of the remainder of earnings. How much tax would Miranda have to pay if she
earned $20,000?
A) $2,900
B) $5,000
C) $4,900
D) $3,000
Answer: $1000 is exempt from tax. So the tax is on $19,000. For the first $9000, the 10%
tax rate means the tax amount is 0.1*9000 equals $900.
For the rest, $10,000 20% tax rate means the tax amount is 0.2*10000 which is 2000.
Total tax amount to be paid is: 900+2000
54. A tax system causes a loss in efficiency because taxes distort incentives.
A) True
B) False
55. If demand and supply are both very elastic, a decrease in the rate of an excise tax will
likely
A) decrease government revenue.
B) increase government revenue.
C) not affect government revenue.
D) make demand and supply both inelastic.
Think of government revenue as the total revenue discussed in the context of elasticity.

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56. Taxation according to the ability-to-pay principle is best illustrated in the United States
by:
A) sales taxes.
B) income taxes.
C) excise taxes.
D) user fees.
Use the following to answer question 57:
Figure: The Market for Blue Jeans

57. (Figure: The Market for Blue Jeans) Look at the figure The Market for Blue Jeans. The
government recently levied a $10 tax on the producers of blue jeans. What area or areas
in the graph identify consumer and producer surplus after the tax was levied?
A) a + b + c
B) a + b + c + d + e + f
C) d + e + f
D) a + f
58. U.S. federal taxes are generally ________, while state and local taxes are generally
________.
A) progressive; progressive
B) progressive; regressive
C) regressive; progressive
D) regressive; regressive

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59. The burden of a tax that is imposed on a good is said to fall completely on the
consumers if the:
A) price paid by consumers for the good declines by the amount of the tax.
B) price paid by consumers for the good increases by the amount of the tax.
C) price paid by consumers does not change.
D) wages received by workers who produce the good increase by the amount of the tax.
Use the following to answer question 60:
Figure: The Market for Blue Jeans

60. (Figure: The Market for Blue Jeans) Look at the figure The Market for Blue Jeans. The
government recently levied a $10 tax on the producers of blue jeans. What is the
deadweight loss?
A) $1,000
B) $500
C) $250
D) $1,250

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Use the following to answer question 61:


Figure: Tax Incidence

61. (Figure: Tax Incidence) Look at the figure Tax Incidence. Based on the figure, the
deadweight loss of an excise tax is likely to be:
A) greater in panel C than in panel D.
B) greater in panel C than in panel A.
C) greater in panel D than in panel A.
D) greater in panel B than in panel A.
Use the following to answer question 62:

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62. (Table: Three Tax Structure Proposals) Look at the table Three Tax Structure Proposals.
If one wished to use a proportional or flat tax structure, one should use proposal
________, in which the percentage of income taxed is ________.
A) 1; 20%
B) 2; 10%
C) 3; 20%
D) 2; 20%
Explanation: note according to Proposal I, the tax amount increases by $16000 for every
increase in the pre-tax income of $20,000. For the other 2 proposals, for the same increase
in the pre-tax income, the tax amount changes from one income group to the other.
63. ________ and ________ are the largest sources of state and local tax revenue.
A) Profit taxes; sales taxes.
B) Property taxes; sales taxes.
C) Payroll taxes; income taxes.
D) Sales taxes; income taxes.
64. Excise taxes that raise the most revenue and cause the least deadweight loss are likely to
be those that are imposed on goods for which:
A) demand is inelastic and supply is elastic.
B) demand and supply are both inelastic.
C) demand is elastic and supply is inelastic.
D) demand and supply are both elastic.
65. The demand for Gala apples is relatively price elastic, so if a tax is levied on the
consumers of Gala apples, the tax incidence:
A) is typically on consumers more than producers.
B) is typically on producers more than consumers.
C) is typically split equally between consumers and producers.
D) cannot be determined without more information.

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Use the following to answer question 66:


Figure: The Market for Yachts

66. (Figure: The Market for Yachts) Look at the figure The Market for Yachts. A quota of
________ will bring about the same price and output in the market for yachts as would
an excise tax of $30,000.
A) 2,000
B) 3,000
C) 4,000
D) The answer is impossible to determine.
Explanation: Mark a vertical distance of $30,000 above the equilibrium. Shift the supply
curve up so that the new supply curve passes through that marked point and is parallel to
the original supply curve.
Now note that the new equilibrium occurs at the intersection of the new supply curve and
the original demand curve at a price of $140,000.
At that new equilibrium price the quantity is 3000.
This question connects the quantity control with taxation.
67. In analyzing the impact of a progressive tax system, economists focus on the ________
tax rate.
A) average
B) opportunity
C) total
D) marginal

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A)
B)
C)
D)

68. A regressive tax structure is one in which taxes:


rise less than in proportion to income.
rise more than in proportion to income.
rise exactly in proportion to income.
stay the same regardless of income changes.

Use the following to answer question 69:


Figure: The Market for Hamburgers

69. (Figure: The Market for Hamburgers) Look at the figure The Market for Hamburgers. If
the market is originally in equilibrium and the government imposes an excise tax of
$0.80 per hamburger, producer surplus will be reduced by:
A) $175.
B) $240.
C) $105.
D) $90.
Focus of this question should be on the area of the producer surplus and the change in it
rather than on the calculation of the surpluses.

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70. CHAPTER 9
Pauli's Pizza offers the following prices: one slice for $2, two slices for $3.50 EACH,
three slices for $4.50 per slice, four slices for $5.00 per slice. The marginal cost of the
third slice to Hui is:
A) $4.50.
B) $10.
C) $1.
D) $2.
Explanation: If Paul buys 2 slices, he must pay $3.50 a slice and if he buys 3 slices, he
should pay $4.50 a slice. So the marginal cost for the third slice is 4.50 - 3.50, which is $1
71. Some highways have one lane; others have two, three, or more. If each lane costs $10
million per mile, an economist would assume that the total benefit of a three-lane
highway must be:
A) less than $10 million per mile.
B) $10 to $20 million per mile.
C) $20 to $30 million per mile.
D) $30 million or more per mile.
72. In economic analysis, the optimal quantity of an activity is the quantity at which:
A) marginal benefit exceeds marginal cost by the greatest amount.
B) total benefit exceeds total cost by the greatest amount.
C) marginal benefit equals marginal cost.
D) total benefit exceeds total cost by the greatest amount and marginal benefit equals
marginal cost.
Use the following to answer question 73:

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73. (Table: TC's Pizza Parlor) Look at the table TC's Pizza Parlor. Given the table, what is
the optimal number of pizza slices that should be produced?
A) 5
B) 10
C) 15
D) 20
Use the following to answer question 74:
Figure: The Optimal Quantity

74. (Figure: The Optimal Quantity) Look at the figure The Optimal Quantity. If the cost of
producing lawn-mowing decreased, the ________ curve in the figure would shift to the
________ and the total net gain would ________.
A) marginal benefit; right; increase
B) marginal cost; right; increase
C) marginal benefit; left; decrease
D) marginal cost; left; decrease

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Use the following to answer question 75:


Figure: The Marginal Cost Curve

75. (Figure: The Marginal Cost Curve) Look at the figure The Marginal Cost Curve.
According to the marginal cost curve, the approximate total cost of mowing seven lawns
is:
A) $175.
B) $113.
C) $50.
D) $24.
76. Suppose Bob has a part-time business washing cars. He has washed nine cars on a given
day; the marginal benefit of washing the tenth car is $20 and the marginal cost is $12.
Bob should:
A) wash the tenth car.
B) not wash the tenth car.
C) increase his marginal benefit.
D) There is not enough information to decide.
77. Most economic models:
A) assume that people behave irrationally.
B) assume that people behave rationally.
C) assume that people are reluctant to learn from their mistakes.
D) are useless because they use too many simplifying assumptions.

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Use the following to answer question 78:

78. (Table: Marginal and Total Benefit) Look at the table Marginal and Total Benefit. Sed is
deciding how many football games he wants to attend this year. If tickets to each
football game cost $10, then he should attend ________ game(s).
A) 0
B) 1
C) 2
D) 5
Total amount to be spent to purchase the tickets is the number of tickets times $10. That is
the total cost of tickets or the games. Use this to compare the total cost with the total
benefits.
79. Mary goes ahead and buys a new car because she expects to receive a 10% increase in
her salary next year. What type of irrational behavior does this represent?
A) status quo bias
B) overconfidence
C) misperception of opportunity costs
D) risk aversion
80. If marginal costs of production are greater than marginal benefits of production:
A) costs will eventually decrease.
B) too much of the good is being produced.
C) more of the good should be produced.
D) all costs are not being considered.

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81. If the marginal benefit received from a good is less than the marginal cost of production,
then:
A) society's well-being can be improved if production increases.
B) society's well-being can be improved if production decreases.
C) society's well-being cannot be improved by changing production.
D) the market is producing too little of the good.

A)
B)
C)
D)

82. The activities of consumers and firms:


have benefits but not costs.
have costs but not benefits.
have both costs and benefits.
are too complex to be analyzed with economic theory.

83. Lucy bought some stock 10 years ago that has been priced at half of her purchase price
for the past 5 years. However, Lucy refuses to sell the stock, thinking that if she waits
long enough, she will recover her investment. Which of the following can describe
Lucy's behavior?
A) mental accounting
B) bounded rationality
C) risk aversion
D) loss aversion
84. Anytime the marginal benefit of an activity is greater than zero, more activity should be
undertaken.
A) True
B) False
85. If the marginal benefit received from a good is greater than the marginal cost of
production, then:
A) society's well-being can be improved if production increases.
B) society's well-being can be improved if production decreases.
C) society's well-being cannot be improved by changing production.
D) the market is producing too much of the good.
86. Costs that are included in the economic concept of cost but that are not explicit costs
are:
A) outlay costs.
B) accounting profits.
C) implicit costs.
D) economic profits.

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A)
B)
C)
D)

87. For which of the following decisions would marginal analysis be relevant?
spending $1,000 on a summer vacation or on painting your house
deciding how much to spend on a summer vacation
buying a new car or a second-hand car
eating dinner at home or going out to a restaurant for dinner

A)
B)
C)
D)

88. Constant marginal costs occur when each individual unit costs
less than the previous one to produce.
more than the previous one to produce.
the same to produce as the previous one.
nothing to produce.

89. Profit computed using explicit costs as the only measure of costs is:
A) explicit profit.
B) accounting profit.
C) implicit profit.
D) economic profit.
90. Since they have already paid for their tickets, it does not make economic sense for fans
to leave before a game is finished.
A) True
B) False
91. Suppose a local floral shop has explicit costs of $200,000 per year and implicit costs of
$50,000 per year. If the store earned an economic profit of $50,000 last year, this means
that the store's accounting profit equaled:
A) $10,000.
B) $50,000.
C) $100,000.
D) $200,000.
Economic profit includes implicit costs and the accounting profit does not. So to calculate
the economic profit, we should subtract the implicit costs from the accounting profit.
Alternatively, Total revenue minus the total explicit costs are the accounting profit, and
total revenue minus explicit costs minus implicit costs are the economic profits.

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92. An eitheror decision involves


A) deciding how much of an activity to do.
B) a choice between two activities.
C) calculating marginal costs for each activity.
D) calculating the marginal benefits for each activity.
93. Which of the following is an eitheror decision?
A) Allen must decide how many courses to take this semester.
B) Sally must decide how many hours to spend studying for each of the four courses that she
is taking this semester.
C) Chris must decide how many hours to work each week at his part-time job.
D) Dylan must decide whether to major in economics or finance.
94. During its only year of operation, a firm collected $175,000 in revenue and spent
$50,000 on raw materials, labor, and utilities. The owners of the firm spent $100,000 of
their own money to build the firm's factory (instead of buying bonds and earning a 10%
annual rate of return), which they sold at the end of the year for $100,000. The firm's
economic profit is:
A) $35,000.
B) $125,000.
C) $115,000.
D) $25,000.
Explanation: Revenue is $175,000 + $100,00 (sale price of the factory building). Explicit
costs are $50,000 (on raw materials etc). Implicit costs are $100,00 (their own money or
savings) + 10% of $100,00 (that would have been earned if the amount of $100,000 were
to be used for buying bonds), which are $110,000.
Economic profit is total revenue minus the explicit costs minus implicit costs. 275,000 50,000 - 110,000

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95. You have rented your first apartment, signing a lease that commits you to pay $500 each
month for 12 months. You have an opportunity to take a trip to Europe during the entire
month of June and you will spend $2,000 traveling. Your apartment will be vacant, but
because of your lease, you must still pay the rent. The cost of taking the trip to Europe
is:
A) $2,000, because the $500 for your June rent is a sunk cost.
B) $2,500, because this is your total spending during the month of June.
C) $1,500, because the June rent is an opportunity cost of traveling that must be deducted
from the explicit cost of the trip.
D) $2,500, because the June rent is an opportunity cost of traveling and must be added to the
explicit cost of the trip.
NOTE THE DIFFERENCE: SUNK COSTS ARE NOT OPPORTUNITY COSTS
BECAUSE THE OPPORTUNITY OF RENTING THE APARTMENT IS NOT LOST
BUT THE AMOUNT OF RENT IS EXPLICIT (OR OUT OF POCKET) COSTS THAT
CANNOT BE RECOVERED
96. Denaro pays $8,000 per month in rent to operate a health club in Memphis. He also pays
$17,000 per month in wages, $3,000 per month in food and supplies, and $1,000 per
month in insurance. All of his costs of production except his insurance and rent can
change if he makes different decisions about his health club production. Denaro's sunk
costs equal:
A) $20,000 per month.
B) $11,000 per month.
C) $29,000 per month.
D) $9,000 per month.
97. Sunk costs:
A) are not considered in marginal analysis.
B) help to determine the optimal quantity of an activity.
C) can dramatically increase marginal costs.
D) are the same as variable costs.

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98. One of Jessuina's New Year's resolutions was to exercise more, so she bought an annual
membership to the local gym that allows unlimited visits with no additional cost per
visit. Unfortunately, the gym is so crowded and noisy that Jessuina leaves every day
with a headache. According to marginal analysis, Jessuina should:
A) continue using the gym for the year since she has already paid for the membership.
B) join another gym only if a membership is cheaper at the new gym.
C) join another gym only if she can get a refund on her current membership.
D) stop using the gym.
EXPLANATION: Even though the membership fee is paid, it is the sunk cost that cannot
be recovered. However, the headache, which is the marginal or additional cost of using the
gym could be higher than the benefit of exercising or using the gym.
99. Suppose Eastland College does not have a summer program and could rent out the
campus to various summer sports camps for $100,000. The potential revenue of the
summer camps represents:
A) an implicit cost of capital.
B) an explicit cost.
C) a total cost.
D) a sunk cost.
Use the following to answer questions 100-102:
Scenario: Betty's Cookie Shop
Betty runs a cookie shop where she sells cookies for $1 each. In order to run the business, she
employs five people, each of whom worked a total of 500 hours last year; she paid them a wage
of $10 per hour. Her costs of equipment and raw materials add up to $75,000. Her business
ability is legendary, and other companies have offered to pay Betty $100,000 if she would come
to work for them. She also knows she could sell her cookie shop for $150,000. The bank in town
currently pays an annual interest rate of 3% on all funds deposited with it. Assume there is no
capital depreciation at this point.
100. (Scenario: Betty's Cookie Shop) Given the information provided, if Betty is trying to
decide at what point she should stop selling cookies and she knows she cannot change
the price of a cookie, then she should stop selling cookies if
A) her economic profit is positive.
B) her explicit and implicit costs are less than her revenues.
C) her implicit costs are greater than her economic profits.
D) her economic profit is equal to her accounting profit.

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101. (Scenario: Betty's Cookie Shop) Given the information provided, Betty's explicit costs
are equal to:
A) $100,000.
B) $80,000.
C) $250,000.
D) $264,000.
Explanation: Explicit costs are out of pocket costs, that is the amount she pays to her hired
employees (500hours*5number employed*$10 wage)) + the amount paid for the materials
($75,000).
102. (Scenario: Betty's Cookie Shop) Given the information provided, Betty's implicit costs
are:
A) her salary if she worked elsewhere and interest she forgoes.
B) labor costs and equipment and raw materials costs.
C) the revenue she receives from selling her cookies, labor costs, and equipment and raw
materials costs.
D) revenue she receives from selling her cookies and her labor costs.
103. CHAPTER 10
Faruq spends all of his income on two goods: tacos and milkshakes. His income is $100,
the price of tacos is $10, and the price of milkshakes is $2. If Faruq purchases 10
milkshakes, he can purchase ________ tacos.
A) 10
B) 50
C) 8
D) 18
104. For economists, the satisfaction an individual derives from the consumption of goods
and services is best described as:
A) happiness.
B) usefulness.
C) utility.
D) opportunity cost.

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Use the following to answer question 105:

105. (Table: Marginal Utility per Dollar of M&Ms) Andy's total utility from eating snacksize bags of M&Ms is given in the table. The price of M&Ms is $2 per bag. Andy's
marginal utility per dollar of the fifth bag of M&Ms is:
A) 0
B) 0.5
C) 1
D) 8
Explanation: First calculate the marginal utilities by subtracting the total utilities, then
divide each marginal utility by the price of $2.
Use the following to answer questions 106-107:

106. (Table: Consumer Equilibrium) Look at the table Consumer Equilibrium. Assume that
the price of each good is $1 per unit. If the consumer is currently consuming 4 units of
good X and 2 units of good Y, what should the consumer do in order to maximize utility
(assuming that the goods are divisible)? ,
A) consume less of X and more of Y.
B) consume more of both X and Y.
C) consume less of both X and Y.
D) consume more of X and less of Y.
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107. (Table: Consumer Equilibrium) Look at the table Consumer Equilibrium. Assume that
the price of each good is $1 per unit and you have $4 (income) to spend on both goods.
To maximize utility, you would consume ________ units of X and ________ units of Y.
A) 0; 4
B) 1; 3
C) 2; 2
D) 3; 1
108. The income effects of a change in the price are most important for goods that:
A) take up a substantial share of a consumer's spending.
B) are very inexpensive.
C) are imported.
D) are normal.
109. A person stranded on a deserted island would have a ________ marginal utility for
high-speed Internet service than the one in New York City, while quiet evenings in New
York City would mean a ________ marginal utility than on a deserted island.
A) lower; higher
B) higher; lower
C) lower; lower
D) higher; higher
110. Joseph consumes pizza and soda. He is currently consuming three units of pizza and two
units of soda. The price of pizza is $5 and the price of soda is $1. If he is consuming the
optimal consumption bundle and his marginal utility of pizza is 50, then his marginal
utility of soda is:
A) 50.
B) 10.
C) 5.
D) impossible to determine unless you know Joseph's income.
EXPLANATION: Optimal bundle implies [MU(pizza)/price of Pizza] = [MU(soda)/price
of soda]. Substitute the given values for prices and marginal utility of pizza and calculate
the marginal utility of soda.
111. For most goods, the income effect has no significant effect on individual consumption.
A) True
B) False

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112. If a consumer purchases a combination of coffee and football tickets such that
MUCoffee/PCoffee = 20 and MUFootball tickets/PFootball tickets = 10, to maximize utility, the consumer
should buy:
A) less coffee and more football tickets.
B) more coffee and fewer football tickets.
C) more coffee and more football tickets.
D) less coffee and fewer football tickets.
113. Assume that the marginal utilities for the first three units of a good consumed are 200,
150, and 125, respectively. The total utility for 2 units is:
A) 125.
B) 150.
C) 350.
D) 200.
114. Faruq spends all of his income on two goods: tacos and milkshakes. His income is $100,
the price of tacos is $10, and the price of milkshakes is $2. The opportunity cost of one
milkshake is equal to ________ tacos.
A) 2
B) 10
C) 5
D) 1/5
Use the following to answer question 115:

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115. (Table: Optimal Choice of Milk and Honey) Hal's total utility from consuming milk and
honey is given in the table. The price of milk is $2 per gallon, and the price of honey is
$4 per jar. Hal's income is $16. Assuming that Hal spends all of his income on honey
and milk, if he buys 2 jars of honey and 4 gallons of milk, his total utility will be:
A) 8
B) 84
C) 104
D) 188
116. Many people have severe food allergies such that even one bite of something might send
a person to the emergency room. For a person with a severe allergy to nuts, for example,
describe the total utility function from eating nuts.
117. The marginal utility of eating sweet potatoes is the:
A) change in total utility from consuming an additional serving.
B) total utility divided by the number of servings consumed.
C) change in total utility divided by the number of servings consumed.
D) total utility divided by the change in the number of servings consumed.
118. According to the substitution effect, which of the following best describes why a
decrease in the price of LED light bulbs leads to an increase in the quantity of LED light
bulbs demanded?
A) Buyers have more real income.
B) Buyers always purchase fewer substitute goods for LED light bulbs.
C) Buyers tend to purchase more of the now less expensive LED light bulbs.
D) Buyers tend to purchase more complementary goods to LED light bulbs.
119. Which of the following goods is most likely to display increasing marginal utility over
some range?
A) chicken during the 1920s, when it was considered a luxury good
B) paint, because you need it in an amount sufficient to paint at least one entire room
C) lobsters, which are so expensive that you must eat two to get your money's worth
D) peanut butter and jelly sandwiches

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Use the following to answer question 120:

120. (Table: Utility from Candy Bars and Sodas) Look at the table Utility from Candy Bars
and Sodas. Stan is choosing between two goods, candy bars and sodas, and his marginal
utility from each is as shown in the table. If he consumes two candy bars and two sodas,
his total utility will be equal to:
A) 15 utils.
B) 33 utils.
C) 18 utils.
D) 78 utils.
121. Assume that Maria spends all her income on ham (X) and pomegranates (Y) and is
purchasing the optimal consumption bundle. If MUX/MUY = 3 and the price of ham is
$12, then the price of pomegranates is:
A) $36.
B) $4.
C) $12.
D) $3.
122. Michael Kawamura, a careful utility maximizer, consumes only two goods, peanut
butter and ice cream. He has just achieved the utility-maximizing solution in his
consumption of the two goods when the price of peanut butter falls. As a consequence
the dollar value of ---------A) the marginal utility of peanut butter and of ice cream will rise.
B) the marginal utility of peanut butter and of ice cream will fall.
C) the marginal utility of peanut butter will fall, and the marginal utility of ice cream will rise.
D) the marginal utility of peanut butter will rise, and the marginal utility of ice cream will fall.

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123. A decrease in the price of a good, holding income and the prices of all other goods
constant, is associated with:
A) a positive substitution effect, since consumers increase their consumption of the good as
the marginal utility per dollar of the good increases.
B) a negative substitution effect, since consumers decrease their consumption of the good as
the marginal utility per dollar spent of the good decreases.
C) the consumer purchasing fewer of all goods in the consumption bundle.
D) a shift inward of the budget line.
124. Gehrig's utility from the consumption of mangoes is measured by the level of
satisfaction he gets from only the first mango he buys and eats.
A) True
B) False

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Answer Key
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.

30.

31.
32.
33.
34.
35.
36.

A
A
B
B
C
D
D
C
D
A
D
D
B
A
D
A
A
A
D
B
C
C
A
B
A
C
A
A
If the price ceiling is effective, it will be set below the market equilibrium price. This
decreases the quantity supplied of the good but increases the quantity demanded of the
good. Because quantity demanded exceeds quantity supplied at the price ceiling, a
shortage is created, and the market cannot eliminate the shortage because the price is not
allowed to rise.
A minimum wage is set above the equilibrium market wage, therefore creating a surplus
of workers. We can imagine some workers who are willing to work for slightly less than
the minimum wage and employers who are only too happy to pay them less than the
minimum wage. If these workers can find such an employer, they might be paid cash
under the table at a rate below the minimum wage.
A
C
A
A
B
B

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37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
71.
72.
73.
74.
75.
76.
77.
78.
79.
80.
81.
82.

C
C
A
D
D
D
C
A
D
C
B
A
A
A
C
B
A
A
B
B
D
B
B
B
A
A
D
B
B
B
D
A
C
C
D
D
C
B
B
A
B
D
B
B
B
C

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83.
84.
85.
86.
87.
88.
89.
90.
91.
92.
93.
94.
95.
96.
97.
98.
99.
100.
101.
102.
103.
104.
105.
106.
107.
108.
109.
110.
111.
112.
113.
114.
115.
116.
117.
118.
119.
120.
121.
122.
123.
124.

D
B
A
C
B
C
B
B
C
B
D
C
A
D
A
D
A
C
A
A
C
C
B
A
D
A
D
B
A
B
C
D
D
If even one bite of nuts sends this person to the hospital, the utility cannot be positive; it
must be negative. Each additional bite puts this person in more and more trouble;
therefore, the utility curve gets more and more negative.
A
C
B
B
B
C
A
B

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