Chapter 0: Economics: The Core Issues: Multiple Choice Questions

Chapter 0: Economics: The Core Issues
Multiple Choice Questions
1. Economics is the study of how:

A) Best to use society's scarce resources.
B) Society spends the income of individuals.
C) Society purchases resources, given its macroeconomic goals.
D) Individual market participants decide what to produce given fixed resource constraints.
Answer: A Type: Basic Understanding Page: 2
2. Economics can be defined as the study of:

A) For whom resources are allocated to increase efficiency.
B) How society spends the income of individuals.
C) How scarce resources are allocated to fulfill society's goals.
D) What scarce resources are used to produce goods and services.
Answer: C Type: Basic Understanding Page: 2
SCARCITY: THE CORE PROBLEM
3. The fundamental problem of economics is:

A) The law of increasing opportunity costs.
B) The scarcity of resources relative to human wants.
C) How to get government to operate efficiently.
D) How to create employment for everyone.
Answer: B Type: Definition Page: 4
4. In economics, what does scarcity mean?

A) That a shortage of a particular good will cause the price to fall.
B) That a production-possibilities curve cannot accurately represent the tradeoff between two g oods.
C) That society's desires exceed the want-satisfying capability of the resources available to satisfy those
desires.
D) That the market mechanism has failed.
Answer: C Type: Definition Page: 4
5. Given that resources are scarce:

A) A "free lunch" is possible but only for a limited number of people.
B) Opportunity costs are experienced whenever choices are made.
C) Poor countries must make choices but rich countries with abundant resources do not have to make
choices.
D) Some choices involve opportunity costs while other choices do not.
Answer: B Type: Complex Understanding Page: 4
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6. Which of the following is the best description of the origin of the economic problem of scarcity?
A) Humans have limited wants for goods and services and resources are also limited.
B) Humans have limited wants for goods and services and resources are unlimited.
C) Humans have unlimited wants for goods and services but resources are limited.
D) Humans have unlimited wants for goods and services and resources are also unlimited.
7. A consequence of the economic problem of scarcity is that:

A) Choices have to be made about how resources are used.
B) There is never too much of any good or service produced.
C) The production of goods and services must be controlled by the government.
D) The production-possibilities curve is bowed outward.
Answer: A Type: Complex Understanding Page: 4
8. Which of the following is a scarce resource?

A) Paper used to produce textbooks. C) Clean water.
B) Wheat given to Russia to alleviate hunger. D) All of the above.
Answer: D Type: Basic Understanding Page: 4
9. Which of the following is a scarce resource?

A) Land. B) Labor. C) Entrepreneurship. D) All of the above.
Answer: D Type: Definition Page: 4
10. Factors of production are:

A) Scarce in every society.
B) Scarce only in United States.
C) Scarce only in the poorest countries of the world.
D) Unlimited in quantity.
11. Which of the following is not a factor of production?

A) A teacher. C) The $100,000 used to start a new business.
B) A ballpoint pen. D) Ten acres of forest.
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12. Which of the following is an economic resource?

A) A worker used to build a new highway.
B) An office building used by an insurance company.
C) A vacant piece of land in New York City.
D) All of the above are economic resources.
13. With respect to factors of production, which of the following statements is not true?
A) Factors of production are also known as resources.
B) In order to produce anything, it is necessary to have factors of production.
C) Factors of production include land, labor, capital, and entrepreneurship.
D) Only those resources that are privately owned are counted as factors of production.
14. Which of the following is the best example of land?

A) The gasoline refined from crude oil.
B) A factory which produces new goods and services.
C) The river water used to float a riverboat casino.
D) A shovel.
15. Capital, as economists use the term, refers to:

A) The money needed to start a new business.
B) The costs of operating a business.
C) Shares of stock issued by businesses.
D) Final goods that are used to produce other goods and services.
16. Which of the following is the best example of capital and no other factor of production?
A) Clean air.
B) Money in a savings account.
C) Equipment that will be used to produce goods.
D) The property on which a landfill has been established.
17. Which of the following performs the role of both capital and land?
A) A manufacturing plant and the property on which it is located.
B) The equipment used to produce goods.
C) A mine that has been vacated because it is no longer profitable.
D) All of the above.
Answer: A Type: Definition Page: 4
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18. An entrepreneur is:

A) An innovator.
B) Someone who brings resources together and produces a product.
C) A risk taker.
19. The role of the entrepreneur in an economy is to:

A) Bring the factors of production together and assume the risk of production.
B) Work with government planners to determine what goods are produced.
C) Arrange bank financing for the owners of new businesses.
D) Ensure full employment of labor.
20. Opportunity cost is:

A) Only measured in dollars and cents.
B) The dollar cost to society of producing the goods.
C) The difficulty associated with using one good in place of another.
D) The alternative that must be given up in order to get something else.
21. Opportunity cost may be defined as the:

A) Goods or services that are forgone in order to obtain something else.
B) Dollar prices paid for final goods and services.
C) Dollar cost of producing a particular product.
D) Difference between wholesale and retail prices.
22. The opportunity cost of studying for an economics test is:

A) Negative, since it may improve your grade.
B) Zero, because you knew when you registered for the class that studying would be required.
C) The money you spent on tuition for the class.
D) The best alternative use of your time.
23. The concept of opportunity cost would become irrelevant if:

A) The market mechanism functioned to allocate resources fairly.
B) The government allocated resources.
C) The production-possibilities curve bowed outward.
D) Resources were no longer scarce.
Answer: D Type: Complex Understanding Page: 5
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PRODUCTION POSSIBILITIES
24. A production-possibilities curve indicates the:

A) Combinations of goods and services an economy is actually producing.
B) Maximu m co mb inations of goods and services an economy can produce given its available resources and
technology.
C) Maximum combinations of goods and services an economy can produce given unlimited resources.
D) Average combinations of goods and services an economy can produce given its available resources and
technology.
Answer: B Type: Basic Understanding Page: 7
25. Which of the following is an assumption under which the production -possibilities curve is drawn?
A) There is significant unemploy ment. C) The price level is changing.
B) The supply of factors of production is fixed. D) Technology is changing.
26. A point on a nation's production-possibilities curve represents:

A) An undesirable combination of goods and services.
B) Combinations of production that are unattainable, given current technology and resources.
C) Levels of production that will cause both unemployment and inflation.
D) The full employment of resources to achieve a particular combination of goods and services.
27. Which of the following correctly characterizes the shape of a production -possibilities curve?
A) A straight line indicating the law of increasing opportunity costs applies.
B) A straight line when there are constant opportunity costs.
C) A line that curves outward when resources are perfectly adaptable in the production of different goods.
D) A line that curves inward when resources are perfectly adaptable in the production of different goods.
Answer: B Type: Analytical Page: 7
28. If an economy is producing on its production-possibilities curve, then producing:

A) More of one good implies producing more of another good.
B) Less of one good implies producing less of another good.
C) More of one good implies producing less of another good.
D) More of one good implies shifting the curve toward the origin.
Answer: C Type: Complex Understanding Page: 7
29. The production-possibilities curve illustrates:

A) The limitations that exist because of scarce resources.
B) That there is no limit to what an economy can produce.
C) That there is no limit to the level of output.
D) The existence of unlimited wants and resources.
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30. The production-possibilities curve illustrates that:

A) Society can always produce more of all goods simultaneously.
B) Constant opportunity costs always exist.
C) There are no opportunity costs in a wealthy economy.
D) If society is efficient, it can produce more of one good only if it reduces output of another good.
31. According to the law of increasing opportunity costs:

A) The more one is willing to pay for resources, the larger will be the possible level of production.
B) Increasing the production of a particular good will cause the price of the good to rise.
C) In order to produce additional units of a particular good, it is necessary for society to sacrifice
increasingly larger amounts of alternative goods.
D) Only by keeping production constant can rising prices be avoided.
32. The law of increasing opportunity costs explains:

A) How everything becomes more expensive as the economy grows.
B) The shape of the production-possibilities curve.
C) Inflation.
33. According to the law of increasing opportunity costs:

A) Greater production leads to greater inefficiency.
B) Greater production means factor prices rise.
C) Greater production of one good requires increasingly larger sacrifices of other goods.
D) Higher opportunity costs induce higher output per unit of input.
34. If an economy experiences increasing opportunity costs with respect to two goods, then the
production-possibilities curve between the two goods will be:
A) Bowed outward. C) A straight, downward-sloping line.
B) Bowed inward . D) All of the above are possible.
35. The production-possibilities curve bows outward because:

A) Resources are used inefficiently as more of a good is produced.
B) In order to get more of a particular good, increasing quantities of other goods must be given up.
C) Resources move easily from the production of one good to the production of another.
D) Resources are scarce and choices must be made.
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36. If the United States decides to convert automobile factories to tank production, as it did during World War II,
but finds that some auto manufacturing facilities are not well suited to tank production, then:
A) The production-possibilities curve between tanks and automobiles will appear as a straight line.
B) The production-possibilities curve between tanks and automobiles will shift outward.
C) Decreasing opportunity costs will occur with greater automobile production.
D) Increasing opportunity costs will occur with greater tank production.
37. Ceteris paribus, if Korea increases the size of its military, then its:
A) Production-possibilities curve will shift outward.
B) Production-possibilities curve will shift inward.
C) Production of non-military goods will increase.
D) Production of non-military goods will decrease.
38. Ceteris paribus, if Russia decreases the size of its military, then its:
A) Production-possibilities curve will shift outward.
B) Production-possibilities curve will shift inward.
C) Production of non-military goods will increase.
D) Production of non-military goods will decrease.
39. Efficiency can be defined as the:

A) Maximum resources used in producing a given output level.
B) Maximum output of a good produced from the available resources.
C) Minimum output of a good produced from the available resources.
D) Maximum output of a good produced if all resources are devoted to its production.
40. When an economy is producing efficiently it is:

A) Producing a combination of goods and services beyond the production -possibilities curve.
B) Getting the most goods and services from the available resources.
C) Experiencing decreasing opportunity costs.
41. Which of the following is true when an economy is producing efficiently?

A) The economy is producing on the production-possibilities curve.
B) Goods and services are being produced using the fewest resources.
C) The economy is getting the most goods and services from the available resources.
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42. Every point on the production-possibilities curve is considered to be:

A) Efficient. B) An optimal level of output. C) Equally desirable. D) All of the above.
43. In terms of the production-possibilities curve, inefficiency is represented by:

A) All points on the curve. C) All points outside the curve.
B) All points inside the curve. D) A rightward shift of the curve.
44. If an economy is producing inside the production-possibilities curve, then:

A) It does not have enough resources to be efficient.
B) It must give up some of one good to produce more of another good.
C) The curve needs to shift inward.
D) It is using its resources inefficiently.
45. If an economy is producing inside the production-possibilities curve, then:

A) There is unemployment of resources.
B) It is operating inefficiently.
C) It can produce more of one good without giving up some of another good.
46. When technological change allows a smaller amount of a resource to be used in producing two goods shown
on a production-possibilities curve, there will be:
A) A movement along the production-possibilities curve.
B) An inward shift of the production-possibilities curve.
C) No change in the production-possibilities curve.
D) An outward shift of the production-possibilities curve.
47. A technological advance would best be represented by:

A) A shift outward of the production-possibilities curve.
B) A shift inward of the production-possibilities curve.
C) A movement from inside the production-possibilities curve to a point on the production-possibilities
curve.
D) A movement fro m the production-possibilities curve to a point inside the production-possibilities curve.
48. Which of the following events would allow the production -possibilities curve to shift outward, ceteris
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paribus?
A) The economy's capital stock grows. C) More women enter the labor force.
B) Technology improves. D) All of the above.
Answer: D Type: Analytical Page: 11
49. The production-possibilities curve shifts outward in response to:

A) Better technology or fewer resources or both.
B) Better technology or more resources or both.
C) Declining technology or fewer resources or both.
D) Declining technology or more resources or both.
50. Long-run economic growth would best be represented by a:

A) Shift outward of the production-possibilities curve.
B) Shift inward of the production-possibilities curve.
C) Movement fro m inside the production-possibilities curve to a point on the production-possibilities curve.
D) Movement from the production-possibilities curve to a point inside the production-possibilities curve.
51. Which of the following events would cause the production -possibilities curve to shift outward?
A) A labor strike. C) The full employment of resources.
B) Increased efficiency in the use of resources. D) A decrease in available resources.
52. Which of the following events would cause the production -possibilities curve to shift inward?
A) A decrease in the supply of labor.
B) An increase in the number of factories.
C) A technological breakthrough occurs which makes production of all goods more efficient.
D) An increase in the unemployment rate.
Answer: A Type: Analytical Page: 11
53. Which of the following will cause the production-possibilities curve to shift inward?
A) An increase in population. C) A decrease in the size of the labor force.
B) A technological advance. D) An increase in knowledge.
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54. A decrease in available resources would cause:

A) An economy to move inside its production-possibilities curve.
B) The production-possibilities curve to shift inward.
C) Opportunity costs to increase.
D) The unemployment of resources.
55. The availability of fewer resources can be represented by:

A) An inward shift of the production-possibilities curve.
B) No change in the production-possibilities curve.
C) A movement along the production-possibilities curve.
D) An outward shift of the production-possibilities curve.
BASIC DECISIONS
56. Which of the following is not a basic decision that all nations must confront?
A) Should we have economic growth?
B) How should we produce goods and services?
C) For whom should goods and services be produced?
D) What goods and services should we produce?
57. In a market economy, the question of WHAT to produce is answered by:

A) Direct negotiations between consumers and producers.
B) Producer profits and sales.
C) Government directives.
D) A democratic vote of all producers.
58. In a market economy, the question of HOW to produce is determined by:

A) Government planners.
B) The production possibilities curve.
C) The least-cost method of production.
D) The method of production which uses the least amount of labor.
59. In a market economy, the people who receive the goods and services that are produced are those who:
A) Need the goods and services the most. C) Have the most political power.
B) Want the goods and services the most. D) Are willing to pay the highest price.
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60. The market mechanism may best be defined as:

A) Price regulation by government.
B) The use of market signals and government directives to select economic outcomes.
C) The process by which the production-possibilities curve shifts inward.
D) The use of market prices and sales to signal desired output.
THE MECHANISMS OF CHOICE
61. The market mechanism:

A) Allows buyers to communicate with producers indirectly.
B) Is directed by the government in order to promote efficiency.
C) Results in the misallocation of resources because producers seek to maximize profits.
D) Allocates goods in an equitable manner.
62. The market mechanism:

A) Is not a very efficient means of communicating consumer demand to the producers of goods and
services.
B) Works through central planning by government.
C) Eliminates market failures created by government.
D) Works because prices serve as a means of communication between consumers and producers.
63. The invisible hand refers to:

A) Intervention in the economy by the government bureaucrats we do not see and over whom we have no
control.
B) Undiscovered natural resources.
C) The allocation of resources by market forces.
D) The person who has the responsibility to coordinate all the markets in a market economy.
64. The doctrine of laissez faire is based on the belief that:

A) Markets are likely to do a better job of allocating resources than government directives.
B) Government directives are likely to do a better job of allocating resources than markets.
C) Government failure does not exist.
D) Markets result in an unfair distribution of income.
65. Which of the following would advocate a laissez faire economic policy?
A) Karl Marx. B) Adam Smith. C) John Maynard Keynes. D) President Franklin Roosevelt.
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66. Karl Marx wrote:

A) The Wealth of Nations, which provided the rationale for centrally-planned economies.
B) The Wealth of Nations, which described the virtues of market-based economies.
C) Das Kapital, which provided the rationale for centrally-planned economies.
D) Das Kapital, which described the virtues of market-based economies.
67. Karl Marx believed that the best use of resources would result from:
A) Government directives.
B) Laissez faire policies.
C) Production decisions based on costs alone.
D) A mixture of government directives and market signals.
68. A city's decision to control apartment rents is an example of:

A) The invisible hand at work. C) The market mechanism at work.
B) Market failure. D) Government intervention.
69. In a mixed economy like that in the United States, the question of WHAT to produce is determined by:
A) Government directives only.
B) Price signals and sales in markets only.
C) Both government directives, and price signals and sales in markets.
D) The invisible hand only.
70. A mixed economy:

A) Is justified by the superiority of laissez faire over government intervention.
B) Utilizes both market and nonmarket signals to allocate goods and services.
C) Relies on the use of central planning by private firms rather than the government.
71. Which of the following is the most appropriate way to match different economic systems with their
corresponding failures?
A) Market failures with command economies.
B) Government failures with market economies.
C) Market failures and government failures with mixed economies.
D) Neither market nor government failure in a purely capitalist economy.
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72. Which of the following can be used to correct market failure?

A) The market mechanism. C) Laws and regulations.
B) Laissez-faire price policies. D) All of the above.
73. When the invisible hand does not produce optimal outcomes for the economy, there is evidence of:
A) Government failure. B) Market failure. C) Macroeconomic failure. D) Scarcity.
74. Government intervention may achieve a more optimal outcome than the market mechanism when
addressing:
A) Inefficient bureaucracy.
B) Lack of incentive to try new products or technologies.
C) Pollution.
75. Pollution is an example of:

A) Inefficient operation by the firm that is polluting.
B) Market failure.
C) The ability of central planning to provide the optimal quantities of goods.
76. If market signals result in pollution beyond the optimal level then:
A) The economy experiences government failure.
B) A laissez-faire approach will reduce the level of pollution.
C) The market mechanism has failed.
D) The government is allocating resources inefficiently.
77. The collapse of communism is evidence of:

A) Ceteris paribus. C) Government failure.
B) Market failure. D) The failure of a mixed economy.
78. When government directives do not produce better economic outcomes, which of the following has
occurred?
A) Government failure. B) Market failure. C) Macroeconomic failure. D) Scarcity.
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79. Which of the following is an example of government failure?

A) Bureaucratic delays.
B) Required use of pollution-control technologies that are obsolete.
C) Inefficient incentives.
WHAT ECONOMICS IS ALL ABOUT
80. Macroeconomics focuses on the performance of:

A) Individual consumers. B) The overall economy. C) Government agencies. D) All of the above.
81. Macroeconomics focuses on the performance of:

A) Individual consumers. C) Government agencies.
B) Specific firms. D) The economy as a whole.
82. Which of the following is a macroeconomic statement?

A) The unemployment rate for the United States rose to 7 percent in the last quarter.
B) The price of wheat fell to a ten year low in July.
C) Unionized workers struck GM for higher wages.
83. Which of the following are classified as microeconomic goals?

A) Full employment, price stability, growth in output.
B) The welfare of individual consumers and business firms.
C) Production, pricing, and purchasing.
D) Land, labor, and capital.
84. The study of microeconomic theory focuses on the:

A) Interaction of international trade and domestic production of goods and services.
B) Operation of the entire economy.
C) Role of the banking system in the economy.
D) Structure and performance of markets and the operation of the price system.
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85. Microeconomics is concerned with issues such as:

A) The demand for CD p layers by individuals. C) Maintaining a strong level of economic growth.
B) The level of in flat ion in the economy. D) All of the above.
86. Economic models are used by economists to:

A) Predict economic behavior. C) Formulate economic policy.
B) Exp lain economic behavior. D) All of the above.
87. The Latin phrase ceteris paribus means:

A) The production-possibilities curve never shifts. C) Other things remain equal.
B) Laissez faire. D) The invisible hand.
88. The ceteris paribus assumption:

A) Is necessary because of the complexity of the real economy.
B) Makes it easier to formulate economic theory and policy.
C) Increases the risk of errors in economic predictions.
D) All of the above are correct.
GRAPH AND MATHEMATICAL QUESTIONS
Use the following to answer questions 89-94:
Figure 1.1
Production-possibilities curve
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89. Society is employing some of its available resources but not all of them. (See Figure 1.1.)
A) A. B) B. C) C. D) D.
Answer: C Type: Analytical Page: 7
90. Society is not able to produce either good because it is so inefficient. (See Figure 1.1.)
A) A. B) B. C) C. D) D.
91. Society is producing the most output possible with the available resources and technology. (See Figure 1. 1.)
A) A. B) B. C) C. D) D.
92. Society might be able to produce this combination if technology improved but cannot produce it with current
technology. (See Figure 1.1.)
A) A. B) B. C) C. D) D.
93. Society is producing some of each type of structure but it is still inefficient. (See Figure 1.1.)
A) A. B) B. C) C. D) D.
94. Society cannot produce this combination with existing resources and technology. (See Figure 1.1.)
A) A. B) B. C) C. D) D.
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Figure 1.2
Production-possibilities curves
95. Choose the letter of the curve in Figure 1.2 that best represents a production -possibilit ies curve for two goods
that use entirely different resources and for wh ich the resources can in no way be adapted fro m the p roduction
of one good to the other.
A) A. B) B. C) C. D) D.
that obey the law of increasing opportunity costs.
A) A. B) B. C) C. D) D.
for which there are constant opportunity costs.
A) A. B) B. C) C. D) D.
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Figure 1.3
• B
• E
• D
•
OUTPUT OF TANKS
• A
• F
PP1 PP2
OUTPUT OF AUTOMOBILES
98. Using Figure 1.3, an increase in the capacity to produce can be represented by a movement from:
A) Point A to point B. B) Point B to point C. C) Point A to point C. D) Point C to point F.
99. Using Figure 1.3, at point A:

A) There is inefficient use of available resources.
B) The available technology keeps production inside PP 1 .
C) All available resources are being used efficiently.
D) An increase in the production of tanks would definitely require a decrease in the production of
automobiles.
100. Which of the following is true about the combination of tanks and automobiles repres ented by point E in
Figure 1.3?
A) This economy will never be able to reach point E.
B) Point E is reachable if this economy uses more of its available resources.
C) Point E is reachable if this economy becomes more efficient.
D) Point E is reachable only if more resources become available or technological advances are made.
101. An increase in the proportion of the population that is unemployed is best represented in Figure 1.3 by a
movement from point:
A) C to point A. B) D to point C. C) C to point B. D) E to point D.
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102. A movement from point F to point D in Figure 1.3 results in:

A) Less efficient production.
B) Permanent unemployment of workers producing automobiles.
C) A reallocation of resources from automobile production to tank production.
D) More efficient production.
103. In Figure 1.3, a shift of the production possibilities curve from PP 1 to PP2 could be caused by:
A) An increase in the quantity of raw materials available.
B) An improvement in the production skills of workers.
C) The use of improved production technology.
D) All of the above could cause the shift.
Figure 1.4
• A
• F
OUTPUT OF SUBMARINES
• E
• C
• B
• D
PP1 PP2
OUTPUT OF RAILROADS
104. Using Figure 1.4, an increase in the capacity to produce can be represented by a movement from point:
A) A to point B. B) C to point E. C) A to point C. D) D to point E.
105. Refer to Figure 1.4, at Point B:

A) The available technology keeps production inside PP 1 .
B) All available resources are being used efficiently.
C) There is inefficient use of available resources.
D) An increase in the production of automobiles would definitely require a decrease in the production of
tanks.
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106. Which of the following is true about the combination of submarines and railroads rep resented by point F in
Figure 1.4?
A) This economy will never be able to reach point F.
B) Point F is reachable if this economy reduces its unemployment rate.
C) Point F would be more easily reachable if the government took control of all privately -run factories.
D) Point F could possibly be reached if mo re econo mic resources become availab le or technology improves.
107. A decrease in the proportion of the population that is unemployed is bes t represented in Figure 1.4 by a
movement from point:
A) C to point B. B) B to point C. C) C to point E. D) E to point F.
108. A movement from point C to point A in Figure 1.4 results in:

A) More efficient production.
B) Permanent unemployment of workers producing railroads.
C) A reallocation of resources from submarine production to railroad production.
D) A reallocation of resources from railroad production to submarine production.
109. In Figure 1.4, a shift of the production-possibilities curve from PP1 to PP2 could be caused by:
A) A decrease in the unemployment rate.
B) Training programs which improve the skills of workers.
C) Better use of existing technology.
D) More strict pollution controls on submarine and railroad producers.
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Figure 1.5
• F
• E
• D
OUTPUT OF CDs
• A
• B
• C
PP1 PP2
OUTPUT OF VIDEO GAMES
110. Using Figure 1.5, if an economy has the capacity to produce represented by PP 2 then point E represents:
A) A constant tradeoff between CDs and video games.
B) A combination of CDs and video games that is not attainable.
C) An efficient use of resources.
D) The unemployment of resources.
111. Using Figure 1.5, if an economy is currently producing on PP 2 , which of the following would shift the
production-possibilities curve toward PP1 ?
A) An increase in the quantity of labor available. C) An increase in the level of unemployment.
B) A decrease in the amount of capital available. D) An advancement in technology.
112. In Figure 1.5, if the opportunity cost of producing video games was zero at all levels of production, the
production-possibilities curve would best be represented by a:
A) Vertical straight line. C) 45-degree line starting at the origin.
B) Horizontal straight line. D) Circle.
113. In Figure 1.5, at which of the following points would the opportunity cost of produ cing either more CDs or
more video games be zero?
A) A. B) D. C) F. D) E.
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Figure 1.6
• C
• B
• A
OUTPUT OF COMPUTERS
• D
• E
• F
PP1 PP2
OUTPUT OF CD PLAYERS
114. Using Figure 1.6, if an economy has the capacity to produce represented by PP 1 then point E represents:
A) A combination of computers and CD players that is not attainable.
B) A constant tradeoff between computers and CD players.
C) The unemployment of resources.
D) An efficient use of resources.
115. In Figure 1.6, if the opportunity cost of producing computers was zero at all levels of production, the
production-possibilities curve would be best be represented by a:
A) Vertical straight line. C) 45-degree line starting at the origin.
B) Horizontal straight line. D) Circle.
116. In Figure 1.6, at which of the following points would the opportunity cost of producing either more CDs or
more computers be zero?
A) A. B) C. C) D. D) E.
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Table 1.1 shows the hypothetical tradeoff between different combinations of Stealth bombers and B-1 bombers that
might be produced in a year with the limited U.S. capacity, ceteris paribus. Complete the table by calculating the
required opportunity costs for both the B-1 and Stealth bombers. Then answer the indicated questions.
Table 1.1
Production possibilities for bombers
Number of Opportunity cost of Opportunity cost of

Stealth Stealth bombers in Number of B-1s in terms of
Combination Bombers terms of B-1s B-1s Stealth bombers
S 10 ________________ 0 ________________
T 9 ________________ 1 ________________
U 7 ________________ 2 ________________
V 4 ________________ 3 ________________
117. On the basis of your calculations in Table 1.1, you may infer that the law of increasing opportunity costs
applies to:
A) Stealth bombers but not to B-1 bo mbers. C) B-1 bombers but not to Stealth bombers.
B) Both B-1 bombers and Stealth bo mbers. D) Neither B-1 bombers nor Stealth bombers.
118. In Table 1.1, the opportunity cost of increasing the production of B-1s fro m 1 to 2 in terms of Stealth bo mbers
is:
A) 1. B) 2. C) 0.33. D) 2.
119. Refer to Table 1.1. In the production range of 7 to 9 Stealths, the opportunity cost of producing 1 more
Stealth bomber in terms of B-1s is:
A) 0. B) 3. C) 0.5. D) 2.
120. The highest opportunity cost anywhere in Table 1.1 for Stealth bombers in terms of B-1 bombers is:
A) 1 B-1 per Stealth bo mber. C) 3 B-1s per Stealth bomber.
B) 2 B-1s per Stealth bomber. D) 0.5 B-1 per Stealth bomber.
121. The lowest opportunity cost anywhere in Table 1.1 for Stealth bombers in terms of B-1 bombers is:
A) 0.1 B-1 per Stealth bo mber. C) 0.5 B-1 per Stealth bomber.
B) 2 B-1s per Stealth bomber. D) 0.33 B-1 per Stealth bomber.
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122. The highest opportunity cost anywhere in Table 1.1 for B-1 bombers in terms of Stealth bombers is:
A) 1 Stealth per B-1 bo mber. C) 3 Stealths per B-1 bomber.
B) 2 Stealths per B-1 bo mber. D) 0.5 Stealth per B-1 bomber.
123. The lowest opportunity cost anywhere in Table 1.1 for B-1 bombers in terms of Stealth bombers is:
A) 0 Stealth per B-1 bo mber. C) 2 Stealths per B-1 bomber.
B) 1 Stealths per B-1 bo mber. D) 0.5 Stealth per B-1 bomber.
124. What is the relationship between the opportunity cost of Stealth bombers and the opportunity cost of B-1
bombers in Table 1.1?
A) They are reciprocals of each other.
B) As one increases the other decreases.
C) They both conform to the law of increasing opportunity cost.
Table 1.2 shows the hypothetical tradeoff between different combinations of Stealth bombers and B-1 bombers that
might be produced in a year with the limited U.S. capacity, ceteris paribus. Complete the table by calculating the
required opportunity costs for both the B-1 and Stealth bombers. Then answer the indicated questions.
Table 1.2
Production possibilities for bombers
Number of Opportunity cost of Opportunity cost of

Stealth Stealth bombers in Number of B-1 bombers in terms
Combination Bombers terms of B-1 bombers B-1 bombers of Stealth bombers
A 195 _______________ 20 _______________

B 180 _______________ 35 _______________
C 150 _______________ 45 _______________
D 100 _______________ 50 _______________
125. On the basis of your calculations in Table 1.2, the law of increasing opportunity costs applies to:
A) Both B-1 and Stealth bombers. C) B-1 bombers but not to Stealth bombers.
B) Stealth bombers but not to B-1 bo mbers. D) Neither bomber.
Page 24
126. Refer to Table 1.2. In the production range of 20 to 35 B-1s, the opportunity cost of producing 1 more B-1
bomber in terms of Stealth bombers is:
A) 195/20. B) 35/20. C) 15. D) 1.
127. Refer to Table 1.2. In the production range of 180 to 195 Stealths, the opportunity cost of producing 1 more
Stealth bomber in terms of B-1 bombers is:
A) 15. B) 1. C) 195/20 D) 195/180.
128. The highest opportunity cost anywhere in Table 1.2 for B-1 bombers in terms of Stealth bombers is:
A) 10 Stealths per B-1 bo mber. C) .33 B-1 per Stealth bomber.
B) .10 B-1 bo mber per Stealth bo mber. D) .10 Stealth per B-1 bomber.
129. The lowest opportunity cost anywhere in Table 1.2 for Stealth bombers in terms of B-1 bombers is:
A) 3 B-1s per Stealth bomber. C) .33 B-1 per Stealth bomber.
B) 10 B-1s per Stealth bo mber. D) .10 B-1 per Stealth bomber.
130. In Table 1.2, what is the relationship between the opportunity cost of Stealth bombers and the opportunity
cost of B-1 bombers?
A) They are reciprocals of each other.
B) As one increases the other increases.
C) Neither conforms to the law of increasing opportunity cost.
The following multiple-choice questions require critical thinking about In the News and World View articles that
appeared in the text.
131. One World View article is titled "North Korea Says It Is Running Out of Food." On a production -possibilities
curve between private and public goods, a decrease in military spending in an effort to increase food
production could be represented as:
A) A movement along the production-possibilities curve toward public goods.
B) A movement along the production-possibilities curve toward private goods.
C) A shift outward of the production-possibilities curve.
D) A shift inward of the production-possibilities curve.
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132. One World View article is titled "North Korea Says It Is Running Out of Food." If North Korea reduces the
size of its military and produces more food, this is most consistent with:
A) Privatization.
B) A movement along the economy's production-possibilities curve.
C) A laissez faire policy.
D) The law of increasing opportunity costs.
133. One World View article states that production on Cuban farms has increased and the food crisis is over
because: "Farms are getting a dose of capitalism." This illustrates the success of:
A) Incentives from a centrally planned economy. C) The theme of Das Kapital.
B) Laissez faire policy. D) All of the above.
134. One In the News article is titled "Bush Seeking Defense Increase." Ceteris paribus, if the economy is
currently on the production-possibilities curve, an increase in defense spending will cause:
A) A movement to a point outside the production-possibilities curve.
B) A movement to a point inside the production-possibilities curve.
C) A movement along the production-possibilities curve.
D) An inward shift of the production-possibilities curve.
135. One In the News article is titled "Bush Seeking Defense Increase." Ceteris paribus, if the economy is
currently on the production-possibilities curve, an increase in defense spending will cause:
A) Increased production of consumer goods.
B) Decreased production of consumer goods.
C) An outward shift of the production-possibilities curve.
D) An inward shift of the production-possibilities curve.
Page 26
APPENDIX
Figure 1.7
Relating grades and hours studied
136. In Figure 1.7, a grade-point average of 3.0 is associated with how many hours of study time per week?
A) 30. B) 20. C) 10. D) 40.
137. The slope of the line between grade-point averages of 1.0 and 3.0 in Figure 1.7 is:
A) -2.0. B) 1/10. C) 4.0. D) 10.0.
138. Figure 1.7 suggests that the relationship between the variables is:
A) Negative after 30 hours of study.
B) Everywhere linear.
C) Linear at places and nonlinear at places.
D) Linear at places and nonlinear at places but always negatively sloped.
139. Figure 1.7 suggests that:

A) The law of increasing opportunity cost does not apply.
B) Resources can be perfectly adapted between study time and grade-point average.
C) The relationship between study time and grade-point average is first linear, then nonlinear.
D) The relationship between study time and grade-point average is constant.
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140. Figure 1.7 suggests that if a student wants to achieve a grade-point average of 3.0, he or she should study:
A) An average of 20 hours per week.
B) An average of 30 hours per week.
C) An average of 40 hours per week.
D) More than 40 hours per week because he or she is a C student.
141. The slope of a curve at any point is given by the formula, the:
A) Change in y coordinates between two points divided by the change in their x coordinates.
B) Change in x coordinates between two points divided by the change in their y coordinates.
C) Percentage change in y coordinates between two points divided by the percentage change in their x
coordinates.
D) Percentage change in x coordinates between two points divided by the percentage change in their y
coordinates.
142. A linear curve that slopes downward from left to right has a:
A) Negative slope.
B) Positive slope.
C) Slope that changes as you move along the curve.
D) Slope of zero.
143. A linear curve can be distinguished by:

A) The continuous change in its slope.
B) The same slope throughout the curve.
C) The changing relationship between the two variables.
D) A shift in the curve.
144. A linear curve with a positive slope:

A) Is drawn downward from left to right.
B) Implies that there is a negative relationship between the two variables.
C) Implies that there is a positive relationship between the two variables.
D) Is drawn as a horizontal line.
145. When the relationship between two variables changes:

A) There is movement from one point on the curve to another po int on the curve.
B) The curve becomes linear.
C) The entire curve shifts.
Page 28
True/False Questions
SCARCITY: THE CORE PROBLEM
T F 146. Goods are scarce because society's desire for them exceeds society's ability to produce them.
Answer: True Type: Basic Understanding Page: 4
T F 147. Scarcity results when available resources cannot satisfy all desired uses of those resources.
PRODUCTION POSSIBILITIES
T F 148. All output combinations that lie outside a production-possibilities curve are attainable with
available resources and technology.
Answer: False Type: Basic Understanding Page: 7
T F 149. All output combinations that lie on the production-possibilities curve are characterized by efficient
use of resources.
T F 150. If the economy is inside the production-possibilit ies curve, then more output can be produced using
existing resources.
T F 151. Technological advance shifts the production-possibilities curve inward.
BASIC DECISIONS
T F 152. For a market economy, the decision about what to produce is made by the government.
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T F 153. All economies must make decisions concerning what to produce, how to produce it, and for whom
to produce.
THE MECHANISMS OF CHOICE
T F 154. Adam Smith observed how government directives can lead to the best allocation of resources.
T F 155. Price signals direct the answers to the WHAT, HOW, and FOR W HOM questions in a laissez-faire
economy.
T F 156. In the U.S. market system, the government gives the signals for deciding how to use the majority of
the resources.
T F 157. When governments "privatize," they expect to achieve greater efficiency through centralizat ion and
public decision making.
Answer: False Type: Complex Understanding Page: 15
T F 158. In a market economy, if a factory pollutes the air, the situation is referred to as government failure.
T F 159. Government failure occurs when government intervention fails to improve economic outcomes.
WHAT ECONOMICS IS ALL ABOUT
T F 160. Macroeconomics addresses the economy as a whole.
Answer: True Type: Definition Page: 16
T F 161. Microeconomics is concerned with individual performance as well as the economy as a whole.
Answer: False Type: Definition Page: 16
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T F 162. The Latin phrase ceteris paribus refers to holding other variables constant.
APPENDIX
T F 163. The slope of a production-possibilities curve is positive.
T F 164. The absolute value of the slope of a production-possibilities curve measures the opportunity cost of
the good.
Answer: True Type: Complex Understanding Page: 21
Page 31
Answers to Table
Table 1.1 Answer
Number Opportunity cost Opportunity cost

of of of
Stealth Stealth bombers Number B-1s in terms of
in of
Combination Bombers terms of B-1s B-1s Stealth bombers
S 10 0
T 9 11=1 1 11=1
U 7 1  2 = 0.5 2 21=2
V 4 1  3 = 0.33 3 31=3
Table 1.2 Answer
Number Opportunity cost Opportunity cost

of of of
Stealth Stealth bombers in Number of B-1 bombers in
terms
Combination Bombers terms of B-1 B-1 of Stealth bombers
bombers bombers
A 195 20
B 180 15  15 = 1 35 15  15 = 1
C 150 10  30 = 0.33 45 30  10 = 3
D 100 5  50 = 0.1 50 50  5 = 10
Page 32
Chapter 1: Supply and Demand
MARKET PARTICIPANTS
1. The goals of market participants include the maximization of:

A) Utility, profits, and the general welfare of society.
B) Rent, wages, profit, and interest.
C) Land, labor, capital, and entrepreneurship.
D) Resource constraints, budget constraints, and legal constraints.
2. The goals of the market participants are the maximization of:

A) Income for consumers, profits for businesses, and taxes for government.
B) Goods and services for consumers, scarce resources for businesses, and resources not used by businesses
for government.
C) Satisfaction from purchases for consumers, profits for businesses, and society's general welfare for
government.
D) Available goods and services for consumers, scarce resources for businesses, and general welfare for
government.
3. The goals of the consumer in a market economy is to buy:

A) The greatest number of goods and services possible.
B) The goods and services that maximize profits for businesses.
C) The combination of goods and services which maximizes their utility given a limited budget.
D) Those goods and services with the lowest prices.
4. The goal of the supplier of a product or service in a market economy is:

A) The use of scarce resources subject to the constraint of taxes.
B) The use of scarce resources subject to the constraint of available profit.
C) Profits subject to the constraint of scarce resources.
D) Profits subject to the constraint of income.
5. People benefit by participating in the market because:

A) Resources are no longer limited.
B) There are always participants in the market that are more efficient than you are in production.
C) Market participation allows individuals to specialize and, ultimately, consume more.
D) Participants in the market do not have to make choices.
Page 1
6. Which of the following are reasons why individual consumers participate in the market?
A) They do not have the time to produce all the goods and services that they desire.
B) They do not have the energy to produce all the goods and services that they desire.
C) They do not have the ability to produce all the goods and services that they desire.
D) All of the above are reasons.
THE CIRCULA R FLOW
7. Which of the following is a market transaction?

A) A house increases in value over the thirty years that it is owned.
B) A college student purchases textbooks.
C) Weather destroys a farmer's crops leaving the farmer unable to buy groceries.
D) A radio station changes its programming from classical to rock.
8. Which of the following is purchased in a product market?

A) A factory. B) National Defense. C) An individuals' labor. D) A bag of pretzels.
9. A market in which final goods and services are exchanged is a:

A) Public-goods market. B) Product market. C) Factor market. D) Labor market.
10. The four factors of production are:

A) Labor, raw materials, capital, and money.
B) Rent, wages, interest, and profit.
C) Production, distribution, pricing, and marketing.
D) Land, labor, capital, and entrepreneurship.
11. A market in which land, labor, capital or entrepreneurship is exchanged is a:

A) Product market. B) Securities market. C) Factor market. D) Bond market.
Page 2
12. Consumers:
A) Provide dollars to the product market.
B) Receive dollars from the product market.
C) Provide dollars to the factor market.
D) Receive goods and services from the factor market.
13. Businesses participate in:

A) Factor markets only. C) Factor and product markets.
B) Product markets only. D) Foreign markets only.
14. Governments participate in:

15. In the U.S. economy, foreigners participate in:

16. In the U.S economy, foreigners participate in:

A) The factor market only.
B) The product market only.
C) Both the product and the factor markets.
D) Foreigners do not participate in the U.S. economy.
17. When a firm offers a higher salary to an employee of another firm and lures the employee away, the firm is:
A) Using the market mechanism.
B) Bidding in the product market.
C) Shifting the demand curve in the product market.
D) Selling in the factor market.
DEMAND
Page 3
18. A buyer is said to have a demand for a good only when:

A) The buyer wants to own the good.
B) The buyer is both willing and able to purchase the good at alternative prices.
C) The price of the good is low enough.
D) An adequate supply of the good is available for purchase.
19. Jon's demand schedule for donuts indicates:

A) How much he likes donuts. C) Why he likes donuts.
B) His opportunity cost of buying donuts. D) How many donuts he will actually buy.
20. The term opportunity costs refers to the:

A) Value of all the options given up when a good or service is produced.
B) Financial costs of all the factors of production used to produce a good or service.
C) Amount of resources used to produce a good or service.
D) Value of the best option given up when a good or service is produced.
21. The quantity of a good a consumer is willing to buy depends on:

A) The price of a good. C) The opportunity cost of purchasing that good.
B) The consumer's income. D) All of the above.
22. The maximu m price a consumer is willing to pay for a good depends on:
A) The amount of utility the consumer receives from the good.
B) The consumer's income.
C) The opportunity cost of purchasing that good.
23. According to the law of demand, the quantity of a good demanded in a given time period:
A) Increases as its price rises, ceteris paribus. C) Increases as its price falls, ceteris paribus.
B) Decreases as its price falls, ceteris paribus. D) Does not change when price changes.
24. According to the law of demand, a demand curve:

A) Has a negative slope. C) Is a horizontal, or flat, line.
B) Has a positive slope. D) Exceeds the economy's ability to produce.
Page 4
25. A lower quantity demanded of a good reflects, ceteris paribus:

A) Lower income. C) A downward shift of the supply curve.
B) A higher price of the good. D) All of the above.
26. Ceteris paribus, which of the following can change without shifting demand?
A) Expectations. B) Income. C) The prices of other related goods. D) The price of the good itself.
27. Which of the following is not held constant along a given demand curve for a good?
A) Price. B) Consumer's income. C) The price of substitutes. D) Consumer tastes.
28. Which of the following determinants might change in the consumer -goods market as a result of an increase in
unemployment?
A) Income. B) Buyer expectations. C) Tastes. D) All of the above.
29. Ceteris paribus, which of the following would generally cause an increase in the demand for automobiles?
A) A decrease in the price of automobiles.
B) An increase in consumers' income.
C) The new models are perceived as ugly compared with old models.
D) Consumer expectations that the price of automobiles will be lower next year.
30. Ceteris paribus, which o f the following wou ld you expect to cause a decrease in the demand for automob iles?
A) A rise in the price of gasoline.
B) Consumer expectation that the price of automobiles will be lower next year.
C) Consumer expectation that a significant recession will develop and last for a year.
31. Ceteris paribus, which of the following would generally cause a decrease in the demand for new
automobiles?
A) A decrease in the price of automobiles.
B) The new models are perceived as ugly compared with old models.
C) An increase in consumers' income.
D) Consumers' expectations that the price of automobiles will be higher next year.
Page 5
32. Which determinant of demand changes in the personal computer market as more individuals become
interested in "surfing the Internet"?
A) Cost of factors of production. B) Income. C) Expectations. D) Number of buyers.
33. If consumers expect PC manufacturers to offer rebates next month, consumers will:
A) Increase their demand for PCs today.
B) Decrease their demand for PCs today.
C) Keep demand the same, but increase the quantity demanded for PCs.
D) Keep demand the same, but decrease the quantity demanded for PCs.
34. Assume Pepsi and Coke are substitutes. An increase in the price of one will result in:
A) A decrease in demand for the other.
B) A decrease in the quantity demanded of the other.
C) An increase in the demand for the other.
D) An increase in the quantity demanded of the other.
35. If bagels and donuts are substitutes, then a decrease in the price of donuts will result in:
A) An increase in the demand for donuts. C) A decrease in the demand for donuts.
B) An increase in the demand for bagels. D) A decrease in the demand for bagels.
36. If Dell co mputers and HP co mputers are substitutes, then an increase in the price o f Dell co mputers will result
in:
A) A decrease in demand for HP computers.
B) A decrease in the quantity demanded of HP computers.
C) An increase in demand for HP computers.
D) An increase in the quantity demanded of HP computers.
37. An increase in the price of one good can cause a decrease in the demand for another good if the goods are:
A) Substitutes. B) Complements. C) Unrelated to each other. D) Both inferior.
Page 6
38. Peanut butter and jelly are complements. An increase in the price of one will result in:
A) A decrease in demand for the other.
B) A decrease in the quantity demanded of the other.
C) An increase in the demand for the other.
D) An increase in the quantity demanded of the other.
39. Assume a series of forest fires reduces the supply of lumber which is an input in the production of wooden
bats. Baseballs and wooden bats are complements. If the price of wooden bats increases, we can expect the:
A) Demand for baseballs to decrease. C) Supply of baseballs to decrease.
B) Demand for baseballs to increase. D) Supply of baseballs to increase.
40. Tennis balls and tennis rackets are commonly used together. A decrease in the price of tennis rackets will
result in:
A) An increase in the demand for tennis balls. C) An increase in the demand for tennis rackets.
B) A decrease in the demand for tennis balls. D) A decrease in the demand for tennis rackets.
41. Ceteris paribus me

A) Holding everything else constant.
B) Allowing the free market to decide, not government.
C) Changing prices to see how demand (or supply) shifts.
D) Holding prices constant to see how each determinant of demand changes the quantity demanded.
42. A shift in demand is defined as a change in the:

A) Price.
B) Quantity demanded because of a change in price.
C) Quantity demanded at any given price.
D) Equilibrium quantity.
43. A change in demand means there has been a shift in the demand curve, and a change in the quantity
demanded:
A) Corresponds to a movement along the demand curve.
B) Means a shortage or surplus will result from holding prices constant.
C) Results from a change in price of other goods.
D) Also means demand has shifted.
Page 7
44. A change in demand means there has been a shift in the demand curve, and a change in quantity demanded:
A) Results from a change in price of other goods.
B) Means a shortage or surplus will result from holding prices constant.
C) Also means demand has shifted.
D) Means that price has changed and there is movement along the demand curve.
45. Economists make a distinction between a change in "demand" and a change in the "quantity demanded":
A) Because the supply curve shifts whenever there is a change in demand.
B) Because the demand curve shifts whenever there is a change in quantity demanded.
C) To distinguish a shift in the demand curve from a movement along the demand curve.
D) To distinguish a shift in supply from a shift in demand.
46. When a buyer purchases a good, ceteris paribus:

A) The demand curve shifts to the left, but quantity demanded remains the same.
B) The quantity demanded of the good falls , but demand remains unchanged.
C) The demand curve shifts to the left, and the quantity demanded falls.
D) There is no change in demand or the quantity demanded.
47. Given a downward-sloping market demand curve for product X, if the price of X is reduced from $10 to $8,
then, ceteris paribus:
A) Demand for X will increase. C) Demand for X will decrease.
B) The quantity demanded of X will increase. D) The quantity demanded of X will decrease.
48. Given a downward-sloping market demand curve for web design services, if the price of web design services
is decreased from $12 per hour to $9 per hour, then, ceteris paribus:
A) Demand for web design services will increase.
B) The quantity demanded of web design services will increase.
C) Demand for web design services will decrease.
D) The quantity demanded of web design services will decrease.
49. The market demand curve for a particular good indicates:

A) Consumers will purchase more of a good at higher prices, ceteris paribus.
B) Sellers will offer more of a good only at higher prices, ceteris paribus.
C) The total quantities that buyers are willing and able to purchase at alternative prices in a given period of
time, ceteris paribus.
D) How much of a good is actually purchased in a given period of time.
Page 8
50. Which of the following is a market-demand determinant but not an individual-demand determinant?
A) Income. B) Price of other goods. C) Tastes. D) Number of buyers.
51. To calculate market demand we:

A) Add the quantities demanded for each individual demand schedule horizontally.
B) Add the quantities demanded for each individual demand schedule vertically.
C) Find the average quantity demanded at each price.
D) Find the difference between the quantity demanded and the quantity supplied at each price.
SUPPLY
52. A change in the price of a good:

A) Causes a shift in the supply curve. C) Results in a change in quantity supplied.
B) Results in a change in supply. D) Is a determinant of supply.
53. An increase in the price of a good causes a:

A) Rightward shift in the supply curve. C) Movement down the supply curve.
B) Movement up the supply curve. D) Leftward shift in the supply curve.
54. Which of the following is not held constant along a given supply curve for a good?
A) The cost of factors of production. B) Price. C) Technology. D) Taxes.
55. A change in quantity supplied is the result of:

A) A change in the price of the good. C) An increase in the number of sellers.
B) A change in technology. D) All of the above.
56. A shift in supply is defined as a change in:

A) Price.
B) Quantity supplied because of a change in price.
C) Equilibrium quantity.
D) Supply because of a change in a non-price determinant.
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57. Economists make a distinction between changes in quantity supplied and changes in supply:
A) Because the supply curve shifts whenever there is a change in quantity supplied.
B) To distinguish a movement along a supply curve from a shift in the supply curve.
C) Because the demand curve shifts whenever there is a change in quantity supplied.
D) To distinguish a supply shift from a demand shift.
58. Which of the following is a determinant of supply?

A) Suppliers' tastes for the good they produced. C) Consumers' desire for the good.
B) Consumers' inco me. D) Available technology.
59. Which of the following is a determinant of supply?

A) Consumer tastes or preferences. C) The prices of the factors of production.
B) Income. D) Number of buyers.
60. The amount of a good suppliers are willing and able to supply at any given price in a given time period could
depend on:
A) Buyer's inco me. C) The state of technology at the time.
B) Expectations on the part of buyers. D) The consumer demand for the good.
61. Which of the following provides an example of the law of supply?

A) Falling labor costs cause an increase in supply.
B) Improved technology shifts the supply curve to the right.
C) Some producers leave the industry, and the supply curve shifts to the left.
D) Price falls and the quantity supplied decreases.
62. According to the law of supply, a supply curve:

A) Has a negative slope. C) Is a horizontal, or flat, line.
B) Has a positive slope. D) Will always be less than the demand curve.
63. To calculate market supply we:

A) Add the quantities supplied for each individual supply schedule horizontally.
B) Add the quantities supplied for each individual supply schedule vertically.
C) Find the average quantity supplied at each price.
D) Find the difference between the quantity supplied and the quantity demanded at each price.
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64. The market supply curve of a particular product indicates the:

A) Total quantities that are actually sold during a given time period.
B) Total quantities that buyers are willing to purchase at alternative prices.
C) Total quantities that sellers are willing and able to offer for sale at alternative prices in a given time
period, ceteris paribus.
D) Specific quantities that an individual seller will make available at a given price in a given time period,
ceteris paribus.
65. Which of the following is a market-supply determinant but not an individual firm's supply determinant?
A) Technology. B) Factor costs. C) Seller expectations. D) Number of sellers.
66. When the number of sellers in a market changes, ceteris paribus:

A) Both individual supply curves and market supply curves shift.
B) Individual supply curves remain unchanged, but the market supply curve shifts.
C) Individual supply curves change, but the market supply curve remains unchanged.
D) There are no changes to either type of curve.
67. Which of the following events would cause a rightward shift in the market supply curve for automobiles?
A) A technological improvement which reduces the cost of production.
B) An increase in the wages of autoworkers.
C) A higher sales tax on automobiles.
D) A decrease in the number of sellers.
68. If corn and wheat are alternative pursuits for a farmer, a change in the supply of corn will take place when,
ceteris paribus:
A) The price of corn changes.
B) The price of wheat changes.
C) The demand for corn changes.
D) Consumers want to buy more corn at the same price.
69. Which of the following would not cause the market supply of cell phones to change?
A) Telecommunications are deregulated, and anyone who wants to can produce and sell cell phones.
B) A cheaper technology for producing plastics used in producing cell phones is developed.
C) A reduction in the demand for cell phones causes the price to fall.
D) Taxes levied on cell phone production are reduced.
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70. Market supply and market demand curves are similar in that both:
A) Involve the willingness and ability of a supplier to sell a product or service.
B) Involve the willingness and ability of a buyer to buy a product or service.
C) Have price on the x-axis and quantity on the y-axis.
D) Can be derived by adding horizontally all the curves of the individuals in the market.
71. Both a demand schedule and a s upply schedule for a good indicate for a given period of time at different
prices, ceteris paribus:
A) The motives for exchanging money for various quantities of the good.
B) The actual quantities of the good exchanged for money.
C) That supply creates its own demand.
D) The quantities of the good that market participants are willing and able to exchange.
72. Which of the following can change without shifting either demand or supply, ceteris paribus?
A) The price of the good itself. B) Incomes. C) The prices of other goods. D) All of the above.
EQUILIBRIUM
73. A market is said to be in equilibrium when:

A) Demand is fully satisfied at all alternative prices.
B) The buying intentions of all consumers are realized.
C) The supply intentions of all sellers are realized.
D) The quantity demanded equals the quantity supplied.
74. The equilibrium price in a market is found where:

A) The market supply curve intersects the market demand curve.
B) The market supply curve intersects the y-axis.
C) The market demand curve intersects the y-axis.
D) The market supply curve intersects the x-axis.
75. At the equilibrium price there are:

A) Shortages. B) Surpluses. C) Excess inventories. D) No shortages or surpluses.
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76. In a market, the equilibrium price is determined by:

A) What buyers are willing and able to purchase.
B) What sellers are willing and able to offer for sale.
C) Both demand and supply.
D) The government.
77. In most markets, the equilibrium price is achieved:

A) Through detailed databases. C) Using an equilibrium price formula.
B) Through government mandate. D) Through trial and error.
78. The market mechanism is consistent with:

A) A trial and error process. B) The invisible hand. C) Equilibrium. D) All of the above.
79. The term market mechanism refers to:

A) The use of market prices and sales to determine resource allocation.
B) The establishment of a ceiling price in a market.
C) Supply and demand curves.
D) Government laws and regulations concerning how the market should operate.
80. The invisible hand explains:

A) The trial-and-error process by which a market reaches equilibrium.
B) The determination of prices set by the government.
C) The appearance of persistent shortages.
81. Suppose there are buyers and sellers in a market but no exchange takes p lace. Assume there is no government
intervention in this market. This implies that:
A) The price must be so high that no one can afford this good.
B) There must be a shortage of the good.
C) The market supply and demand curves do not intersect.
D) Market demand must be upward sloping.
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82. When a surplus exists:

A) Producers reduce price in an attempt to decrease excess inventory.
B) Consumers buy more of the good because they know a surplus exists.
C) Government officials offer more subsidies.
83. When a surplus exists for a product:

A) Producers increase supply.
B) Consumers increase demand.
C) Government purchases decrease.
D) Producers reduce the level of output and reduce price.
84. A ballet performance had many empty seats. This implies that the:
A) Hall where the performance was being held was very large.
B) Price of the tickets must have been very low because of the low demand.
C) Ballet group was not very well known.
D) Price of the tickets must have been above the equilibrium price.
85. If the quantity demanded of a good is greater than the quantity supplied of the good at the current price, then:
A) Price will increase until it reaches the equilibrium price.
B) The demand curve will shift to the left to create an equilibrium.
C) The supply curve will shift to the right to create an equilibrium.
D) There is a surplus of the good.
86. A market shortage is:

A) The amount by which the quantity demanded exceeds the quantity supplied at a given price.
B) A situation of excess demand.
C) A situation in which people cannot buy all of the goods they are willing and able to buy at the actual
market price.
87. A market shortage is:

A) The amount by which the quantity demanded exceeds the quantity supplied at a given price.
B) The result of a price ceiling.
C) A situation in which people cannot buy all the goods and services that they are willing and otherwise able
to buy.
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88. A rock concert was sold out several weeks before the performance. This implies that the:
A) Stadium where the concert was being held was very small.
B) Price of the tickets must have been very high because of the high demand.
C) Rock group must be very popular.
D) Price of the tickets must have been below the equilibrium price.
89. When a shortage exists:

A) Producers reduce price in an attempt to increase inventory.
B) Consumers bid up the price.
C) Government officials increase taxes on the good.
90. As a result of a shortage:

A) Consumers increase demand fo r the product. C) Producers increase output and raise the price.
B) Producers reduce supply. D) Government purchases decrease.
91. A rightward shift in a demand curve and a rightward shift in a supply curve both result in a:
A) Lower equilibriu m price. C) Lower equilibrium quantity.
B) Higher equilibriu m price. D) Higher equilibrium quantity.
92. A rightward shift in a demand curve and a leftward shift in a supply curve both result in a:
A) Lower equilibriu m price. C) Lower equilibrium quantity.
B) Higher equilibriu m price. D) Higher equilibrium quantity.
93. A leftward shift of the market demand curve for HDTVs, ceteris paribus, causes equilibrium:
A) Price to increase and quantity to decrease. C) Price to decrease and quantity to decrease.
B) Price to increase and quantity to increase. D) Price to decrease and quantity to increase.
94. A rightward shift of the market demand curve for MP3 players, ceteris paribus, causes equilibrium:
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95. When the demand for Play Station II increases, ceteris paribus, the equilibrium price will also increase
because:
A) A shortage exists at the old equilibrium price.
B) There must be a surplus of the good.
C) The market supply and demand curves do not intersect.
D) Market demand must be upward sloping.
96. When demand decreases, ceteris paribus, the equilibrium price will also decrease because:
A) A shortage exists at the old equilibriu m price. C) The quantity demanded has increased.
B) A surplus exists at the old equilibriu m price. D) The quantity supplied has decreased.
97. When the supply of HDTVs increases, ceteris paribus, the equilibrium price will decrease because:
98. When the supply of gasoline decreases, ceteris paribus, the equilibrium price will increase because:
99. When half of the consumers in a small town move away, the markets for different goods and services will
generally experience:
A) Lower equilibrium price and lower equilibrium quantity.
B) Lower equilibrium price and higher equilibrium quantity.
C) Higher equilibrium price and lower equilibrium quantity.
D) Higher equilibrium price and higher equilibrium quantity.
100. A leftward shift of the market supply curve, ceteris paribus, causes equilibrium:
101. An increase in the supply of gasoline, ceteris paribus, will cause equilibrium:
A) Price to rise and quantity to fall. C) Price to fall and quantity to rise.
B) Price and quantity to rise. D) Price and quantity to fall.
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102. A leftward shift in a supply curve, ceteris paribus, is characterized by:

A) A decrease in equilibrium quantity and a decrease in price.
B) A decrease in equilibrium quantity and an increase in price.
C) An increase in equilibrium quantity and a decrease in price.
D) An increase in equilibrium quantity and an increase in price.
103. A rightward shift of the market supply curve, ceteris paribus, causes equilibrium:
104. Suppose that during the 1995-2001 time period, the nu mber of motorcycles sold increased despite an increase
in price. How can this be explained using demand and supply analysis?
A) Demand must be upward sloping.
B) Demand must have increased while supply remained constant.
C) Supply must have decreased while demand remained constant.
D) This cannot be explained using demand and supply.
105. In 1998 a co mpany sold 35,000 CD p layers at $100 each. In 1999 the same company sold 40,000 CD players
at $120 each. The information suggests that:
A) The supply of CD players increased from 1998 to 1999.
B) The demand of CD players increased from 1998 to 1999.
C) The price of CD players increased because the costs of production increased from 1998 to 1999.
D) From 1998 to 1999 the demand curve for CD players was upward sloping because of improved
technology.
106. Suppose there are a series of forest fires which affect the lu mber industry while, at the same time, consumers
demand more wooden furniture. The wooden furniture market would experience:
A) An increase in price and an indeterminate change in quantity.
B) An increase in price and an increase in quantity.
C) An increase in quantity and an indeterminate change in price.
D) A decrease in price and an indeterminate change in quantity.
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107. Suppose both the demand and supply of salsa increase (although not necessarily by the same amount). What
can we conclude about changes in the price and quantity of salsa?
A) Both the prices and quantity increase.
B) The price increases but the change in the quantity cannot be determined.
C) The quantity increases but the change in the price cannot be determined.
D) Both the price and quantity decrease.
108. Suppose both the demand and supply of peaches decrease (although not necessarily by the same amount).
What can we conclude about changes in the price and quantity of peaches?
A) Both the prices and quantity increase.
B) The price decreases but the change in the quantity cannot be determined.
C) The quantity decreases but the change in the price cannot be determined.
D) Both the price and quantity decrease.
MARKET OUTCOMES
109. In a market economy, which of the following determines the answer to the WHAT to produce question?
A) Direct negotiations between consumers and producers.
B) Prices and profits.
C) Government directives.
D) A democratic vote for all consumers.
110. In a market economy, which of the following is an incentive for producers to produce efficiently?
A) Govern ment laws and regulations. C) Profits.
B) The production-possibilities curve. D) The public's welfare.
111. In a market economy, the people who receive the goods and services produced are t hose who:
A) Need the goods and services the most. C) Have the most political power.
B) Want the goods and services the most. D) Are willing and able to pay the market price.
112. When economists talk about "optimal outcomes" in the marketplace, they mean that:
A) The allocation of resources by the market is perfect.
B) All the consumer desires are satisfied and business profits are maximized.
C) The allocation of resources by the market is likely to be the best possible, given scarce resources and
income constraints.
D) Everyone who wants a good or service can have it.
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113. When the market mechanism is allowed to operate freely prices will determine:
A) The mix of output to be produced.
B) The resources to be used in the production process.
C) To whom the output will be distributed.
THE ECONOM Y TOMORROW
114. An increase in the equilibrium price of electricity can be caused by:

A) An increase in the supply of electricity. C) An increase in the demand for electricity.
B) A decrease in the demand for electricity. D) All of the above.
115. Which of the following changes in the electricity market can best explain an increase in the equilibriu m price
of electricity?
A) An increase in demand and a decrease in supply.
B) A decrease in demand and an increase in supply.
C) An increase in both demand and supply.
D) A decrease in both demand and supply.
116. The increase in the price of electricity in California can best be explained by:
A) The increased population in California and the growing economy.
B) The abnormally cold winters and hot summers.
C) The increased use of electronic devises such as computers.
117. Which of the following is most likely to occur because of the increase in the price of electricity in California?
A) An increase in the electricity imported into California.
B) A decrease in the electricity imported into California.
C) An increase in the consumption of electricity in California.
D) An increase in the supply of electricity in California.
118. The California legislature placed an upper limit on electricity prices which is called a:
A) Price floor. B) Price ceiling. C) Price support. D) Demand ceiling.
119. The price ceiling that the California legislature placed on electricity caused:
Page 19
A) An increase in demand. B) An increase in supply. C) A shortage. D) A surplus.
120. An effective price ceiling results in black-market pressures to:

A) Reduce prices because of surpluses. C) Raise prices because of shortages.
B) Raise prices because of surpluses. D) Reduce prices because of shortages.
121. Price ceilings are intended to address the problem of:

A) Inefficiency in production.
B) Inequity in the distribution of goods and services.
C) Business bankruptcies.
D) Shortages.
122. If a price ceiling results in a shortage:

A) This is an example of market failure.
B) The program is poorly designed because effective price ceilings produce surpluses.
C) Buyers will be dissatisfied because they cannot purchase all they wish at a less -than-equilibrium price.
D) It is not effective.
123. If a price ceiling is to be effective, it should be set:

A) Below the equilibrium price, and it will create a market shortage.
B) Below the equilibrium price, and it will create a market surplus.
C) Above the equilibrium price, and it will create a market shortage.
D) Above the equilibrium price, and it will create a market surplus.
124. If the government prevented prices from falling to their equilibrium levels, there would be:
A) A shortage. B) A surplus. C) A price ceiling. D) An equilibrium price.
125. Which of the following is a predictable effect of price ceilings?

A) An increase in the quantity supplied. C) An increase in the quantity demanded.
B) A market surplus. D) All of the above.
Page 20

A) A decrease in the quantity supplied. C) A decrease in the quantity demanded.
B) A market surplus. D) All of the above.

A) A decrease in the quantity supplied. C) A market shortage.
B) An increase in the quantity demanded. D) All of the above.
128. When effective price ceilings are set for a market:

A) Quantity demanded will be less than the equilibriu m quantity, and price will be less than the equilib riu m
price.
B) Quantity demanded will be less than the equilibrium quantity, and price will be greater than the
equilibrium price.
C) Quantity demanded will be greater than the equilibrium quantity, and price will be less than the
equilibrium price.
D) Quantity demanded will be greater than the equilibrium quantity, and price will be greater than the
equilibrium price.
129. When a price ceiling is eliminated the:

A) Quantity demanded increases. C) Market shortage disappears.
B) Quantity supplied decreases. D) All of the above.
130. When a price ceiling is eliminated the:

A) Quantity demanded decreases. C) Market surplus disappears.
B) Quantity supplied decreases. D) Market shortage remains.
131. Suppose a hurricane hits Florida causing widespread damage to houses and businesses. The governor of
Florida places a price ceiling on all build ing materials to keep the prices reasonable. Which of the following
is the most likely result?
A) A faster recovery from the storm.
B) More people will be able to afford and purchase building materials.
C) Shortages of building materials and a slower recovery from the storm.
D) Both a and b are correct.
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132. Suppose a hurricane hits Florida causing widespread damage to houses and businesses. The gov ernor of
Florida places a price ceiling on all build ing materials to keep the prices reasonable. Which of the following
is the most likely result?
A) Shortage of building materials. C) A slower recovery from the storm.
B) Long lines at lu mber stores. D) All of the above would probably result.
133. After a major snowstorm last winter, some college students earned extra money by clearing driveways of
snow for $25. Town officials determined that $25 was too high and set a price ceiling of $15 for this service.
Which of the following was the most likely result?
A) More people were able to afford and purchase this service.
B) People had to wait longer but eventually everyone got their driveway cleared.
C) Fewer driveways were cleared.
D) No driveways were cleared.
134. If the demand for concert tickets is greater than the supply of concert tickets at the established price then:
A) The price will decrease until the quantity demanded equals the quantity supplied.
B) The established price is a price ceiling.
C) The government should intervene to encourage producers to produce more.
D) Demand is greater than it would be at a lower price.
Choose the letter of the diagram in Figure 3.1 that best describes the type of shift that would occur in each situation for
the market listed at the left, ceteris paribus.
Figure 3.1
Shifts of supply and demand
135. Laptop computers: An advancement in technology reduces the cost of producing laptop computers.
A) A B) B C) C D) D
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136. 2001 model cars: 2002 model cars are introduced for purchase in the market, and consumers prefer the new
cars.
A) A B) B C) C D) D
137. 2002 model cars: Consumer confidence in the economy improves.

A) A B) B C) C D) D
138. Steel: The government introduces environmental res trict ions on the dumping of wastes fro m processing steel.
A) A B) B C) C D) D
139. Orange juice: Much of the Florida citrus crop is destroyed by a hurricane.
A) A B) B C) C D) D
140. Housing: The cost of lumber decreases because less expensive lumber is imported from Canada.
A) A B) B C) C D) D
141. Donuts: People become more health-wise and prefer power bars over donuts.
A) A B) B C) C D) D
142. All goods and services: The level of income increases for all consumers.
A) A B) B C) C D) D
Page 23
EQUILIBRIUM
Complete Table 3.1. Then answer the indicated questions.
Table 3.1
Indivi dual demand and supply schedules
Quantity Demanded By
Price Al Betsy Casey Market
$4.00 4 2 1 ______
3.00 6 2 2 ______
2.00 10 2 3 ______
1.00 12 2 3 ______
Quantity Supplied By
Price Alice Butch Connie Market
$4.00 15 9 11 ______
3.00 8 7 10 ______
2.00 6 3 6 ______
1.00 0 0 5 ______
143. In Table 3.1, if the price were $4 the market would:

A) Be at equilib riu m. C) Experience a surplus of 20 units.
B) Experience a shortage of 7 units. D) Experience a surplus of 28 units.
144. In Table 3.1, if the price were $2 the market would:

A) Be at equilib riu m. C) Experience a surplus of 2 units.
B) Experience a shortage of 12 units. D) Experience a surplus of 25 units.
145. In Table 3.1, if government held the price at $3:

A) The government would be setting an effective price ceiling.
B) The shortage would be the same as the quantity demanded.
C) There would be a surplus.
D) The market would be in equilibrium.
146. In Table 3.1, the equilibrium market quantity would be:

A) 17 units. B) 15 units. C) 25 units. D) 35 units.
Page 24
147. In Table 3.1, the equilibrium market price would be:

A) $4. B) $3. C) $2. D) $1.
For the indicated questions, choose the letter of the diagram in Figure 3.2 that best describes the type of shift that
would occur in each situation for the indicated market, ceteris paribus.
Figure 3.2
148. What will happen in the international gold market if Russia decides to open new mines and dump gold? (See
Figure 3.2.)
A) A. B) B. C) C. D) D.
149. What will happen in the oil market if Russia, a majo r producer of oil, finds its oil reserves are becoming more
difficult to exploit, its equipment is deteriorating, and it does not have the financing to improve the
equipment? (See Figure 3.2.)
A) A. B) B. C) C. D) D.
150. Suppose there is a breakdown in the Russian transportation system. If this raised the cost of shipping grain,
what would be the impact on the Russian grain market? (See Figure 3.2.)
A) A. B) B. C) C. D) D.
Page 25
151. If massive unemployment occurs in Russia, households will have less to spend on consumer goods. What
would be the impact on the market for consumer goods? (See Figure 3.2.)
A) A B) B C) C D) D
Complete Table 3.2. Then answer the indicated questions.
Table 3.2
Demand and supply for trucks (millions of trucks per year)
Price Americans Rest of World Worldwide Market
(per truck)
$50,000 5 10 __________
40,000 10 20 __________
30,000 20 40 __________
20,000 40 60 __________
Price Americans Rest of World World wide Market
(per truck)
$50,000 40 60 __________
40,000 30 50 __________
30,000 20 40 __________
20,000 15 5 __________
152. In Table 3.2, if the worldwide price of trucks were $30,000, the international truck market would:
A) Be at equilibrium.
B) Experience a shortage of 50 million trucks per year.
C) Experience a surplus of 50 million trucks per year.
D) Experience a shortage of 85 million.
153. In Table 3.2, if the worldwide price of trucks were $50,000, the international truck market would:
A) Be at equilibrium.
B) Experience a shortage of 15 million trucks per year.
C) Experience a surplus of 100 million trucks per year.
D) Experience a surplus of 85 million trucks per year.
154. In Table 3.2, the equilibrium price in the international truck market would be:
A) $40,000. B) $30,000. C) $80,000. D) $50,000.
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155. In Table 3.2, the equilibrium quantity demanded in the international truck market would be:
A) 30 million trucks per year. C) 60 million trucks per year.
B) 100 million trucks per year. D) 15 million trucks per year.
Figure 3.3
Supply and demand
Supply
$10
$8
Dollars Per Unit
$6
$4
$2
Demand
$0
10 20 30 40 50
Quantity
156. The equilibrium price and quantity in Figure 3.3 are, respectively:
A) $6 and 30 units. B) $4 and 20 units. C) $8 and 20 units. D) $8 and 40 units.
157. If the actual market price were fixed at $10 per unit in Figure 3.3:
A) There would be a surplus of 40 units. C) There would be a surplus of 20 units.
B) There would be a shortage of 10 units. D) There would be a shortage of 20 units.
158. Figure 3.3 indicates that:

A) The lowest price at which sellers are willing and able to supply 40 units is $4.
B) The highest price at which buyers are willing and able to buy 40 units is $4.
C) A surplus of 40 units would result if the market price were $4.
Page 27
Figure 3.4
Supply and demand
Supply
$25
$20
Dollars Per Unit
$15
$10
$5
Demand
$0
10 20 30 40 50
Quantity
159. Equilibrium price and quantity in Figure 3.4 occur at:

A) A price of $15 and a quantity of 10 units. C) A price of $20 and a quantity of 20 units.
B) A price of $15 and a quantity of 30 units. D) A price of $10 and a quantity of 30 units.
160. If a price ceiling of $10 was in effect in Figure 3.4:

A) A shortage of 20 units would occur. C) A shortage of 10 units would occur.
B) A surplus of 20 units would occur. D) A surplus of 10 units would occur.
161. In Figure 3.4, at a price of $20:

A) The market is in equilibrium.
B) The quantity demanded is greater than the quantity supplied.
C) The quantity supplied is greater than the quantity demanded.
D) A shortage exists.
Page 28
162. Using Figure 3.4, at a price of $5

A) The quantity demanded is 10 units. C) The quantity supplied is 30 units.
B) The quantity demanded is 50 units. D) The quantity supplied is 50 units.
Figure 3.5
Supply and demand
Supply
$50
$40
Dollars Per Unit
$30
$20
$10
Demand
$0
10 20 30 40 50
Quantity
163. In Figure 3.5, equilibrium occurs at a:

A) Price of $10 and a quantity of 10 units. C) Price of $30 and a quantity of 30 units.
B) Price of $20 and a quantity of 20 units. D) Price of $40 and a quantity of 20 units.
164. In Figure 3.5, excess supply exists:

A) At a price of $10. B) At a price of $20. C) At a price of $30. D) At a price of $40.

A) The quantity supplied is greater than the quantity demanded.
B) There is a surplus of 20 units.
C) With no interference in the market, there is a downward pressure on price.
Page 29

A) A shortage of 20 units exists. C) Price is above the equilibrium price.
B) A surplus of 20 units exists. D) The quantity demanded is 10 units.
Figure 3.6
S0 S0 S1 S1
Price Per Unit
Price Per Unit

Price Per Unit
Price Per Unit
S1 S1 S0 S0
D1 D0 D1 D0
D0 D1 D0 D1
Quantity Quantity Quantity Quantity

A B C D
167. Which panel of Figure 3.6 represents the changes in the market for insulation when the cost of heating homes
increases and the workers who install insulation get lower wages?
A) A B) B C) C D) D
168. Which panel of Figure 3.6 represents the changes in the market for beef when the price of corn (cattle feed)
falls and the surgeon general reports that red meat contributes to heart disease?
A) A B) B C) C D) D
169. Which panel of Figure 3.6 represents the changes in the market for cigarettes when the government increases
subsidies for the production of tobacco and at the same time bans smoking in public buildings?
A) A B) B C) C D) D
170. Which panel of Figure 3.6 represents the changes in the market for textbooks when the cost of paper increases
and the government ceases to make student loans?
A) A B) B C) C D) D
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For the following questions, choose the letter of the diagram in Figure 3.7 that best describes the type of shift that
would occur in each situation for the U.S. farming market, ceteris paribus.
Figure 3.7
171. OPEC raises oil prices, which causes a significant increase in the cost of fuel for tractors and other farm
vehicles.
A) A B) B C) C D) D
172. The Freedom to Farm Act reduces subsidies to U.S. farmers.

A) A B) B C) C D) D
173. The U.S. population becomes more weight conscious and consumes less of all foods.
A) A B) B C) C D) D
174. Improvements in crops allow farmers to use fewer pesticides and other chemicals, which reduces costs.
A) A B) B C) C D) D
175. The government allows ethanol, a corn-based product, to be used in place of petroleum-based fuel.
A) A B) B C) C D) D
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176. As the population grows, the need for food grows as well.
A) A B) B C) C D) D
177. The weather is particularly favorable for crops throughout the Unit ed States for the entire year.
A) A B) B C) C D) D
178. One In the News article in the text describes how a decrease in PC prices caused an increase in the quantity
sold. This illustrates the:
A) Law of demand.
B) Direct relationship between price and quantity demanded.
C) Law of supply.
D) Indirect relationship between price and quantity supplied.
179. One In the News article in the text, “PC Prices Fall with Demand,” suggests that a decrease in demand caused
prices to fall. In this case, weak demand caused a:
A) Shortage to exist and producers responded by decreasing their prices.
B) Surplus to exist and producers responded by decreasing their prices.
C) Surplus to exist and producers responded by increasing their prices.
D) New equilibrium to exist where equilibrium price was lower and equilibrium quantity was higher.
180. The In the News article, “Californ ians Pinched by Power Prices,” suggests that electricity prices increased in
California. This increase was most likely caused by:
A) An increase in factor costs. C) Reduced consumption by consumers.
B) Weak demand. D) Too little regulation by the state government.
181. The In the News article, “Californ ians Pinched by Power Prices,” suggests that electricity prices increased in
California because of a decrease in supply. The reduced supply caused:
A) A surplus to exist at the original equilibrium price.
B) Consumers to pay lower prices as they reduced their energy consumption.
C) A shortage to exist at the original equilibrium price.
D) A decrease in demand as the price increased.
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182. One In the News article in the text described how some U2 concert fans waited for as long as five days for the
ticket office to open to beat "the scalpers." Apparently the $28.50 price of the ticket was:
A) Too low for equilibrium, resulting in a surplus of tickets.
B) Too low for equilibrium, resulting in a shortage of tickets.
C) Too high for equilibrium, resulting in a surplus of tickets.
D) Too high for equilibrium, resulting in a shortage for tickets.
183. One In the News article in the text described how some U2 concert fans waited for as much as five days for
the ticket office to open to beat "the scalpers." If the price of tickets had been allowed to reach its equilib riu m
level, which of the following would most likely have occurred?
A) Scalpers would have been seen before the concert selling tickets at very high prices.
B) Fewer people would have lined up to wait for the sale of tickets.
C) A larger stadium would have been needed to accommodate those who could not get tickets.
D) More people would have lined up to wait for the sale of tickets.
184. One In the News article in the text is titled "Federal Price Limits Backfire." The article emphasizes that price
ceilings cause:
A) A surplus. B) A shortage. C) Supply to increase. D) Demand to decrease.
185. One In the News article in the text is titled "Federal Price Limits Backfire." Which of the following occurred
in California as a result of the rate caps?
A) An increase in consumer confidence because of a stable power supply.
B) An increase in profits for power producers.
C) Rolling blackouts because of a shortage of power.
D) An increase in the supply of power in response to demand.
MARKET PARTICIPANTS
T F 186. As a result of specialization and trade individuals no longer have to make choices about how to
spend their incomes.
T F 187. The basic goals of utility maximization, profit maximization, and welfare maximization explain
most market activity.
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CIRCULAR FLOW
T F 188. Markets require a physical location to permit sellers to supply money to buyers for goods and
services.
T F 189. Land, labor, capital, and entrepreneurship are bought and sold in the product market.
DEMAND
T F 190. According to the law of demand, a decrease in price leads to an increase in quantity demanded.
T F 191. When the number of buyers in a market changes, the market-demand curve for goods and services
shifts.
T F 192. A change in price changes the quantity demanded and is represented by a movement alon g the
demand curve.
T F 193. A decrease in price increases the demand for goods purchased by consumers.
T F 194. The demand schedule and demand curve remain unchanged only so long as the underlying
determinants of demand remain constant.
T F 195. If the prices of the factors used to produce a good change, bo th the demand curve and the supply
curve of the good will shift.
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T F 196. If a large number o f people petition the government for free food, then there is a greater demand for
food.
T F 197. When the number of buyers in a market changes, the market demand curve for goods and services
also changes, even if individual demand curves do not shift.
T F 198. An increase in the price of one good can cause the demand for another good to increase if the goods
are substitutes.
T F 199. An increase in the price of one good can cause the demand for another good to increase if the goods
are complements.
SUPPLY
T F 200. When a seller sells a good, the supply curve shifts to the right.
T F 201. When individual supply curves shift, ceteris paribus, the market supply curve shifts.
T F 202. Both the supply and demand curves depend on expectations but the supply curve depends on the
expectations of the buyer and the demand curve depends on the expectations of the seller.
T F 203. The law of supply and the law of demand both rely on the concept of opportunity cost.
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EQUILIBRIUM
T F 204. The market price equals the equilib riu m price if quantity demanded equals quantity supplied, at the
market price.
T F 205. Market price is the same thing as equilibrium price.
T F 206. The market mechanism satisfies all consumer desires and maximizes business profits.
T F 207. There are never shortages or surpluses when the price in a market is equal to the equilibrium price
for the market.
T F 208. Scalping is likely to appear when price is set below equilibrium price by the seller.
T F 209. In California, market shortages of electricity are the result of price ceilings.
T F 210. In California, price ceilings on electricity have caused an increase in demand.
T F 211. In California, market shortages of electricity are the result of good government regulation.
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Answers to Table
Table 3.1 Answer
Individual demand and supply schedules
Price Al Betsy Casey Marke
t
$4.00 4 2 1 7
3.00 6 2 2 10
2.00 10 2 3 15
1.00 12 2 3 17
Price Alic Butch Conni Marke
e e t
$4.00 15 9 11 35
3.00 8 7 10 25
2.00 6 3 6 15
1.00 0 0 5 5
Table 3.2 Answer

Demand and supply for trucks (millions of trucks per year)
Price Americans Rest of Worldwide
World Market
(per
truck)
$50,000 5 10 15
40,000 10 20 30
30,000 20 40 60
20,000 40 60 100
Price Americans Rest of Worldwide
World Market
(per
truck)
$50,000 40 60 100
40,000 30 50 80
30,000 20 40 60
20,000 15 5 20
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Consumer Choice + Elasticity
THE DETERMINANTS OF DEMAND
1. Status and ego considerations in consumption are:

A) Sociopsychiatric explanations of demand. C) An example of income.
B) Economic determinants of demand. D) All of the above.
2. A movement along a given demand curve between two prices refers to:
A) The price elasticity of demand. C) A change in quantity demanded.
B) A change in demand. D) The law of diminishing marginal utility.
3. When the demand for a good increases:

A) Consumers are willing and able to pay only lower prices for any given quantity of the good.
B) Consumers desire to have more of the good.
C) Consumers are willing and able to purchase greater quantities of the good at any given price.
D) There is movement along the demand curve.
THE DEMAND CURVE
4. Utility refers to the:

A) Satisfaction obtained from a good or service.
B) Additional satisfaction obtained from one more unit of a good or service.
C) Willingness to buy specific quantities of a good or service at a particular price.
D) Decrease in satisfaction as more of a good or service is consumed.
5. Which of the following determinants of demand is most directly an indication of a consumer's utility for a
good?
A) Income. B) Tastes. C) Expectations of future prices. D) Other goods (availability and prices).
6. The amount of satisfaction obtained from consumption of an additional unit of a good or service is:
A) Never negative. B) Total utility. C) A function of supply. D) Marginal utility.
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7. Marginal utility for a good is computed as:
A) Total utility divided by quantity.
B) Quantity divided by total utility.
C) The change in quantity divided by total utility.
D) The change in total utility divided by the change in quantity.
8. The additional pleasure or satisfaction from a good declines as more of it is consumed in a given period. This
is the definition of the:
A) Law of demand. C) Law of diminishing total utility.
B) Law of d iminishing marg inal utility. D) Total revenue rule.
9. According to the law of diminishing marginal utility:

A) Consumers will purchase more of a good at a lower price, ceteris paribus.
B) Consumers maximize total utility when the marginal utility per dollar spent is equal for all goods
consumed.
C) Each successive unit of a good consumed yields less additional utility.
D) Consumers behave rationally when the price of a good equals the marginal utility of the good.
10. The law of diminishing marginal utility suggests that:

A) People are willing to buy additional quantities of a good only if its price falls.
B) People will substitute lower-priced goods for more expensive goods, ceteris paribus.
C) Price and quantity demanded are directly related.
D) As marginal utility decreases, the willingness to pay increases.
11. As more satisfaction is achieved from consuming a good with dimin ishing marg inal utility, then total utility:
A) Increases at a decreasing rate.
B) Decreases as long as marginal utility is negative.
C) Decreases as long as marginal utility is positive.
D) Is negative as long as marginal utility is decreasing.
12. At some point during a meal each extra bite provides less and less additional satisfaction. This can be
explained by:
A) The law of demand. C) The law of increasing opportunity cost.
B) The law of dimin ishing marginal utility. D) A shift in the demand curve.
13. Jose goes to an all-you-can-eat buffet at a Chinese restaurant and consumes three plates of food. He does not
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go back for a fourth plate of food because:
A) The price of the fourth plate is too high.
B) He has reached the point of increasing marginal utility.
C) The marginal utility of the fourth plate would be zero or even negative.
D) His total utility would increase with the fourth plate of food.
14. As consumption increases, total utility must:

A) Fall. C) Increase only if marginal utility increases.
B) Increase as long as marg inal ut ility is positive. D) Increase.
15. If marginal utility is negative, then:

A) Total utility will increase with additional consumption.
B) Total utility will decrease with additional consumption.
C) The good or service being consumed is an inferior good.
D) Total utility is at a minimum.
16. Total utility is maximized when:

A) Price is less than marg inal utility. C) Marginal utility is zero.
B) Price is equal to marginal utility. D) Marginal utility is maximized.
17. Which of the following is not held constant when considering the demand for pizza?
A) Consumer inco mes. C) The price of spaghetti (a substitute).
B) The price of pizza. D) Expectations of higher prices for pizzas.
18. If a good had a zero price (i.e. the good was free), a rational person would consume:
A) An infinite amount of the good.
B) The good until total utility was zero.
C) The good until the marginal utility was maximized.
D) The good until the marginal utility of the last unit was zero.
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19. The fact that a cup of gold is normally priced higher than a cup of water suggests that:
A) The total utility of gold is higher than the total utility of water.
B) The marginal utility of a cup of gold is greater than the marginal utilit y of a cup of water.
C) Gold is a normal good while water is an inferior good.
D) There are more substitutes for water than for gold.
20. According to the law of demand, ceteris paribus:

A) The quantity demanded increases at lower prices.
B) A consumer will purchase more of a good at higher prices than at lower prices.
C) Price and quantity supplied are directly related.
D) The responsiveness of consumer demand to a change in the price of a good is measured by the price
elasticity of demand.
PRICE ELASTICITY
21. Price elasticity of demand shows how:

A) To compute the slope of the demand curve.
B) Quantity demanded responds to price changes.
C) Quantity demanded responds to changes in the price of other goods.
D) Price responds to quantity changes.
22. The price elasticity of demand is defined as the:

A) Percentage change in quantity demanded times the percentage change in price.
B) Unit change in price divided by the unit change in quantity demanded.
C) Percentage change in quantity demanded divided by the percentage change in price.
D) Unit change in quantity demanded times the unit change in price.
23. For downward-sloping linear demand curves, the price elasticity of demand:
A) Is constant at each point on the curve. C) Tends to be elastic at relatively low prices.
B) Varies throughout the demand curve. D) Is equal to the slope of the demand curve.
24. The price elasticity of demand for a good is likely to be elastic if the marginal utility for that good:
A) Decreases slowly as additional units are consumed.
B) Remains constant as additional units are consumed.
C) Increases rapidly as additional units are consumed.
D) Decreases rapidly as additional units are consumed.
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25. The demand curve is typically downward sloping because:
A) Of the law of diminishing marginal utility.
B) Consumers will not to pay as much for a good with a low marginal utility as they will for a good with a
high marginal utility.
C) Consumers have limited budgets.
26. Assume the price elasticity of demand for U.S. Frisbee Co. frisbees is –0.5. If the co mpany increases the price
of each frisbee from $6 to $8, the number of frisbees sold will:
A) Decrease by 14.3 percent. C) Increase by 20.0 percent.
B) Decrease by 33.3 percent. D) Increase by 7.0 percent.
27. Assume the price elasticity of demand for JT Chip Co. chips is –2.0. If the company decreases the price of
each bag of chips from $1.89 to $1.49, the number of bags sold will:
A) Decrease by 39 percent. C) Increase by 24 percent.
B) Increase by 47 percent. D) Increase by 39 percent.
28. The price elasticity of demand is calculated using percentage changes in order to:
A) Avoid mistaking elasticity with slope.
B) Make elasticity a percentage figure.
C) Avoid problems associated with units of measurement.
D) Find a constant elasticity along each demand curve.
29. For product X, the price elasticity of demand has an absolute value of 2. Th is means that quantity demanded
will increase by:
A) 1 percent for each 2 percent decrease in price, ceteris paribus.
B) 1 unit for each $2 decrease in price, ceteris paribus.
C) 2 percent for each 1 percent decrease in price, ceteris paribus.
D) 2 units for each $1 decrease in price, ceteris paribus.
30. Assume the price elasticity of demand has an absolute value of 4 for a particular good. This means that
quantity demanded will decrease by:
A) 4 percent for each 1 percent increase in price, ceteris paribus.
B) 1 unit for each $4 increase in price, ceteris paribus.
C) 1 percent for each 4 percent increase in price, ceteris paribus.
D) 4 units for each $1 increase in price, ceteris paribus.
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31. Suppose the quantity demanded of U.S. cars falls from 4.0 million to 3.0 million as a result of an average
price increase from $20,000 to $25,000 per vehicle. The absolute value of the price elasticity of demand is
closest to:
A) 0.20. B) 1.29. C) 0.78. D) 0.29.
32. Suppose a university raises its tuition by 4 percent and as a result the enrollment of students decreases by 2
percent. The absolute value of the price elasticity of demand is:
A) 0.50. B) 2.0. C) 8.0. D) 6.0.
33. Suppose Harley Davidson increases the price of a particular model of motorcycle by 3 percent and as a result
sales of the model decreases by 1 percent. The absolute value of the price elasticity of demand is:
A) 4.0. B) 3.0. C) 2.0. D) 0.33.
34. A demand curve is described as perfectly inelastic if:

A) The same quantity is purchased regardless of price.
B) The same price is charged regardless of quantity sold.
C) Only quantity demanded can change.
D) It is horizontal.
35. A demand curve that is completely inelastic is:

A) Horizontal. B) Vertical. C) Upward sloping. D) Downward sloping.
36. When the percentage change in quantity demanded is less than the percentage change in price, ceteris
paribus:
A) Demand is elastic. C) Demand is unitary elastic.
B) Demand is inelastic. D) Elasticity is impossible to calculate.
37. A demand curve is described as perfectly elastic if:

A) The same quantity is purchased regardless of price.
B) The same price is charged regardless of quantity sold.
C) Only price can change.
D) It is vertical.
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38. A demand curve that is completely elastic is:
A) Horizontal. B) Vertical. C) Upward sloping. D) Downward sloping.
39. When the percentage change in quantity demanded is greater than the percent age change in price, ceteris
paribus:
A) Demand is unitary elastic. C) Demand is elastic.
B) Demand is inelastic. D) Elasticity is impossible to calculate.
40. Which of the following influences the price elasticity of demand?

A) Availability of substitutes. B) Price relative to budget. C) Length of time. D) All of the above.
41. Which of the following would be most likely to have a price-elasticity coefficient greater than 1?
A) Cigarettes. B) Coffee. C) An addictive drug. D) Restaurant meals.
42. Which of the following would be most likely to have a price-elasticity coefficient less than 1?
A) An addictive drug. B) Airline travel. C) Restaurant meals. D) New cars.
43. Which of the following is likely to have the most inelastic price elasticity of demand?
A) Automobiles. B) Pickup trucks. C) Hondas. D) The Hondas one Honda dealer sells.
44. Which of the following is likely to have the most elastic price elasticity of demand?
A) Food.
B) Fruit.
C) Peaches.
D) Farmer Betty's peaches (which are exactly like all the other farmer's peaches).
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45. Ceteris paribus, as the number of substitutes for a good increase, the:
A) Price elasticity of demand should become smaller.
B) Price elasticity of demand should become larger.
C) Cross-price elasticity of demand should become negative.
D) Income elasticity of demand should become negative.
46. Ceteris paribus, as the number of substitutes for a good decrease, the:
47. Ceteris paribus, as the number of substitutes for a good increases the:
48. Which of the following causes demand to be more elastic with respect to price?
A) Shorter periods of time to adjust to a change in price.
B) A steeper demand curve for a given price and quantity.
C) Fewer substitutes.
D) A high ratio of price to income.
49. Ceteris paribus, the higher the ratio of price to income for a particular good, the:
A) More elastic the demand for the good. C) More unitary elastic the demand for the good.
B) Less elastic the demand for the good. D) Smaller the income elasticity for the good.
50. Ceteris paribus, the lower the ratio of price to income for a particular good, the:
A) More elastic the demand for the good. C) More unitary elastic the demand for the good.
B) Less elastic the demand for the good. D) Smaller the income elasticity for the good.
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51. Which of the following causes demand to be less elastic with respect to price?
A) A longer period of time to adjust to a change in price.
B) A flatter demand curve for a given price and quantity.
C) More substitutes.
D) A low ratio of price to income.
52. Ceteris paribus, the longer the time period, the:

A) Smaller the inco me elasticity for the good. C) More unitary elastic the demand for the good.
B) Less elastic the demand for the good. D) More elastic the demand for the good.
53. Which of the following causes demand to be more elastic with respect to price?
A) Longer periods of time to adjust to a change in price.
B) A lower ratio of price to income.
C) Fewer substitutes.
PRICE ELASTICITY AND TOTAL REVENUE
54. The total revenue effect of a movement along a demand curve can best be predicted using the:
A) Law of d iminishing marg inal utility. C) Utility-maximizing rule.
B) Price elasticity of demand. D) Law of demand.
55. The local baseball team owner hires you to help maximize the team's profits. You are told that costs are
constant because enough help is always hired in case of a full stadium, so assume your task is to maximize
revenues from ticket sales. Your advice to the owner should be:
A) Set the ticket price in the inelastic region of the demand curve in order to increase revenues.
B) Raise the price as high as possible until the number of tickets sold begins to fall.
C) Set the price as low as possible to make sure the stadium is always full.
D) Set the price of tickets at the unitary elasticity price.
56. Assume a good has a downward-sloping, linear demand curve. As the price of this good increases, total
revenue:
A) Increases indefinitely.
B) Decreases indefinitely because the quantity sold will decrease.
C) Remains constant.
D) Increases then decreases.
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57. Assume a good has a downward-sloping, linear demand curve. As its price increases, consumer expenditures
on this good:
A) Increase indefinitely.
B) Decrease indefinitely because the quantity sold will decrease.
C) Remain constant.
D) Increase then decrease.
58. Moving downward along a linear demand curve results in more:

A) Inelastic demand and a changing slope. C) Elastic demand and a changing slope.
B) Inelastic demand but a constant slope. D) Elastic demand and a constant slope.
59. If the price elasticity of demand is 2.0, and a firm raises its price by 10 percent, the quantity sold by the firm
will:
A) Increase by 10 percent. C) Decrease by 20 percent.
B) Decrease by 10 percent. D) Increase by 20 percent.
60. If the price elasticity of demand is 1.0, and a firm raises its price by 15 percent, the quantity sold by the firm
will:
A) Fall by 15 percent. B) Fall by 6.7 percent. C) Rise by 15 percent. D) Rise by 150 percent.
61. If the price elasticity of demand is 1.0, and a firm raises its price by 10 percent, the total revenue will:
A) Rise by 10 percent. B) Fall by 10 percent. C) Not change. D) Rise by 100 percent.
62. Suppose AAA Airlines is suffering from low revenues and profits. If the company wants to increase ticket
revenue and the price elasticity of demand is 0.75, the company should:
A) Increase the price of tickets.
B) Decrease the price of tickets.
C) Keep the price unchanged because if the price is either increased or decreased total revenues will fall.
D) Advertise. The only option the company has to raise total revenues is to advertise.
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63. Ashley has budgeted $40 per month for candy bars. No matter how the price of candy bars changes, she
spends exactly $40 per month. What does this behavior imply about Ashley's price elasticity of demand for
candy bars?
A) Her price elasticity of demand must equal zero.
B) Her price elasticity of demand must be unitary.
C) Her price elasticity of demand must be very inelastic since the amount he spends is not responsive to a
price change.
D) Her price elasticity of demand must be very elastic since the quantity demanded can change significantly
if the price of candy bars changes significantly.
64. Assume the price elasticity of demand for Great Fit Shoe Co. shoes is –1.5. If the company decreases the
price of each pair of shoes, total revenue will:
A) Increase because more shoes will be sold.
B) Decrease because the company will be receiving less revenue per pair of shoes.
C) Increase because the percentage increase in the nu mber sold is greater than the percentage decrease in the
price.
D) Impossible to predict because we do not know the percentage change in price.
65. Assume the price elasticity of demand for M C Pret zel Co. p retzels is –0.8. If the co mpany increases the price
of each bag of pretzels, total revenue will:
A) Decrease because fewer bags will be sold.
B) Increase because the company will be receiving more revenue per bag.
C) Increase because the percentage increase in the price is greater than the percentage decrease in the
number of bags sold.
D) Impossible to predict because we do not know the percentage change in price.
66. When demand is price inelastic, ceteris paribus:

A) An increase in price leads to lower total revenue.
B) An increase in total revenue means quantity rises.
C) An increase in total revenue indicates a reduction in price.
D) An increase in price leads to greater total revenue.
67. Maximum total revenue occurs when:

A) Total revenue is 1.0.
B) The absolute value of the price elasticity of demand is 1.0.
C) Price multiplied by quantity is 1.0.
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68. A price cut will increase the total revenue a firm receives, ceteris paribus, only if the demand for its product
is:
A) Elastic. B) Inelastic. C) Unitary elastic. D) Perfectly inelastic.
OTHER ELASTICITIES
69. Which of the following would best measure the effects of a recession?
A) Income elasticity of demand. C) Cross-price elasticity of demand.
B) Price elasticity of demand. D) Utility-maximizing rule.
70. Suppose the income elasticity of demand for U.S. automobiles is 2.0. If the level of income decreases by 1
percent, the number of U.S. automobiles sold will, ceteris paribus:
A) Rise 0.5 percent. B) Rise 2.0 percent. C) Fall 0.5 percent. D) Fall 2.0 percent.
71. Suppose income falls 1 percent in a year and as a result construction of new ho mes falls fro m 18 million to 16
million units annually. The value of the income elasticity of demand for housing is closest to:
A) 1.13. B) 0.89. C) 2.0. D) 11.8.
72. Suppose the income elasticity of demand for used automobiles is 3.0. If the level of income decreases by 1
percent, the number of used automobiles sold will, ceteris paribus:
A) Rise 0.33 percent. B) Rise 3.0 percent. C) Fall 0.33 percent. D) Fall 3.0 percent.
73. Suppose income falls 5 percent in a year and as a result, housing construction falls from 10 million to 5
million units annually. Based on this information housing starts are:
A) An inferior good. B) A normal good. C) Price elastic. D) Price inelastic.
74. Other things being equal, if inco me increases and as a result, the demand for good X increases, then good X is:
A) An inferior good. B) A luxury good. C) A substitute good. D) A normal good.
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75. Other things being equal, if income increases and as a result, the demand for good X increases and the
demand for good Y falls:
A) Good X is an inferior good and good Y is a normal good.
B) Good X is a normal good and good Y is an inferior good.
C) Goods X and Y are substitute goods.
D) Goods X and Y are complementary goods.
76. Other things being equal, if income increases and as a result, the demand for good X decreases, then good X
is:
A) An inferior good. B) A normal good. C) A substitute good. D) A complementary good.
77. Which of the following is most likely an inferior good?

A) A Mercedes-Benz automobile. C) A black-and-white television set.
B) An original work of art. D) A luxury vacation.
78. Suppose computer prices at an office supply store fall from $1,000 to $900 and as a result the quantity
demanded of typewriters decreases from 40 to 20 per month. The cross -price elasticity is closest to:
A) 0.16. B) 0.2. C) 5.0. D) 6.3.
79. Assume apples and oranges are substitutes. Suppose apple growers launch a very successful advertising
campaign that convinces consumers apples are a better product. As a result the cross -price elasticity of apples
and oranges will become:
A) Less negative (move closer to zero). C) Less positive (move closer to zero).
B) More negative. D) More positive.
80. Other things being equal, if the price of good X increases and as a result, the demand for good Y increases:
A) Goods X and Y are inferior goods. C) Goods X and Y are complementary goods.
B) Goods X and Y are normal goods. D) Goods X and Y are substitute goods.
81. Other things being equal, if the price of coffee increases significantly, the:
A) Demand for coffee substitutes will decrease. C) Demand for coffee substitutes will increase.
B) Demand for coffee will decrease. D) Quantity demanded of coffee will increase.
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82. If goods X and Y are substitute goods, an increase in the price of X will, ceteris paribus:
A) Decrease the demand for X. C) Increase the demand for Y.
B) Decrease the demand for Y. D) Not change the demand for Y.
83. When the prices of postage stamps rise, the demand for Internet service increases, ceteris paribus. Postage
stamps and Internet service are therefore:
A) Elastic. B) Inelastic. C) Complements. D) Substitutes.
84. Suppose the price of video game cartridges falls from $40 to $20 and as a result the quantity demanded of
bicycles falls from 40,000 to 20,000 per year. The value of the cross -price elasticity is:
A) Zero. B) 1.0. C) 10.0. D) 2.0.
85. Suppose the price of Honda motorcycles increases by 10 percent and as a result, Harley -Davidson
experiences a 5 percent rise in the quantity of motorcycles demanded. The value of the cross -price elasticity
for Harley-Davidson motorcycles is:
A) 0.5. B) 2.0. C) -0.5. D) 5.0.
86. If goods X and Y are complementary goods, an increase in the price of X will, ceteris paribus:
A) Decrease the demand for X. C) Increase the demand for Y.
B) Decrease the demand for Y. D) Not change the demand for Y.
87. If goods X and Y are complementary goods, a decrease in the price of X will, ceteris paribus:
A) Increase the demand for X. C) Not change the demand for Y.
B) Decrease the demand for Y. D) Increase the demand for Y.
88. Other things being equal, if the price of good X increases and as a result, the demand for good Y decreases,
goods X and Y are:
A) Inferior goods. B) Normal goods. C) Complementary goods. D) Substitute goods.
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89. If DVD players and DVDs are co mplementary goods, an increase in the price of DVDs will, ceteris paribus:
A) Increase the quantity demanded of DVDs.
B) Increase the quantity demanded of DVD players.
C) Reduce the demand for DVD players.
D) Reduce the demand for DVDs.
90. Suppose the cross-price elasticity of demand for automobiles with respect to the price for gasoline is -0.10. If
gasoline prices rise 20 percent, then automobile sales should, ceteris paribus:
A) Fall by 2 percent. B) Fall by 50 percent. C) Rise by 2 percent. D) Rise by 50 percent.
CHOOSING AMONG PRODUCTS
91. When two or more goods are being purchased, optimal consumptio n is achieved when:
A) Opportunity costs relative to utility are zero for all goods.
B) Marginal utility equals zero.
C) The price elasticity of demand is greatest.
D) The ratio of marginal utility to price is the same for all goods.
92. Assume that Heather always maximizes her total utility given her budget constraint. Every morning for
breakfast Heather has two eggs and three sausages. If the marginal utility of the last eg g is 20 utils and the
price of eggs is $1 each, what can we say about the marginal utility of the last sausage if the price of each
sausage is $2?
A) It must be equal to 40 utils. C) It must be equal to 10 utils.
B) It must be equal to 20 utils. D) Indeterminate.
93. Suppose that Jason has allocated his entire budget to the purchase of apples and bananas. The marginal utility
of the last apple purchased is 10 utils and each apple costs 10 cents. The marginal utility of the last banana
purchased is 10 utils and each banana costs 5 cents. Brian should:
A) Select more apples and fewer bananas because he likes apples more than bananas.
B) Select more bananas and fewer apples because of the lower price for bananas.
C) Select more bananas and fewer apples because he gets more marginal utility per dollar from bananas.
D) Jason has made the choice that gives him the most total utility.
94. Maximum utility is achieved when:

A) Total revenue is the greatest. C) Marginal utility is zero.
B) The price elasticity of demand is 1.0. D) All of the above.
Page 15
95. A consumer maximizes total utility from a given amount of income when the:
A) Marginal utility obtained from the last dollar spent on each good is the same.
B) Marginal utility of the last unit of each good is the same.
C) Total utility obtained from each product is the same.
D) Amount spent for each product is the same.
96. One of the objectives of advertising, from an economic perspective, is to shift the:
A) Supply curve to the left. C) Demand curve to the left.
B) Supply curve to the right. D) Demand curve to the right.
97. A successful advertising campaign will:

A) Increase the demand for the advertised good.
B) Increase the price elasticity of demand for the advertised good.
C) Cause the quantity supplied of the advertised good to increase.
98. The objective of advertising is to:

A) Increase demand and increase the price elasticity of demand.
B) Increase demand and decrease the price elasticity of demand.
C) Increase demand only.
D) Decrease demand and make the price elasticity of demand unitary.
99. A successful advertising campaign will affect the:

A) Supply of the advertised good. C) Quantity supplied of the advertised good.
B) Demand for the advertised good. D) Quantity demanded of the advertised good.
100. When Claudia goes to the gas station she buys 10 gallons of gas no matter what the price per gallon. What
does this imply about her price elasticity of demand for gasoline?
A) It is unitary. B) It is relatively elastic. C) It is perfectly inelastic. D) It is perfectly elastic.
Page 16
Figure 5.1
$200
180
160
120
(per unit)
100
Price
80
40
Demand
0
20 40 80 100 120 160
Quantity Demanded
(per period)
101. In Figure 5.1, total revenue is maximized at the unit price of:
A) $50. B) $60. C) $80. D) $100.
102. In Figure 5.1, at what price is the elasticity of demand unitary?

A) $100. B) $200. C) $40. D) $160.
103. In the $80 to $40 price range in Figure 5.1, demand is:
A) Perfectly price elastic. B) Price inelastic. C) Unitary price elastic. D) Price elastic.
104. If price were raised from $100 to $120 in Figure 5.1, ceteris paribus:
A) Demand would decrease. C) Total revenue would increase.
B) Quantity demanded would increase. D) Total revenue would decrease.
105. In the $160 to $180 price range in Figure 5.1, the absolute value of the price elasticity of demand is:
A) 9.0. B) 1.0. C) 5.7. D) 0.175.
Page 17
106. Over the price range from $80 to $40 in Figure 5.1, ceteris paribus:
A) Demand is inelastic. C) Demand is increasing.
B) Total revenue is maximized. D) All of the above are correct.
Figure 5.2
$100
90
80
(per unit)
60
Price
50
40
20 Demand
0
10 20 40 50 60 80
Quantity Demanded
(per period)
107. In Figure 5.2, total revenue is maximized at the unit price of:
A) $40. B) $80. C) $60. D) $50.
108. In the $40 to $20 price range of Figure 5.2, demand is:
A) Perfectly p rice elastic. C) Unitary price elastic.
B) Perfectly p rice inelastic. D) Relatively price inelastic.
109. If price were raised from $80 to $90 in Figure 5.2, ceteris paribus:
A) Demand would decrease. C) Total revenue would remain the same.
B) Total revenue would decrease. D) Total revenue would be maximized.
Page 18
110. In the $40 to $20 price range of Figure 5.2, the absolute value of the price elasticity of demand is closest to:
A) 2.0. B) 1.0. C) 2.3. D) 0.4.
111. If price were reduced from $80 to $60 in Figure 5.2, ceteris paribus:
A) Total revenue would increase. C) We can be certain that profits would increase.
B) Demand would increase. D) All of the above are correct.
112. In Figure 5.2, consumer expenditures on this good are maximized at a price of:
A) $100. B) $50. C) $20. D) $60.
Complete Table 5.1. Then use the information in the table to answer the indicated questions.
Table 5.1
Utility schedule
Quantity Total Marginal

consumed utility utility
1 10 10
2 _____ 6
3 18 _____
4 _____ 1
113. In Table 5.1, the marginal utility of the third unit is:
A) 18. B) 6. C) 2. D) 1.
114. In Table 5.1, the total utility when two units are consumed is:
A) 10. B) 16. C) 18. D) 19.
115. In Table 5.1, the total utility when four units are consumed is:
A) 19. B) 53. C) 18. D) 10.
Page 19
116. In Table 5.1, diminishing marginal utility occurs:
A) With the second and fourth units only. C) Only with the second unit.
B) With the first and third units. D) With all units after the first.
Complete Table 5.2. Then use the information in the table to answer the indicated questions.
Table 5.2
Utility schedule

1 25 25
2 _____ 22
3 60 _____
4 65 _____
117. In Table 5.2, the marginal utility of the third unit is:
A) 13. B) 60. C) 5. D) 22.
118. In Table 5.2, the marginal utility of the fourth unit is:
A) 22. B) 5. C) 60. D) 65.
119. In Table 5.2, the marginal utility of the fourth unit is:
A) 78. B) 65. C) 60. D) 5.
120. In Table 5.2, the total utility when two units are consumed is:
A) 25. B) 22. C) 47. D) 60.
Page 20
Table 5.3
Demand schedule for automobiles
Price of auto Number of new autos

(dollars per auto) (millions per year)
$25,000 10
22,000 12
121. In Table 5.3, what is the total revenue from automobile sales at a price of $22,000 per auto?
A) $300 billion per year. C) $250 billion per year.
B) $264 billion per year. D) $14 billion per year.
122. Which of the following elasticities can be computed using the data in Table 5.3?
A) The price elasticity of demand. C) The cross-price elasticity of demand.
B) The income elasticity of demand. D) The quantity elasticity of demand.
123. What is the value of the price elasticity of demand wh ich can be calculated fro m the information in Table 5.3?
A) 0.70. B) 0.35. C) 0.67. D) 1.42.
124. In Table 5.3, as price increases from $22,000 per car to $25,000 per car:
A) The demand curve for cars shifts to the left. C) The quantity of cars demanded increases.
B) Total revenue falls. D) All of the above.
Table 5.4
Demand schedule for automobiles
Price of auto Number of new autos

(dollars per auto) (millions per year)
$20,000 10
18,000 30
Page 21
127. Which of the following elasticities can be computed using the demand schedule in Table 5.4?
A) The income elasticity of demand. C) The price elasticity of demand.
B) The cross-price elasticity of demand. D) The quantity elasticity of demand.
128. According to Table 5.4, the price elasticity of demand is.

A) 9.5, and total revenue will decrease if price decreases.
B) 9.5, and total revenue will increase if price decreases.
C) 0.11, and total revenue will decrease if price increases.
D) 0.11, and total revenue will increase if price decreases.
129. In Table 5.4, as price decreases from $20,000 per car to $18,000 per car:
A) There is movement along the demand curve. C) The quantity of cars demanded increases.
B) Total revenue increases. D) All of the above.
Co mplete Table 5.5. Then use the information in the table to answer the indicated questions. Assume the price of cola
is $4 per unit and the price of pretzels is $2 per unit.
Table 5.5
Michael's utility schedule
Units of TU of MU of
Units of cola TU of cola MU of cola pretzels pretzels pretzels
1 40 40 1 30 30
2 _____ 32 2 _____ 20
3 96 24 3 66 16
4 112 _____ 4 78 _____
5 124 _____ 5 84 _____
Page 22
130. In Table 5.5, what is the total utility of 2 units of cola?
A) 32. B) 40. C) 72. D) 96.
131. In Table 5.5, what is the marginal utility of the fifth unit of cola?
A) 6. B) 12. C) 16. D) 24.
132. Refer to Table 5.5. Suppose Michael has $8 to spend on cola and pretzels. What combina tion should he
purchase in order to maximize his utility?
A) 2 colas and 2 pret zels. C) 1 cola and 2 pretzels.
B) No colas and 4 pret zels. D) 2 colas and no pretzels.
133. Refer to Table 5.5. If Michael has $8 to spend on cola and pretzels, what is his maximu m utility?
A) 72. B) 78. C) 90. D) 138.
134. Refer to Table 5.5. If M ichael has $14 to spend on cola and pretzels, what combination should he purchase in
order to maximize his utility?
A) 2 colas and 3 pret zels. C) 3 colas and 1 pretzel.
B) 1 cola and 5 pret zels. D) 2 colas and 2 pretzels.
Figure 5.3
4
MARGINAL UTILITY
3
(utils)
0
1 2 3 4 5
6 7
-1
-2
QUANTITY OF APPLES
Page 23
135. Refer to Figure 5.3. The total utility of 5 apples is:
A) 1 utils. B) 17 utils. C) 18 utils. D) 20 utils.
136. Refer to Figure 5.3. The total utility of 2 apples is:

A) 2 utils. B) 5 utils. C) 6 utils. D) 11 utils.
137. Refer to Figure 5.3. Total utility is maximized at:

A) 6 apples. B) 7 apples. C) 1 apple. D) 3 apples.
138. Refer to Figure 5.3. With no budget constraint, a rational consumer will consume _________ apples.
A) Zero. B) One. C) Six. D) An infinite amount.
Figure 5.4
11
10
7
TOTAL UTILITY
6
(utils)
1
0
1 2 3 4 5 6
QUANTITY OF TACOS
139. Refer to Figure 5.4. Marginal utility:

A) Becomes negative at some level of taco consumption beyond 6 tacos.
B) May never become negative.
C) Becomes negative after the fourth taco.
D) Becomes negative after the first taco because of diminishing marginal utility.
Page 24
140. Refer to Figure 5.4. With no budget constraint, a rational consumer will consume _________ tacos.
A) Six. B) Four. C) Three. D) An infinite amount.
141. If tacos were free, the consumer represented in Figure 5.2 would consume:
A) An infinite amount. B) 6 tacos. C) 1 taco. D) 4 tacos.
Figure 5.5
A
PRICE
P2
P1
0
B A
QUANTITY
142. Refer to Figure 5.5. Assume the two demand curves in Figure 5.5 are parallel. Which curve is relatively more
price inelastic between P1 and P2 ?
A) AA.
B) BB.
C) Cannot be determined.
D) Both curves have the same slope and, therefore, the same price elasticity.
143. Refer to Figure 5.5. Assume the two demand curves in Figure 5.5 are parallel. Which curve is relatively more
price elastic between P1 and P2 ?
A) AA.
B) BB.
C) Cannot be determined.
D) Both curves have the same slope and, therefore, the same price elasticity.
Page 25
Figure 5.6
P1 •A
P2
•C
Demand
0 B D
QUANTITY
144. Refer to Figure 5.6. If the area 0P1 AB is less than the area 0P2 CD, we can conclude that the price elasticity of
demand between Point A and Point C is:
A) Elastic.
B) Inelastic.
C) Unitary.
D) Impossible to determine. It depends on whether the price has increased or decreased.
145. Refer to Figure 5.6. Suppose that the areas 0P1 AB and 0P2 CD are equal. We can conclude that the price
elasticity of demand between Point A and Point C is:
A) Elastic.
B) Inelastic.
C) Unitary.
D) Impossible to determine. It depends on whether the price has increased or decreased.
146. Refer to Figure 5.6. Comparing the price elasticity of demand at points A and C, we can say that:
A) The elasticities are the same because the points are on the same demand curve.
B) Point A has a greater price elasticity of demand.
C) Point C has a greater price elasticity of demand.
D) Indeterminate because specific price data is not given.
Page 26
147. One In the News article reports "… young women spend a lot more money on clothing, personal care items,
and their pets." A successful advertising campaign should shift the:
A) Demand curve to the left. C) Supply curve to the left.
B) Demand curve to the right. D) Supply curve to the right.
148. One In the News article differentiates the spending habits of wo men and men : "Men spend twice as much as
women do on television and stereo equipment … young women spend a lot more money on clothing,
personal care items, and their pets." Which determinant of demand is most likely involved?
A) Income. B) Tastes. C) Expectations. D) Other goods (availability and prices).
149. One of the lessons to be learned in the World View article titled "Cigarette Smuggling: A Lesson in Price
Elasticity" is:
A) Raising taxes on a good for which there are many substitutes may not result in higher revenues or
reduced consumption.
B) Raising taxes may encourage significant tax-evading behavior.
C) When high potential profits are involved, entrepreneurs will sometimes become involved in illegal
activities.
150. According to the World View article titled "Cigarette Smuggling: A Lesson in Price Elasticity," if all states
and countries raised cigarette taxes by the same amount at the same time, the price elasticity of demand of
cigarettes would be:
A) Less price elastic.
B) More price elastic.
C) Equal to unitary price elasticity.
D) The same as the cross-price elasticity of demand.
151. One In the News article states “For every 10 percent decline in the price, youth smoking rises by almost 7
percent…" Given this information, the price elasticity of demand for smoking amongst youth must be:
A) 0.70 and relat ively elastic. C) 1.42 and relatively elastic.
B) 0.70 and relat ively inelastic. D) 1.42 and relatively inelastic.
Page 27
152. One In the News article, titled "Stung By the Economy, Americans Lose Their Appetite for Dining Out,"
reports that a decrease in income causes a decrease in the consumption of restaurant meals . Based on this
information, restaurant meals are:
A) A complementary good. B) A substitute good. C) A normal good. D) An inferior good.
153. One In the News article, titled "Stung By the Economy, Americans Lose Their Appetite for Dining Out,"
reports that a decrease in income causes a decrease in the consumption of restaurant meals. Based on this
information, which of the following is true about restaurant meals?
A) Demand has shifted to the left.
B) Demand has shifted to the right.
C) There has been a decrease in quantity demanded.
D) There has been an increase in quantity demanded.
154. One In the News article is titled "DVD Sales are Soaring as Prices Drop." If a decrease in the price of DVDs
causes an increase in the sales of DVD players, then the two goods are:
A) Normal. B) Inferior. C) Substitutes. D) Complements.
155. One In the News article is titled "DVD Sales are Soaring as Prices Drop." If a decrease in the price of DVDs
causes an increase in the sales of DVD players, then:
A) The cross-price elasticity of demand is greater than zero.
B) The cross-price elasticity of demand is equal to zero.
C) The cross-price elasticity of demand is less than zero.
D) The price elasticity of demand must be elastic for DVD players.
APPENDIX
156. An indifference curve shows:

A) The maximu m utility that can be achieved for a given consumer budget.
B) The maximu m utility that can be achieved for different amounts of a good.
C) The combinations of goods giving equal utiity to a consumer.
D) The optimal consumption combinations between two goods.
157. Which of the following is used to depict alternative combinations of goods that are equally satisfying?
A) An indifference map. B) An indifference curve. C) A demand curve. D) A budget constraint.
Page 28
158. An indifference curve represents:
A) All combinations of two goods that are equally satisfying.
B) A constant level of utility.
C) A greater level of total utility the farther it is from the origin.
159. A budget line represents:

A) Consumption possibilities.
B) The combinations of goods giving equal utility to a consumer.
C) The combinations of price and quantity available to a consumer.
D) The amount of income that is required to purchase a given amount of a good.
160. Which of the following is used to depict all combinations of goods that are affordable with a given income
and given prices?
A) An indifference curve. B) An indifference map. C) A demand curve. D) A b udget constraint.
161. A budget line represents:

A) The combinations of goods giving equal utility to a consumer.
B) The demand curve.
C) Combinations of two goods which can be purchased with a given budget.
D) The amount of income that is required to purchase a given amount of a good.
162. The slope of the budget constraint is always equal to the:

A) Marginal rate of substitution.
B) Ratio of the price of one good to the price of the other good.
C) Income of the consumer.
D) Reciprocal of the marginal utility of one good.
163. The point where the budget line and an indifference curve are tangent:
A) Represents an optimal consumption point.
B) Indicates the quantity and price that would appear on a demand curve.
C) Indicates that the relative marginal utilities of the goods equal their relative prices.
Page 29
164. The optimal consumption combination:
A) Maximizes total utility subject to a budget constraint.
B) Is the point of tangency between the budget constraint and an indifference curve.
C) Occurs when the marginal rate of substitution equals the ratio of the prices of the two goods.
165. The slope of the budget constraint, when a consumer has reached optimal consumption of two goods, is equal
to the:
A) Marginal rate of substitution. C) Ratio of the marginal utilities of the two goods.
B) Ratio of the prices of the two goods. D) All of the above.
166. The rate at which a consumer is willing to exchange one good for another refers to the:
A) Marginal rate of substitution. C) Optimal consumption combination.
B) Slope of the budget constraint. D) Ratio of the prices of the two goods.
167. The slope of the indifference curve is equal to the:

A) Ratio of the price of one good to the price of the other good.
B) Income of the consumer.
C) Marginal rate of substitution.
D) Slope of the demand curve.
Page 30
Use the indifference curves and the budget lines in Figure 5.7 to answer the indicated questions. Assume the price of
Y is $1 per unit.
Figure 5.7
168. Refer to Figure 5.7. If the price per unit of good X is $3, the consumer would maximize utility at point:
A) A. B) B. C) C. D) D.
169. Refer to Figure 5.7. If the price per unit o f good X is $3, the consumer would maximize utility by consuming:
A) 30 units of Y. B) 21 units of Y. C) 10 units of Y. D) 25 units of Y.
170. Refer to Figure 5.7. If the price per unit of good X is $1, optimal consumption is found at point:
A) B. B) D. C) E. D) C.
171. Refer to Figure 5.7. If the price per unit o f good X is $1, the consumer would maximize utility by consuming:
A) 25 units of Y. B) 21 units of Y. C) 15 units of Y. D) 10 units of Y.
Page 31
172. In Figure 5.7, given an income of $30 and a price for good Y of $1, which of the following two points
represent optimal consumption?
A) A when price of X is $3 and C when price of X is $1.
B) B when price of X is $1 and D when price of X is $3.
C) A when price of X is $1 and D when price of X is $3.
D) B when price of X is $1 and C when price of X is $3.
Use the indifference curves and budget lines in Figure 5.8 to answer the indicated questions. Assume the price of Y is
$3 per unit.
Figure 5.8
173. The income per period available to the consumer depicted in Figure 5.8 is:
A) $30. B) $60. C) $42. D) $90.
174. Refer to Figure 5.8. If the price per unit of good X is $9, the consumer would maximize utility at point:
A) A. B) B. C) C. D) D.
175. Refer to Figure 5.8. If the price per unit of good X is $3, the consumer's optimal co mbination of goods X and
Y is found at point:
A) B. B) C. C) D. D) All of the points above yield equal utility.
Page 32
176. Refer to Figure 5.8. If the price per unit of good X is $9, the co mb ination wh ich yields the most satisfaction is:
A) 21 units of X and 3 un its of Y. C) 5 units of X and 25 units of Y.
B) 15 units of X and 15 units of Y. D) 3 units of X and 21 units of Y.
177. Refer to Figure 5.8. If the price per unit of good X is $3, the co mb ination wh ich yields the most satisfaction is:
A) 20 units of X and 10 units of Y. C) 5 units of X and 25 units of Y.
B) 15 units of X and 15 units of Y. D) 3 units of X and 21 units of Y.
DETERMINANTS OF DEMAND
T F 178. Status and ego considerations in consumption are economic explanations of demand.
T F 179. An expected increase in the price of a good causes a rightward shift in demand, while a higher
current price of a good causes a movement along the demand curve.
T F 180. When the price of a good is expected to fall next month, there should be a downward movement
along the current demand curve.
T F 181. When the price of a good is expected to fall next month, the current demand curve should shift to the
left.
Page 33
THE DEMAND CURVE
T F 182. Marginal utility represents the additional satisfaction obtained from one more unit of a good or
service.
T F 183. The law of diminishing marginal utility does not apply to goods that a person really enjoys.
T F 184. If there is no budget constraint, utility maximization is achieved when marginal utility is zero.
T F 185. Utility maximization is always achieved where total revenue is maximized.
PRICE ELASTICITY
T F 186. The price elasticity of demand is influenced by all of the determinants of demand.
T F 187. All price elasticities of demand along downward-sloping demand curves have a negative value
because of the inverse relationship between price and quantity demanded.
T F 188. A horizontal demand curve has an elasticity of zero.
T F 189. A demand curve is perfectly elastic if consumers reduce their quantity demanded to zero when price
rises by even the slightest amount.
T F 190. A demand curve is perfectly inelastic if consumers reduce their quantity demanded to zero when
price rises by even the slightest amount.
Page 34
T F 191. Elasticity of demand is unitary at the point on a linear demand curve for which total revenue is
maximized.
PRICE ELASTICITY AND TOTAL REVENUE
T F 192. If the absolute value of the price elasticity of demand is 2.0, total revenue will increase if price
increases.
T F 193. If the absolute value of the price elasticity of demand is 0.50, total revenue will increase if price
increases.
T F 194. A price change does not change total revenue if demand is unitary elastic.
OTHER ELASTICITIES
T F 195. If income increases, the demand for a normal good will increase.
T F 196. An increase in consumer income will shift the demand curve of an inferior good to the right.
T F 197. A negative cross-price elasticity indicates goods are substitutes because a positive percentage
increase in one good results in a negative percentage increase in the other.
T F 198. Advertisers currently spend about $1 million per year to change the demand for products.
Page 35
T F 199. A successful advertising campaign induces consumers to buy more of the product at any given price
than before.
T F 200. A successful advertising campaign will make demand for the product less price elastic.
APPENDIX
T F 201. An indifference curve represents combinations of two goods which provide an individual the same
total utility.
T F 202. The closer the indifference curve is to the origin, the more total utility it yields.
T F 203. A budget line shows all the combinations that provide the consumer with equal utility.
Page 36
Answers to Table
Table 5.1 Answer
Utility schedule

1 10 10
2 16 6
3 18 2
4 19 1
Table 5.2 Answer

Utility schedule

1 25 25
2 47 22
3 60 13
4 65 5
Table 5.5 Answer

Michael's utility schedule
Units of TU of MU of
Units of cola TU of cola MU of cola pretzels pretzels pretzels
1 40 40 1 30 30
2 72 32 2 50 20
3 96 24 3 66 16
4 112 16 4 78 12
5 124 12 5 84 6
Page 37

Chapter 0: Economics: The Core Issues: Multiple Choice Questions

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Chapter 0: Economics: The Core Issues: Multiple Choice Questions

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Chapter 0: Economics: The Core Issues

Chapter 0: Economics: The Core Issues

Multiple Choice Questions

1. Economics is the study of how:

Answer: A Type: Basic Understanding Page: 2

2. Economics can be defined as the study of:

Answer: C Type: Basic Understanding Page: 2

SCARCITY: THE CORE PROBLEM

3. The fundamental problem of economics is:

Answer: B Type: Definition Page: 4

4. In economics, what does scarcity mean?

Answer: C Type: Definition Page: 4

5. Given that resources are scarce:

Answer: B Type: Complex Understanding Page: 4

Answer: C Type: Definition Page: 4

7. A consequence of the economic problem of scarcity is that:

Answer: A Type: Complex Understanding Page: 4

8. Which of the following is a scarce resource?

Answer: D Type: Basic Understanding Page: 4

9. Which of the following is a scarce resource?

Answer: D Type: Definition Page: 4

10. Factors of production are:

Answer: A Type: Basic Understanding Page: 4

11. Which of the following is not a factor of production?

Answer: C Type: Basic Understanding Page: 4

12. Which of the following is an economic resource?

Answer: D Type: Basic Understanding Page: 4

Answer: D Type: Definition Page: 4

14. Which of the following is the best example of land?

Answer: C Type: Definition Page: 4

15. Capital, as economists use the term, refers to:

Answer: D Type: Definition Page: 4

Answer: C Type: Definition Page: 4

Answer: A Type: Definition Page: 4

18. An entrepreneur is:

Answer: D Type: Definition Page: 5

19. The role of the entrepreneur in an economy is to:

Answer: A Type: Basic Understanding Page: 5

20. Opportunity cost is:

Answer: D Type: Definition Page: 5

21. Opportunity cost may be defined as the:

Answer: A Type: Definition Page: 5

22. The opportunity cost of studying for an economics test is:

Answer: D Type: Definition Page: 5

23. The concept of opportunity cost would become irrelevant if:

Answer: D Type: Complex Understanding Page: 5

24. A production-possibilities curve indicates the:

Answer: B Type: Basic Understanding Page: 7

Answer: B Type: Basic Understanding Page: 7

26. A point on a nation's production-possibilities curve represents:

Answer: D Type: Definition Page: 7

Answer: B Type: Analytical Page: 7

28. If an economy is producing on its production-possibilities curve, then producing:

Answer: C Type: Complex Understanding Page: 7

29. The production-possibilities curve illustrates:

Answer: A Type: Complex Understanding Page: 7

30. The production-possibilities curve illustrates that:

Answer: D Type: Complex Understanding Page: 7

31. According to the law of increasing opportunity costs:

Answer: C Type: Definition Page: 7

32. The law of increasing opportunity costs explains:

Answer: B Type: Definition Page: 7

33. According to the law of increasing opportunity costs: