Chapter 1 – The Ten Principles of Microeconomics
1. The business cycle refers to regular and predictable
fluctuations in economic activity.
Answer: False
2. In 2008 and 2009, the U.S. economy experienced a
deep economic downturn. If there is a short run
trade-off between inflation and unemployment, to
combat the high unemployment, President Obama
should have pursued an inflationary policy such as a
stimulus package of reduced taxes and increased
government spending.
Answer: True
3. A society faces many decisions, but a household
does not.
Answer: False
4. Public policies aimed at increasing the size of the
economic pie also lead to a higher degree of
equality.
Answer: False
5. You can stay home and study to do well on your
exam or you can go to the movies with your friends,
but not both. This example illustrates
Answer: a. scarcity and tradeoffs.
6. Your opportunity cost of going to a Maroon 5 concert
during your Spring Break is:
Answer: D. the price of the concert ticket,
plus the cost of any beverages you buy at
the concert, and the value of your time.
7. Certain employees are eligible for unemployment
compensation if they lose their jobs through no fault
of their own. If Jim, a factory worker, will receive
compensation of half his regular pay for 52 weeks
while he looks for a job, then:
Answer: D. the unemployment
compensation most likely lowers Jim’s
incentive to save while he is working.
Unemployment compensation most likely
decreases Jim’s efforts to find a new job.
8. Micah has spent $30 for a taxi ride to a [end a Colts
game. When he arrives at the stadium, he discovers
that he le] his ticket at home. He doesn’t have time
to return home to get it. He paid $60 for his ticket,
but can buy another one for $80. In deciding whether
he should buy another ticket Micah should compare
the value he places on a[ending the game to
Answer: B. $80.
9. Trade between countries tends to
C. raises specialization and makes everyone
better off.
10. Which of the following is the primary determinant of
the standard of living?
Answer: B. productivity
11. As the manager at the local Save-a-lot, you are
thinking of adding one more cashier that would
increase sales revenues by $400 per week. What is
the most you can pay this new cashier and why?
Answer: B. $400 per week, because that is
the marginal benefit of hiring the new
cashier.
12. High inflation is
Answer: C. associated with high money
supply growth rates. An increase in inflation
temporarily reduces unemployment.
13. Which of the following is not an incentive effect of
higher gasoline prices?
Answer: D. Exxon-Mobile drills fewer oil
wells.
14. Adam Smith would have loved Uber, the company
providing an app for smartphones that connects
passengers and drivers, because:
Answer: C. the service increases consumer
well-being.
Chapter 2 – Thinking Like an Economist
1. A production possibilities frontier that illustrates the
production of cars and computers shows the
opportunity cost of computers measured in terms of
cars
Answer: True
2. A circular flow diagram shows how dollars flow
through financial markets among households and
firms.
Answer: False
3. Positive statements are prescriptive and cannot be
confirmed or refuted by examining the evidence.
Answer: False
4. In a circular flow diagram, decisions are made by
Answer: A. Households and firms. Firms are
sellers in the markets for goods and
services; households are buyers in the
markets for goods and services.
5. Which of the following examples does not correctly
describe the movement of $10 through a circular
flow diagram?
Answer: C. An individual buys one share of
stock for $10. The firm that sold the stock
uses the $10 to pay back interest on a loan
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 from the U.S. government’s Small Business
Administration (SBA). The SBA uses the $10
to pay one of its employees.
6. On the production possibilities graph, which points
are efficient?
Answer: A.) A, B, and D
7. Fruit of the Loom’s production possibilities between
“tighty-whities” (T-W's) and boxers: Refer to the Fruit
of the Loom's table above. What is the opportunity
cost of increasing the production of T-W’s from 0 to
10?
Answer: B. 10 boxers
8. Fruit of the Loom’s production possibilities between
“tighty-whities” (T-W's) and boxers: Refer to the Fruit
of the Loom's table above. What is the opportunity
cost of increasing the production of T-W’s from 20 to
30?
Answer: C. 20 boxers
9. Fruit of the Loom’s production possibilities between
“tighty-whities” (T-W's) and boxers: Refer to the Fruit
of the Loom's table above. What is the opportunity
cost of increasing the production of boxers from 0 to
25?
Answer: B. 10 T-W’s
10. In the figure above, assume the economy is
producing at point D; then a technological innovation
is discovered that reduces the production costs of
pizza. As a result, the economy would be able to
produce more.
Answer: C. more CDs and more pizzas.
11. For the production possibilities frontier above,
identify which of the following statements is
incorrect:
Answer: B. production points D and E are
efficient
12. On a production possibilities frontier showing military
goods and consumer goods, which of the following is
most likely to cause an inward shift of the PPF?
Answer: A. destruction of economic
resources because of war
13. As we move to the right on a bowed outward
production possibilities frontier, we see:
Answer: C. increasing opportunity cost
14. Which of the following topics falls within the study of
macroeconomics?
Answer: C. the effects of borrowing by the
federal government
15. Which of the following illustrates a positive statement
followed by a normative statement?
Answer: C. The Earned Income Tax Credit
benefits the working poor. The government
should expand the Earned Income Tax
Credit.
16. “Laws that limit the resale of tickets for entertainment
and sports events make potential audience
members for those events worse off on average.”
Answer: A. agree
Chapter 3 – Interdependence and the Gains from Trade
1. If a country has an absolute advantage in producing
a good, than it must also have a comparative
advantage in producing that good.
Answer: False
2. If a country has comparative advantage in producing
a good, then the other country has comparative
advantage in producing the other good.
Answer: True
3. International trade can make some individuals worse
off, even as it makes the country as a whole better
off.
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 Answer: True
4. Countries specialize in the production of the good
they can produce at the highest opportunity cost.
Answer: False
5. Refer to the figures above. What is the opportunity
cost of a pound of cheese in Denmark?
Answer: D. 1/2 loaves of bread
6. Refer to the figures above. Which country has the
absolute advantage in producing cheese and which
has the comparative advantage producing cheese?
Answer: A. Denmark, Denmark
7. Refer to the figures above. Suppose these two
countries trade only with each other. With no trade
restrictions in effect, what kind of trade, if any, would
occur?
Answer: C. Denmark would sell cheese to
and buy bread from Finland.
8. Refer to the figures above. If these two countries
were to trade, a possible exchange rate would be 1
loaf of bread for
Answer: B. 3/2 kilograms of cheese.
Chapter 4 – The Market Forces of Supply and Demand
9. Refer to the table above. The opportunity cost of a
pound of coffee in Argentina is
Answer: A. 3 bu. of wheat.
10. Refer to the table above. Which country has the
absolute advantage in wheat and which has the
Comparative advantage in wheat?
Answer: B. Brazil has the absolute
advantage, Argentina has the comparative
advantage.
11. Refer to the table above. Suppose these two
countries trade with each other but no other
countries. With no trade restric8ons in effect, what
kind of trade if any would occur?
Answer: D. Argentina would import coffee
and export wheat.
12. Refer to the table above. If these two countries were
to trade, a possible exchange rate would be 1 lb. of
coffee to
Answer: C. 5/2 bu. of wheat.
13. Suppose that France has a comparative advantage
in the production of Camembert cheese and that
Spain has a comparative advantage in the
production of oranges. If the two countries do not
trade with any countries but then agree to trade with
each other, which of the following will be true
concerning French and Spanish consumption
possibilities?
Answer: D. France and Spain can each
consume more cheese and more oranges.
14. “Trade with China makes most Americans better off
because, among other advantages, they can buy
goods that are made or assembled more cheaply in
China.”
Answer: A. agree
15. “Some Americans who work in the production of
competing goods, such as clothing and furniture, are
made worse off by trade with China.”
Answer: A. agree
1. Changes in the price of chocolate cake cause the
demand curve for chocolate cake to shi6, whereas
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 changes in income cause a movement along the
demand curve for chocolate cake.
Answer: B. False
2. A movement along the downward-sloping demand
curve for frozen margaritas can be caused by a
change in weather.
Answer: B. False
3. Changes in the price of cheese cause a movement
along the supply of cheese, whereas changes in
input prices cause the supply of cheese to shift.
Answer: A. True
4. If demand decreases, both thee equilibrium price
and quantity decrease.
Answer: A. True
5. A market is a
Answer: C. group of buyers and sellers of a
particular good or service.
6. Assuming apricots and nectarines are substitutes for
peaches. Which of the following would shift the
demand curve for peaches to the right?
Answer: A. an increase in the price of
apricots
7. Which of the following is an example of the law of
demand?
Answer: D. When tuition at State U rises,
fewer students enroll in courses at State U.
8. In 1971 a pocket calculator cost more than $75. In
2015 a calculator of the same quality cost less than
$10. Which of the following explanations is most
consistent with these facts?
Answer: B. a change in technology
9. This graph illustrates the market for fine wine. If the
current price is $50 per bottle, we expect the
Answer: A. price to decrease due to the
surplus of wine.
10. This graph illustrates the market for gluten free
chocolate cake. If the current price is $30 per cake,
we expect the
Answer: B. price to increase due to the
shortage of cake.
11. An advance in technology would shift the
Answer: A. supply curve to the right.
12. Which of the following would shift the supply curve of
iPhones to the right?
Answer: A. a decrease in wages paid to
workers making the iPhones.
13. Suppose that cold temperatures cause a decrease in
the supply of tea. What should happen in the market
for coffee, assuming tea and coffee are substitutes?
C. Both the equilibrium price and quantity
will increase.
14. “Connecticut should pass its Senate Bill 60, which
states that during a 'severe weather event
emergency, no person within the chain of distribution
of consumer goods and services shall sell or offer to
sell consumer goods or services for a price that is
unconscionably excessive.”
Answer: B. disagree
Chapter 5 – Elasticity and Its Application
1. The price elasticity of supply measures how much
the quantity supplied of good X responds to changes
in the price of good X.
Answer: A. True
2. If farmers become more productive in growing
wheat, total revenue of wheat farmers will rise.
Answer: B. False
3. A demand curve with a price elasticity of zero is a
horizontal line.
Answer: B. False
4. A vertical supply curve has a price elasticity of zero.
Answer: A. True
5. Which of the following goods would have the least
elastic demand?
Answer: A. milk
6. Which of the following statements is correct?
Answer: C. the demand for Coca-Cola is
more elastic than the demand for soda.
7. If the price of yachts were to decrease by 10%, we
would expect the number of yachts purchased to
Answer: A. increase by more than 10%.
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 8. If the price elasticity of demand for beef is 1.6, then
a 10% increase in the price of beef would be
expected to result in a
Answer: D. 16% decrease in quantity
demanded.
9. Suppose the price of a Snickers bar is reduced from
$1.65 to $1.35, and as a result the quantity
demanded increases from 1,400 to 1,600. Using the
midpoint method, the price elasticity of demand for
Snickers in the given price range is
Answer: C. 2/3.
10. The athletic director of State U suggests that the
university should reduce ticket prices to its football
games in order to increase both attendance and
revenue from ticket sales. Economic theory predicts
that, for a price elastic demand, this price reduction
would
Answer: C. increase attendance and increase revenue.
11. The price elasticity of demand for gasoline has been
estimated to be 0.2 for a 3-month, me period. During
that, me period, how will an increase in the supply of
gasoline affect the total revenues of sellers of
gasoline?
Answer: B. Total revenues will fall.
12. Last year Ashley bought 6 pairs of shoes when her
income was $40,000. This year her income is
$50,000, and she purchased 10 pairs of shoes.
Ashley’s
Answer: A. income elasticity of shoes is
positive.
13. The cross-price elasticity of demand between golf
balls and golf clubs is
B. negative.
14. A combination of great weather and beneficial
scientific discoveries lead to a doubling of the per
acre yield in cotton fields. Assume the demand for
cotton is inelastic. Will the cotton farmers be better
off?
Answer: B. No
Chapter 6 – Supply, Demand, and Government Policies
1. When the government imposes a binding price
ceiling, it causes a surplus of the good.
Answer: B. False
2. A $2 tax levied on the producers of a good has the
same effect on buyers and sellers as a $2 tax levied
on the consumers of the good.
Answer: A. True
3. Rent controls cause
Answer: D. shortages of apartments which
are larger in the long run than in the short
run.
4. Which of the following would not be a result of a
binding price ceiling on child care?
Answer: C. an increase in the quantity of
child care supplied
5. Refer to the labor market graph. The Imposition of
an $8 minimum wage would cause
Answer: B. unemployment of 35 labor hours.
6. The market for gluten-free breakfast cereal is shown
in the graph above. Suppose the government enacts
a $2 tax per unit, imposed on the sellers. The policy
will cause:
Answer: C. buyers and sellers to each bear
a $1 burden of the tax.
7. Suppose that the City of Bloomington imposes a $1
per-tire recycling fee on buyers whenever they
purchase a new tire. We can illustrate the tax on a
graph by shifting the demand curve
Answer: C. down by $1; the price paid by
buyers would rise by less than $1.
8. The market for gluten-free breakfast cereal is shown
in the graph. The after-tax price paid by buyers and
price received by sellers are, respectively,
Answer: Price paid by buyers
Price received by sellers
D. $6.00 $4.00
9. Assuming the graph is drawn to scale, which of the
following is true regarding the burden of the tax in
market above?
Answer: B. Sellers pay a larger share of the
tax because supply is more inelastic than
demand.
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10. In 2015, the minimum wage according to federal law
was $7.25 per hour. Increasing minimum wage to $8
per hour (approximately a 10% increase) will
probably lead to:
Answer: D. All of the above

11. “Local ordinances that limit rent increases for some

rental housing units, such as in New York and San
Francisco; have had a positive impact over the past
three decades on the amount and quality of broadly
affordable rental housing in cities that have used
them.”
Answer: B. disagree

12. “If the federal minimum wage is raised gradually to

$15-per-hour by 2020, the employment rate for low-
wage U.S. workers will be substantially lower than it
would be under the status quo.”
Answer: A. agree