Baruch College Econ 1001 Microeconomics (PS#1) Summer 2002 1.

Economics may best be defined as: A) the interaction between macro and micro considerations. B) the study of the behavior of people and institutions in the production, distribution, and consumption of scarce goods. C) the empirical testing of value judgments through the use of induction and deduction. D) the use of policy to refute facts and hypotheses. 2. The study of economics is primarily concerned with: A) keeping private businesses from losing money. B) demonstrating that capitalistic economies are superior to socialistic economies. C) choices which are made in seeking to use scarce resources efficiently. D) determining the most equitable distribution of society's output. 3. The assertion that "There is no free lunch" means that: A) there are always tradeoffs between economic goals. B) all production involves the use of scarce resources and thus the sacrifice of alternative goods. C) marginal analysis is not used in economic reasoning. D) choices need not be made if behavior is rational. 4. Studying economics: A) helps one become a better-informed citizen and voter. B) is detrimental to good citizenship because economics emphasizes individualism. C) is a waste of time since we all participate in the economy whether we understand it or not. D) is important because economics is the "science of earning money." 5. Learning economics: A) is detrimental to good citizenship because economics emphasizes individualism. B) is helpful to employers, but not to workers and consumers. C) is important because economics is the "science of earning money." D) helps students improve analytical skills which are in great demand in the workplace.

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6. Economic theories: A) are useless because they are not based upon laboratory experimentation. B) which are true for individual economic units are never true for the economy as a whole. C) are generalizations based upon a careful observation of facts. D) are abstractions and therefore of no application to real situations. 7. Economic models: A) are of limited use because they cannot be tested empirically. B) are limited to variables which are directly related to one another. C) emphasize basic economic relationships by abstracting from the complexities of the real world. D) are unrealistic and therefore of no practical consequence. 8. The term "other things equal" means that: A) the associated statement is normative. B) many variables affect the variable under consideration. C) a number of relevant variables are assumed to be constant. D) when variable X increases so does related variable Y. 9. In formulating economic policy it is important to: A) carefully state specific economic goals. B) consider the benefits and costs of the various policy options for reaching desired goals. C) evaluate the effectiveness of any chosen policy. D) do all of the above. 10. Macroeconomics approaches the study of economics from the viewpoint of: A) the entire economy. B) governmental units. C) the operation of specific product and resource markets. D) individual firms. 11. Which of the following is associated with macroeconomics? A) an examination of the incomes of Harvard Business School graduates B) an empirical investigation of the general price level and unemployment rates in the 1990s C) a study of the trend of pecan prices since World War II D) a case study of pricing and production in the textbook industry
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12. Microeconomics is concerned with: A) the aggregate or total levels of income, employment, and output. B) a detailed examination of specific economic units which comprise the economic system. C) the concealing of detailed information about specific segments of the economy. D) the establishing of an overall view of the operation of the economic system. 13. Which of the following is a microeconomic statement? A) The real domestic output increased by 2.5 percent last year. B) Unemployment was 6.8 percent of the labor force last year. C) The price of personal computers declined last year. D) The general price level increased by 4 percent last year. 14. A normative statement is one which: A) is based on the law of averages C) pertains only to macroeconomics 15. A positive statement is one which is: A) derived by induction B) derived by deduction D) objective and is based on facts C) subjective and is based on a value judgment 16. Normative statements are concerned with: A) facts and theories C) what is B) what ought to be D) rational choice involving costs and benefits B) pertains only to microeconomics D) is based upon value judgments

17. A positive statement is concerned with: A) some goal which is desirable to society C) what is B) what should be D) the formulation of economic policy.

18. The "fallacy of composition" states that: A) because economic systems are comprised of so many diverse economic units economic laws are necessarily inexact. B) the anticipation of a particular event can affect the nature or composition of that event when it occurs. C) what is true for the individual must necessarily be true for the group. D) because event A precedes event B, A is necessarily the cause of B.
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19. The safest way for an individual to leave a burning theater is to run for the nearest exit; it is therefore also the best means of escape for a large audience. This illustrates the: A) "after this, therefore because of this" fallacy C) fallacy of composition B) correlation fallacy D) fallacy of limited decisions

20. The economizing problem is essentially one of deciding how to make the best use of: A) virtually unlimited resources to satisfy virtually unlimited wants. B) limited resources to satisfy virtually unlimited wants. C) unlimited resources to satisfy limited wants. D) limited resources to satisfy limited wants. 21. The concept of economic efficiency is primarily concerned with: A) the limited wants-unlimited resources dilemma. B) considerations of equity in the distribution of wealth. C) obtaining the maximum output from available resources. D) the conservation of irreplaceable natural resources. 22. As used in economics, the notion of scarce resources means that: A) mineral deposits are only available in finite amounts. B) resources are not so plentiful that all material wants can be fulfilled. C) some resources are free while others have price tags on them. D) the quantities available of some resources exceed the demand for them. 23. Economic resources are also called: A) free gifts of nature C) units of money capital B) consumption goods D) factors of production

24. As a consequence of the condition of scarcity: A) there is never enough of anything. B) production has to be centrally planned. C) things which are plentiful have relatively high prices. D) individuals and communities have to make choices from among alternatives. 25. A market:
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A) reflects upward sloping demand and downward sloping supply curves. B) entails the exchange of goods, but not services. C) is an institution which brings together buyers and sellers. D) always entails face-to-face contact between buyer and seller. 26. Markets which are explained on the basis of supply and demand: A) assume many buyers and many sellers of a standardized product. B) assume market power so that buyers and sellers bargain with one another. C) have no counterpart in the real-world economy. D) are approximated by markets wherein a single seller determines price. 27. The law of demand states that: A) price and quantity demanded are inversely related. B) the larger the number of buyers in a market, the lower will be product price. C) price and quantity demanded are directly related. D) consumers will buy more of a product at high prices than at low prices. 28. The demand curve shows the relationship between: A) money income and quantity demanded. B) price and production costs. C) price and quantity demanded. D) consumer tastes and the quantity demanded. 29. Economists use the term "demand" to refer to: A) a particular price-quantity combination on a stable demand curve. B) the total amount spent on a particular commodity over a stipulated time period. C) an upward sloping line on a graph which relates consumer purchases and product price. D) a schedule of various combinations of market prices and amounts demanded. 30. When the price of a product increases, a consumer is able to buy less of it with a given money income. This describes: A) the cost effect B) the inflationary effect C) the income effect D) the substitution effect

31. A demand curve:
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A) shows the relationship between price and quantity demanded. B) indicates the quantity demanded at each price in a series of prices. C) graphs as a downward sloping line. D) has all of the above characteristics. 32. An increase in the price of a product will reduce the amount of it purchased because: A) supply curves are upward sloping. B) the higher price means that real incomes have risen. C) consumers will substitute other products for the one whose price has risen. D) consumers substitute relatively high-priced for relatively low-priced products. 33. "When the price of a product rises, consumers shift their purchases to other products whose prices are now relatively lower." This statement describes: A) an inferior good C) the substitution effect B) the rationing function of prices D) the income effect

34. The construction of demand and supply curves assumes that the primary variable which influences decisions to produce and purchase goods is: A) price B) expectations C) preferences D) incomes

35. One reason why the quantity of a good demanded increases when its price falls is that the: A) price decline shifts the supply curve to the left. B) lower price shifts the demand curve to the left. C) lower price shifts the demand curve to the right. D) lower price increases the real incomes of buyers, enabling them to buy more. 36. Which of the following would not shift the demand curve for beef? A) a widely publicized study which indicates beef increases one's cholesterol B) a reduction in the price of cattle feed C) an effective advertising campaign by pork producers D) a change in the incomes of beef consumers 37. During the 1970s the price of oil rose dramatically, which in turn caused the price of coal to increase. This can best be explained by saying that oil and coal are: A) complementary goods and the higher price for oil increased the demand for coal.
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B) substitute goods and the higher price for oil increased the demand for coal. C) complementary goods and the higher price for oil decreased the supply of coal. D) substitute goods and the higher price for oil decreased the supply of coal. 38. An economist for a bicycle company predicts that, other things equal, a rise in consumer incomes will increase the demand for bicycles. This prediction is based on the assumption that: A) there are many goods which are substitutes for bicycles. B) there are many goods which are complementary to bicycles. C) there are few goods which are substitutes for bicycles. D) bicycles are normal goods. 39. If two goods are complements: A) they are consumed jointly. B) an increase in the price of one will reduce the demand for the other. C) a decrease in the price of one will increase the demand for the other. D) all of the above will be true. 40. Which of the following is most likely to be an inferior good? A) fur coats B) Porsches C) used clothing D) steak

41. Which of the following statements is correct? A) An increase in the price of C will decrease the demand for complementary product D. B) A decrease in income will decrease the demand for an inferior good. C) An increase in income will reduce the demand for a normal good. D) A decline in the price of X will increase the demand for substitute product Y. 42. A shift to the right in the demand curve for product A can be most reasonably explained by saying that: A) consumer incomes have declined and they now want to buy less of A at each possible price. B) the price of A has increased and, as a result, consumers want to purchase less of it. C) consumer preferences have changed in favor of A so that they now want to buy more at each possible price. D) the price of A has declined and, as a result, consumers want to purchase more of it. 43. Which of the following will cause the demand curve for product A to shift to the left?
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A) population growth which causes an expansion in the number of persons consuming A B) an increase in money income if A is a normal good C) a decrease in the price of complementary product C D) an increase in money income if A is an inferior good 44. Other things equal, which of the following might shift the demand curve for gasoline to the left? A) the discovery of vast new oil reserves in Montana B) the development of a low-cost electric automobile C) an increase in the price of train and air transportation D) a large decline in the price of automobiles 45. The demand curve for a product might shift as the result of a change in: A) consumer tastes C) the prices of related goods 46. The law of supply indicates that: A) producers will offer more of a product at high prices than they will at low prices. B) the product supply curve is downward sloping. C) consumers will purchase less of a good at high prices than they will at low prices. D) producers will offer more of a product at low prices than they will at high prices. 47. A leftward shift of a product supply curve might be caused by: A) an improvement in the relevant technique of production B) a decline in the prices of needed inputs C) an increase in consumer incomes D) some firms leaving an industry B) consumer incomes D) all of the above

48. "Because of unseasonably cold weather, the supply of oranges has substantially decreased." This statement indicates that: A) the demand for oranges will necessarily rise. B) the equilibrium quantity of oranges will rise. C) the amount of oranges that will be available at various prices has declined. D) the price of oranges will fall. 49. Assume a drought in the Great Plains reduces the supply of wheat. Noting that wheat is a basic ingredient in the production of bread and that potatoes are a consumer substitute for bread, we would expect the price of wheat to:
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A) rise, the supply of bread to increase, and the demand for potatoes to increase. B) rise, the supply of bread to decrease, and the demand for potatoes to increase. C) rise, the supply of bread to decrease, and the demand for potatoes to decrease. D) fall, the supply of bread to increase, and the demand for potatoes to increase. 50. In which of the following instances is the effect on equilibrium price indeterminate, that is, dependent on the magnitude of the shifts in supply and demand? A) demand rises and supply rises C) demand rises and supply falls B) supply falls and demand remains constant D) supply rises and demand falls

51. If the money income of a consumer decreases and, as a result, his or her demand for product X increases, product X is: A) a normal good C) a substitute good B) a complementary good D) an inferior good

52. The price elasticity of demand coefficient indicates: A) buyer responsiveness to price changes. B) the extent to which a demand curve shifts as incomes change. C) the slope of the demand curve. D) how far business executives can stretch their fixed costs. 53. The basic formula for the price elasticity of demand coefficient is: A) absolute decline in quantity demanded/absolute increase in price. B) percentage change in quantity demanded/percentage change in price. C) absolute decline in price/absolute increase in quantity demanded. D) percentage change in price/percentage change in quantity demanded. 54. The demand for a product is inelastic with respect to price if: A) consumers are largely unresponsive to a per unit price change. B) the elasticity coefficient is greater than 1. C) a drop in price is accompanied by a decrease in the quantity demanded. D) a drop in price is accompanied by an increase in the quantity demanded. 55. If the price elasticity of demand for a product is 2.5, then a price cut from $2.00 to $1.80 will: A) increase the quantity demanded by about 2.5 percent.
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B) decrease the quantity demanded by about 2.5 percent. C) increase the quantity demanded by about 25 percent. D) increase the quantity demanded by about 250 percent. 56. Suppose that as the price of Y falls from $2.00 to $1.90 the quantity of Y demanded increases from 110 to 118. Then the price elasticity of demand is: A) 4.00 B) 2.09 C) 1.37 D) 3.94

57. Which of the following is not characteristic of the demand for a commodity which is elastic? A) The relative change in quantity demanded is greater than the relative change in price. B) Buyers are relatively sensitive to price changes. C) Total revenue declines if price is increased. D) The elasticity coefficient is less than one. 58. If the demand for product X is inelastic, a 4 percent increase in the price of X will: A) decrease the quantity of X demanded by more than 4 percent. B) decrease the quantity of X demanded by less than 4 percent. C) increase the quantity of X demanded by more than 4 percent. D) increase the quantity of X demanded by less than 4 percent. 59. If a firm can sell 3,000 units of product A at $10 per unit and 5,000 at $8, then: A) the price elasticity of demand is 0.44 C) the price elasticity of demand is 2.25 B) A is a complementary good D) A is an inferior good

60. Most demand curves are relatively elastic in the upper-left portion because the original price: A) and quantity from which the percentage changes in price and quantity are calculated are both large. B) and quantity from which the percentage changes in price and quantity are calculated are both small. C) from which the percentage price change is calculated is small and the original quantity from which the percentage change in quantity is calculated is large. D) from which the percentage price change is calculated is large and the original quantity from which the percentage change in quantity is calculated is small.

61. Suppose Piazza's pizzeria currently faces a linear demand curve and is charging a very high price per
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pizza and doing very little business. Piazza now decides to lower pizza prices by 5 percent per week for an indefinite period of time. We can expect that each successive week: A) demand will become more price elastic. B) price elasticity of demand will not change as price is lowered. C) demand will become less price elastic. D) the elasticity of supply will increase. 62. A leftward shift in the supply curve of product X will increase equilibrium price to a greater extent the: A) more elastic the supply curve C) more elastic the demand for the product B) larger the elasticity of demand coefficient D) more inelastic the demand for the product

63. The price elasticity of demand of a straight-line demand curve is: A) elastic in high-price ranges and inelastic on low-price ranges. B) elastic, but does not change at various points on the curve. C) inelastic, but does not change at various points on the curve. D) 1 at all points on the curve.

64. Suppose the price of local cable TV service increased from $16.20 to $19.80 and as a result the number of cable subscribers decreased from 224,000 to 176,000. Along this portion of the demand curve, price elasticity of demand is: A) 0.8. B) 1.2. C) 1.6. D) 8.0

65. When the percentage change in price is greater than the resulting percentage change in quantity demanded: A) a decrease in price will increase total revenue C) an increase in price will increase total revenue B) demand may be either elastic or inelastic D) demand is elastic

66. Suppose the income elasticity of demand for toys is +2.00. This means that: A) a 10 percent increase in income will increase the purchase of toys by 20 percent. B) a 10 percent increase in income will increase the purchase of toys by 2 percent. C) a 10 percent increase in income will decrease the purchase of toys by 2 percent. D) toys are an inferior good.

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67. The formula for cross elasticity of demand is percentage change in: A) quantity demanded of X/percentage change in price of X. B) quantity demanded of X/percentage change in income. C) quantity demanded of X/percentage change in price of Y. D) price of X/percentage change in quantity demanded of Y. 68. The larger the positive cross elasticity coefficient of demand between products X and Y, the: A) stronger their complement. B) greater their substitutability. C) smaller the price elasticity of demand for both products. D) the less sensitive purchases of each are to increases in income. 69. Compared to coffee, we would expect the cross elasticity of demand for: A) tea to be negative, but positive for cream C) both tea and cream to be negative B) tea to be positive, but negative for cream
D) both tea and cream to be positive

70. Which of the following has been a significant factor in compact discs (CDs) replacing vinyl longplay records (LPs) in the retail music market? A) CDs are now cheaper than LPs. B) A scarcity of vinyl has curtailed the manufacture of LPs. C) Most consumers perceive CD sound reproduction to be of higher quality. D) The price of LP players has increased dramatically. 71. Consumer demand for compact discs (CDs) has increased over time because the price of CD players has: A) decreased, and CD players and CDs are substitute goods. B) decreased, and CD players and CDs are complementary goods. C) increased, and CD players and CDs are substitute goods. D) increased, and CD players and CDs are complementary goods. 72. "Essential" water is cheaper than "nonessential" diamonds because: A) new industrial uses for diamonds have been discovered. B) the supply of water is great relative to demand and the supply of diamonds is small relative to demand. C) although the total utility of diamonds is greater, their marginal utility is small.
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D) the supply of diamonds is great relative to demand and the supply of water is small relative to demand. 73. The fact that most medical care purchases are financed through insurance: A) has no effect on health care consumption because aggregate costs are the same regardless of payment method. B) reduces the amount of health care consumed. C) has decreased health care costs and therefore reduced aggregate health care expenditures. D) increases the amount of health care consumed.

74. Why does the existence of scarcity mean that we must make choices?

75. What are the three broad classifications of factors of production? Give two examples of each.

76. Explain the difference between wants and demands.

77. List three events that would likely cause an increase in the demand for peanut butter. What effect would such an increase in demand have on the price of peanut butter and the quantity traded?

78. The price of personal computer has continued to fall even in the face of increasing demand. Explain why.

79. Why is elasticity superior to slope as a measure of the sensitivity of quantity demanded to changes in price?

80. Explain why knowing that demand is elastic tells us that a decrease in price will cause an increase in total revenue.

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81. A freeze in Florida will have a larger effect on the price of oranges the more inelastic the demand for oranges. Explain.

82. Suppose a landlord owns two similar apartments in neighboring communities, one of which has rent control (price ceiling) while the other is unregulated. Why is the landlord likely to take better care of the apartment in the community with an unregulated housing market?

83. Why would no black market arise if a legal price is set above the actual market-clearing (equilibrium) price?

84. What are the effects of a minimum wage that is set above the market-clearing wage rate for unskilled labor?

85. The market for gravel has been estimated to have these supply and demand relationships: Supply P = 10 + 0.01Q Demand P = 100 – 0.01Q, where P represents price per unit in dollars, and Q represents sales per week in tons. Determine the equilibrium price and sales. And determine the amount of shortage or surplus that would develop at P = $40/ton. 86. Indicate whether each of the following statements is positive or normative. If it is normative (positive), rewrite it so that it becomes positive (normative).
(a) “The government ought to reduce the size of the deficit in order to lower interest rate.” (b) “Government imposition of a tax on tobacco products will reduce their consumption.”

87. How would Bill Clinton’s proposed increase in cigarette taxes succeed according to the following criteria: collecting a large amount of tax revenue; distorting demand as little as possible; discouraging consumption of harmful commodities?

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88. The cross-elasticity between two goods has been measured at –1.2. How are the goods related? Explain. Give an example of goods for which this might be a reasonable measure of cross-elasticity.

89. New York City’s public bus line has been operating at a deficit. The city decides to raise the fare from $1.50 to $1.75, anticipating enough additional revenue to cover the deficit. What assumption is the city making about price elasticity?

90. Give an example of a price ceiling. Draw a corresponding diagram and explain why there is a continuing shortage.

91. Are there ever exceptions to the law of demand?

92. “In 1992, Occupational Safety and Health Authority passed the Bloodborne Pathogens Standard(BBP), a regulation concerning procedures for infection control in the dental office designed to minimize the transmission of infectious disease from patient to dental workers. The effect of this regulation was both to increase the cost of providing dental care and to ease the fear of going to the dentist as the risk of contracting an infectious decreased.” What is the effect of the BBP on the market for dental care? Draw the diagram.

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