100

1. Basic Economic Concepts Elasticity Economic Performance Supply and Demand Income & Price Determination Production Costs 100 100 100 100 100 100 200 200 200 200 200 200 300 300 300 300 300 300 400 400 400 400 400 400 500 500 500 500 500 500

2. A professor hires two aides, assigning them the tasks of reading student papers and of typing lectures notes on a computer. One of the aides, Ben, can read 1 page of lecture notes per minute or type 50 words per minute and the other aide, Ann, can read 3 pages of a student paper per minute or type 60 words of lectures notes per minute. Which of the following statements is true? • Ann has a comparative advantage in reading student papers, and Ben has a comparative advantage in typing lecture notes. • Ann has an absolute advantage in reading student papers, and Ben has an absolute advantage in typing lecture notes. • Ben has a comparative advantage in reading student papers, and Ann has a comparative advantage in typing lecture notes. • Ben has a comparative advantage in both reading student papers and typing lecture notes. • Ben has an absolute advantage in both reading student papers and typing lecture notes. A 100

3. According to the graph, if a country is currently producing at point X, the opportunity cost of producing another consumer good is 20 capital goods more than 20 capital goods fewer than 20 capital goods 20 consumer goods fewer than 20 consumer goods 200 A

4. The study of economics is primarily concerned with which of the following? • The testing of hypotheses under controlled conditions • The allocation of scarce resources, given unlimited wants • The fair and equal treatment of all households • The provision of conclusive answers to public policy issues • The development of the dynamics of group behavior B 300

5. Mr. Carpenter devotes his working time to producing tables and chairs. An increase in the demand for chairs will result in • an increase in the amount of time he devotes to producing tables • an increase in his opportunity cost of producing tables • a decrease in the price of lumber • a decrease in the price of chairs • a decrease in his total revenue B 400

6. For an economy with a straight-line production possibilities curve, which of the following must be true? • The opportunity cost of producing another unit is constant. • Resources are completely adaptable to alternative uses. • Resources are used efficiently. • I only • II only • III only • I and II • II and III D 500

7. To alleviate a financial crisis, a university increases student fees. This action will increase university revenues if the price elasticity of demand for university education is • inelastic • unit elastic • elastic • equal to the price elasticity of supply • equal to one A 100

8. Assume that both the supply of and the demand for a good are relatively price elastic. The imposition of a per-unit excise tax on the sale of the good would cause the equilibrium price and quantity to change in which of the following ways? • Price Quantity • Increase Increase • Increase No change • Increase Decrease • Decrease No change • Decrease Decrease C 200

9. If a 5 percent wage increase in a particular labor market results in a 10 percent decrease in employment, the demand for labor is • perfectly elastic • relatively elastic • unit elastic • relatively inelastic • perfectly inelastic B 300

10. If the market demand for a good is inelastic and the supply is elastic, which of the following is true when there is an increase in sales tax? • Consumers will bear most of the burden of the tax. • Producers will bear all of the burden of the tax. • Producers will bear most of the burden of the tax or risk losing sales. • Both consumers and producers will share the burden of the tax equally. • The price of the good will not change. A 400

11. Following a decrease in the supply of oranges, the price of orange juice increased by 20%, which resulted in a 10% increase in the quantity of apple juice consumed. This implies that the cross elasticity of demand between orange juice and apple juice is • 0 • 0.5 • 1 • 2 • indeterminate B 500

12. 100 • The major difference between real and nominal gross domestic product (GDP) is that real GDP • excludes government transfer payments • excludes imports • is adjusted for price-level changes using a price index • measures only the value of final goods and services that are consumed • measures the prices of a market basket of good purchased by a typical urban consumer C

13. 200 • Which of the following statements exemplifies the concept of structural unemployment? • New entrants into the labor force have trouble finding jobs. • Workers leave their current jobs to find better jobs. • Workers are laid off because aggregate demand has declined. • Workers are fired because consumers have reduced their total expenditures. • Workers are fined because their skills are no longer in demand. E

14. 300 • Under which of the following conditions would consumer spending most likely increase? • Consumers have large unpaid balances on their credit cards. • Consumers’ wealth is increased by changes in the stock market. • The government encourages consumers to increase their savings. • Social security taxes are increased. • Consumers believe they will not receive pay increases next year. B

15. 400 • The unemployment rate measures the percentage of • people in the labor force who do not have jobs • people in the labor force who have a part-time job but are looking for a full-time job • people who do not have jobs and have given up looking for work • people in the adult population who do not have jobs • people in the adult population who have temporary jobs A

16. 500 • Which of the following can be considered a leakage from the circular flow of economic activity? • Investment • Government expenditures • Consumption • Exports • Saving E

17. Which of the following will occur if the government imposes a price ceiling below the equilibrium price of a good? • The quantity sold will exceed the equilibrium quantity. • Firms’ total revenues will increase if demand is price elastic. • There will be a shortage in the market. • All firms will shut down, since price is below the equilibrium price. • Price will exceed the marginal cost of producing the last unit sold. C 100

18. Which of the following will decrease the demand for beef? • An increase in the price of pork, if pork and beef are substitute goods. • An increase in the price of potatoes, if potatoes and beef are complementary goods. • A decrease in the cost of transporting beef to consumers. • An increase in the income levels of most consumers, if beef is a normal good. • Research showing beef is better for your health than chicken. B 200

19. Assume that consumers consider potatoes to be an inferior good, but consider rice to be a normal good. An increase in consumers’ incomes will most likely affect the equilibrium price and quantity of potatoes and rice in which of the following ways? • Potatoes Rice • Price Quantity Price Quantity • Decrease Decrease Increase Increase • Decrease Increase Increase Decrease • Decrease Decrease Decrease Decrease • Increase Increase Decrease Decrease • Increase Decrease Increase Decrease A 300

20. Assume that a consumer spends all her income on the purchase of two goods. If the consumer’s income doubles and the prices of the two goods also double, the quantity of the two goods purchased will • also double • more than double • increase, but it will be less than double • not change • depend on the slope of the demand curve D 400

21. Consumer surplus is defined as • opportunity cost minus total revenue • total revenue minus opportunity cost • the difference between the resource costs and the price that consumers pay • the difference between the value that consumers place on a good and the price they pay • the sum of external costs and benefits D 500

22. 100 • Crowding out is best described as which of the following? • The decrease in full-employment output caused by an increase in taxes • The decrease in consumption or private investment spending caused by an increase in government spending • The decrease in government spending caused by a decrease in taxes • The increase in the amount of capital outflow caused by the increase in government spending • The increase in the amount of capital inflow caused by the increase in government spending B

23. 200 • The classical economists argued that involuntary unemployment would be eliminated by • increasing government spending to increase aggregate demand • increasing the money supply to stimulate investment spending • self-correcting market forces stemming from flexible prices and wages • maintaining the growth of the money supply at a constant rate • decreasing corporate income taxes to encourage investment C

24. 300 • An increase in the marginal propensity to consume causes an increase in which of the following? • Marginal propensity to save • Spending multiplier • Savings rate • Exports • Aggregate supply B

25. 400 • Assume that the economy is at full-employment equilibrium in the diagram shown above. Which of the following would lead to stagflation? • A leftward shift of the short-run aggregate supply curve only • A rightward shift of the short-run aggregate supply curve only • A leftward shift of the aggregate demand curve only • A rightward shift of the aggregate demand curve only • A rightward shift in both the short-run aggregate supply curve and the aggregate demand curve A

26. 500 • A change in which of the following will cause the short-run aggregate supply curve to shift? • The price level • Government spending • The cost of all inputs • I only • II only • III only • I and II only • I, II, and III C

27. If the price of a firm’s variable input increases, which of the following will occur? • The firm will decrease its level of production. • The price of the good will decrease in the short run. • The firm’s marginal costs will decrease at every level of output. • The firm’s average fixed cost will decrease. • More firms will enter the industry in the long run. A 100

28. In a given time period, a person consumes more and more of a good or service and, as a result, enjoys each additional unit less and is willing to pay less for each additional unit. This behavior is consistent with the law of • diminishing returns • diminishing marginal product • diminishing marginal utility • increasing costs • scarce resources C 200

29. Which of the following best describes the relationship between the average total cost curve and the marginal cost curve in the short run? • If the average total cost curve is rising, the marginal cost curve is above the average total cost curve. • If the average total cost curve is rising, the marginal cost curve is below the average total cost curve. • If the average total cost curve is above the marginal cost curve, the marginal cost curve is rising. • If the average total cost curve is below the marginal cost curve, the marginal cost curve is falling. • If the average and marginal cost curves intersect, the marginal cost curve is at a minimum. A 300

30. At the current production level of good X, price is greater than marginal cost. Which of the following actions would lead to greater efficiency? • Decreasing the production of good X • Increasing the production of good X • Maintaining the current level of production of good X • Imposing a tax on the production of good X • Imposing an effective price floor on good X B 400

31. Economies of scale exist when • the doubling of all inputs doubles the output produced • short-run average total cost decreases as output increases • short-run average total cost remains constant as output increases • long-run average total cost increases as output increases • long-run average total cost decreases as output increases E 500