Microeconomics Test 1
1. According to Emerson: "Want is a growing giant whom the coat of Have was never large
enough to cover." According to economists, "Want" exceeds "Have" because:
A. people are greedy.
B. productive resources are limited.
C. human beings are inherently insecure.
D. people are irrational.
2. Economics may best be defined as the:
A. interaction between macro and micro considerations.
B. social science concerned with how individuals, institutions, and society make optimal choices
under conditions of scarcity.
C. empirical testing of value judgments through the use of logic.
D. study of why people are rational.
3. Purposeful behavior means that:
A. people are selfish in their decision making.
B. people weigh costs and benefits to make decisions.
C. people are immune from emotions affecting their decisions.
D. decision makers do not make mistakes when weighing costs and benefits.
4. If someone produced too much of a good, this would suggest that:
A. rational choice cannot be applied to many economic decisions.
B. the good was produced past the point where its marginal cost exceeded its marginal benefit.
C. certain goods and services such as education and health care are inherently desirable and
should be produced regardless of costs and benefits.
D. the good was produced to the point where its marginal benefit exceeded its marginal cost.
5.Refer to the diagram. The concept of opportunity cost is best represented by the:
A. shift of the production possibilities curve from PP1 to PP2.
B. move from B on PP1 to E on PP2.
C. move from B on PP1 to C on PP1.
D. move from D inside PP1 to B on PP1.
6. Refer to the diagram. An improvement in technology will:
A. shift the production possibilities curve from PP1 to PP2.
B. shift the production possibilities curve from PP2 to PP1.
C. move the economy from A to C along PP1.
D. move the economy from A, B, or C on PP1 to D.
7. Which of the following statements, if any, is correct for a nation that is producing only consumer
and capital goods?
A. Other things equal, the more consumer goods a nation produces, the greater will be its future
growth rate.
B. Other things equal, the more capital goods a nation produces, the greater will be its future
growth rate.
C. There is no general relationship between the current division of output between consumer and
capital goods and the future growth rate.
D. None of these statements is correct.
8. If all discrimination in the United States were eliminated, the economy would:
A. have a less concave production possibilities curve.
B. produce at some point closer to its production possibilities curve.
C. be able to produce at some point outside of its production possibilities curve.
D. produce more consumer goods and fewer investment goods.
9. The fallacy of composition states that:
A. because economic systems are composed of so many diverse economic units, economic laws are
necessarily inexact.
B. the anticipation of a particular event can affect the 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.
10. A caller to a radio talk show states that oil companies are "greedy price gougers." This is an example
of:
A. loaded terminology.
B. the "after this, therefore because of this fallacy."
C. the fallacy of composition.
D. the economic perspective.
11. The French term "laissez-faire" means:
A. "there is no free lunch."
B. "let it be."
C. "circular flow."
D. "public ownership."
12. Copyrights and trademarks are examples of:
A. capital goods.
B. human capital.
C. property rights.
D. public goods.
13. Competition means that:
A. sellers can manipulate market price by causing product scarcities.
B. there are independently acting buyers and sellers in each market.
C. a product can be purchased at a number of different prices.
D. there is more than one seller in a market.
14. Specialization—the division of labor—enhances productivity and efficiency by:
A. allowing workers to take advantage of existing differences in their abilities and skills.
B. avoiding the time loss involved in shifting from one production task to another.
C. allowing workers to develop skills by working on one, or a limited number, of tasks.
D. all of the means identified in the other answers.
15. Which of the following characteristics is least unique to a market system?
A. Private ownership of property resources.
B. Competition among buyers and sellers pursuing monetary returns.
C. The widespread use of money.
D. Freedom of enterprise and choice.
16. Economic profits and losses:
A. are both considered by economists to be a part of production costs.
B. are essential to the reallocation of resources from less desired to more desired goods.
C. have no influence on the composition of domestic output.
D. equalize the distribution of income in the long run.
17. The economic function of profits and losses is to:
A. bring about a more equal distribution of income.
B. signal that resources should be reallocated.
C. eliminate small firms and reduce competition.
D. tell government which industries need to be subsidized.
18. The advent of DVDs has virtually demolished the market for videocassettes. This is an example
of:
A. creative destruction.
B. derived demand.
C. capital accumulation.
D. the difference between normal and economic profits.
19. "Consumer sovereignty" refers to the:
A. fact that resource prices are higher than product prices in capitalistic economies.
B. idea that the pursuit of self-interest is in the public interest.
C. idea that the decisions of producers must ultimately conform to consumer demands.
D. fact that a federal agency exists to protect consumers from harmful and defective products.
20.
Refer to the diagram. A surplus of 160 units would be encountered if the price was:
A. $1.10, that is, $1.60 minus $.50.
B. $1.60.
C. $1.00.
D. $0.50.
21. At the equilibrium price:
A. quantity supplied may exceed quantity demanded or vice versa.
B. there are no pressures on price to either rise or fall.
C. there are forces that cause price to rise.
D. there are forces that cause price to fall.
22.
Refer to the diagram. If this is a competitive market, price and quantity will move toward:
A. $60 and 100, respectively.
B. $60 and 200, respectively.
C. $40 and 150, respectively.
D. $20 and 150, respectively.
23. Assume in a competitive market that price is initially above the equilibrium level. We can predict
that price will:
A. decrease, quantity demanded will decrease, and quantity supplied will increase.
B. decrease and quantity demanded and quantity supplied will both decrease.
C. decrease, quantity demanded will increase, and quantity supplied will decrease.
D. increase, quantity demanded will decrease, and quantity supplied will increase.
24. Assume in a competitive market that price is initially below the equilibrium level. We can predict
that price will:
A. decrease, quantity demanded will decrease, and quantity supplied will increase.
B. decrease and quantity demanded and quantity supplied will both decrease.
C. increase, quantity demanded will increase, and quantity supplied will decrease.
D. increase, quantity demanded will decrease, and quantity supplied will increase.
25. Other things equal, an excise tax on a product will:
A. increase its supply.
B. increase its price.
C. increase the quantity sold.
D. increase its demand.
26. 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.
27. Which of the following is not characteristic of the demand for a commodity that 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.
28. A perfectly inelastic demand schedule:
A. rises upward and to the right but has a constant slope.
B. can be represented by a line parallel to the vertical axis.
C. cannot be shown on a two-dimensional graph.
D. can be represented by a line parallel to the horizontal axis.
29. Suppose Aiyanna's Pizzeria currently faces a linear demand curve and is charging a very high price
per pizza and doing very little business. Aiyanna 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.
30. If the demand for bacon is relatively elastic, a 10 percent decline in the price of bacon will:
A. decrease the amount demanded by more than 10 percent.
B. increase the amount demanded by more than 10 percent.
C. decrease the amount demanded by less than 10 percent.
D. increase the amount demanded by less than 10 percent.
31. A demand curve that is parallel to the horizontal axis is:
A. perfectly inelastic.
B. perfectly elastic.
C. relatively inelastic.
D. relatively elastic.
32. In which of the following instances will total revenue decline?
A. Price rises and supply is elastic.
B. Price falls and demand is elastic.
C. Price rises and demand is inelastic.
D. Price rises and demand is elastic.
33. If a firm's demand for labor is elastic, a union-negotiated wage increase will:
A. necessarily be inflationary.
B. cause the firm's total payroll to increase.
C. cause the firm's total payroll to decline.
D. cause a shortage of labor.
34. The Illinois Central Railroad once asked the Illinois Commerce Commission for permission to increase
its commuter rates by 20 percent. The railroad argued that declining revenues made this rate increase
essential. Opponents of the rate increase contended that the railroad's revenues would fall because of
the rate hike. It can be concluded that:
A. both groups felt that the demand was elastic but for different reasons.
B. both groups felt that the demand was inelastic but for different reasons.
C. the railroad felt that the demand for passenger service was inelastic and opponents of the rate
increase felt it was elastic.
D. the railroad felt that the demand for passenger service was elastic and opponents of the rate
increase felt it was inelastic.
35. Gigantic State University raises tuition for the purpose of increasing its revenue so that more faculty
can be hired. GSU is assuming that the demand for education at GSU is:
A. decreasing.
B. relatively elastic.
C. perfectly elastic.
D. relatively inelastic.
36. In which of the following cases will total revenue increase?
A. Price falls and demand is inelastic.
B. Price falls and supply is elastic.
C. Price rises and demand is inelastic.
D. Price rises and demand is elastic.
37. The demand schedules for such products as eggs, bread, and electricity tend to be:
A. perfectly price elastic.
B. of unit price elasticity.
C. relatively price inelastic.
D. relatively price elastic.
38. The narrower the definition of a product:
A. the larger the number of substitutes and the greater the price elasticity of demand.
B. the smaller the number of substitutes and the greater the price elasticity of demand.
C. the larger the number of substitutes and the smaller the price elasticity of demand.
D. the smaller the number of substitutes and the smaller the price elasticity of demand.
39. The price of old baseball cards rises rapidly with increases in demand because:
A. the supply of old baseball cards is price inelastic.
B. the supply of old baseball cards in price elastic.
C. the demand for old baseball cards is price inelastic.
D. the demand for old baseball cards is price elastic.
40. Which type of goods is most adversely affected by recessions?
A. Goods for which the income elasticity coefficient is relatively low or negative.
B. Goods for which the income elasticity coefficient is relatively high and positive.
C. Goods for which the cross elasticity coefficient is positive.
D. Goods for which the cross elasticity coefficient is negative.
41. The utility of a good or service:
A. is synonymous with usefulness.
B. is the satisfaction or pleasure one gets from consuming it.
C. is easy to quantify.
D. rarely varies from person to person.
42. Marginal utility can be:
A. positive, but not negative.
B. positive or negative, but not zero.
C. positive, negative, or zero.
D. decreasing, but not negative.
43. The law of diminishing marginal utility states that:
A. total utility is maximized when consumers obtain the same amount of utility per unit of each
product consumed.
B. beyond some point, additional units of a product will yield less and less extra satisfaction to a
consumer.
C. price must be lowered to induce firms to supply more of a product.
D. it will take larger and larger amounts of resources beyond some point to produce successive
units of a product.
44. Marginal utility is the:
A. sensitivity of consumer purchases of a good to changes in the price of that good.
B. change in total utility obtained by consuming one more unit of a good.
C. change in total utility obtained by consuming another unit of a good divided by the change in
the price of that good.
D. total utility associated with the consumption of a certain number of units of a good divided by
the number of units consumed.
45. Where total utility is at a maximum, marginal utility is:
A. negative.
B. positive and increasing.
C. zero.
D. positive but decreasing.
46. The theory of consumer behavior assumes that:
A. consumers behave rationally, attempting to maximize their satisfaction.
B. consumers have unlimited money incomes.
C. consumers do not know how much marginal utility they obtain from successive units of various
products.
D. marginal utility is constant.
47. How did Apple overcome consumers' diminishing marginal utility for iPads?
A. Apple lowered the price of iPads so that previous buyers would purchase another unit.
B. Apple introduced new features to entice previous buyers to purchase new models.
C. Apple ignored the problem and focused solely on attracting new buyers.
D. Apple was unable to overcome the problem and has faced steadily declining sales.
48. The diamond-water paradox arises because:
A. essential goods may be cheap while nonessential goods may be expensive.
B. the marginal utility of certain products increases, rather than diminishes.
C. essential goods are always higher priced than nonessential goods.
D. we sometimes fail to use money as a standard of value.
49. 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 by raising the price of additional units of care.
C. has decreased health care costs and therefore reduced aggregate health care expenditures.
D. increases the amount of health care consumed by reducing the price of additional units of care.
50. According to economists, gift registries, returning gifts for cash refunds, and "recycling gifts":
A. are inefficient because the time spent in these activities is never worth the benefit recipients
receive from doing them.
B. are equally efficient because the recipient gets exactly what he wants.
C. are more efficient than if givers simply gave cash gifts.
D. increase the efficiency of gift-giving because they allow the recipient to consume goods that
provide greater utility and transfer away those goods that are less satisfying.
51. Most people do not steal because:
A. stolen goods are subject to the law of diminishing marginal utility.
B. the marginal utilities of stolen goods are negative.
C. their marginal costs, including guilt costs, are too high.
D. stolen goods can only be sold at deep discounts.
52. Which of the following assumptions about human behavior is most likely to be accepted by
behavioral economists?
A. People have preferences that are unstable and vary by context.
B. People are almost entirely self-interested in their behavior.
C. People plan out decisions well and possess lots of willpower.
D. People eagerly and accurately calculate the benefits and costs of their decisions.
53. According to behavioral economists, the human brain:
A. makes most decisions based on careful calculation of benefits and costs.
B. uses evolutionary-developed heuristics to make many decisions.
C. only develops heuristics for decision making after the same decision has been made multiple
times using a rational framework of comparing benefits and costs.
D. employs heuristics in decision making that are slow but generally error-free.
54. According to the "endowment effect:"
A. people are willing to pay more for things they don't own than they would have to receive to give
up something they already have.
B. people feel gains and losses with equal intensity.
C. people assign higher values to things they own than things they don't.
D. the intensity of feelings from gains and losses depends on how much wealth one possesses.
55. In the face of rising costs, some firms reduce the quality of the goods they produce rather than
maintain quality and increase prices. How would behavioral economics explain this strategy?
A. People have an aversion to losses, and consumers are more likely to feel the loss of a price
increase than a quality reduction.
B. Consumers are more tolerant of diminished quality because diminishing marginal utility causes
people to get rid of goods sooner than in the past.
C. Firms are myopic in their decision making, with little regard for future profitability.
D. The availability heuristic will cause people to buy whatever is offered, regardless of the quality.
56. Credit card companies require low minimum payments that impose significant interest costs on
consumers choosing to pay the minimum. Recent legislation has required credit card companies to show
on customer billing statements how much interest would be paid and how long it would take to repay
the current balance if only the minimum is paid. Behavioral economists would expect this legislation to:
A. substantially increase monthly payments, as consumers make better decisions when they have
more information.
B. overcome the status quo bias that keeps people paying the minimum.
C. cause credit card companies to increase the minimum payments.
D. have little effect, as anchoring would keep many people paying the minimum.
57. For economists, "myopia" refers to:
A. visual nearsightedness.
B. people's difficulty in conceptualizing the future.
C. people's tendency to put too much emphasis on the future and ignore important present
concerns.
D. people's tendency to focus on microeconomic concerns because of an inability to conceptualize
macroeconomics.
58. Which of the following individuals least likely suffers from myopia?
A. Marilyn, who struggles to lose weight because she regularly cheats on her diet.
B. Myrna, who lived through the Great Depression and tends to spend frugally and save most of
her money.
C. Malcolm, who currently spends all his income and saves nothing for retirement.
D. Marvin, who regularly sleeps in and is constantly late for work, much to the chagrin of his boss.
59. Natural disasters often cause shortages of critical supplies. What outcomes would neoclassical and
behavioral economics typically predict from these events?
A. Both would expect prices to rise significantly, whether from market forces or from self-interest
overwhelming any sense of compassion for others.
B. Both would expect sellers to keep prices unchanged, whether to keep customers happy long-
term or out of a sense of fairness.
C. Neoclassical economists would expect economic chaos and collapse, while behavioral
economists would expect everyone to act cooperatively.
D. Neoclassical economists would expect prices to rise dramatically as a natural result of the
greater scarcity, and behavioral economists would expect prices to increase less or not at all as people
try not to take advantage of the situation.
60. The threat of rejection in market transactions:
A. leads to higher prices as sellers try to cover possible losses.
B. leads to better products and lower prices for consumers.
C. leads to less cooperation between buyers and sellers.
D. does all of these.
