Exam

Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the
question.

1) BMW recently decided to build a manufacturing plant in Shenyang, China. At this plant, BMW is able
to take advantage of paying lower wages to its Chinese workers than it pays its German workers, but it
also sacrifices the high levels of technical training possessed by its German workers. In deciding to open
the Shenyang plant, BMW
A) faced no trade-offs because employing lower-wage workers increased efficiency.
B) eroded some of its competitiveness in the luxury car market because of its decreased cost of
production.
C) faced a trade-off between higher cost and lower precision.
D) adopted a negative technological change because it replaced high-skilled workers with low-skilled
workers.

2) The production possibilities frontier shows the ________ combinations of two products that may be
produced in a particular time period with available resources.
A) only B) maximum attainable
C) minimum attainable D) equitable

3) The production possibilities frontier model assumes which of the following?

A) The economy produces only two products.
B) The level of technology is variable.
C) Any level of the two products that the economy produces is currently possible.
D) Labor, capital, land and natural resources are unlimited in quantity.

4) Bella can produce either a combination of 60 silk roses and 80 silk leaves or a combination of 70 silk
roses and 55 silk leaves. If she now produces 60 silk roses and 80 silk leaves, what is the opportunity cost
of producing an additional 10 silk roses?
A) 2.5 silk leaves B) 10 silk leaves C) 25 silk leaves D) 55 silk leaves

Figure 2-3

5) Refer to Figure 2-3. Sergio Vignetto raises cattle and llamas on his land. His land is equally suitable
for raising either animal. Which of the graphs in Figure 2-3 represent his production possibilities
frontier? A) Graph A
B) Graph B
C) Graph C
D) either Graph A or Graph C
E) either Graph B or Graph C

6) Refer to Figure 2-3. Sergio Vignetto raises cattle and llamas on his land. A portion of his land is more
suitable for raising cattle, and the other portion is better suited for raising llamas. Which of the graphs in
Figure 2-3 represent his production possibilities frontier?
A) Graph A
B) Graph B
C) Graph C
D) either Graph B or Graph C
E) either Graph A or Graph C

Table 2-1

Production choices for Tomaso's Trattoria

Quantity of
Quantity of Calzones
Choice Pizzas Produced Produced
A 48 0
B 36 15
C 24 30
D 12 45
E 0 60

7) Refer to Table 2-1. Assume Tomaso's Trattoria only produces pizzas and calzones. A combination of
36 pizzas and 30 calzones would appear
A) at the horizontal intercept of Tomaso's production possibilities frontier.
B) outside Tomaso's production possibilities frontier.
C) along Tomaso's production possibilities frontier.
D) inside Tomaso's production possibilities frontier.

8) Economic decline (negative growth) is represented on a production possibilities frontier model by the
production possibility frontier
A) becoming steeper. B) becoming flatter.
C) shifting inward. D) shifting outward.

9) Without an increase in the supplies of factors of production, how can a nation achieve economic
growth?
A) through technological advancement which enables more output with the same quantity of resources
B) by increasing the prices of factors of production
C) by lowering the prices of factors of production
D) by producing more high-value goods and less of low-value goods
Figure 2-4

Figure 2-4 shows various points on three different production possibilities frontiers for a nation.

10) Refer to Figure 2-4. A movement from X to Y

A) is the result of advancements in food production technology only, with no change in the technology for
plastic production.
B) is the result of advancements in plastic production technology only, with no change in food production
technology.
C) could occur because of an influx of immigrant labor.
D) could be due to a change in consumers' tastes and preferences.

11) Refer to Figure 2-4. Consider the following events:

a. an increase in the unemployment rate
b. a decrease in a nation's money supply
c. a war that kills a significant portion of a nation's population

Which of the events listed above could cause a movement from Y to W ?

A) a, b and c
B) a and c only
C) a only
D) c only
E) a and b only

12) Suppose there is no unemployment in the economy and society decides that it wants more of one
good. Which of the following statements is true?
A) It can increase output without giving up another good.
B) It can only achieve this with an advance in technology.
C) It can only achieve this with an increase in resource supplies.
D) It will have to give up production and consumption of some other good.

Figure 2-5
13) Refer to Figure 2-5. If the economy is currently producing at point W, what is the opportunity cost
of moving to point X?
A) 19 million tons of steel B) 5 million tons of paper
C) 9 million tons of paper D) 3 million tons of steel

Figure 2-6

General Motors recently approved for production the Cadillac Converj, an electric car based on its Chevy
Volt. The Converj will feature a "Generation 1.5 Voltec" powertrain, with a hybrid engine that runs on a
combination of electricity and gasoline. Assume GM chooses to produce both hybrid-engine vehicles and
gasoline-engine vehicles for its Cadillac brand. Figure 2-6 shows changes to its production possibilities
frontier in response to new developments and different strategic production decisions.

14) Refer to Figure 2-6. In response to changing consumer demands, GM has cut back on the
production of hybrids and increased its production of gasoline-powered vehicles. This strategy is best
represented by the
A) movement from J to H in Graph B. B) movement from F to E in Graph A.
C) movement from L to K in Graph C. D) movement from G to J in Graph B.

15) Refer to Figure 2-6. Assume a technological advancement greatly reduces the cost to produce
hybrid-engine vehicles. This is best represented by the
A) movement from G to H in Graph B. B) movement from H to J in Graph B.
C) movement from E to F in Graph A. D) movement from K to L in Graph C.

Table 2-3

Serena Haley
Bracelets 8 9
Necklaces 16 12

Table 2-3 shows the output per week of two jewelers, Serena and Haley. They can either devote their
time to making bracelets or making necklaces.

16) Refer to Table 2-3. What is Haley's opportunity cost of making a bracelet?
A) 1 1/3 necklaces B) 3/4 of a bracelet
C) 3 bracelets D) 2 necklaces

17) Refer to Table 2-3. What is Serena's opportunity cost of making a bracelet?
A) 2 necklaces B) 1/2 of a bracelet
C) 3/4 of a bracelet D) 1/2 of a necklace

18) Refer to Table 2-3. Which of the following statements is true?

A) Serena has a comparative advantage in making both products.
B) Haley has a comparative advantage in making necklaces and Serena in making bracelets.
C) Haley has a comparative advantage in making bracelets and Serena in making necklaces.
D) Haley has a comparative advantage in making both products.

19) Specializing in the production of a good or service in which one has a comparative advantage enables
a country to do all of the following except
A) increase the variety of products that it can consume with no increase in resources.
B) produce a combination of goods that lies outside its own production possibilities frontier.
C) engage in mutually beneficial trade with other nations.
D) consume a combination of goods that lies outside its own production possibilities frontier.

20) Rayburn Reed is a highly talented photographer. He has chosen to specialize in photography because
of all of the following except
A) he obviously has a comparative advantage in photography.
B) for him, this is the most lucrative way to purchase the products that he wants to consume.
C) his photographs are highly esteemed by art lovers who are willing to pay very high prices.
D) his opportunity cost of pursuing another career is very low.

21) All of the following are examples of spending on factors of production in the circular flow model
except
A) Bima hires two students to work at his ice-cream store.
B) The Banyan Tree rents a much larger property so that it can add a restaurant to its facilities.
C) "Get Fit Together" purchases 3 new treadmills for its gym.
D) Iris buys a dozen roses for her mother's birthday.

22) The market for tablet computers has grown rapidly over the past few years, due in part to the
overwhelming success of the Apple iPad. Following the successful launch of the iPad in 2010, companies
such as Toshiba, Samsung, Dell, and Amazon have all introduced products to compete with the iPad. The
tablet computers introduced to compete with the iPad would be considered
A) inferior goods compared to the iPad. B) normal goods compared to the iPad.
C) complements to the iPad. D) substitutes for the iPad.

23) Holding everything else constant, an increase in the price of MP3 players will result in
A) a decrease in the quantity of MP3 players supplied.
B) an increase in the supply of MP3 players.
C) a decrease in the demand for MP3 players.
D) a decrease in the quantity of MP3 players demanded.
24) If an increase in income leads to in an increase in the demand for peanut butter, then peanut butter is
A) a normal good. B) a complement.
C) a neutral good. D) a necessity.

25) The Internet has created a new category in the book selling market, namely, the "barely used" book.
How does the availability of barely used books affect the market for new books?
A) The demand curve for new books shifts to the right.
B) The supply curve for new books shifts to the right.
C) The supply curve for new books shifts to the left.
D) The demand curve for new books shifts to the left.

26) Elvira decreased her consumption of bananas when the price of peanut butter increased. For Elvira,
peanut butter and bananas are
A) both inferior goods. B) both luxury goods.
C) complements in consumption. D) substitutes in consumption.

27) Technological advances have resulted in lower prices for digital cameras. What is the impact of this
on the market for traditional (non-digital) cameras?
A) The supply curve for traditional cameras shifts to the left.
B) The demand curve for traditional cameras shifts to the right.
C) The demand curve for traditional cameras shifts to the left.
D) The supply curve for traditional cameras shifts to the right.

28) In June, buyers of titanium expect that the price of titanium will fall in July. What happens in the
titanium market in June, holding everything else constant?
A) The quantity demanded decreases B) The demand curve shifts to the left.
C) The demand curve shifts to the right. D) The quantity demanded increases.

29) During the recession of 2007-2009, despite falling income levels, the fast-food chain Subway
experienced increased sales. The increase in demand for Subway sandwiches despite the decline in
income indicates that Subway sandwiches are considered
A) complementary goods. B) inferior goods.
C) substitute goods. D) normal goods.

30) Last year, the Pottery Palace supplied 8,000 ceramic pots at $40 each. This year, the company
supplied the same quantity of ceramic pots at $55 each. Based on this evidence, The Pottery Palace has
experienced
A) an increase in supply. B) an increase in the quantity supplied.
C) a decrease in supply. D) a decrease in the quantity supplied.

31) In October, market analysts predict that the price of platinum will fall in November. What happens in
the platinum market in October, holding everything else constant?
A) The demand curve shifts to the right. B) The supply curve shifts to the right.
C) The quantity demanded and the quantity supplied of platinum increase. D) The supply curve shifts
to the left.

32) Danielle Ocean pays for monthly pool maintenance for her home swimming pool. Last week the owner
of the pool service informed Danielle that he will have to raise his monthly service fee because of
increases in the price of pool chemicals. How is the market for pool maintenance services affected by
this?
A) There is a decrease in the demand for pool maintenance services.
B) There is a decrease in the quantity of pool maintenance services supplied.
C) There is a decrease in the supply of pool maintenance services.
D) There is an increase in the supply of pool maintenance services.

33) If a firm has an incentive to increase supply now and decrease supply in the future, the firm expects
that the
A) demand for the product will be lower in the future than it is today.
B) price of inputs will be lower in the future than they are today.
C) price of its product will be lower in the future than it is today.
D) price of its product will be higher in the future than it is today.

Figure 3-4

34) Refer to Figure 3-4. If the current market price is $10, the market will achieve equilibrium by
A) a price increase, increasing the supply and decreasing the demand.
B) a price decrease, decreasing the quantity supplied and increasing the quantity demanded.
C) a price increase, increasing the quantity supplied and decreasing the quantity demanded.
D) a price decrease, decreasing the supply and increasing the demand.

Figure 3-6
35) Refer to Figure 3-6. The figure above represents the market for canvas tote bags. Assume that the
market price is $35. Which of the following statement is true?
A) There is a surplus that will cause the price to increase; quantity demanded will then decrease and
quantity supplied will increase until the price equals $25.
B) There is a surplus that will cause the price to decrease; quantity supplied will then increase and
quantity demanded will decrease until the price equals $25.
C) There is a surplus that will cause the price to decrease; quantity demanded will then increase and
quantity supplied will decrease until the price equals $25.
D) There will be a surplus that will cause the price to decrease; demand will then increase and supply
will decrease until the price equals $25.

36) Which of the following would cause both the equilibrium price and equilibrium quantity of cotton
(assume that cotton is a normal good) to increase?
A) a decrease in consumer income
B) a drought that sharply reduces cotton output
C) unusually good weather that results in a bumper crop of cotton
D) an increase in consumer income

37) Which of the following would cause the equilibrium price of white bread to decrease and the
equilibrium quantity of white bread to increase?
A) a decrease in the price of flour
B) an increase in the price of flour
C) an increase in the price of butter, a complement for white bread
D) an increase in the price of rye bread, a substitute for white bread

38) In recent years the cost of producing organic produce in the U.S. has decreased largely due
technological advancement. At the same time, more and more Americans prefer organic produce over
conventional produce. Which of the following best explains the effect of these events in the organic
produce market?
A) Both the supply and demand curves have shifted to the right. As a result, there has been an increase
in the equilibrium quantity and an uncertain effect on the equilibrium price.
B) The supply curve has shifted to the left and the demand curve has shifted to the right. As a result
there has been an increase in the equilibrium quantity and an uncertain effect on the equilibrium price.
C) Both the supply and demand curves have shifted to the right. As a result, there has been an increase
in both the equilibrium price and the equilibrium quantity.
D) The supply curve has shifted to the left and the demand curve has shifted to the right. As a result,
there has been an increase in the equilibrium price and an uncertain effect on the equilibrium quantity.

39) Positive technological change in the production of LCD televisions caused the price of LCD televisions
to fall. Holding everything else constant, how would this affect the market for Blu-ray players (a
complement to LCD televisions)?
A) The demand for blu-ray players would increase and the equilibrium price of blu-ray players would
increase.
B) The demand for blu-ray players would increase and the equilibrium price of blu-ray players would
decrease.
C) The supply of blu-ray players would increase and the equilibrium price of blu-ray players would
decrease.
D) The demand for blu-ray players would decrease because consumers could afford to buy fewer LCD
televisions and blu-ray players.

Figure 3-8

40) Refer to Figure 3-8. The graph in this figure illustrates an initial competitive equilibrium in the
market for apples at the intersection of D2 and S2 (point E). Which of the following changes would cause
the equilibrium to change to point A?
A) A decrease in the wages of apple workers and an increase in the price of oranges, a substitute for
apples.
B) A positive change in the technology used to produce apples and decrease in the price of oranges, a
substitute for apples.
C) An increase in the number of apple producers and a decrease in the number of apple trees as a result
of disease.
D) An increase in the wages of apple workers and a decrease in the price of oranges, a substitute for
apples.

41) What would happen in the market for laser eye surgery if insurance companies started to cover a
portion of the price of voluntary procedures?
A) Demand and supply will both increase.
B) Supply will increase, but this will not shift the demand curve.
C) Demand will increase, but this will not shift the supply curve.
D) Demand will increase and supply will decrease.

42) All else equal, a shortage of display screens used in the manufacture of tablet computers would
A) shift the demand curve for tablet computers to the left.
B) shift the supply curve for tablet computers to the left.
C) shift the supply curve for tablet computers to the right.
D) shift the demand curve for tablet computers to the right.
43) Suppose the value of the price elasticity of demand is -3. What does this mean?
A) A 1 percent increase in the price of the good causes quantity demanded to decrease by 3 percent.
B) A 3 percent increase in the price of the good causes quantity demanded to decrease by 1 percent.
C) A $1 increase in price causes quantity demanded to fall by 3 units.
D) A 1 percent increase in the price of the good causes quantity demanded to increase by 3 percent.

44) Jenna runs a small boutique in Capitola. She tells one of her suppliers that she is willing to pay $6 for
a pair of wool hand warmers and not a dime more. On the basis of this information, what can you
conclude about her price elasticity of demand for wool hand warmers?
A) It is perfectly inelastic. B) It is elastic.
C) It is perfectly elastic. D) The price elasticity coefficient is 0.

45) If, for a given percentage increase in price, quantity demanded falls by a proportionately smaller
percentage, then demand is
A) relatively elastic. B) relatively inelastic.
C) perfectly elastic. D) unit-elastic.

46) When there few close substitutes available for a good, demand tends to be
A) relatively inelastic. B) relatively elastic.
C) perfectly inelastic. D) perfectly elastic.

47) Jonah lives in a small town where there is only one Mexican restaurant. Which of the following is
likely to be true about the price elasticity of demand for meals at the Mexican restaurant?
A) Demand is likely to be perfectly elastic.
B) Demand is likely to be relatively elastic.
C) Demand is likely to be relatively inelastic.
D) Demand is likely to be perfectly inelastic.

48) If the price of steel increases drastically, the quantity of steel demanded by the building industry will
fall significantly over the long run because
A) profits will fall by a greater amount in the long run than in the short run.
B) buyers of steel are less sensitive to a price change if they have more time to adjust to the price change
C) sales revenue in the building industry will fall sharply.
D) buyers of steel are more sensitive to a price change if they have more time to adjust to the price
change.

49) If the market for a product is broadly defined, then

A) there are many substitutes for the product and the demand for the product is relatively elastic.
B) there are few substitutes for the product and the demand for the product is relatively inelastic.
C) the expenditure on the good is likely to make up a large share of one's budget.
D) the good has many complements.

50) A service station owner in Staten Island, New York, was worried that raising the price of gasoline
would cause the quantity demanded to fall by so much that he would be in a worse situation than if he did
not raise the price. If raising the price of gasoline would cause the owner to receive less total revenue
from the sale of gasoline, the demand for gasoline is
A) elastic. B) unit elastic.
C) inelastic. D) perfectly inelastic.

51) When demand is elastic, a fall in price causes total revenue to rise because
A) the demand curve shifts.
B) when price falls, quantity sold increases so total revenue automatically rises.
C) the percentage increase in quantity demanded is less than the percentage fall in price.
D) the increase in quantity sold is large enough to offset the lower price.

52) Suppose a decrease in the supply of wheat results in an increase in revenue. This indicates that
A) the decrease in quantity sold is proportionately larger than the resulting change in price.
B) the resulting increase in price is proportionately greater than decrease in quantity sold.
C) the supply curve for wheat must be vertical.
D) the demand curve for wheat must be vertical.

53) If you expect the economy is going to boom and average income in the economy will rise in the
foreseeable future, the type of firm that would be able to increase its sales if your expectations are met is
A) one that sells a luxury good. B) one that sells an inferior good.
C) one that sells a necessity good. D) one that sells a price inelastic good.

54) Consider the following pairs of items:

a. shampoo and conditioner
b. iPhones and earbuds
c. a laptop computer and a desktop computer
d. beef and pork
e. air-travel and weed killer

Which of the pairs listed will have a negative cross-price elasticity?

A) e only B) a and b only

C) c and d only D) a, b, and c only

55) Paul goes to Sportsmart to buy a new tennis racquet. He is willing to pay $200 for a new racquet, but
buys one on sale for $125. Paul's consumer surplus from the purchase is
A) $325 B) $200 C) $125 D) $75

56) Marginal cost is

A) the difference between the lowest price a firm would have been willing to accept and the price it
actually receives.
B) the total cost of producing one unit of a good or service.
C) the average cost of producing a good or service.
D) the additional cost to a firm of producing one more unit of a good or service.

Figure 4-3
Figure 4-3 shows the market for tiger shrimp. The market is initially in equilibrium at a price of $15 and a
quantity of 80. Now suppose producers decide to cut output to 40 in order to raise the price to $18.

57) Refer to Figure 4-3. At a price of $18 consumers are willing to buy 40 pounds of tiger shrimp. Is this
an economically efficient quantity?
A) No, the marginal benefit of the 40th unit exceeds the marginal cost of that 80th unit.
B) No, the marginal cost of the 40th unit exceeds the marginal benefit of the 40th unit.
C) Yes, because $18 shows what consumers are willing to pay for the product.
D) Yes, otherwise consumers would not buy 40 units.

58) Economic surplus

A) is equal to the sum of consumer surplus and producer surplus.
B) does not exist when a competitive market is in equilibrium.
C) is equal to the difference between consumer surplus and producer surplus.
D) is the difference between quantity demanded and quantity supplied when the market price for a
product is greater than the equilibrium price.

59) If, in a competitive market, marginal benefit is less than marginal cost,
A) the quantity sold is less than the equilibrium quantity.
B) the quantity sold is greater than the equilibrium quantity.
C) the net benefit to consumers from participating in the market is less than the net benefit to producers.
D) the government must force producers to raise prices in order to achieve economic efficiency.

Figure 4-4
60) Refer to Figure 4-4. The figure above represents the market for pecans. Assume that this is a
competitive market. At a price of $9
A) the marginal benefit of pecans is greater than the marginal cost; therefore, output is inefficiently high.
B) the marginal cost of pecans is greater than the marginal benefit; therefore, output is inefficiently low.
C) the marginal benefit of pecans is greater than the marginal cost; therefore, output is inefficiently low.
D) producers should lower the price to $3 in order to sell the quantity demanded of 4,000.

Figure 4-5

Figure 4-5 shows the market for apartments in Springfield. Recently, the government imposed a rent
ceiling of $1,000 per month.

61) Refer to Figure 4-5. With rent control, the quantity supplied is 200 apartments. Suppose apartment
owners ignore the law and rent this quantity for the highest rent they can get. What is the highest rent
they can get per month?
A) $1,000 B) $1,500 C) $2,000 D) $2,300

Figure 4-6
Figure 4-6 shows the demand and supply curves for the almond market. The government believes that
the equilibrium price is too low and tries to help almond growers by setting a price floor at Pf.

62) Refer to Figure 4-6. What area represents consumer surplus after the imposition of the price floor?
A) A + B + E B) A C) A + B + E + F D) A + B

63) Refer to Figure 4-6. What is the area that represents producer surplus after the imposition of the
price floor?
A) A + B + E B) B + E + F C) B + C + D + E D) B + E

64) Refer to Figure 4-6. What area represents the portion of consumer surplus that has been transferred
to producer surplus as a result of the price floor?
A) B + C B) B C) B + E D) E

Figure 4-8

Figure 4-8 shows the market for beer. The government plans to impose a unit tax in this market.

65) Refer to Figure 4-8. What is the size of the unit tax?
A) $2 B) $5 C) $7 D) $12

66) Refer to Figure 4-8. How much of the tax is paid by buyers?
A) $2 B) $5 C) $7 D) $12
67) Refer to Figure 4-8. How much of the tax is paid by producers?
A) $2 B) $5 C) $7 D) $12

68) Refer to Figure 4-8. As a result of the tax, is there a loss in consumer surplus?
A) Yes, because consumers paying a price above the economically efficient price.
B) No, because the market reaches a new equilibrium
C) No, because consumers are charged a lower price to cover their tax burden.
D) No, because the producer pays the tax.

69) Suppose the demand curve for a product is vertical and the supply curve is upward sloping. If a unit
tax is imposed in the market for this product,
A) the tax burden will be shared equally between buyers and sellers.
B) buyers share the burden of the tax with government.
C) buyers bear the entire burden of the tax.
D) sellers bear the entire burden of the tax.

70) When the government taxes a good or service, it

A) eliminates the deadweight loss associated with the good or service.
B) affects the market equilibrium for that good or service.
C) increases consumer surplus for the good or service.
D) increases producer surplus for the good or service.
1) C
2) B
3) A
4) C
5) A
6) C
7) B
8) C
9) A
10) C
11) D
12) D
13) B
14) A
15) C
16) A
17) A
18) C
19) B
20) D
21) D
22) D
23) D
24) A
25) D
26) C
27) C
28) B
29) B
30) C
31) B
32) C
33) C
34) C
35) C
36) D
37) A
38) A
39) A
40) A
41) C
42) B
43) A
44) C
45) B
46) A
47) C
48) D
49) B
50) A
51) D
52) B
53) A
54) B
55) D
56) D
57) A
58) A
59) B
60) A
61) C
62) B
63) D
64) B
65) C
66) B
67) A
68) A
69) C
70) B