The study of economics arises due to

1) The study of economics arises due to

a. greed.

b. scarcity.

c. resources.

d. money.


2) Economists assume that individuals

a. are rational and respond to incentives.

b. prefer to live in a society that values fairness above all else.

c. will never take actions to help others.

d. behave in unpredictable ways.


3) Your roommate, Serafina, a psychology major, said, The problem with economics is

that it assumes that consumers and firms always make the correct decision. But we

know that everyones human, and we all make mistakes. Is Serafinas criticism accurate?

a. No. If we cannot assume that decisions are correct, then we will not be able to examine

the moral implications of these decisions.

b. Yes. One cannot make predictions about economic behavior because in reality people

make incorrect choices in many situations.

c. No. Economics assumes that economic agents behave rationally, meaning they make

the best decisions given their knowledge of the costs and benefits of these decisions.

d. Yes. Economic theory should allow for irrational behavior so that we can have more

reliable predictions.


4) In Austria a woman can get up to 48 months of pension benefits and is guaranteed

a maternity allowance two months before and after she gives birth. Further, the Austrian

government gives monthly payouts ranging from $132 to $547, depending on

the age of offspring and offers generous tax benefits for families with children. How

will these benefits affect a womans decision to have children?

a. These incentives will encourage women to have children and increase the birth rate.

b. These incentives will encourage only less educated women to have more children.

c. These incentives will encourage only women with high opportunity costs to have more


d. These incentives will have no effect on having children; the decision to have children

is a social and psychological decision, not an economic decision.


5) Making marginal decisions involves

a. calculating the total benefits of an activity and determining if you are satisfied with

that amount.nit 1 Examination

b. calculating the total costs of an activity and determining if you can afford to incur

that expenditure.

c. comparing the additional benefits and the additional costs of an activity.

d. calculating the average benefit and the average cost of an activity to determine if it is

worthwhile to undertake that activity.





Scenario 1-1

Suppose a cell-phone manufacturer currently sells 20,000 cell-phones per week and

makes a profit of $5,000 per week. A manager at the plant observes, Although the last

3,000 cell phones we produced and sold increased our revenue by $6,000 and our costs

by $6,700, we are still making an overall profit of $5,000 per week so I think were on

the right track. We are producing the optimal number of cell phones.


6) Refer to Scenario 1-1. Using marginal analysis terminology, what is another economic

term for the incremental revenue received from the sale of the last 3,000 cell


a. gross profit

b. marginal revenue

c. gross earnings

d. sales revenue


7) Automobile manufacturers produce a range of automobiles such as sports utility

vehicles, luxury sedans, pickup trucks and compact cars. What fundamental economic

question are they addressing by making this range of products?

a. How to produce goods that consumers want?

b. What goods and services will be produced?

c. Who to produce automobiles for?

d. Why produce a variety of automobiles?


8) Which of the following contributes to the efficiency of markets?

a. Markets promote equal standards of living.

b. Markets promote competition and voluntary exchange.

c. Governments play an active role in the of markets.

d. Markets are able to bring about an equitable distribution of goods and services.

Unit 1 Examination

Figure 1-4


9) Refer to Figure 1-4. Which of the following statements is true?


a. The slope of the tangent at E is positive and the slope of the tangent at F is negative.

b. The slope of the tangent at E and the slope of the tangent at F are negative.

c. The slope of the tangent at E is negative and the slope of the tangent at F is positive.

d. The slope of the tangent at E and the slope of the tangent at F are positive.


10) The production possibilities frontier model assumes all of the following except

a. the economy produces only two products.

b. the level of technology is fixed and unchanging.

c. labor, capital, land and natural resources are fixed in quantity.

d. production of goods requires full employment of all resources.



Figure 2-2

Unit 1 Examination

Figure 2-2 above shows the production possibilities frontier for Mendonca, an agrarian nation

that produces two goods, meat and vegetables.


11) Refer to Figure 2-2. The linear production possibilities frontier in the figure indicates


a. the tradeoff between meat and vegetables is constant.

b. Mendonca has a comparative advantage in the production of vegetables.

c. it is progressively more expensive to produce meat.

d. Mendonca has a comparative disadvantage in the production of meat.


Table 2-3


One Digital Camera Wheat (per pound)

China 100 hours 4 hours

South Korea 60 hours 3 hours


Table 2-3 shows the number of labor hours required to produce a digital camera and a

pound of wheat in China and South Korea.


12) Refer to Table 2-3. What is South Koreas opportunity cost of producing one pound of


a. 20 digital cameras

b. 0.05 units of a digital camera

c. 60 digital cameras

d. 5 digital cameras


13) Which of the following are flows in the circular flow model?

a. the flow of income earned by factors of production and the flow of expenditures on

goods and services

b. the flow of goods and the flow of services

c. the flow of costs and the flow of revenue

d. the flow of income received by households and the flow of tax revenues paid by households


14. Which of the following statements about a simple circular flow model is true?

a. Producers are neither buyers nor sellers in the product market.

b. Households are sellers in the product market.

c. Producers are buyers in the factor market.

d. Households are neither buyers nor sellers in the factor market.

15) The term property rights refers to

a. the ability to exercise control over ones own resources within the confines of the law.

b. the governments right to appropriate land from wealthy individuals to redistribute to

low income families.

c. the physical possession of a house or any other property which the owner legally purchased.

d. the right of a business not to have its assets confiscated by the government in the

event that the business is accused of committing fraud.


Table 3-1

Loose leaf Tea

Price per lb.



Quantity Demanded (lbs)


Quantity Demanded (lbs)

Rest of Market


Demanded (lbs)





$8 4 0 30
6 7 2 40
5 9 3 51
4 12 5 64
3 15 8 90



16) Refer to Table 3-1. The table above shows the demand schedules for loose-leaf tee of two individuals (Sunil and Mia) and the rest of the market. If the price of from $3 to $4 the market quantity demanded would

a. decrease by 32 pounds.

b. decrease by 64 pounds.

c. increase by 64 pounds.

d. increase by 32 pounds.


17) If a firm expects that the price of its product to be higher in the future than it is today

a. the firm has an incentive to decrease supply now and increase supply in the future.

b. the firm has an incentive to decrease quantity supplied now and increase quantity

supplied in the future.

c. the firm will go out of business.

d. the firm has an incentive to increase supply now and decrease supply in the future.


18) Which of the following is the correct way to describe equilibrium in a market?

a. At equilibrium, demand equals supply.

b. At equilibrium, quantity demanded equals quantity supplied.

c. At equilibrium, scarcity is eliminated.

d. At equilibrium, market forces no longer apply.


Figure 3-4





19) Refer to Figure 3-4. The fi gure represents the market for canvas tote bags. Assume

that the price of tote bags is $15. At this price:

a. the quantity demanded exceeds the quantity supplied of tote bags by 75. The price

will eventually rise to $25 where quantity demanded will equal quantity supplied.

b. there is a shortage, equal to 55 tote bags; the price of tote bags will rise until demand

is equal to supply.

c. the demand exceeds the supply of tote bags by 55. Some consumers will have an

incentive to offer to buy tote bags at a higher price.

d. there is a shortage, equal to 55 tote bags, that will be eliminated when the price rises

to $25.


20) 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 fl our

b. an increase in the price of butter, a complement for white bread

c. an increase in the price of rye bread, a substitute for white bread

d. an increase in the price of fl our

Unit 1 Examination

Figure 4-6

Figure 4-6 shows the market for apartments in Bay City. Recently, the government imposed

a rent ceiling at R0.


21) Refer to Figure 4-6. What is the area that represents the producer surplus after the

imposition of the ceiling?

a. F + G

b. F

c. A + B + D + F + G

d. D + F + G


22) Which term refers to a legally established minimum price that fi rms may charge?

a. A subsidy.

b. A tariff.

c. A price floor.

d. A price ceiling.


23) A positive externality causes

a. the marginal social benefi t to be equal to the marginal private cost of the last unit


b. the marginal social benefi t to exceed the marginal private cost of the last unit produced.

c. the marginal social benefi t to be less than the marginal private cost of the last unit


d. the marginal private benefi t to exceed the marginal social cost of the last unit produced.


Figure 4-15

Companies producing toilet paper bleach the paper to make it white. The bleach is discharged

into rivers and lakes and causes substantial environmental damage. Figure 4-15

illustrates this situation in the toilet paper market.


24) Refer to Figure 4-15. An efficient way to get the fi rm to produce the socially optimal

output level is

a. to assign property rights to the fi rms in the industry.

b. to impose a tax to make the industry bear the external costs it creates.

c. to grant a subsidy to enable the industry to internalize the external costs of production.

d. for government to set a quota on the quantity of toilet paper that the toilet paper

industry can produce.


25) What is the rationale behind a tradable emissions allowance scheme?

a. to create a market for externalities: the scheme brings together buyers and sellers of

marketable permits

b. to raise revenue for the government through the sale of emission permits and at the

same time set an emissions target

c. to provide fi rms with the incentive to consider less costly alternatives to pollution

reduction by making fi rms pay for the right to pollute beyond their specified allowance

d. to discipline polluting fi rms by specifying the maximum amount of emissions allowed

and giving them permits to pollute up to their allowance


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