Final Exam Study Guide for Economics Chapter 1 (1-60)

Final Exam Study Guide 1. The models used in economics: a. are always limited to variables that are directly related. b. are of necessity unrealistic and not related to the real world. c. are essentially not reliable because they are not testable in the real world. d. emphasize basic relationships by abstracting from complexities in the everyday world. Answer: D 2. An economic model: a. allows nothing to change in the economic situation that is being described. b. often leads to faulty conclusions because of the ceteris paribus assumption. c. is useful for explaining past economic conditions but not for predicting. d. is a simplified version of reality used to understand real-world economic conditions. Answer: D 3. The production possibility frontier illustrates that: a. an economy's productive capacity increases one-for-one with its population. b. the economy will automatically end up at full employment. c. if all resources of an economy are being used efficiently, more of one good can be produced only if less of another good is produced. d. economic production possibilities have no limit. Answer: C 4. (Table: Production Possibilities Schedule I) Look at the table Production Possibilities Schedule I. If the economy produces two units of consumer goods per period, it also can produce at most _____ units of capital goods per period. a. 30 b. 28 c. 24 d. 18 Answer: C 5. (Figure: Guns and Butter) Look at the figure Guns and Butter. If the economy is operating at point B, producing 16 guns and 12 pounds of butter per period, a decision to move to point E and produce 18 pounds of butter: a. indicates that you can have more butter and guns simultaneously. b. makes it clear that this economy has decreasing opportunity costs. c. necessitates a loss of eight guns per period. d. necessitates a loss of four guns per period. Answer: C 6. If an economy has to sacrifice only one unit of good X for each unit of good Y produced throughout the relevant range, then its production possibility frontier has: a. a zero slope. b. a constant negative slope. c. an increasing negative slope. d. a decreasing negative slope. Answer: B 7. In movement along a production possibility frontier, the opportunity cost to society of getting more of one good: a. is always constant. b. is measured in dollar terms. c. is measured by the amount of the other good that must be given up. d. usually decreases. Answer: C 8. The fact that a society's production possibility frontier is bowed out, or concave to the origin of a graph, demonstrates the law of _____ opportunity cost. a. increasing b. decreasing c. constant d. concave Answer: A 9. If an economy is producing a level of output that is on its production possibility frontier, the economy has: a. idle resources. b. idle resources but is using resources efficiently. c. no idle resources but is using resources inefficiently. d. no idle resources and is using resources efficiently. Answer: D 10. Technological improvements will: a. leave the production possibility frontier unchanged. b. shift the production possibility frontier inward. c. shift the production possibility frontier outward. d. necessarily lead to increased unemployment. Answer: C 11. All points inside the production possibility frontier represent: a. efficient production points. b. inefficient production points. c. infeasible production points. d. economic growth. Answer: B 12. As long as people have different _____, everyone has a comparative advantage in something. a. direct costs b. benefits c. utility d. opportunity costs Answer: D 13. The economy with the lowest opportunity cost of producing a particular good is said to have: a. an increasing opportunity cost. b. a comparative advantage. c. a production possibility frontier. d. a technological advantage. Answer: B 14. Free trade between countries: a. should be based on absolute advantage. b. will allow wealthy countries to exploit less developed nations. c. will shift the domestic production possibility frontier to the right. d. will allow for greater levels of consumption than without trade. Answer: D 15. If Brazil gives up three automobiles for each ton of coffee it produces, while Peru gives up seven automobiles for each ton of coffee it produces, then Brazil has a comparative advantage in _____ production and should specialize in _____. a. automobile; coffee b. coffee; automobiles c. coffee; coffee d. automobile; automobiles Answer: C 16. Economists are generally in support of: a. government restrictions on trade. b. free international trade. c. tariffs to restrict trade. d. subsidizing exports. Answer: B 17. The simplest circular-flow model shows the interaction between households and firms. In this model: a. only barter transactions take place. b. households and firms interact in the market for goods and services, but firms are the only participants in the factor markets. c. firms supply goods and services to households, which in turn supply factors of production to firms. d. attention is focused on real flows of goods, services, and factors of production, but money flows between households and firms are ignored for simplicity. Answer: C 18. In the circular-flow diagram, the factor market is where: a. households buy factors of production. b. households buy goods and services. c. businesses buy goods and services. d. businesses buy factors of production. Answer: D 19. Macroeconomics deals with: a. bits and pieces of the economy. b. how a business unit should operate profitably. c. the working of the entire economy or large sectors of it. d. how individuals make decisions. Answer: C 20. If resources are scarce, it means that they: a. are insufficient to provide enough goods and services to satisfy all human material wants and needs. b. have no opportunity cost. c. are probably not valued by consumers. d. have an unlimited supply. Answer: A 21. The problem of scarcity is confronted by: a. industrialized societies only. b. societies governed by communist philosophies only. c. preindustrial societies only. d. all societies. Answer: D 22. Scarcity exists when: a. resources are unlimited. b. making choices among two or more alternatives is not necessary. c. individuals can have more of one good but only by giving up something else. d. individuals can have more of any good without giving up anything. Answer: C 23. A resource is anything that: a. can be used in production. b. you pay for. c. is in scarce supply. d. can be consumed. Answer: A 24. The opportunity cost of something is: a. less during periods of falling prices. b. equal to the money cost. c. greater during periods of rising prices. d. what is given up to acquire it. Answer: D 25. Because people usually exploit opportunities to make themselves better off, to encourage young people to go to college in their home state, state universities can: a. offer high-interest loans to in-state students. b. award special scholarships to out-of-state students. c. charge higher tuition to in-state students. d. offer lower tuition to in-state students. Answer: D 26. Gains from trade exist for: a. individuals only. b. states only. c. countries only. d. individuals, states, and countries. Answer: D 27. Increases in total output realized when individuals specialize in particular tasks and trade are known as: a. the gains from trade. b. marginal analysis. c. a trade-off. d. the profits obtained from sales of a good or service. Answer: A 28. Individuals gain from trade because: a. of specialization in production. b. self-sufficiency is efficient. c. of the principle of absolute advantage d. they can sell at a lower price than they can buy at. Answer: A 29. Equilibrium exists when: a. an individual would be better off taking a different action. b. scarcity is eliminated. c. output is distributed equitably. d. no individual has an incentive to change his or her behavior. Answer: D 30. An economy is efficient if it is: a. producing a combination of goods. b. possible to produce more of one good without producing less of another. c. not possible to produce more of one good without producing less of another good. d. possible to produce more of all goods and services. Answer: C 31. The law of demand states that other things equal, as the price: a. increases, demand will decrease. b. increases, the quantity demanded will increase. c. decreases, the demand curve will shift to the right. d. increases, the quantity demanded will decrease. Answer: D 32. Which of the following illustrates the law of demand? a. Oil companies drill for new sources because prices are higher. b. Consumers buy more personal computers because prices have fallen. c. Fewer people play golf because incomes are lower. d. An increase in tuition encourages more students to enroll in college because the quality of education has risen. Answer: B 33. A negative relationship between the quantity demanded and price is called the law of: a. demand b .marginality c. efficiency d. supply Answer: A 34. The law of demand is illustrated by a demand curve that is: a. horizontal b. downward-sloping c. vertical d. upward-sloping Answer: B 35. The _____ apples will decrease when apple prices rise. a. demand for b. quantity demanded of c. supply of d. equilibrium of Answer: B 36. Which of the following statements is CORRECT? a. Both a change in quantity demanded and a change in demand are shifts of the demand curve, only in different directions. b. A change in demand is a movement along the demand curve, and a change in quantity demanded is a shift of the demand curve. c. Both a change in quantity demanded and a change in demand are movements along the demand curve, only in different directions. d. A change in quantity demanded is a movement along the demand curve, and a change in demand is a shift of the demand curve. Answer: D 37. Which of the following best describes demand? a. A change in demand is a movement along the demand curve, and a change in quantity demanded is a shift in the demand curve. b. A change in quantity demanded is a movement along the demand curve, and a change in demand is a shift in the demand curve. c. Both a change in quantity demanded and a change in demand are shifts in the demand curve, only in different directions. d. Both a change in quantity demanded and a change in demand are movements along the demand curve, only in different directions. Answer: B 38. Which of the following will NOT cause an increase in demand for good X? a. a decrease in income if good X is an inferior good b. an increase in income if good X is a normal good c. a decrease in the price of good X d. an increase in consumers' taste for good X Answer: C 39. The demand curve for videos has shifted to the right. What could have caused it? a. a fall in the price of videos b. an increase in the price of videos c. an increase in the supply of videos d. an increase in the incomes of buyers Answer: D 40. When the price of gas goes down, the demand for tires goes up. A likely possibility is that tires and gas are: a. substitutes b. complements c. both inferior goods d. both inexpensive Answer: B 41. The typical supply curve illustrates that: a. other things equal, the quantity supplied for a good is inversely related to the price of a good. b. price and quantity supplied are unrelated. c. other things equal, the quantity supplied for a good is positively related to the price of a good. d. other things equal, the supply of the good creates its own demand for the good. Answer: C 42. A decrease in supply means: a. a shift to the left of the entire supply curve. b. that less will be demanded at every price. c. that more will be supplied at every price. d. a movement down the supply curve as prices go down. Answer: A 43. A technological advance in the production of automobiles will _____ the _____ automobiles. a. decrease; demand for b. increase; supply of c. decrease; demand d. decrease; supply of Answer: B 44. An increase in the supply of a good is caused by: a. input prices rising. b. a fall in the price of the good. c. an increase in the number of sellers. d. expectations of future price increases. Answer: C 45. Which of the following is most likely to shift the supply of milk to the right? a. an increase in household income, milk being a normal good b. a tax on each gallon of milk produced c. a decrease in the price of feed given to dairy cows d. the bankruptcy of many small dairy farms Answer: C 46. Market equilibrium occurs when: a. the market clears. b. quantity demanded equals quantity supplied. c. there is no incentive for prices to change in the market. d. there is no incentive for prices to change in the market, quantity demanded equals quantity supplied, and the market clears. Answer: D 47. The market equilibrium is found at the: a. price where quantity demanded exceeds quantity supplied. b. price where quantity demanded equals quantity supplied. c. highest price the market will bear. d. price where quantity supplied exceeds quantity demanded. Answer: B 48. A price control is: a. control of the price of a good by the firm that produces it. b. a legal restriction on how high or low a price in a market may go. c. an upper limit on the quantity of some good that can be bought or sold. d. a tax on the sale of a good that controls the market price. Answer: B 49. The market for apples is in equilibrium at a price of $0.50 per pound. If the government imposes a price floor in the market at a price of $0.40 per pound: a. there will be a shortage of apples. b. quantity supplied will increase. c. quantity demanded will decrease. d. the price floor will not affect the market price or output. Answer: D 50. A binding price ceiling is designed to: a. keep prices below the equilibrium level. b. increase the quality of the good. c. prevent shortages. d. increase efficiency. Answer: A 51. The government decides to impose a price ceiling on a good because it thinks the marketdetermined price is too high. If the government imposes the price ceiling below the equilibrium price: a. consumers will respond to the lower price and wish to purchase more of the good than at the equilibrium price. b. it will not be binding. c. producers will respond to the lower price and offer more units for sale. d. consumers will be able to purchase more of the good after the price ceiling is imposed. Answer: A 52. The government imposes a price ceiling below the equilibrium price. The price ceiling will cause: a. demand to decrease. b. supply to increase. c. a shortage of the good. d. an increase in the quality of the good. Answer: C 53. A price ceiling will have NO effect if: a. it is set above the equilibrium price. b. it is set below the equilibrium price. c. the equilibrium price is above the price ceiling. d. it creates a shortage. Answer: A 54. A persistent shortage may occur if: a. the government imposes a price ceiling. b. the government imposes a price floor. c. demand keeps falling. d. supply shifts rightward Answer: A 55. The most likely reason that the government implements a _____ is because it feels the price is too high for _____. a. price ceiling; consumers b. price floor; consumers c. price ceiling; producers d. price floor; producers Answer: A 56. By definition, in a black market, goods or services are bought and sold: a. at night. b. without any information about quality. c. without any information about price. d. illegally. Answer: D 57. To be binding, a price floor must be set: a. lower than the equilibrium price. b. higher than the equilibrium price. c. so that quantity demanded exceeds quantity supplied. d. lower than the equilibrium price and so that quantity demanded exceeds quantity supplied. Answer: B 58. A minimum price set above the equilibrium price is a: a. demand price. b. supply price. c. price floor. d. price ceiling. Answer: C 59. Suppose the government sets a price floor below the current price of a good. This price floor will: a. result in an excess supply of the good. b. result in an excess demand for the good. c. have no effect on the price of the good. d. increase the quantity supplied of the good. Answer: C 60. Which of the following is an example of a price floor? a. a government decree that capped the price of bottled water in the aftermath of a devastating hurricane b. a rent-controlled apartment c. the minimum wage d. a maximum legal price that could be charged for gasoline during a time of war Answer: C