Chapters Four, Five and Seven Test 1. There is substantial agreement among scholars that at least two functions of government are legitimate. These two functions are the A. Protection of the rights of individuals to their person and property and the provision of goods that cannot easily be provided through markets B. Redistribution of income from some individuals to others and the waging of war to expand the nation’s territory C. Production of postal services and cable television D. Taxation of goods that are generally considered immoral or bad and the regulation of large corporations 2. In economics, a free rider is the term used for a person who A. Receives the benefit of a good without contributing to its costs of production B. Purchases an item during a buy one, get one free sale C. Lives in a town in which the city provides free bus service D. Pays for exactly what they receive 3. You and your college roommate eat three packages of Ramen noodles each week. After graduation last month, both of you were hired at several times your college income. You still enjoy Ramen noodles very much and buy even more, but your roommate plans to buy fewer Ramen noodles in favor of foods she prefers more. When looking at income elasticity of demand for Ramen noodles A. Yours would be negative and your roommate’s would be positive B. Yours would be positive and your roommate’s would be negative C. Yours would be zero and your roommate’s would approach infinity D. Yours would approach infinity and your roommate’s would be zero 4. The market demand for an item is A. The sum of individual demands B. Steeper for any given price change than the individual demand curves C. Independent of the number of individuals in the market D. Determined by dividing the quantity demanded by each individual by the number of individuals in the market 5. If the demand for a product increases as the result of a decline in income, it can be concluded that the A. Product is an inferior good B. Demand for the product is inelastic C. Price elasticity of demand for the product equals unity D. Demand for the product is elastic 6. Figure 4 Refer to figure 4. Given the demand and supply conditions shown, what will happen as the result of imposing a price ceiling of a? A. Demand for the product will decline B. Supply will increase C. There will be a shortage of the product D. Over time, the quality of the product offered by suppliers will increase 7. When economists say that an activity meets the criterion for economic efficiency, they mean A. A majority of citizens favor the activity B. The benefits that result from the activity exceed the costs C. The number of people who gain from the activity exceeds the number on whom costs are imposed D. The costs that result from the activity exceed the benefits 8. When consumers cannot tell the difference at the time of sale between high-quality products and those with defects, strong sales of the low-quality products will tend to depress price and drive the high-quality products from the market. Economists call this A. The curse of advertising B. The information problem C. The brand name problem D. An open-access resource 9. A market that operates outside the legal system, either by selling illegal goods or by selling goods at illegal prices is referred to in economics as a A. Gray market B. Resource market C. Black market D. Criminal market 10. Other things constant, an increase in the demand for televisions will A. Decrease the price of automobiles B. Decrease the quantity of automobiles bought and sold C. Decrease the demand for automobile workers and lower their wages D. Increase the demand for automobile workers and increase their wages 11. Compared to legal markets, black markets have A. Products of higher quality B. Similar prices C. Lower profit rates D. More violence 12. A legally mandated minimum wage is an example of A. The invisible hand principle B. A price floor C. A price ceiling D. A fringe benefit 13. When a tax is imposed on a good, the actual incidence of the tax generally A. Falls entirely on the buyer B. Falls entirely on the seller C. Is shared between the buyer and seller D. Is the same as the statutory incidence 14. The difference between the amount consumers would be willing to pay and the amount they actually pay for a good is called A. Price elasticity of demand B. Consumer surplus C. The substitution effect D. Income elasticity of demand 15. How will the price and output of chemical products in a competitive market compare with their values under conditions of ideal economic efficiency in the following situation? Chemical plants are allowed, to dump harmful products into lakes without any charge. A. The price would be too low, and the output would be too large B. The price would be too high, and the output would be too large C. The price would be too low, and the output would be too small D. The price would be too high, and the output would be too small 16. Using the criterion of economic efficiency, if the construction of a new dam would create $20 billion worth of benefits and would cost $16 billion to build then the dam A. Should be built B. Should not be built C. Results in no net improvement to the welfare of society D. Should be built only if it passes by a majority vote 17. What are the two distinguishing characteristics of a public good? A. Nonrivalry in consumption and nonexcludability B. Indivisibility in production and excludability of nonpaying customers C. Provision by government and funding through taxation D. Mass production and comparative advantage 18. An increase in the number of students going to universities and colleges would tend to A. Reduce the demand for college professors B. Decrease the number of college professors employed C. Increase the demand for college professors D. All of the above 19. Which of the following is most consistent with the idea that if it’s worth doing, it’s worth doing imperfectly? A. We should eliminate all pollution B. Automobiles should be made completely safe C. When cleaning house, people only generally clean the most visible areas D. A price cannot be put on human life 20. When a price floor is imposed above the equilibrium price of a commodity A. Quantity demanded will be greater than quantity supplied for the good B. The quantity demanded by consumers will be greater than at the equilibrium price C. A shortage for the good will develop D. A surplus of the good will develop 21. After eating fifteen oatmeal raisin cookies in eight minutes, Sarah said, “You would have to pay me to eat another oatmeal raisin cookie!” This statement best illustrates Jody says, “You would have to pay me to eat another chocolate candy bar!” This statement best illustrates A. The law of demand B. The substitutability among goods C. The law of diminishing marginal utility D. That chocolate bars are an inferior good 22. Which of the following will result from rent controls that reduce monthly rental rates below market equilibrium? A. The quality of rental housing will deteriorate B. Strong investment will increase the supply of rental housing in the future C. Discrimination against minorities and persons with unconventional lifestyles will be less likely to occur in the housing market D. A surplus of rental housing units will soon develop 23. A good for which it is impossible or at least very costly to exclude nonpaying customers from receiving the good and for which many individuals can share in the consumption of the same unit of the good is called a A. Public good B. Joint good C. Excludable good D. National good 24. A law establishing a maximum legal price for a good or service (rent controls for example) is known as A. An equilibrium price B. A price floor C. A price ceiling D. A price wall 25. Which of the following is the best example of a public good? A. A government-run health care system B. The Walt Disney World amusement park C. National defense D. Long-distance telephone service 26. Sarah recently got a 10 percent raise. She now purchases 30 percent more in groceries on a weekly basis. Sarah s income elasticity for groceries is A. 0.33 B. 0.5 C. 1 D. 3 27. When competitive forces in an industry are weak A. The absence of competition generally leads to overproduction B. Prices may exceed the amount consumers are willing to pay C. The operational efficiency of private firms will be enhanced D. Higher prices and less than optimal production may result 28. Which of the following can help sellers provide assurance to consumers about the quality of their products when the information problem is present? A. Product guarantees B. Brand names C. Franchising D. Al of the above 29. If bus travel is an inferior good, then its income elasticity of demand will be A. Strictly greater than one B. Positive C. Equal to zero D. Negative 30. For which one of the following goods would you expect the demand to be most elastic? A. Salt B. “Gasoline, short-run” C. Automobiles D. Chevrolet automobiles 31. Information problems are likely to be most serious in which of the following markets? A. Automobile repair service B. Magazines C. Toothpaste D. Pencils 32. Economic analysis suggests that the time cost of using a product A. Matters only to the poor B. Matters only to the rich C. Seldom matters; usually only the money cost is important D. Is greater the higher your income 33. The spillover effects of actions that affect the well-being of nonconsenting third parties are called A. Side components B. Externalities C. Free riders D. Internalizations 34. What will most likely happen when a price ceiling sets the price of chicken below market equilibrium? A. The quantity of beef demanded will decrease B. The quantity of beef supplied will increase C. There will be a surplus of beef D. There will be a shortage of beef 35. If the demand for cigarettes is highly inelastic, this indicates that A. High cigarette prices will increase the demand for cigarettes B. The price elasticity coefficient of cigarettes exceeds 1 C. The price elasticity coefficient of cigarettes equals 1 D. The quantity of cigarettes purchased by consumers is not very responsive to a change in the price of cigarettes 36. Suppose the Ashley Doll Company cuts the price of its Potrzbie dolls by 10 percent, and as a result, the quantity of the dolls sold increases by 25 percent. This indicates that the price elasticity of demand for the dolls over this range is A. 2.5 B. 0.4 C. 0.5 D. 5 inelastic 37. Which of the following would be considered a repeat-purchase item for most people? A. Toothpaste B. An economic textbook C. A meal at a restaurant while traveling on vacation D. A prescription drug for a temporary illness 38. If an increase in the government-imposed minimum wage pushes the price (wage) of unskilled labor above market equilibrium, which of the following will most likely occur in the unskilled labor market? A. An increase in quantity of unskilled labor demanded B. A decrease in the quantity of unskilled labor supplied C. A shortage of unskilled labor D. A surplus of unskilled labor (unemployment) 39. Which of the following would cause a consumer to purchase less of a good when the price of the good rises? A. The income effect B. The substitution effect C. Both A and B D. Neither A and B 40. Which of these choices is an example of a regressive income tax? A. “I earn $500 and pay $50 in taxes; you earn $1,000 and pay $90 in taxes” B. “I earn $500 and pay $50 in taxes; you earn $1,000 and pay $100 in taxes” C. “I earn $500 and pay $50 in taxes; you earn $1,000 and pay $100 in taxes” D. “I earn $500 and pay $50 in taxes; you earn $1,000 and pay $1250 in taxes”