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Unit 2 Test: How Markets Work
Name:_______________________
Date:_______________________
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1
When shoes at a local shoe store went on sale at 50 percent off the regular price, the store
sold almost every pair of shoes it had in less than a day. By the time the stock was
replenished, the sale was over and shoes were being purchased at a much slower rate.
Which of the following does this illustrate?
A
B
C
D
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the income effect
the law of supply
the law of demand
the substitution effect
Which of the following government actions would be most likely to increase competition
among firms?
A
B
C
D
minimum wage laws
licensing
price ceilings
deregulation
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Copyright © 2005 - 2006 by Pearson Education
Page 1 of 6
Unit 2 Test: How Markets Work
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3
Directions: Use the chart to answer the following question.
Market Demand Schedule
Price (per cup)
Quantity
demanded (per day)
$.50
300
$1.00
250
$1.50
200
$2.00
150
$2.50
100
$3.00
50
Milly’s Tea Pot sells cups of tea for $2.00. According to the market demand schedule and
assuming ceteris paribus, what happens when Milly’s raises the price to $2.50 a cup?
A
B
C
D
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The quantity demanded per day stays the same.
The quantity demanded falls from 100 cups a day to 50 cups a day.
The quantity demanded falls from 150 cups a day to 100 cups a day.
The quantity demanded rises to 250 cups a day.
Mariah is buying fewer boxes of macaroni and cheese, used cars, fast-food dinners, and
generic products because her income has increased. This shift in the demand curve
caused by Mariah’s income has resulted in
A
B
C
D
a decreased demand for inferior goods.
a decreased demand for tangible goods.
a decreased demand for normal goods.
a decreased demand for expendable goods.
______________________________________________________________________________________________
Copyright © 2005 - 2006 by Pearson Education
Page 2 of 6
Unit 2 Test: How Markets Work
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5
When the price of delivered pizza goes up by 40 percent, Kate’s quantity demanded falls
by 60 percent. Therefore, Kate’s demand for pizza delivery is best described as
A
B
C
D
6
According to the law of supply, the higher the price,
A
B
C
D
7
a market supply schedule
diminishing marginal returns
variable costs
subsidies
To calculate profits, a firm subtracts total costs from total revenues. What makes up the
firm’s production costs?
A
B
C
D
9
the more consumers are willing to pay.
the larger the quantity produced.
the smaller the quantity produced.
the more the availability of a good is reduced.
Lily is opening a new coffee shop and is having trouble deciding on the price to charge for
a cup of cappuccino. What should she look for?
A
B
C
D
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elastic.
inelastic.
unitary elastic.
unitary inelastic.
variable costs and rent
raw materials and salaries
marginal costs and labor
fixed and variable costs
Suppose you are running a pie company with five employees. Orders increase, so you hire
a sixth pie maker. Your profits go down. Which of the following might explain the
decrease?
A
B
C
D
Your marginal returns increased.
Your fixed costs increased.
Your marginal product of labor decreased.
Your output level decreased.
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Unit 2 Test: How Markets Work
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10
In which category do subsidies, excise taxes, and regulation belong?
A
B
C
D
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effects of rising costs
national limitations on imports
government influences on supply
benefits of marginal costs
Directions: Use the graph to answer the following question.
Study the graph showing the number of hats sold at local summer baseball games. Which
of the following can be said about the equilibrium price and the equilibrium quantity?
A
B
C
D
The quantity supplied and the quantity demanded are equal at 40 hats per game.
The quantity demanded and the quantity supplied are equal at $8.00 per hat.
The quantity supplied is not equal to the quantity demanded in this market, which
should be at 40 per game.
The maximum quantity demanded, 70 per game, is more than the quantity
supplied.
______________________________________________________________________________________________
Copyright © 2005 - 2006 by Pearson Education
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Unit 2 Test: How Markets Work
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12
Which of the following government actions is an attempt to control the high cost of living
for lower-income families?
A
B
C
D
13
Compared with a perfectly competitive market, a monopolist usually produces fewer goods
at a higher price. Which statement is true about a monopoly?
A
B
C
D
14
a negative result on the change in demand graph.
a flattening of the demand curve.
a sharp drop in the marginal product demand ratio.
a rapid shift to the right in a market demand curve.
Which of the following BEST explains why rationing, not a price-based system, was used
during World War II?
A
B
C
D
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Its marginal revenue is lower than the market price.
Its marginal revenue is half the market price.
Its marginal revenue is the same as market price.
Its marginal revenue is higher than the market price.
The economic impact of a holiday fad is illustrated by
A
B
C
D
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farm subsidies
rent control
minimum wage
price floors
Rationing controlled production so that suppliers and manufacturers could
concentrate on supporting the war effort.
Rationing made it possible for the government to control people’s behavior during
the war.
Rationing helped ease shortages and guaranteed every American a minimum
standard of living.
Rationing more severely restricted consumers’ buying habits, and it temporarily
shifted distribution of food and goods to the military.
Factors that make it difficult for new firms to enter a market are called
A
B
C
D
start-up costs.
barriers to entry.
perfect competition.
commodities.
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Unit 2 Test: How Markets Work
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17
In a free market economy, which best describes how suppliers decide which goods or
services to offer?
A
B
C
D
18
Suppliers seek to fulfill consumer demand.
Suppliers seek to maximize productive output.
Suppliers seek to sell expensive products.
Suppliers seek to provide great vareiety.
Which phrase best completes the following sentence?
When a market is at equilibrium,
A
B
C
D
19
Which of the following is the correct mathematical formula for calculating average cost?
A
B
C
D
20
buyers are willing to purchase goods.
sellers are happy with prices.
both buyers and sellers seek disequilibrium.
both buyers and sellers benefit.
total revenue divided by market price
total cost divided by variable cost
total cost divided by quantity produced
total revenue divided by marginal cost
Which of the following is most likely to happen when a monopolistically competitive firm
starts earning profits well above its costs?
A
B
C
D
The firm becomes an oligopoly by eliminating the competition.
The firm floods the market with defective products.
The firm faces competition as rivals differentiate their products to increase market
share.
The firm eventually goes out of business because demand decreases.
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