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Bradley University
ECO 100 INTRODUCTION TO ECONOMICS
NAME: _______________________
Instructions:
1)
2)
3)
4)
5)
6)
A maximum of two hours is allowed to complete this examination.
This is a closed book examination.
Only non-programmable calculators will be allowed)
Mark your answer clearly, in pencil on the Scantron Form
Notes and other work will not be considered in determining a grade.
If you have questions regarding this examination please refer to the TAC student
guide for direction about whom to contact.
7) Your final grade for ECO 100 will be available after 30-JUNE-2007.
8) The Scantron Form and the Examination must be returned at the end of the
examination
9) This examination covers material drawn from the Seventh Edition of Principles of
Economics by Case and Fair which is published by Prentice Hall. Chapters included
in this examination are:
Chapter 1: The Scope and Method of Economics
Chapter 2: The Economic Problem: Scarcity and Choice
Chapter 3: Demand, Supply, and Market Equilibrium
Chapter 4: Demand and Supply Applications and Elasticity
Chapter 5: Household behavior and Consumer Choice
Chapter 6. The Production Process: The Behavior of Profit-Maximizing Firms
Chapter 17: Introduction to Macroeconomics
Chapter 18: Measuring National Output and National Income
ECO 100 INTRODUCTION TO ECONOMICS
Page 1 of 10
1. When prices are falling, economists say that
there is
a)
b)
c)
d)
disinflation.
deflation.
a contraction.
an inverted inflation
2. As the price level decreases, the value of
money
a)
b)
c)
d)
increases, so people want to hold more of it.
increases, so people want to hold less of it.
decreases, so people want to hold more of it.
decreases, so people want to hold less of it.
3. Printing money to finance government
expenditures
a) causes the value of money to rise.
b) imposes a tax on everyone who holds money.
c) is the principle method by which the U.S.
government finances its expenditures.
d) None of the above is correct.
4. All else equal, when a good becomes more
abundant, its market value tends to
a) increase
b) stay the same
c) decrease
d) none of the above
the ability of unions to raise wages.
government spending.
the money supply growth rate.
the monopoly power of firms.
6. Disinflation is defined as a
a)
b)
c)
d)
zero rate of inflation.
constant rate of inflation.
reduction in the rate of inflation.
negative rate of inflation.
7. Economics is the study of choice under
conditions of
a)
b)
c)
d)
e)
a) centrally planned and socialist economies, but
not capitalism
b) communism and communal ownership only
c) socialism and capitalism, but not communism
d) communal ownership, communism, and
socialism, but not capitalism
e) all economic systems
9. The statement “The unemployment rate in
Japan is 4 percent” is
a) a statement of opinion
b) a positive statement that can be falsified
c) lacking proper microeconomic foundations
d) a statistical anomaly
e) a philosophical difference of opinions regarding
the nature and significance of statistical
inference
10. Microeconomics is the study of
a) the economic behavior of individual decision
makers
b) the federal government's budget
c) the economic behavior of entire nations
d) government decisions
e) the overall economy
11. Macroeconomics is the study of
5. In the long run, the inflation rate depends
primarily on
a)
b)
c)
d)
8. The problem of scarcity occurs under
a) how the price of gasoline is determined
b) large objects
c) the economic behavior of individual decision
makers
d) the behavior of the economy as a whole
e) the economic behavior of individual firms
12. Which of the following would be studied in
macroeconomics?
a) total output in the nation
b) an individual household’s decision on
allocating its spending power
c) a rise in employment in movie theaters across
the nation
d) a drop in the price of personal computers
e) a local bank’s increase in the interest rate
offered on savings deposits
demand
supply
scarcity
opportunity
abundance
ECO 100 INTRODUCTION TO ECONOMICS
Page 2 of 10
13. Opportunity costs arise because of resource
scarcity.
a) True
b) False
18. An economy’s production possibilities frontier
is fixed in the long run.
a) True
b) False
14. The opportunity cost of any activity can be
measured by the
a) value of the best alternative that is given up
b) price (or monetary costs) of the activity
c) level of technology
d) time needed to select among various
alternatives
e) fringe benefits associated with the activity
15. Production possibilities frontiers are typically
concave (bowed out) from the origin because
a) of the law of supply
b) there is usually a one-for-one trade-off in
resources used in production
c) economies of scale enable firms to reduce the
average costs of production as output rises
d) the opportunity cost of a good rises as the
quantity of the good produced increases
e) resources are often left idle in the firm
16. Combinations of goods outside the production
possibilities curve
a) are unattainable given society’s technology
and resources
b) are combinations that have already been
consumed
c) go beyond basic necessities
d) result from involuntary unemployment
e) are the result of economic recessions
17. If the economy is producing a combination of
goods inside its production possibilities frontier,
then
a) workers are on vacation
b) a significant number of workers have little
education
c) some resources are being wasted
d) technology must improve before output can
increase
e) the opportunity cost of producing more output
is greater than the value of the additional output
that could be produced
19. When there is an improvement in technology,
holding all else constant,
a) the production possibilities frontier will shift
inward
b) society faces larger opportunity costs from
shifting productive resources from one use to
another
c) goods and services will increase in price
d) the economy must have some idle resources
e) the production possibilities frontier will shift
outward
20. Which of the following could lead to an inward
shift of the production possibilities frontier?
a) an increase in the cost of one good
b) an increase in the utilization of resources
c) a rise in the level of technology
d) a law is passed whereby a mandatory
retirement age of 60 is imposed
21. The production possibilities frontier can be
used to illustrate all of the following concepts,
except one. Which is the exception?
a)
b)
c)
d)
e)
technical inefficiency
opportunity cost
the law of demand
scarcity
the law of increasing opportunity costs
22. Specialization leads to greater production than
is otherwise possible
a) even if different workers have identical natural
abilities
b) only if production is organized within business
firms
c) under capitalism, but not under communism
d) only if different workers have different natural
abilities
e) under communal ownership, but not under
capitalism
ECO 100 INTRODUCTION TO ECONOMICS
Page 3 of 10
23. In a market economy, most of what we
consume is obtained by
28. Supply curves are usually assumed to slope
upward because
a)
b)
c)
d)
e)
a) profits fall as prices rise
b) a higher price leads to increases in demand
c) a higher price leads to decreases in demand
d) a higher price attracts resources from other
less valued uses
e) firms drop out of the market as prices rise
exchange
greed
altruism
a command system
central planning
24. Under market capitalism, resources are
allocated primarily through
a)
b)
c)
d)
e)
government decree
voter consensus
tradition
lottery
prices
29. A monopoly exists because of
a) barriers to entry
b) the large number of buyers and sellers
c) the absence of barriers to entry
d) collusion among the dominant firms
e) the absence of exclusive government
franchises
25. An economic system in which resources are
owned by the state and allocated by command
is called
30. Which of the following goods would be most
likely to be produced by a monopoly?
a)
b)
c)
d)
e)
a)
b)
c)
d)
e)
market capitalism
market socialism
centrally-planned capitalism
centrally-planned socialism
a tradition-based economy
26. According to the law of demand,
a) there is a positive relationship between
quantity demanded and price
b) as the price rises, demand will shift to the left
c) there is a negative relationship between
quantity demanded and price
d) as the price rises, demand will shift to the right
e) as the price rises, consumers switch their
purchases to substitute goods
27. Each point along the market demand curve
shows
a) the quantity of the good that firms would be
willing and able to supply at a specific price
b) the relationship between the price of the good
and total quantity demanded at a series of
prices
c) the opportunity cost of supplying a given
quantity of goods to the market
d) the quantity of the good that consumers would
be willing and able to purchase at a specific
price
e) how population changes affect the quantity
demanded at a specific price
Lotso-Sugar brand cereal
Pepsi
margarine
electricity
Ford automobiles
31. Most markets are not monopolies in the real
world because
a) firms usually face downward-sloping demand
curves
b) supply curves slope upward
c) price is usually set equal to marginal cost by
firms
d) monopolies are not efficient
e) there are substitutes for most goods
32. The De Beers Company has had a virtual
monopoly in the finished diamond market due
to:
a) a patent
b) a copyright
c) large economies of scale
d) having control of most worldwide diamond
mines
e) government regulation
ECO 100 INTRODUCTION TO ECONOMICS
Page 4 of 10
33. All of the following are characteristics of a
perfectly competitive market, except one. Which
is the exception?
a)
b)
c)
d)
e)
a large number of sellers
a standardized product
no barriers to entry
sellers can easily exit the market
an intensive rivalry between the sellers
34. If price is less than average total cost, the firm
a)
b)
c)
d)
e)
earns an economic profit
hires additional workers
moves its factory offshore
fires the marginal worker
suffers an economic loss
decrease firms’ investment expenditures
increase the standard of living in the economy
increase of the present value of capital good
increase firms’ investment expenditures
encourage production of durable goods
a corporate bond
a piece of real estate
a share of Coca-Cola stock
a Treasury bond
a) True
b) False
38. Antitrust law
protects consumers from fraud or similar harm
helps define ownership of resources
is designed to enforce contracts
helps prevent firms from limiting competition
39. Since the government cannot function without
revenue from taxes, and the only efficient taxes
available are unfair, we tolerate the inefficiency
that taxes create.
a) True
b) False
41. Public goods are nonrivalrous in consumption
and nonexcludable.
a)
b)
c)
d)
cable TV service
fire protection
a fireworks display
higher education
43. Comparative advantage is determined by the
a) elasticities of demand for a good in two
countries
b) opportunity costs of producing a good in two
different countries
c) presence of absolute advantages in production
d) amounts of resources required to produce a
good in different countries
44. When the minimum wage is set above the
equilibrium market wage,
37. Contracts reduce the level of specialization in
an economy.
a)
b)
c)
d)
automobiles
sulfur
electricity
nuclear power
education
42. Which of the following is a public good?
36. Which of the following is not a financial asset?
a)
b)
c)
d)
a)
b)
c)
d)
e)
a) True
b) False
35. Other things equal, an increase in the interest
rate will
a)
b)
c)
d)
e)
40. A free market would tend to produce too little
of which of the following goods?
a) there will be an excess demand for labor at the
minimum wage
b) it will have no effect on the quantity of labor
employed
c) the unemployment rate will rise
d) the quality of the labor force will rise
e) the unemployment rate will fall
45. An increase in supply results in a(n)
a) increase in demand
b) decrease in equilibrium quantity and an
increase in equilibrium price
c) decrease in equilibrium quantity and a
decrease in equilibrium price
d) decrease in equilibrium price and an increase
in equilibrium quantity
ECO 100 INTRODUCTION TO ECONOMICS
Page 5 of 10
46. A decrease in demand and a decrease in
supply results in a(n)
48. When people buy land, their purchases are
included in GDP.
a) increase in equilibrium price and a decrease in
equilibrium quantity
b) decrease in equilibrium price and a decrease
in equilibrium quantity
c) increase in equilibrium price and a increase in
equilibrium quantity
d) ambiguous effect of equilibrium price and a
decrease in equilibrium quantity
e) ambiguous effect on equilibrium price and a
increase in equilibrium quantity
a) True
b) False
47. If a firm is producing output at the level where
the total cost curve intersects the total revenue
curve,
a) the economy will return quickly to full
employment in most cases
b) if output is below its potential, the economy will
soon return to full employment
c) production can be stuck below its fullemployment level for extended periods of time
d) the Great Depression proved that classical
economics does a good job of explaining how
the economy operates
a)
b)
c)
d)
e)
profit is positive
profit is maximized
profit is zero
costs are minimized
average revenue is maximized
49. Classical economists believed that production
could be stuck below its full employment level
for a long period of time.
a) True
b) False
50. According to Keynesian economists,
END OF EXAMINATION
ECO 100 INTRODUCTION TO ECONOMICS
Page 6 of 10
BRADLEY UNIVERSITY
ECO 100 INTRODUCTION TO ECONOMICS
ANSWER KEY AND COMMENTS
QUESTION
1
ANSWER
B
2
A
3
B
4
C
5
C
6
7
8
C
C
E
9
B
10
A
11
D
12
13
A
A
14
15
A
D
COMMENT
Deflation is a situation when prices are falling. Dis-inflation,
conversely, is a situation where the rate of increase of prices gets
reduced (so, prices are still increasing, but less rapidly).
When prices fall we can purchase more goods with the same amount
of money we have in our pockets (that is, our purchasing power
increases if prices fall). Therefore, when prices are falling money
becomes a more attractive asset to hold, so people want to hold
more of it.
Printing money (that is, expanding the money supply) makes money
a more abundant good (relative to the amount of other goods).
Hence, the value of money falls, since it is now more abundant
(when a good becomes more abundant it is also less valuable), thus
hurting all holders of money. That is why inflation acts like a tax, a
tax on money holders.
Any good that becomes more abundant, relative to other goods,
becomes less valuable.
In the short-run, many factors may affect inflation (like government
spending, wages, oil shocks, etc.), but in the long-term none of these
previously mentioned factors can determine the rate of inflation.
However, the rate at which the supply of money is being expanded
does explain the relative abundance of money, and hence, the rate
of money growth explains the rate of inflation in the long-term.
Already explained in the answer to question one.
In a world of abundance, there would be no need for Economics!
The Scarcity of means relative to ends is a universal fact of life,
independent of institutional arrangements.
Positive statements involve falsifiable facts; normative statements
involve value judgments.
The nature of Microeconomics is the study of individual decisionmaking at different levels: households, firms, markets, etc.
The nature of Macroeconomics is to study the behavior of the
economy as a whole.
Option A is the only one dealing with the whole economy.
True. Opportunity cost is the value of the best alternative forgone
when making a choice. We were confronted with the need to choose
because some critical resource (time, money, etc.) was scarce.
Explained in the answer to the previous question.
As an economy allocates more and more resources to the production
of a given good x (measure this on the horizontal axis), the
opportunity cost rises because more and more alternative goods
ECO 100 INTRODUCTION TO ECONOMICS
Page 7 of 10
16
A
17
C
18
B
19
20
E
D
21
C
22
A
23
A
24
E
25
D
26
C
27
D
28
D
29
A
have to be given up. In the extreme, if we use the most talented
musician’s time to bake cakes all day long (say, because the
economy’s commander decided that the economy has to produce as
many cakes as possible –here x = cakes) we give up the enormous
pleasure produced by listening to the musician’s songs (that had to
be left unwritten). To represent the giving up of increasing amounts
of alternative goods as we increase the production of x, we draw a
PPF that bows out (the line becomes steeper and steeper as we
approach the horizontal axis from above).
Any combination outside the PPF line is unattainable, given our
resources and our current technology. Would we all like to go to the
moon? Sure. Can we? Not at the moment. That possibility lies
outside the current PPF of our economies.
A point inside the frontier’s line is inefficient. That is, we could move
to the northeast and get more of both goods.
False. The PPF is drawn for a given technology and resources. But
technology improves over time (what we call economic growth).
When technology improves, the PFF line shifts to the right to
represent the fact that we can attain combinations of goods that were
not attainable before.
Explained in answer to previous question.
Remember the frontier shifts when either: (i) the amount of a
resource changes; or (ii) the level of technology changes. Hence,
alternative a) is irrelevant. Alternatives b) and c) both lead to an
outward shift of the PPF line. Forcing people (workers) that were
working before is the type of reduction in resources that in practice
usually shifts the PPF line inwards.
The law of demand has nothing to do with the production possibilities
frontier concept.
Every worker experiences a learning curve. Specialization allows a
worker to move along the learning curve for a specific activity.
Specialization therefore increases total production.
In a highly specialized economy like the one we live in today, we
obtain most of the goods we consume through exchange.
In a market economy prices signal relative scarcities and also
provide the incentives needed to increase the production of goods
that are relatively scarce (when a good is scarce relative to people’s
demands, its price goes up, signaling producers where resources
should flow, and also giving them the incentives to do so).
Centrally planned socialism involves command decisions and state
property over productive resources.
The law of demand says that we reduce consumption of good x as
the price of x goes up.
For given income, wealth, preferences, etc., every point of a given
demand curve represents the consumer’s willingness to pay for the
different quantities.
Price has to increase as we try to produce more of good x, because
extra production of good x requires extra resources to be allocated to
produce good x. To attract those resources to industry x (and out of
other industries), the price of good x needs to be increased, thus
making production of x more profitable.
“Monopoly” means single seller. Why is there an absence of
competition? Because of barriers that prevent other potential
ECO 100 INTRODUCTION TO ECONOMICS
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30
D
31
E
32
D
33
E
34
35
E
A
36
B
37
B
38
D
39
A
40
E
41
A
42
43
C
B
44
C
producers to entry into that market.
Because electricity is most likely to be subjected to diminishing unit
costs of production, itself the main barrier to entry.
The reason why most markets are not characterized by a single
seller is, quite obviously, the existence of substitute goods.
If the good is a natural resource for which there is almost no
substitute, and a single corporation controls most of the sources of
production, then it will be a monopoly. The situation is infrequent,
that is why the De Boers monopoly in the diamonds industry is
interesting. Note: neither a patent, nor a copyright apply in the case
of a natural resource producer. Patents and copyrights protect
intellectual property, noy ownership of natural resources. Diseconomies of scale (unit costs that increase with production) tend to
generate competition, not monopolies.
There is no such thing as “intense rivalry” in perfect competition.
Indeed, each producer makes decisions ignoring other producers
completely! There is no strategic interaction in a setup with many,
many competitors.
If the firm cannot recover unit costs, it makes a loss.
Borrowing money to buy equipment and machines is more expensive
after the increase in the interest rate. Hence, firms invest less.
Land is the only one on that list that is not a financial asset (the
owner of land does not have a claim on another party, as is the case
with the bonds, neither does it have a share of property in a
corporation, as in the case of stocks). Land is not connecting savers
and investors in any meaningful way, as stocks and bonds do.
Quite the contrary. By ensuring property rights and making explicit
the allocation of responsibilities by the different parties to a contract,
contracts promote specialization.
The goal of antitrust legislation is to avoid business practices that
limit competition.
A. True. This is a world of trade-offs! There is no free lunch, and
taxation is no exception.
This is because Education is subject to positive externalities. This
means that most of the benefits accrue to society (think of primary
education), and not to the individual. How much does the wage of a
worker increase if he completes one more year of elementary
schooling? Not much. What are societal benefits from his completing
one more year of schooling? Very large, indeed. This is the essence
of the problem of positive externalities. Since the individual is not the
one appropriating the benefits from his (costly) actions, he produces
too little. This is a ‘market failure’, and the reason why primary
education tends to be both compulsory and heavily subsidized.
True. These two (non-rivalry and non-excludability) are the defining
characteristics of public goods.
Options a), b), and d) are private goods (rival, excludable)
Specialization occurs according to the ‘principle of the lowest
opportunity cost’. In other words, people (or countries) try to
minimize what they give up when picking the good they’re going to
specialize on.
A minimum wage set above the market-clearing wage implies the
creation of some unemployment, since the higher wage discourages
ECO 100 INTRODUCTION TO ECONOMICS
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45
D
46
D
47
48
C
B
49
B
50
C
firms from hiring workers while at the same time giving incentives for
people that were not in the labor force to renter and search for work.
On a pair of Cartesian axes, with p, price, on top, and q, quantity at
the bottom, draw demand and supply. Now shift the supply curve to
the right. Since we are moving to the right, quantity has to increase.
Regarding price, since we are moving downwards, price has to fall.
Draw q at the bottom, price on top, as usually. Since both curves
move to the left, we know for sure that quantity will decline. What is
ambiguous is what will happen to price, since supply is moving up
and demand is moving down.
If Revenues are equal to Costs, Profits are exactly zero.
False. Land is not a new good! (only new, final goods are included in
GDP).
False. Classical economists believed the Aggregate Supply curve
was vertical at the level of full employment output. He economy was
always operating at full employment, in their view.
Keynesians believe that the economy maybe stuck below full
employment for long periods of time, as it did during the Great
Depression (the decade between 1929 and 1939)
ECO 100 INTRODUCTION TO ECONOMICS
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