Download ECO 2301 Spring 2014 Sec 002 Klaus Becker EXAM 1 Form 1

ECO 2301
Sec 002
Spring 2014
Klaus Becker
EXAM 1
Form 1
Solutions
1. Economics is best defined as the study of:
A. wages and incomes.
B. prices and quantities.
C. how people make choices under the conditions of scarcity and the results of those choices.
D. inflation and interest rates.
Refer to the definition of economics
2. The logical implication of the scarcity principle is that:
A. as wealth increases, making choices becomes less necessary.
B. as wealth decreases, making choices becomes less necessary.
C. one will never be satisfied with what one has.
D. choices must be made.
The scarcity principle implies that a person cannot have or do everything, but must choose from among
alternatives.
3. The cost-benefit principle indicates that an action should be taken:
A. if the net benefit (benefit minus cost) is zero.
B. if the average benefits exceed the average costs.
C. if the total benefits exceed the total costs.
D. if the extra benefit is greater than or equal to the extra costs.
Refer to the definition of the cost-benefit principle given in the text: the extra benefits and extra costs determine
whether an action should be taken.
4. The opportunity cost of an activity is the value of:
A. the next-best alternative forgone.
B. an alternative forgone.
C. the least-best alternative forgone.
D. the difference between the chosen activity and the next-best alternative forgone.
Opportunity cost is not the total value of all possible activities, but only the value of the alternative you give up.
5. Matt has decided to purchase his textbooks for the semester. His options are to purchase the books via the
Internet with next day delivery to his home at a cost of $175, or to drive to campus tomorrow to buy the books
at the university bookstore at a cost of $170. Last week he drove to campus to buy a concert ticket because they
offered 25 percent off the regular price of $16.
According to the cost-benefit principle:
A. it would not be rational for Matt to drive to campus to purchase the books because the cost of gas and his
time must certainly be more than the $5 he would save.
B. it would be rational for Matt to drive to campus to purchase the books because it costs less to buy the books
there than via the Internet.
C. it would not be rational for Matt to drive to campus to purchase the books because the $5 saving is only two
percent of the cost of the books, and that is much less than the 25 percent he saved on the concert ticket.
D. it would be rational for Matt to drive to campus to purchase the books because the $5 saving is more than he
saved by driving there to buy the concert ticket.
Because Matt was willing to drive to school to save $4 last week, we can assume that the cost of driving to
school is no more than $4, so he should be willing to drive to school to save $5.
6. If a nation has the lowest opportunity cost of producing a good, that nation has a(n):
A. absolute advantage and possibly a comparative advantage.
B. comparative advantage and an absolute advantage.
C. absolute advantage.
D. comparative advantage.
Comparative advantage means having a lower opportunity cost.
7. Which of the following statements is always true?
A. Absolute advantage implies comparative advantage.
B. Comparative advantage requires absolute advantage.
C. Comparative advantage does not require absolute advantage.
D. Absolute advantage requires comparative advantage.
Comparative advantage and absolute advantage differ: you can have both at the same time, but you can also
have either one but not the other.
8. Application of the Principle of Comparative Advantage leads to:
A. greater specialization of labor and other factors of production.
B. societies without any specialization of labor.
C. lower total output.
D. less specialization of labor and other factors of production.
The Principle of Comparative Advantage states that people should specialize in those activities for which their
opportunity cost is lower, so it leads to specialization.
9. In general, individuals and nations should specialize in producing those goods for which they have a(n):
A. comparative advantage.
B. absolute advantage.
C. absolute advantage and a comparative advantage.
D. absolutely comparative advantage.
The Principle of Comparative Advantage states that people should specialize in those activities for which their
opportunity cost is lower, which is the same as saying the activity for which they have a comparative advantage.
10. The production possibilities curve shows:
A. how increasing the production of one good allows production of the other good to also rise.
B. the maximum production of one good for every possible production level of the other good.
C. the minimum production of one good for every possible production level of the other good.
D. how increasing the inputs used for one good increases the production of the other good.
The production possibilities curve describes the maximum amount of one good that can be produced for every
possible amount produced of another good.
11. This graph describes the production possibilities on the island of Genovia:
The opportunity cost of producing one car in Genovia is:
A. 5,000 tons of agricultural products.
B. 500 tons of agricultural products.
C. 5 tons of agricultural products.
D. 50 tons of agricultural products.
The opportunity cost of any good equals what you must give up of the other good divided by what you gain.
This country could give up 50,000 agricultural products to gain 1,000 cars. 50,000/1,000 = 50. For linear
production possibility curves, the axis intercepts can be used to calculate opportunity cost.
12.
Refer to the figure above. If Pat and Chris were to specialize in the task for which each has a comparative
advantage:
A. Chris would remove trash and Pat would plant bulbs.
B. Pat and Chris would each spend one hour on each task.
C. Chris would plant bulbs and Pat would remove trash.
D. both Pat and Chris would plant bulbs because they both have an absolute advantage in that task.
Chris gives up fewer bulbs to haul out trash so Chris' comparative advantage is in trash hauling. Pat has a
comparative advantage in bulb planting.
13. Points that lie below the production possibilities curve are inefficient because:
A. producers face scarcity.
B. more of one or both goods could be produced using currently available resources without giving up
production of another good.
C. too many goods are being produced.
D. producers are not specializing.
Inefficient points lie below the production possibilities curve so it is possible, given currently available
resources, to produce more of one good without giving up production of the other good.
14. According to the principle of increasing opportunity cost, expanding production requires using resources in
which order?
A. Starting with the resource closest to the average opportunity cost, then progressing to higher opportunity cost
resources.
B. Starting with the resource with the lowest opportunity cost and proceeding to the higher opportunity cost
resources.
C. In random order.
D. Starting with the resource with the highest opportunity cost and progressing to the lower opportunity cost
resources.
Recall the low-hanging-fruit analogy: take advantage of the most favorable opportunities first.
15. Economic growth can result from a(n):
A. increase in number of the minimum wage jobs.
B. increase in the amount of consumer goods produced.
C. increase in the amount of productive resources.
D. decrease in the number of workers available.
More productive resources will shift the PPC outward.
16. In the long-run, if the production of all goods increases for a society (there is economic growth), it will
cause the production possibility curve to:
A. stay the same.
B. shift outward.
C. shift inward.
D. first shift inward and then shift outward.
With growth, more of both goods can be produced.
17. The entire group of buyers and sellers of a particular good or service makes up:
A. the equilibrium.
B. a market.
C. only the supply curve.
D. only the demand curve.
The definition of market given in the text is that the market for any good consists of all buyers or sellers of that
good.
18. As coffee becomes more expensive, Joe starts drinking tea, and therefore quantity demanded for coffee
decreases. This is called:
A. a shift in the demand curve.
B. the substitution effect.
C. the change in equilibrium.
D. the income effect.
When one good becomes more expensive, buyers switch to substitutes.
19. When the price of an item increases, buyers tend to purchase less of that item:
A. only if the substitution effect and the income effect do not cancel out each other.
B. solely because of the income effect.
C. solely because of the substitution effect.
D. because of both the substitution and the income effects.
Both the substitution effect and the income effect operate to reduce the quantity demanded when price
increases.
20. The buyer's reservation price of a particular good or service is the:
A. same as the market price.
B. price the buyer must pay to ensure he or she gets it.
C. maximum amount the buyer would be willing to pay for it.
D. minimum amount the buyer would be willing to pay for it.
The definition of a buyer's reservation price is the largest dollar amount the buyer would be willing to pay for a
good.
21. The supply curve illustrates that firms:
A. decrease the quantity supplied to earn higher profits.
B. increase the quantity supplied of a good when its price rises.
C. increase the supply of a good when its price rises.
D. decrease the quantity supplied of a good when input prices fall.
At higher prices, more sellers find that the price they can sell an item for is greater than their opportunity cost to
produce that item.
22. An increase in the quantity demanded of tea occurs whenever:
A. the price of coffee rises.
B. tea drinkers receive an increase in their incomes.
C. the price of the tea falls.
D. the population of tea drinkers grows.
A change in price leads to a change in quantity demanded.
23. If the demand for a good decreases as income decreases, it is a(n):
A. substitute good.
B. complementary good.
C. inferior good.
D. normal good.
A normal good is one for which the demand curve shifts leftward when the incomes of buyers decrease.
24. Whether or not a good can be classified as a complement depends on whether;
A. an increase in demand for one good follows an increase in the price of the other.
B. an increase in demand for one good follows a decrease in the price of the other.
C. you personally tend to consume the goods together.
D. no substitutes exist.
Whether a good is a complement is determined by the reaction of market demand for one good to a change in
the price of the other.
25. Suppose that the price of doughnuts decreases and that doughnut-holes are a by-product of producing
doughnuts. One would expect:
A. the supply of doughnut-holes to increase.
B. the quantity supplied of doughnuts to decrease.
C. the quantity supplied of doughnut-holes to increase.
D. the supply of doughnuts to decrease.
A decrease in price decreases the quantity supplied.
26. At the beginning of the fall semester, college towns experience large increases in their populations, causing
a(n):
A. increase in the supply of apartments.
B. increase in the demand for apartments.
C. decrease in the quantity of apartments supplied.
D. decrease in the quantity of apartments demanded.
Apartments are complements to college attendance.
27. Which of the following would cause an increase in quantity supplied of wheat?
A. The price firms pay for liability insurance falls.
B. The price of fertilizer farmers' use in their fields decreases.
C. New, better technology for farming is introduced.
D. The price farmers receive for their wheat rises.
An increase in price causes a movement up and along the supply curve.
28. Suppose that the technology used to manufacture laptops has improved. The likely result would be:
A. an increase in quantity supplied of laptops.
B. an increase in supply of laptops.
C. a decrease in supply of laptops.
D. a decrease in quantity supplied of laptops.
An improvement in technology causes supply to shift to the right.
29. Which of the following is NOT a determinant of demand for gasoline?
A. The price of automobiles.
B. Consumers' incomes.
C. The price of diesel.
D. The quantity of gasoline supplied.
A change in quantity supplied does not change demand.
30. As the price of flour (an input into the cookie production process) increases, firms that produce cookies
will:
A. decrease the quantity of cookies supplied.
B. increase the quantity of cookies supplied.
C. increase the supply of cookies.
D. decrease the supply of cookies.
An increase in the price of an input causes supply to shift upward and to the left.