STUDY QUESTIONS (Chapters 1-4) 6.

If you own a building and you decide to use that

building to open a book store
1. Which of the following is the best definition of A) there is no opportunity cost of using this building for a
economics? book store because you own it.
A) the study of how individuals and societies choose to B) there is an opportunity cost of using this building for a
use the scarce resources that nature and previous book store because it could have been used in other ways.
generations have provided C) the opportunity costs equal the cost of inventory.
B) the study of how consumers spend their income D) the only cost relevant to this decision is the price you
C) the study of how business firms decide what inputs to paid for the building.
hire and what outputs to produce
D) the study of how the federal government allocates tax
dollars 7. You own the video game Grand Theft Auto V. The
opportunity cost of playing this game for the second time
A) is zero.
2. The study of economics B) is one-half the cost of the game, as this is the second
A) is a very narrow endeavor. time you have played it.
B) is a way of analyzing decision-making processes C) is the value of the alternative use of the time you spend
caused by scarcity. playing the game.
C) is concerned with proving that capitalism is better than D) cannot be calculated.
socialism.
D) focuses on how a business should function.
8. The amount of education that one has is an important
factor in the determination of his or her wage rate. This is
3. The concept of opportunity cost best described as
A) is relevant only to economics. A) a positive statement.
B) can be applied to the analysis of any decision-making B) an example of the fallacy of composition.
process. C) a normative statement.
C) applies to consumers but not to firms. D) an example of marginalism.
D) refers only to actual payments and incomes.

4. Opportunity cost is
A) that which we forgo, or give up, when we make a 9. Which of the following is a normative question?
choice or a decision. A) Why do gasoline prices increase between Memorial
B) a cost that cannot be avoided, regardless of what is Day and Labor Day?
done in the future. B) What will happen to gasoline consumption if the
C) the additional cost of producing an additional unit of federal tax on gasoline is eliminated?
output. C) To reduce the regressive nature of the gasoline excise
D) the additional cost of buying an additional unit of a tax, should the portion of the gasoline excise tax paid by
product. high-income individuals be increased?
D) How will oil exploration be affected if the government
subsidizes oil producers?
5. Which of the following is not an opportunity cost of
attending college?
A) the tuition you pay 10. The reoccurrence of contagious diseases should be
B) the income you could have earned if you didn't attend significantly lower in a technically advanced nation such
college as the United States. This statement is best described as
C) the alternative uses of the time you spend studying A) a normative statement.
D) the cost of the food that you consume while you are B) a positive statement.
attending college C) a marginal statement.
D) an implication of an efficient market.
11. The production possibility frontier is a graph that 16. Consider two countries, Japan and Malaysia. Japan
shows devotes a smaller portion of its production to capital. All
A) all the combinations of goods and services that are other things equal, which of the following statements is
consumed over time if all of society's resources are used most likely true?
efficiently. A) Japan is a poorer country than Malaysia.
B) the amount of goods and services consumed at various B) Japan will move up its production possibility curve
average price levels. faster than Malaysia.
C) the rate at which an economy's output will grow over C) Malaysia is producing inside its production possibility
time if all resources are used efficiently. frontier, whereas Japan is producing at a point on its
D) all the combinations of goods and services that can be production possibility frontier.
produced if all of society's resources are used efficiently. D) Malaysia's production possibility frontier will shift up
and out farther and faster than Japan's.

12. Production inefficiency occurs

A) only when an economy produces underneath its 17. An economy in which a central authority draws up a
production possibility frontier. plan that establishes what will be produced and when, sets
B) only when an economy produces at the wrong point on production goals, and makes rules for distribution is a
the production possibility frontier. A) free-market economy.
C) either when an economy produces underneath the B) laissez-faire economy.
production possibility frontier or when the economy is C) public-goods economy.
producing the wrong combination of goods on the D) command economy.
production possibility frontier.
D) only when the economy produces outside the
production possibility frontier. 18. An economy in which individual people and firms
pursue their own self-interest without any central
direction or regulation is a(n)
13. For an economy to produce at a point beyond its A) command economy.
current ppf, the economy must B) laissez-faire economy.
A) waste less. C) invisible-hand economy.
B) be more efficient. D) private-sector economy.
C) reduce inputs.
D) increase its resource base.
19. In a laissez-faire economy, ________ what gets
produced, how it is produced, and who gets it.
14. In terms of the production possibility frontier, an A) the behavior of buyers and sellers determines
increase in productivity attributable to new technology B) the central government authority determines
would best be shown by C) firms but not consumers determine
A) a movement along the frontier. D) consumers but not firms determine
B) the production possibility frontier shifting outward,
away from the origin.
C) a movement from a point inside the frontier to a point 20. Firms are organizations that
on it. A) take advantage of the public.
D) a movement toward the origin. B) transform resources into products.
C) transform outputs into inputs.
D) demand consumer outputs.
15. An improvement in technology will cause the
A) production possibility frontier to shift outward.
B) production possibility frontier to shift inward. 21. The consuming units in an economy are known as
C) economy to move down the production possibility A) firms.
frontier. B) entrepreneurs.
D) economy to move closer to its production possibility C) households.
frontier. D) factors.
22. A factor market is 29. A frozen food manufacturer can produce either pizzas
A) where goods are exchanged. or calzones. As the result of an increase in the price of
B) where resources are exchanged. calzones, the firm produces more calzones and fewer
C) where goods are made. pizzas. An economist would explain this by saying
D) organized by government. A) the supply of calzones increased and the supply of
pizzas decreased.
B) there has been an increase in the quantity supplied of
23. In an output market calzones and a decrease in the quantity supplied of pizzas.
A) consumers purchase products. C) there has been an increase in the quantity supplied of
B) firms purchase resources. calzones and a decrease in the supply of pizza.
C) households earn income. D) the supply of calzones increased and the quantity
D) land, labor, and capital may be exchanged. supplied of pizza decreased.

24. Capital, labor, and land are 30. The change in the price of a good leads to a change in
A) factors of production. ________, which leads to a ________.
B) inputs. A) quantity supplied; movement along a supply curve
C) resources. B) quantity supplied; shift of the supply curve
D) all of the above. C) supply; movement along a supply curve
D) supply; shift of the supply curve

25. The "law of demand" implies that

A) as prices fall, demand increases. 31. When there is a shortage of a product in an
B) as prices rise, demand increases. unregulated market, there is a tendency for
C) as prices fall, quantity demanded increases. A) price to rise.
D) as prices rise, quantity demanded increases. B) price to fall.
C) quantity demanded to increase.
D) quantity supplied to decrease.
26. A decrease in demand for cameras would likely be
caused by
A) an increase in the price of a substitute good. 32. If the market for tires is unregulated and is presently
B) an increase in the price of cameras. characterized by excess supply, you can accurately
C) an increase in the price of a complementary good. predict that price will
D) a decrease in the price of cameras. A) increase, the quantity demanded will fall, and the
quantity supplied will rise.
B) increase, the quantity demanded will rise, and the
27. In response to news reports that taking aspirin daily quantity supplied will fall.
can reduce an individual's risk of a heart attack, there will C) decrease, the quantity demanded will rise, and the
most likely be a(n) quantity supplied will fall.
A) increase in the supply of aspirin. D) decrease, the quantity demanded will fall, and the
B) decrease in the supply of aspirin. quantity supplied will rise.
C) increase in the demand for aspirin.
D) increase in the quantity demanded of aspirin.
33. Bacon is used to produce bacon cheeseburgers, and
the price of bacon decreases. In the market for bacon
28. A change in income leads to a ________ that causes a cheeseburgers you would expect that
________. A) the demand for bacon cheeseburgers would increase
A) change in demand; movement along the demand curve and the price of bacon cheeseburgers would increase.
B) change in quantity demanded; movement along the B) the demand for bacon cheeseburgers would decrease
demand curve and the price of bacon cheeseburgers would fall.
C) change in demand; shift of the demand curve C) the supply of bacon cheeseburgers would decrease and
D) change in quantity demanded; shift of the demand the price of bacon cheeseburgers would increase.
curve D) the supply of bacon cheeseburgers would increase and
the price of bacon cheeseburgers would decrease.
34. When the supply of chocolate decreases while the 40. An example of a price ceiling would be the
demand for chocolate also decreases, the equilibrium government setting the price of sugar
________ of chocolate will definitely ________, ceteris A) above the equilibrium market price.
paribus. B) at the equilibrium market price.
A) price; increase C) below the equilibrium market price.
B) price; decrease D) none of the above.
C) quantity; increase
D) quantity; decrease
41. If the market price of coffee is $3.00 per pound but the
government will not allow coffee growers to charge more
35. In a "black market," than $2.00 per pound of coffee, which of the following
A) suppliers take advantage of buyers. will happen?
B) price is illegally below market price. A) Demand must eventually decrease so that the market
C) illegal trading at market prices takes place. will come into equilibrium at a price of $2.50.
D) only illegal goods and services are traded. B) There will be a shortage of coffee.
C) Supply must eventually increase so that the market will
come into equilibrium at a price of $2.50.
36. If the government imposes a maximum price that is D) The market will be in equilibrium at a price of $2.00.
above the equilibrium price
A) this maximum price will have no economic impact.
B) quantity demanded will be less than quantity supplied. 42. It is necessary to ration a good whenever ________
C) demand will be greater than supply. exists.
D) the available supply will have to be rationed with a A) excess demand
nonprice rationing mechanism. B) excess supply
C) a surplus
D) market equilibrium
37. People scalping tickets for a jazz festival will be
successful at selling the tickets for a profit
A) any time the jazz festival is popular. 43. A price ceiling is
B) when the price set by the festival organizers is less than A) a minimum price set by government that sellers may
the market equilibrium price. charge for a good.
C) when prices are too high. B) a maximum price set by government that sellers may
D) only when there is excess supply. charge for a good.
C) the difference between the initial equilibrium price and
the equilibrium price after a decrease in supply.
38. An example of an ineffective price ceiling would be D) the minimum price that consumers are willing to pay
the government setting the maximum price of wheat at for a good.
________ per bushel when the market price is at $5.00 per
bushel.
A) $2.25 44. A price floor is
B) $3.00 A) a minimum price set by government that sellers may
C) $4.75 charge for a good.
D) $6.00 B) a maximum price set by government that sellers may
charge for a good.
C) the difference between the initial equilibrium price and
39. If the equilibrium price of gasoline is $4.00 per gallon the equilibrium price after a decrease in supply.
and the government will not allow oil companies to D) the minimum price that consumers are willing to pay
charge more than $3.00 per gallon of gasoline, which of for a good.
the following will happen?
A) Demand must eventually decrease so that the market 45. If a price ceiling is set above the equilibrium price
will come into equilibrium at a price of $3.00. A) quantity demanded will equal quantity supplied.
B) Supply must eventually increase so that the market will B) there will be a surplus.
come into equilibrium at a price of $3.00. C) there will be a shortage.
C) A nonprice rationing system such as ration coupons D) demand will be less than supply.
must be used to ration the available supply of gasoline.
D) The market will be in equilibrium at a price of $3.00.
46. If a price floor is set above the equilibrium price 53. Producer surplus is
A) quantity demanded will equal quantity supplied. A) the difference between the maximum a person is
B) there will be a surplus. willing to pay and current market price.
C) there will be a shortage. B) the difference between current market price and full
D) the floor will be ineffective. costs of production for the firm.
C) the difference between willingness to sell and full costs
of productions for the firm.
47. The government imposes a maximum price on D) current market price.
apartments that is above the equilibrium price. You
accurately predict that
A) the law will have no economic impact. 54. If the most someone is willing to pay for ticket to see
B) the law will create a surplus of apartments. their favorite team is $100 and the market price of the
C) renters will find that landlords start offering to furnish ticket is $35, then this buyer will get consumer surplus of
the apartments. A) 1 ticket.
D) landlords are less likely to do routine maintenance B) $35.
work in the apartments. C) $65.
D) $100.

48. The government imposes a price ceiling on sugar that

is above the market price. You are asked to suggest a 55. If the market price of a basketball is $35 and the full
rationing scheme that will minimize the misallocation of cost of producing it is $20, then a basketball producing
resources. You suggest firm gets producer surplus of
A) using rationing coupons that cannot be resold. A) 1 basketball.
B) using rationing on a first-come, first-served basis. B) $35.
C) using rationing coupons that can be resold. C) $20.
D) that no rationing system will be necessary. D) $15.

49. If a price is demand determined, then 56. The total of consumer plus producer surplus is greatest
A) the supply curve must be horizontal. A) when consumer surplus is maximized.
B) the supply curve must be vertical. B) when producer surplus is maximized.
C) the demand curve must be vertical. C) at the market equilibrium.
D) the demand curve must be upward sloping. D) all of the above

50. An effective price ceiling must be set 57. When there is underproduction in a market
A) above the equilibrium price. A) market price is too high.
B) below the equilibrium price. B) there is excess quantity supplied.
C) at the equilibrium price. C) the total of consumer and producer surplus is
D) either at or above the equilibrium price. maximized.
D) there is a deadweight loss.

51. An effective price floor must be set

A) above the equilibrium price.
B) below the equilibrium price.
C) at the equilibrium price.
D) either at or below the equilibrium price.

52. Consumer surplus is

A) the difference between the maximum a person is
willing to pay and current market price.
B) the difference between current market price and full
costs of production for the firm.
C) the difference between the maximum a person is
willing to pay and full costs of productions for the firm.
D) current market price.