1. Basic Economic Concepts Income and Price Determination
100
200
300
400
500
Basic Economic Concepts
Supply and Demand
Economic Performance
Production and Costs
Income and Price Determination
Market Structures

2. A professor hires two aides, assigning them the tasks of reading student papers and of typing lectures notes on a computer. One of the aides, Ben, can read 1 page of lecture notes per minute or 50 words per minute and the other aide, Ann, can read 3 pages of a student paper per minute or type 60 words of lectures notes per minute. Which of the following statements is true?
Ann has a comparative advantage in reading student papers, and Ben has a comparative advantage in typing lecture notes.
Ann has an absolute advantage in reading student papers, and Ben has an absolute advantage in typing lecture notes.
Ben has a comparative advantage in reading student papers, and Ann has a comparative advantage in typing lecture notes.
Ben has a comparative advantage in both reading student papers and typing lecture notes.
Ben has an absolute advantage in both reading student papers and typing lecture notes.
100 A

3. According to the graph, if a country is currently producing at point X, the opportunity cost of producing another consumer good is GRAPH #2 2005
20 capital goods
more than 20 capital goods
fewer than 20 capital goods
20 consumer goods
fewer than 20 consumer goods
200 A

4. 300
The study of economics is primarily concerned with which of the following?
The testing of hypotheses under controlled conditions
The allocation of scarce resources, given unlimited wants
The fair and equal treatment of all households
The provision of conclusive answers to public policy issues
The development of the dynamics of group behavior B

5. 400
Mr. Carpenter devotes his working time to producing tables and chairs. An increase in the demand for chairs will result in
an increase in the amount of time he devotes to producing tables
an increase in his opportunity cost of producing tables
a decrease in the price of lumber
a decrease in the price of chairs
a decrease in his total revenue B

6. 500
For an economy with a straight-line production possibilities curve, which of the following must be true?
The opportunity cost of producing another unit is constant.
Resources are completely adaptable to alternative uses.
Resources are used efficiently.
I only
II only
III only
I and II
II and III D

7. 100
To alleviate a financial crisis, a university increases student fees. This action will increase university revenues if the price elasticity of demand for university education is
inelastic
unit elastic
elastic
equal to the price elasticity of supply
equal to one A

8. 200
Which of the following will occur if the government imposes a price ceiling below the equilibrium price of a good?
The quantity sold will exceed the equilibrium quantity.
Firms’ total revenues will increase if demand is price elastic.
There will be a shortage in the market.
All firms will shut down, since price is below the equilibrium price.
Price will exceed the marginal cost of producing the last unit sold. C

9. B 300 Which of the following will decrease the demand for beef?
An increase in the price of pork, if pork and beef are substitute goods.
An increase in the price of potatoes, if potatoes and beef are complementary goods.
A decrease in the cost of transporting beef to consumers.
An increase in the income levels of most consumers, if beef is a normal good.
Research showing beef is better for your health than chicken. B

10. Assume that both the supply of and the demand for a good are relatively price elastic. The imposition of a per-unit excise tax on the sale of the good would cause the equilibrium price and quantity to change in which of the following ways?
Price Quantity
Increase Increase
Increase No change
Increase Decrease
Decrease No change
Decrease Decrease C
400

11. Assume that consumers consider potatoes to be an inferior good, but consider rice to be a normal good. An increase in consumers’ incomes will most likely affect the equilibrium price and quantity of potatoes and rice in which of the following ways?
Potatoes Rice
Price Quantity Price Quantity
Decrease Decrease Increase Decrease
Decrease Increase Increase Decrease
Decrease Decrease Decrease Decrease
Increase Increase Decrease Decrease
Increase Decrease Increase Decrease A
500

12. 100
The major difference between real and nominal gross domestic product (GDP) is that real GDP
excludes government transfer payments
excludes imports
is adjusted for price-level changes using a price index
measures only the value of final goods and services that are consumed
measures the prices of a market basket of good purchased by a typical urban consumer C

13. 200
Which of the following statements exemplifies the concept of structural unemployment?
New entrants into the labor force have trouble finding jobs.
Workers leave their current jobs to find better jobs.
Workers are laid off because aggregate demand has declined.
Workers are fired because consumers have reduced their total expenditures.
Workers are fined because their skills are no longer in demand. E

14. 300
Under which of the following conditions would consumer spending most likely increase?
Consumers have large unpaid balances on their credit cards.
Consumers’ wealth is increased by changes in the stock market.
The government encourages consumers to increase their savings.
Social security taxes are increased.
Consumers believe they will not receive pay increases next year. B

15. A 400 The unemployment rate measures the percentage of
people in the labor force who do not have jobs
people in the labor force who have a part-time job but are looking for a full-time job
people who do not have jobs and have given up looking for work
people in the adult population who do not have jobs
people in the adult population who have temporary jobs A

16. 500
Which of the following can be considered a leakage from the circular flow of economic activity?
Investment
Government expenditures
Consumption
Exports
Saving E

17. 100
If the price of a firm’s variable input increases, which of the following will occur?
The firm will decrease its level of production.
The price of the good will decrease in the short run.
The firm’s marginal costs will decrease at every level of output.
The firm’s average fixed cost will decrease.
More firms will enter the industry in the run. A

18. 200
In a given time period, a period consumes more and more of a good or service and, as a result, enjoys each additional unit less and is willing to pay less for each additional unit. This behavior is consistent with the law of
diminishing returns
diminishing marginal product
diminishing marginal utility
increasing costs
scarce resources C

19. Which of the following best describes the relationship between the average total cost curve and the marginal cost curve in the short run?
If the average total cost curve is rising, the marginal cost curve is above the average total cost curve.
If the average total cost curve is rising, the marginal cost curve is below the average total cost curve.
If the average total cost curve is above the marginal cost curve, the marginal cost curve is rising.
If the average total cost curve is below the marginal cost curve, the marginal cost curve is falling.
If the average and marginal cost curves intersect, the marginal cost curve is at a minimum. A
300

20. 400
At the current production level of good X, price is greater than marginal cost. Which of the following actions would lead to greater efficiency?
Decreasing the production of good X
Increasing the production of good X
Maintaining the current level of production of good X
Imposing a tax on the production of good X
Imposing an effective price floor on good X B

21. 500
Locotek produces toy trains and pays each worker $350 per week. Five workers can produce 40 trains per week and six workers can produce 45 trains per week. The marginal product per week of the sixth worker is
$70
$350
5 trains
7.5 trains
42.5 trains C

22. B 100 Crowding out is best described as which of the following?
The decrease in full-employment output caused by an increase in taxes
The decrease in consumption or private investment spending caused by an increase in government spending
The decrease in government spending caused by a decrease in taxes
The increase in the amount of capital outflow caused by the increase in government spending
The increase in the amount of capital inflow caused by the increase in government spending B

23. 200
The classical economists argued that involuntary unemployment would be eliminated by
increasing government spending to increase aggregate demand
increasing the money supply to stimulate investment spending
self-correcting market forces stemming from flexible prices and wages
maintaining the growth of the money supply at a constant rate
decreasing corporate income taxes to encourage investment C

24. 300
An increase in the marginal propensity to consume causes an increase in which of the following?
Marginal propensity to save
Spending multiplier
Savings rate
Exports
Aggregate supply B

25. 400
Assume that the economy is at full-employment equilibrium in the diagram shown above. Which of the following would lead to stagflation?
A leftward shift of the short-run aggregate supply curve only
A rightward shift of the short-run aggregate supply curve only
A leftward shift of the aggregate demand curve only
A rightward shift of the aggregate demand curve only
A rightward shift in both the short-run aggregate supply curve and the aggregate demand curve A

26. 500
A change in which of the following will cause the short-run aggregate supply curve to shift?
The price level
Government spending
The cost of all inputs
I only
II only
III only
I and II only
I, II, and III C

27. 100
One characteristic of perfectly competitive markets is that individual firms
engage in product differentiation
are free to enter or exit an industry in the long run
earn positive economic profits in the long run
advertise to increase market share
face a downward-sloping demand curve B

28. 200
Which of the following is true of a monopolistically competitive firm in long-run equilibrium?
Price is greater than marginal cost, and marginal revenue is equal to average total cost.
Price is greater than marginal revenue, and marginal cost is equal to average total cost.
Price is greater than marginal revenue, and marginal cost is greater than average total cost.
Marginal revenue is equal to marginal cost, and price is equal to average total cost.
Marginal revenue is greater than marginal cost, and price is equal to average total cost. D

29. E 300 Generally, monopolies are considered inefficient because they
produce at a point where marginal cost is less than marginal revenue
produce at a point where marginal cost exceeds price
produce more output than does a competitive industry with similar cost conditions
lead to an overallocation of resources in the affected market
lead to an underallocation of resources in the affected market E

30. E 400 Economies of scale exist when
the doubling of all inputs doubles the output produced
short-run average total cost decreases as output increases
short-run average total cost remains constant as output increases
long-run average total cost increases as output increases
long-run average total cost decreases as output increases E

31. 500
If the only two firms in an industry successfully collude to maximize their joint profit, the price for the product will be
equal to the marginal cost of production
equal to the average total cost of production
above the marginal cost of production
above the monopoly price
below the average variable cost of production C