Econ 101, sections 4 and 5, S09, Schroeter

Exam #1, Red

Choose the single best answer for each question. Do all of your scratch work in the
margins or on the backs of pages.

1. Economics is the study of
a. production methods.
*. how society manages its scarce resources.
c. how households decide who performs which tasks.
d. the interaction of business and government.

2. Senator Smith argues that replacing the income tax with a national sales tax would
increase the level of output. Senator Wells objects that this policy would benefit the rich
at the expense of the poor.
a. Both Senators' arguments are primarily about equality.
b. Both Senators' arguments are primarily about efficiency.
c. Senator Smith's argument is primarily about equality, while Senator Wells' argument is
primarily about efficiency.
*. Senator Smith's argument is primarily about efficiency, while Senator Wells' argument
is primarily about equality.

3. When calculating the opportunity cost of attending college, which of the following
should you probably not include?
a. The cost of tuition.
b. The cost of books required for your college classes.
c. The income you would have earned had you not gone to college.
*. The cost of rent for your off-campus apartment.

4. Adam Smith's "invisible hand" refers to
a. the fact that the actions of corporations have a disproportionate effect on the market.
b. the influence of government regulation on economic activity.
*. how self-interested decisions lead to desirable market outcomes.
d. the impact of advertising on the modern market economy.

5. Which of these consumption activities will most likely impose an external cost?
a. An ISU student works out at Lied Recreation Center.
*. A secretary smokes a cigarette in a crowded break room.
c. An executive purchases a newspaper to read on a business trip.
d. A professor pushes her baby in a stroller.

6. Production is efficient if the economy is producing at a point
*. on the production possibilities frontier.
b. outside of the production possibilities frontier.
c. either on or inside of the production possibilities frontier.
d. inside the production possibilities frontier.
2
Questions 7 through 11 are based on the following information. Two small counties,
Plymouth and Mahaska, use their labor resources to produce goods of two types:
manufactured goods and agricultural goods. The table below gives the number of hours
of labor needed to produce one unit of each type of good in each country.

Hours needed to produce one unit of
manufactured goods agricultural goods
Plymouth 4.0 0.5
Mahaska 6.0 2.0

7. The resource cost of 1 unit of manufactured goods in Plymouth is
a. 8 hours per unit of manufactured goods.
b. 6 hours per unit of manufactured goods.
*. 4 hours per unit of manufactured goods.
d. 2 hours per unit of manufactured goods.

8. The opportunity cost of 1 unit of agricultural goods in Mahaska is
*. 1/3 units of manufactured goods per unit of agricultural goods.
b. 0.5 units of manufactured goods per unit of agricultural goods.
c. 2 hours per unit of agricultural goods.
d. 4 hours per unit of agricultural goods.

9. Which of the following is true?
a. Mahaska has the absolute advantage in the production of manufactured goods.
b. Plymouth has the comparative advantage in the production of manufactured goods.
*. Plymouth has the absolute advantage in the production of agricultural goods.
d. All of the above are true.

10. Suppose that there were international markets in manufactured goods and agricultural
goods in which the terms of trade were 5 units of agricultural goods per unit of
manufactured goods. At these terms of trade,
*. Plymouth would want to buy manufactured goods.
b. Mahaska would want to buy manufactured goods.
c. Both countries would want to buy agricultural goods.
d. None of the above.

11. Plymouth and Mahaska would be able to engage in a mutually beneficial trade with
each other as long as the trade price of one unit of agricultural goods was between
a. 0.5 and 2 units of manufactured goods.
b. 4 and 6 units of manufactured goods.
c. 1/3 and 3 units of manufactured goods.
*. 1/8 and 1/3 units of manufactured goods.
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12. Production possibilities frontiers are usually bowed outward. This is because
a. more resources used to produce one good mean fewer available to produce the other.
b. the opportunity cost of producing a good decreases as more of the good is produced.
c. of the effects of technological innovations.
*. resources are specialized.

13. Which of the following is a normative statement?
a. The average price of gasoline in the U.S. is lower today than it was two months ago.
b. Raising the minimum wage will increase unemployment.
c. Tax rates on the wealthiest Americans are lower now than they were in the 1970s.
*. None of the above; all are positive statements.

14. Which of the following is false?
a. Positive statements can, in principle, be confirmed or refuted by examining evidence.
b. Normative statements involve value judgments.
*. Any statement making a claim about the future is necessarily normative.
d. Deciding what is good or bad policy is not just a matter of science.

15. An economy's resources can be used to produce computers and cars. The production
possibilities frontier is a straight line with intercepts of 40,000 computers/month and
100,000 cars/month. The economy's opportunity cost of a computer is
a. 0.4 cars.
*. 2.5 cars.
c. 4 cars.
d. 10 cars.

16. Imports are
a. workers in a foreign country.
*. goods produced abroad and sold domestically.
c. limits placed on the quantity of goods leaving a country.
d. goods in which the producing country has a comparative advantage.

17. The group of buyers and sellers of a particular good is called
a. a coalition.
b. an economy.
*. a market.
d. a competitive circle.

18. Which of the following is not a determinant of the quantity demanded of a particular
good?
a. the price of the good itself.
b. the prices of substitute goods.
*. the prices of inputs used to produce the good.
d. the average household income of consumers of the good.
4
Questions 19, 20, 21, and 22 refer to the following graph of supply and demand curves in
a competitive market.


19. Equilibrium price and quantity in this market are:
a. p1 and Q3.
*. p2 and Q2.
c. p3 and Q1.
d. none of the above.

20. At a price of p3, there would be
a. excess supply in quantity Q2 - Q1.
b. excess supply in quantity Q4 -Q1.
c. excess demand in quantity Q4 - Q2.
*. none of the above.

21. Which of the following could account for a change in equilibrium to price p3 and
quantity Q4?
a. an increase in demand.
b. a decrease in demand.
*. an increase in supply.
d. a decrease in supply.

22. A change in equilibrium to price p3 and quantity Q2 would require
a. an increase in demand and an increase in supply.
b. an increase in demand and a decrease in supply.
*. a decrease in demand and an increase in supply.
d. a decrease in demand and a decrease in supply.
Demand
Supply
($/unit)




p1

p2

p3
Q1 Q2 Q3 Q4 (units/day)
5
23. Which of the following is true in a perfectly competitive market?
a. Sellers get together and collectively decide at what price they will sell the product.
*. No single buyer or seller has any influence over the market price.
c. Sellers have a strong incentive to charge more than the market price in order to
increase profit.
d. Buyers exert more control over the price than sellers do.

24. Which of the following would cause a leftward shift in the supply of a good?
a. an increase in the price of a substitute good.
*. an increase in the price of a factor of production.
c. a technological innovation that reduced the cost of producing the good.
d. a decrease in the good's own price.

25. Which of the following is most likely to be a pair of complementary goods for most
people?
a. butter and margarine.
b. lawnmowers and automobiles.
*. chips and salsa.
d. cola and lemonade.

26. Toyota announces that next month it will reduce the price of new Toyota Camrys by
$1000. As a result,
a. this month's demand for Toyota Camrys will shift to the right.
*. this month's demand for Toyota Camrys will shift to the left.
c. next month's demand for Toyota Camrys will shift to the right.
d. next month's demand for Toyota Camrys will shift to the left.

27. In a competitive market, an increase in demand will result in
*. an increase in equilibrium price and an increase in equilibrium quantity.
b. an increase in equilibrium price and a decrease in equilibrium quantity.
c. a decrease in equilibrium price and an increase in equilibrium quantity.
d. a decrease in equilibrium price and a decrease in equilibrium quantity.

28. What will happen to the equilibrium price and quantity in the competitive market for
music compact discs if compact disc players become cheaper and royalties paid to
musicians increase?
*. equilibrium price will increase and the effect on equilibrium quantity is ambiguous.
b. equilibrium price will decrease and the effect on equilibrium quantity is ambiguous.
c. equilibrium quantity will increase and the effect on equilibrium price is ambiguous.
d. equilibrium quantity will decrease and the effect on equilibrium price is ambiguous.
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29. Widgets are sold in a competitive market. You observe that the equilibrium price and
quantity of widgets have both decreased over time. Which of the following could
account for this observation?
a. The technology of manufacturing widgets has improved.
b. Consumer income has increased and widgets are a normal good.
*. The price of gizmos, a substitute for widgets, has decreased.
d. The price of copper, a raw material used to make widgets, has increased.

30. In a competitive market, equilibrium price will definitely increase when
a. demand and supply both increase.
b. demand and supply both decrease.
*. demand increases and supply decreases.
d. demand decreases and supply increases.