Practice Test 1 Fall 2015

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. Suppose the cost of flying a 200-seat plane for an airline is $100,000 and there are 10 empty seats on a flight.
If the marginal cost of flying a passenger is $200 and a standby passenger is willing to pay $300, the airline
should
a. sell the ticket because the marginal benefit exceeds the marginal cost.
b. sell the ticket because the marginal benefit exceeds the average cost.
c. not sell the ticket because the marginal benefit is less than the marginal cost.
d. not sell the ticket because the marginal benefit is less than the average cost.
____ 2. Suppose there is a decrease in the price of corn. If corn is an input into the production of ethanol, we would
expect the supply curve for ethanol to
a. shift rightward.
b. shift leftward.
c. become flatter.
d. remain unchanged.
____ 3. Today's supply curve for ipods could shift in response to a change in
a. today's price of ipods.
b. the expected future price of ipods.
c. the number of buyers of ipods.
d. All of the above are correct.

Figure 4-2
price
40

36

32
S
28

24

20

16

12

4
D

2 4 6 8 10 12 14 16 18 20 quantity

____ 4. Refer to Figure 4-2. At a price of $12, there is a

a. surplus of 2 units.
b. surplus of 4 units.
c. shortage of 2 units.
d. shortage of 4 units.
____ 5. Refer to Figure 4-2. At a price of $24, there is a
a. surplus of 4 units.
b. surplus of 8 units.
c. shortage of 4 units.
d. shortage of 8 units.

Problem

1. The term ______ refers to the size of the economic pie, and the term ______ refers to how the pie is divided.

Scenario 1-1
You have the afternoon free. You have a choice between going to the movies with a friend or studying
economics for three hours. If you go to the movies, you will spend $8.00 on a ticket and $4.50 on popcorn. If
you choose to study economics for three hours, you will raise your exam grade by 10 points.

2. Refer to Scenario 1-1. What is your opportunity cost of going to the movies?

3. What is another word for “marginal”?

4. Economists use the term ______ to refer to a situation in which the market on its own fails to produce an
efficient allocation of resources.

5. In the short run, an increase in the money supply is likely to lead to ______ inflation and ______
unemployment.

6. Economists use the term ______ to refer to fluctuations in economic activity, such as employment and
production.

Figure 2-1

1 2

B
 7. Refer to Figure 2-1. What do the ovals represent in the figure?

8. Refer to Figure 2-1. What do the rectangles represent in the figure?

9. Refer to Figure 2-1. What do the outer arrows represent in the figure?

10. Refer to Figure 2-1. What do the inner arrows represent in the figure?

11. Refer to Figure 2-1. What does the arrow going from oval A to rectangle 2 represent in the figure?

12. Refer to Figure 2-1. What does the arrow going from oval B to rectangle 2 represent in the figure?

13. The three main factors of production, or categories of inputs, used by firms to produce goods and services are

Figure 2-2
cars
10

9 A
8

7 B
6

5 C
4 G
3 D
2 F
1

E
20 40 60 80 100 120 140 160 180 corn
135

Consider the production possibilities curve for a country that can produce cars, corn (in bushels), or a
combination of the two.

14. Refer to Figure 2-2. Which point(s) on the graph is(are) efficient production possibilities?

15. Refer to Figure 2-2. Which point(s) on the graph show unemployment of resources?

16. Refer to Figure 2-2. Which point(s) on the graph is(are) unattainable given current resources and
technology?

17. Is the following a positive or normative statement? The federal minimum wage is lower than many state
minimum wages.
 Scenario 4-1

The following table shows the supply and demand schedules in a market.

Quantity Quantity
Demanded Supplied
Price ($) (units) (units)
0 50 0
2 40 15
4 30 30
6 20 45
8 10 60
10 0 75

18. Refer to Scenario 4-1. What is the equilibrium price in this market?

19. Refer to Scenario 4-1. What is the equilibrium quantity in this market?

20. Suppose the supply and demand of corn both increase. As a result, what will happen to the equilibrium price
and equilibrium quantity in the market?

21. If the supply of tennis balls, a complement to tennis racquets, decreases, what will happen to the equilibrium
price of tennis balls and to the equilibrium price of tennis racquets?

22. If the supply of pencils, a substitute for pens, increases, what will happen to the equilibrium price of pencils
and to the equilibrium price of pens?

23. If the price of steel, an input into the production of automobiles, rises, and at the same time the price of
gasoline rises, what will happen to the equilibrium price and quantity of automobiles?

24. If the demand for a good increases at the same time as the supply of the same good decreases, what will
happen to the equilibrium price and quantity of the good?
Practice Test 1 Fall 2015
Answer Section

MULTIPLE CHOICE

1. ANS: A PTS: 1 DIF: 2 REF: 1-1

NAT: Analytic LOC: Marginal costs & benefits TOP: Marginal cost | Marginal benefit
MSC: Applicative
2. ANS: A PTS: 1 DIF: 2 REF: 4-3
NAT: Analytic LOC: Supply and demand TOP: Input prices
MSC: Applicative
3. ANS: B PTS: 1 DIF: 2 REF: 4-3
NAT: Analytic LOC: Supply and demand TOP: Expectations
MSC: Applicative
4. ANS: D PTS: 1 DIF: 2 REF: 4-4
NAT: Analytic LOC: Supply and demand TOP: Surpluses
MSC: Applicative
5. ANS: B PTS: 1 DIF: 2 REF: 4-4
NAT: Analytic LOC: Supply and demand TOP: Shortages
MSC: Applicative

PROBLEM

1. ANS:
efficiency; equality

PTS: 1 DIF: 2 REF: 1-1 NAT: Analytic

LOC: Efficiency and equity TOP: Efficiency | Equality
MSC: Definitional
2. ANS:
$12.50 and 10 points on your exam grade

PTS: 1 DIF: 2 REF: 1-1 NAT: Analytic

LOC: Scarcity, tradeoffs, and opportunity cost TOP: Opportunity cost
MSC: Applicative
3. ANS:
incremental; additional

PTS: 1 DIF: 1 REF: 1-1 NAT: Analytic

LOC: Marginal costs & benefits TOP: Marginal changes
MSC: Definitional
4. ANS:
market failure

PTS: 1 DIF: 1 REF: 1-2 NAT: Analytic

LOC: Markets, market failure, and externalities TOP: Market failure
MSC: Definitional
 5. ANS:
higher; lower

PTS: 1 DIF: 2 REF: 1-3 NAT: Analytic

LOC: Unemployment and inflation TOP: Money | Inflation | Unemployment
MSC: Applicative
6. ANS:
business cycle

PTS: 1 DIF: 1 REF: 1-3 NAT: Analytic

LOC: Unemployment and inflation TOP: Business cycle
MSC: Definitional
7. ANS:
Market for Goods and Services
Market for Factors of Production

PTS: 1 DIF: 2 REF: 2-1 NAT: Analytic

LOC: Understanding and applying economic models TOP: Circular flow model
MSC: Applicative
8. ANS:
Firms
Households

PTS: 1 DIF: 2 REF: 2-1 NAT: Analytic

LOC: Understanding and applying economic models TOP: Circular flow model
MSC: Applicative
9. ANS:
flow of dollars

PTS: 1 DIF: 2 REF: 2-1 NAT: Analytic

LOC: Understanding and applying economic models TOP: Circular flow model
MSC: Applicative
10. ANS:
flow of inputs and outputs

PTS: 1 DIF: 2 REF: 2-1 NAT: Analytic

LOC: Understanding and applying economic models TOP: Circular flow model
MSC: Applicative
11. ANS:
goods and services bought

PTS: 1 DIF: 2 REF: 2-1 NAT: Analytic

LOC: Understanding and applying economic models TOP: Circular flow model
MSC: Applicative
12. ANS:
income

PTS: 1 DIF: 2 REF: 2-1 NAT: Analytic

LOC: Understanding and applying economic models TOP: Circular flow model
MSC: Applicative
13. ANS:
land, labor, and capital.

PTS: 1 DIF: 1 REF: 2-1 NAT: Analytic

LOC: Understanding and applying economic models TOP: Scientific method
MSC: Definitional
14. ANS:
A, D, and E

PTS: 1 DIF: 2 REF: 2-1 NAT: Analytic

LOC: Understanding and applying economic models TOP: Production Possibilities Curve
MSC: Analytical
15. ANS:
C and F

PTS: 1 DIF: 2 REF: 2-1 NAT: Analytic

LOC: Understanding and applying economic models TOP: Production Possibilities Curve
MSC: Analytical
16. ANS:
B and G

PTS: 1 DIF: 2 REF: 2-1 NAT: Analytic

LOC: Understanding and applying economic models TOP: Production Possibilities Curve
MSC: Analytical
17. ANS:
positive

PTS: 1 DIF: 1 REF: 2-2 NAT: Analytic

LOC: The study of economics and definitions in economics
TOP: Positive economics | Normative economics MSC: Interpretive
18. ANS:
$4

PTS: 1 DIF: 2 REF: 4-4 NAT: Analytic

LOC: Supply and demand TOP: Equilibrium MSC: Applicative
19. ANS:
30 units

PTS: 1 DIF: 2 REF: 4-4 NAT: Analytic

LOC: Supply and demand TOP: Equilibrium MSC: Applicative
20. ANS:
The equilibrium quantity will increase. The change in the equilibrium price is ambiguous.

PTS: 1 DIF: 2 REF: 4-4 NAT: Analytic

LOC: Supply and demand TOP: Equilibrium MSC: Analytical
21. ANS:
The equilibrium price of tennis ball will rise. The equilibrium price of tennis racquets will fall.

PTS: 1 DIF: 3 REF: 4-4 NAT: Analytic

LOC: Supply and demand TOP: Equilibrium MSC: Analytical
22. ANS:
The equilibrium price of pencils will fall. The equilibrium price of pens will fall.

PTS: 1 DIF: 3 REF: 4-4 NAT: Analytic

LOC: Supply and demand TOP: Equilibrium MSC: Analytical
23. ANS:
The equilibrium quantity will fall. The change in the equilibrium price is ambiguous.

PTS: 1 DIF: 3 REF: 4-4 NAT: Analytic

LOC: Supply and demand TOP: Equilibrium MSC: Analytical
24. ANS:
The equilibrium price will rise. The change in the equilibrium quantity is ambiguous.

PTS: 1 DIF: 3 REF: 4-4 NAT: Analytic

LOC: Supply and demand TOP: Equilibrium MSC: Analytical