ECON 2101 - Principles of Macroeconomics, Fall 2008 - Test 1 VERSION B

Multiple Choice (2.5 points each)

Choose the response that best answers the question or completes the statement. Make sure you put all of your responses on the
opscan form.

1. One reason that the quantity demanded of a good increases when its price falls is that the:

A. lower price shifts the demand curve to the right.

B. lower price shifts the demand curve to the left.
C. price decline shifts the supply curve to the left.
D. lower price increases the real incomes, and purchasing power, of buyers, enabling them to buy more.

2. The law of increasing opportunity costs states that:

A. the sum of the costs of producing a particular good cannot rise above the current market price of that good.
B. if the sum of the costs of producing a particular good rises by a specified percent, the price of that good must rise by a
greater relative amount.
C. if the prices of all the resources used to produce goods increase, the cost of producing any particular good will increase at
the same rate.
D. if society wants to produce more of a particular good, it must sacrifice larger and larger amounts of other goods to
do so.

3. In economics, consumers only receive utility if the consumption of a good makes them happier.
A. True
B. False

4. Well-defined property rights:

A. encourage owners to maintain or improve their property.

B. discourage hard work.
C. discourage investment and growth.
D. impede exchange.

5. Suppose that a university decides to spend $1 million to upgrade personal computers and scientific equipment for faculty rather
than spend $1 million to expand parking for students. This example illustrates:

A. increasing opportunity costs.

B. productive efficiency.
C. distorted priorities.
D. opportunity costs.

6. The term laissez faire suggests that:

A. land and other natural resources should be publicly owned, but capital equipment should be privately owned.
B. land and other natural resources should be privately owned, but capital should be publicly owned.
C. government should not interfere with the operation of the economy.
D. government action is necessary if the economy is to achieve full employment and full production.
7. The competitive market system, unlike command systems:

A. discourages innovation because it is difficult to acquire additional capital in the form of new machinery and equipment.
B. discourages innovation because firms want to get all the profits possible from existing machinery and equipment.
C. encourages innovation because government provides tax breaks and subsidies to those who develop new goods or new
productive techniques.
D. encourages innovation because successful innovators are rewarded with economic profits.

1
8. At the equilibrium price:

A. there are forces that cause price to rise.

B. there are no pressures on price to either rise or fall.
C. quantity supplied may exceed quantity demanded or vice versa.
D. there are forces that cause price to fall.

9. The economizing problem is one of deciding how to make the best use of:

A. virtually unlimited resources to satisfy virtually unlimited wants.

B. limited resources to satisfy limited wants.
C. unlimited resources to satisfy limited wants.
D. limited resources to satisfy virtually unlimited wants.

10. In terms of the circular flow diagram, households make expenditures in the _____ market and receive income through the
_____ market.

A. product; financial
B. capital; product
C. product; resource
D. resource; product
11. Equilibrium is defined as where demand equals supply.

A. True
B. False
12. The law of demand states that as price increases, demand for a good decreases, ceteris paribus.

A. True
B. False

13. If we are considering the relationship between two variables and relax any one of the other-things-equal assumptions, we
would expect:

A. the relationship to change from inverse to direct.

B. the line representing that relationship on a graph to change locations.
C. the relationship to change from direct to inverse.
D. the data points to have a tighter fit to the line representing the relationship.
14. At the current market price there is a shortage of eggs. Assuming a free market for eggs, we would expect the price of eggs to:

A. increase, quantity demanded to increase, and quantity supplied to decrease.

B. increase, quantity demanded to decrease, and quantity supplied to increase.
C. decrease, quantity demanded to increase, and quantity supplied to decrease.
D. increase, quantity demanded to increase, and quantity supplied to increase.

15. Which of the following statements pertains more to macroeconomics than microeconomics?

A. Because the minimum wage was raised, Mrs. Olsen decided to enter the labor force.
B. The Pumpkin Center State Bank increased its interest rate on consumer loans by 1 percentage point.
C. A decline in the price of soybeans caused farmer Jones to plant more land in wheat.
D. National income grew by 2.7 percent last year.

2
16. A production possibilities curve shows:

A. combinations of capital and labor necessary to produce specific levels of output.

B. that resources are unlimited.
C. the maximum amounts of two goods that can be produced assuming the full use of available resources.
D. that people prefer one of the goods more than the other.

17. Which of the following would not shift the demand curve for beef?

A. a change in the incomes of beef consumers

B. a reduction in the price of cattle feed
C. an effective advertising campaign by pork producers
D. a widely publicized study that indicates beef increases one's cholesterol
18. Specialization in production is economically beneficial primarily because it:

A. guarantees full employment.

B. allows everyone to have a job which they like.
C. permits the production of a larger output with fixed amounts of resources.
D. facilitates trade by bartering.

19. You should decide to go to a movie:

A. if your income will allow you to buy a ticket.

B. if the marginal benefit of the movie exceeds its marginal cost.
C. because movies are enjoyable.
D. if the marginal cost of the movie exceeds its marginal benefit.

20. Refer to the above diagram. A price of $60 in this market will result in:

A. equilibrium.
B. a surplus of 100 units.
C. a surplus of 50 units.
D. a shortage of 100 units.

21. Assume an economy is operating at some point on its production possibilities curve, which shows civilian and military goods. If
the output of military goods is increased, the output of civilian goods:

A. must be decreased.
B. may be either increased or decreased.
C. will remain unchanged.
D. must also be increased.

3
22. Which graph(s) in the diagram on the previous page illustrate(s) the effect of a decline in the price of irrigation equipment on
the market for corn?

A. C only.
B. D only.
C. B only.
D. B and C.
23. Economic systems differ according to what two main characteristics?

A. Who owns the factors of production, and what methods are used to coordinate economic activity.
B. How goods are produced, and who gets them.
C. The political system in place, and the degree of scarcity facing the economy.
D. The technology used in production, and the quantity and quality of natural resources.

24. Consumers buy more of normal goods as their incomes rise.

A. True
B. False

25. The creation of capital, according to economists, is called investment.

A. True
B. False

27.
26. A decrease
Marginal in the means
analysis demandthat
for decision-makers
hotel rooms in Vegas might
compare betotal
the caused by an
benefits increase
with in costs
the total the: of a specific choice.

A. price of hotel rooms in Disneyworld.

True
B. price of hotel rooms in Vegas.
False
C. incomes of people who like to gamble.
D. price of airline tickets.

28. In moving along a stable demand curve, which of the following is not held constant?

A. consumer incomes.
B. the price of the good for which the demand curve is relevant.
C. consumer expectations.
D. the prices of complementary goods.

4
29. An economy will always operate at some point on its production possibilities curve.

A. True
B. False

30. The four factors of production are:

A. labor, capital, technology, and entrepreneurial ability

B. land, labor, capital, and entrepreneurial ability
C. labor, capital, entrepreneurial ability, and money
D. land, labor, capital, and money
31. "In the corn market, demand often exceeds supply and supply sometimes exceeds demand."
"The price of corn rises and falls in response to changes in supply and demand."

In which of these two statements are the terms demand and supply being used correctly?

A. in both statements.
B. in the first statement.
C. in neither statement.
D. in the second statement.

32. In 2003 the price of electricity increased, which in turn caused the demand for natural gas to increase, pushing up the
equilibrium price of natural gas. This can best be explained by saying that electricity and natural gas are complements.

A. True
B. False

33. Although sleeping in on a school day has an opportunity cost, sleeping late on the weekend does not.

A. True
B. False

34. The location of the supply curve of a good depends on:

A. the prices of resources used in its production.

B. the technology used to produce it.
C. the number of sellers in the market.
D. All of the above.

35. Economic scarcity:

A. is peculiar to market systems.

B. is peculiar to the United States economy.
C. applies to all economies.
D. is peculiar to command systems.

In questions 36 and 37, you are asked to determine, ceteris paribus, the effects of a given change in a determinant of
demand or supply for good X upon (1) the demand (D) for, or supply (S) of, X, (2) the equilibrium price (P) of X and (3)
the equilibrium quantity (Q) of X.

36. Refer to the above. If X is an inferior good, a decrease in income will:

A. increase D, decrease P, and increase Q.

B. decrease D, decrease P, and decrease Q.
C. increase D, increase P, and increase Q.
D. increase S, decrease P, and increase Q.

5
37. Refer to the above. An improvement in the technology used to produce X will:

A. increase S, increase P, and decrease Q.

B. decrease S, increase P, and increase Q.
C. decrease D, decrease P, and decrease Q.
D. increase S, decrease P, and increase Q.

38. Which of the following is assumed in constructing a typical production possibilities curve?

A. resources are perfectly shiftable and equally efficient among alternative uses.
B. Labor, capital and technology are fixed.
C. the economy is engaging in international trade.
D. the economy is using its resources inefficiently.

39. Refer to the above diagram. Flow (3) represents:

A. goods and services.

B. land, labor, capital, and entrepreneurial ability.
C. wage, rent, interest, and profit income.
D. consumer expenditures.

6
40. Refer to the above diagram. If society is currently producing the combination of bicycles and computers shown by point B, the
production of 2 more units of computers:

A. Can be achieved without giving up any bicycles.

B. will cost 2 units of bicycles.
C. will cost 3 units of bicycles.
D. cannot be achieved because resources are fully employed.