all graded assignments

A decrease in the price of a substitute good (Indicate which of the following will cause a movement along a demand curve. Which will shift the demand curve to the left? Which will shift the demand curve to the right? Will demand increase or decrease?)

Shift the demand curve to the left and a decrease in demand

Expectations of falling income in the near future (Indicate which of the following will cause a movement along a demand curve. Which will shift the demand curve to the left? Which will shift the demand curve to the right? Will demand increase or decrease?)

Shift the demand curve to the left and a decrease in demand. (if the good is normal)

Expectations of rising prices in the near future (Indicate which of the following will cause a movement along a demand curve. Which will shift the demand curve to the left? Which will shift the demand curve to the right? Will demand increase or decrease?)

Shift the demand curve to the right and an increase in demand now

(Any over-the-counter allergy medicine) Any over-the-counter allergy medicine Sudafed Cold and allergy medicine Allergy medicine that is prescribed by a physician (Rank the following in order from the least elastic demand to most elastic:)

2nd elastic

(Demand for dessert) Demand for Oreos Demand for dessert Demand for cookies Demand for food (Rank the following from the least elastic (inelastic) to most elastic. (Hint: think about the substitutes for each of these goods when ranking them).)

2nd elastic

(Demand for cookies) Demand for Oreos Demand for dessert Demand for cookies Demand for food (Rank the following from the least elastic (inelastic) to most elastic. (Hint: think about the substitutes for each of these goods when ranking them).)

3rd elastic

(Demand for Oreos) Demand for Oreos Demand for dessert Demand for cookies Demand for food (Rank the following from the least elastic (inelastic) to most elastic. (Hint: think about the substitutes for each of these goods when ranking them).)

least elastic

(Sudafed Cold and allergy medicine) Any over-the-counter allergy medicine Sudafed Cold and allergy medicine Allergy medicine that is prescribed by a physician (Rank the following in order from the least elastic demand to most elastic:)

least elastic

Change in technology

supply changes

number of sellers

supply changes

When demand is elastic and price decreases what happens to revenues?

increases

When demand is inelastic and price decreases what happens to costs?

increases

When demand is inelastic and price decreases what happens to quantity?

increases

When demand is inelastic and price increases what happens to profits?

increases

When demand is inelastic and price increases what happens to revenues?

increases

I started a business last year. My revenues were $100,000. My rent and materials costs were $60,000. My best alternative was and is to go to work for a company in a job that would pay me $30,000. The "true" (economic) profits from my business were _____. (hint: when calculating economic profit we would take into account all types of costs). A $10,000 B $30,000 C $40,000 D $90,000 E $240,000

A ($10,000) (My revenues are $100,000. My costs of generating those revenues are the payments for rent and materials ($60,000) and the $30,000 that I could earn in my best alternative job. Thus my "true" profit is the $100,000 minus $90,000.)

A small clothing firm currently produces 50,000 shirts and blouses per month. The costs of its factory, raw materials, and labor is $500,000 per month. If the company is to increase production by 5,000 and that requires an additional labor and raw material expense of $100,000, what is the best estimate of costs of the increased production? A $100,000 B $400,000 C $500,000 D $600,000

A ($100,000) (The best estimate of costs is what one has to give up to increase production. In this case it is $100,000.)

Last year, you purchased land to build a retail store. You paid $20 million for the land. Another business has now offered $8 million for the land and that is the highest price your business should now be able to get for the land. Which of the following costs is relevant for your decision as to whether or not you should build a new retail store? A $8 million B $12 million C $20 million D $28 million

A ($8 million) (The $20 million is a sunk cost. The $8 million is the best offer and that is the opportunity cost. That is what one would give up if you built a new retail store now.)

Looking at the production of handbags and phones once again, if a firm has 6 workers with three workers producing handbags and three workers producing phones, what is the marginal cost of producing one additional phone if a worker changes from handbag production to phone production? A 1.25 handbags B 0.80 handbags C 10 handbags D It depends on the wage of the worker

A (1.25 handbags) (The cost is what is given up to produce more phones. 8 more phones are made at a cost of the 10 handbags that could have been produced instead. So the marginal cost per phone is 1.25 handbags.)

A company produces flashlights. If they hire one worker that worker will produce 10 flashlights in an hour, if they hire a second worker both workers will produce 16 flashlights in an hour, and if they hire a third worker they will all produce 18 flashlights. What is the marginal benefit of hiring the third worker? A 2 B 6 C 18 D 16

A (2) (The marginal benefit is the additional output created with the additional worker. The increase of the third worker increases the total output from 16 to 18, an addition of 2 units of output.)

At what level of output is each additional roll of film worth more to consumers than it costs to produce? SEE DOC A 50 B 100 C 150

A (50) (The demand curve represents what a good is worth to the consumer, or what consumers are willing to pay at each level of output. Along the demand curve, the value will change as the quantity changes. If the value to consumers is above the price at which a producer is willing to supply the good, then the value of one more unit of output is more than the cost. A production level of 50 represents this situation.)

Ceteris paribus, an increase in an inelastic demand will cause _______change in the equilibrium quantity than the same increase in an elastic demand. A A greater B A smaller C The same

A (A greater) (This is a bit more difficult. Demand goes up. Price starts to increase. If demand is inelastic, price has to increase a lot to decrease quantity demanded enough to equal the quantity supplied. Quantity demanded will be relatively close to the increase in demand. If demand is elastic, price will begin to increase and quantity demanded will fall quickly and thus end up being closer to the original amount.)

If the benefits (correctly defined) of a doing something are greater than the costs (correctly defined) of doing whatever it is, what should one do? A Always do it B Only decide to do it if it is the best choice C Only decide to do it if there is no opportunity cost

A (Always do it) (We should always make the decision to do it. If the benefits of doing something else are greater, then that is part of the cost and that makes the cost greater than the benefits.)

An increase in the number of potential buyers will most likely cause which of the following? A An increase in demand B A decrease in demand C An increase in the quantity demanded D A decrease in the quantity demanded

A (An increase in demand) (The entire demand relationship will likely change and an increase in the number of buyers will increase the market demand for a product.)

In the production possibilities frontier below, point D represents which of the following? A An unobtainable level of production B A point where the opportunity cost of the production of one good is greater than the benefits gained C An inefficient allocation of resources D A point where the opportunity cost of the production of one good equals the benefits gained

A (An unobtainable level of production) (A point outside the curve is not a possible level of production unless there is a change in the resources or technology. An increase in resources or a change in technology which allows firms to produce more with the same resources will shift the curve to the right. For this particular curve, it is point D that cannot be reached.)

Why is it so difficult to ignore costs we have actually already paid? A Because they are explicit and we actually handed over a check. B Because we should not count them as costs. C Because they are not actually costs.

A (Because they are explicit and we actually handed over a check.) (Because we actually handed money to someone or wrote a check to someone.)

Oprah Winfrey made comments about the possibility of contracting mad-cow disease from eating beef. Some observers said that those comments had negative effects on the beef market. In the same period of time, changes in rate of production may have been the real culprit. If only Oprah's comments affected the market, then the equilibrium price would have ______________ and the equilibrium quantity would have ______________. A Decreased; decreased B Increased; increased C Decreased; increased D Increased; decreased

A (Decreased; decreased) (If Oprah's comments are the only thing that caused a disturbance in the market, then she would have caused demand to decrease. If people listened to her and decided not to buy any meat, then the demand curve would shift to the left causing a surplus of meat. Suppliers inventories would increase and prices would have to go down to sell off the excess meat. This would result in a new equilibrium of lower prices and lower quantity supplied.)

A major city was thinking about increasing its bus fares and commissioned a study to estimate the price elasticity of demand. The study estimated that elasticity was 0.4. What action should the city have taken to increase revenue from bus fares? A Increase fares B Decrease fares C Do not change fares

A (Increase fares) (Since 0.4 is inelastic, in order to increase revenues, price should be increased.)

As resources are moved from the production of one good to another, we would normally expect the cost of producing one more unit of the new good to _______. A Increase B Decrease C Not change

A (Increase) (As more resources are devoted to the production of a good it is likely that some of those resources do not add as much to production as the first resources used. Thus, for example, each new additional worker will not be able to add as much to production as the first few workers hired. The cost in terms of what that worker could have produced will begin to increase.)

A business should ___________ the price of a good with an inelastic demand if it wants to increase revenues. A Increase B Decrease

A (Increase) (When demand is inelastic, a change in the price leads to a less than proportional change in quantity, so the effect of the price change is greater than the quantity change. If price increases, revenue increases. If price decreases, revenue decreases.)

An increase in the price of a substitute good will cause the equilibrium price of its substitute to ______________ and the equilibrium quantity to ______________. A Increase; increase B Increase; decrease C Decrease; decrease D Decrease; increase

A (Increase; increase) (An increase in the price of a substitute good will cause demand for the other good to increase.)

Indicate how a decrease in the cost of producing oranges (a substitute for apples) will affect the equilibrium price and the equilibrium quantity in the market for apples. A Increase; increase B Increase; decrease C Decrease; decrease D Decrease; increase

A (Increase; increase) (Since the lower price of the substitute good, oranges, will attract consumers, the demand for apples will decrease. Apple suppliers will still have all of their apples and inventories will grow since suppliers cannot sell all they want at the going market price. To sell off the excess goods, suppliers will begin to lower prices and some consumers will offer lower prices. As the price drops, the quantity demanded will increase as the quantity supplied decreases, since farmers will produce less for the lower price. This will continue until the surplus does not exist and a new equilibrium price is reached. This equilibrium is a lower price and a lower quantity, therefore the correct answer is decrease/decrease. The best way to work through these is to suggest examples, to draw the graphs, and to explain why the prices and quantities adjust.)

Indicate how an increase in tastes for apples will affect the equilibrium price and the equilibrium quantity in the market for apples. A Increase; increase B Increase; decrease C Decrease; decrease D Decrease; increase

A (Increase; increase) (The first part brings up changes in taste. As we learned, tastes and preferences influence demand. In this situation, as tastes for apples increase, the demand will increase. This means that at the current price, the quantity demanded will be higher than the quantity supplied, and a shortage is formed. As suppliers learn that consumers are willing to pay more, they will produce more apples and charge higher prices. As prices increase, some consumers pull out of the market and the quantity demanded is reduced. This continues until the quantity demanded equals the quantity supplied. A new equilibrium is created with a higher quantity supplied and higher price.)

Consider the markets for ball-point pens and "rollerball" pens. Suppose that, due to an increased cost of the metal that is used in "rollerball" pens, the prices of "rollerball" pens increase. There are no other changes. What would happen to the demand schedules of both products? The demand curve for ball-point pens would ______________ ; the demand curve for "rollerball" pens would ______________. A Increase; not change B Increase; increase C Decrease; not change D Decrease; increase E Not change; decrease

A (Increase; not change) (The rule with substitute goods is that when the price of one increases, the demand for the substitute good increases. This happens as people buy the substitute good instead of the now more expensive good. This describes what will happen with the two different types of pens. The demand schedules show the relationship between prices and quantities demanded. The price of rollerball pens increases. The demand for rollerball pens does not change. Consequently, the demand for ball-point pens, the substitute good, increases and the curve shifts rights.)

Tesla is building a car battery factory in Nevada to drastically increase their production capacity from where it is now. Since the factory has not opened yet, Tesla is __________. A Increasing its production possibility frontier B Not technically efficient, but they will be technically efficient when the factory opens C Never going to be technically efficient because of pollution D Economically efficient

A (Increasing its production possibility frontier) (Expanding production in the future does not mean a firm is not technically efficient now. The factory will allow Tesla to reach a point outside of the production possibilities frontier curve that it currently cannot attain.)

If the income elasticity of a good is 0.8, what do we know about the good? A It is a normal good. B It is an inelastic good. C It is an inferior good. D It is an elastic good.

A (It is a normal good.) (With respect to income elasticity of demand, if the measure is positive, it is a normal good - i.e., income is increasing and quantity demanded is also increasing.)

Which of the following best describes the relationship between diminishing marginal returns and marginal cost? A Marginal cost must increase as output increases due to diminishing marginal return. B If marginal returns are diminishing while output increases, marginal cost must be decreasing. C Marginal cost must increase as output decreases because of diminishing marginal returns D Marginal returns diminish as output increases, and thus marginal cost must decrease.

A (Marginal cost must increase as output increases due to diminishing marginal return.) (Diminishing returns says that as one increases an input, eventually the additions to output will begin to get smaller. That implies that the costs of each of those new units of output will be larger. (If one more worker now produces half of what the previous worker hired did, the cost of that new production is twice as much as the previous worker's output).)

Which point represents an economy that is not utilizing all of its resources for production? A Point A B Point B C Point C D Point D

A (Point A) (Point A is on the side of production possibilities frontier curve that is closest to the origin. Since the production possibilities frontier curve represents the different mixes of both goods that could be made if all resources are being utilized, point A must represent an economy that could use more of its inputs for production.)

What would be the initial change in the market for beer if a city suddenly restricted the number of bar licenses they permitted? (Note: A bar requires a licenses to operate.) A Supply would decrease and there would be a shortage B Supply would decrease and there would be a surplus C Demand would increase and there would be a shortage D Demand would increase and there would be a surplus

A (Supply would decrease and there would be a shortage) (The reduced number of licenses would reduce the number of sellers of beer, leading to a decrease in supply. Since demand has remained constant and supply has decreased, quantity supplied is smaller than quantity demanded and there is a shortage.)

A pizza parlor can make 100 pizzas in an evening. They make 40 pepperoni pizzas and 60 extra cheese pizzas. 100 people order pizza, but 50 people would like a pepperoni pizza and 50 would like an extra cheese pizza. This pizza parlor is what? A Technically efficient, but not allocatively efficient nor economically efficient B Allocatively efficient, but not technically efficient nor economically efficient C Technically efficient, but not allocatively efficient, and therefore, economically efficient D Allocatively efficient, but not technically efficient, and therefore, economically efficient

A (Technically efficient, but not allocatively efficient nor economically efficient) (A Technically efficient, but not allocatively efficient nor economically efficient)

A decrease in income will cause which of the following to happen to the demand for used cars? Assume used cars are inferior goods. A The demand for used cars will increase. B The demand for used cars will decrease. C The quantity demanded for used cars will increase. D The quantity demanded for used cars will decrease.

A (The demand for used cars will increase.) (Used cars may be inferior goods for many individuals. As their incomes increase, they will likely buy fewer used cars and more new cars. However, if their incomes decrease, they will be more likely to buy a used car instead of a new automobile. If used cars were classified as normal goods, the answer would be a decrease in demand.)

Which of the following options best describes the cost of moving production from point C to point B on the production possibilities frontier pictured below? A The opportunity cost is the number of tennis rackets given up B The opportunity cost is the number of tennis balls given up C There is no opportunity cost as we are still on the production possibilities frontier D There is an increasing opportunity cost of tennis balls

A (The opportunity cost is the number of tennis rackets given up) (The movement from point C to point B shows a production decision to produce more tennis balls and fewer tennis rackets. This means that the opportunity cost of producing tennis balls is the number of tennis rackets given up.)

Which of the following is likely to have the largest elasticity of supply? A The producer of vanilla ice cream B The producer of yachts C A dentist

A (The producer of vanilla ice cream) (It is far easier for a producer of vanilla ice cream to react and change production if the price of vanilla ice cream changes than it is for a dentist or someone who builds yachts.)

If the government taxes car producers, what will happen in the market for cars? A The supply curve will shift to the left. B The demand curve will shift to the right. C There will be a movement along the supply curve to the left. D There will be a movement along the demand curve to the right.

A (The supply curve will shift to the left.) (A tax on producers represents an increase in the cost of doing business, so supply would decrease, shifting the curve to the left.)

Sometimes consumers purchase goods because of "conspicuous consumption"; i.e., they want others to know that they can afford to buy the goods. There are many examples of these goods, such as Rolex watches, Coach purses, and flying first class. What would you expect the income elasticity of demand to be for these goods? A These are luxury goods, so income elasticity would be greater than 1. B These are normal goods, so income elasticity would be greater than 1. C These are inferior goods, so income elasticity would be greater than 1.

A (These are luxury goods, so income elasticity would be greater than 1.) (If income increases, for example, then consumers are likely to disproportionately increase their spending on luxury goods to keep pace with those with their new, higher incomes.)

A country is currently producing bricks and spatulas using all of their resources and satisfying the wants of their economy. If the country has a change in preferences and wants more spatulas, which of the following is true? A They are no longer economically efficient because they are not allocatively efficient B They are no longer economically efficient because they are not technically efficient C The country will have a smaller marginal return from bricks D The country will have an increasing marginal cost of bricks

A (They are no longer economically efficient because they are not allocatively efficient) (The country is no longer satisfying the wants of its economy so it is not allocatively efficient nor is it economically efficient.)

Is it possible to have allocative efficiency without technical efficiency? A Yes B No

A (Yes) (Allocative efficiency only requires that the economy is producing to match the wants and needs of the economy. This can be done without producing as much as possible.)

Is tuition a part of the cost of deciding to go to college? A Yes B No C Part of room and board may be part of the cost.

A (Yes) (It is part of the cost because we have to give that amount of money to the college if we go. And we don't have to give that amount up, if we decide not to go.)

Is the money, you could have earned instead of going to college, part of the cost of going to college? A Yes B No C A portion of it is

A (Yes) (Yes, it is because if that is what you would be doing instead of college, you are giving it up.)

Demand is said to be _______when the quantity demanded changes at the same proportion as the price. A elastic B unitary elastic C inelastic D independent

B (unitary elastic)

Suppose you bought a basketball game ticket with $30 and no refunds are possible. What is your opportunity cost of attending the basketball game ? A Zero, plus what I would have done with my time. B $30, plus what I would have done with my time. C $60, plus what I would have done with my time. D None of the above

A (Zero, plus what I would have done with my time.) (The correct answer is that even though I paid $50 for the ticket, it has no value now beyond getting me into the concert. Thus, the cost of going to the concert at this point is zero, plus what I would have done with my time. I cannot get my money back; I cannot sell it to someone else. (Let's just assume that I am not allowed to give it to someone. If I could, there might be some benefit in doing so.) The idea is that the amount you originally paid is now irrelevant. What is relevant is what you are giving up at this time by going to the concert. The original payment is irrelevant. Whether you go to the concert or not will not affect that fact that you already paid the $50. The amount that you have already spent is a sunk cost. That amount is not affected by the choice you make now. It is sunk in that it is no longer available; it is gone; it is irrelevant to the current decision.)

Demand is said to be _______ when the quantity demanded is very responsive to changes in price. A elastic B unit elastic C inelastic D independent

A (elastic)

In order for a country to be economically efficient and operate at a point beyond the production possibilities frontier curve, the country would have to do which of the following? A improve technology in the future B Reallocate its workers C Experience increasing marginal costs D Become technically efficient

A (improve technology in the future) (Any point outside of the production possibilities frontier curve is unattainable given current resources and technology. The only way to reach such a point is to improve technology or increase resources in the future.)

The price elasticity of demand for tickets to local baseball games is estimated to be equal to 0.89. In order to boost ticket revenues, an economist would advise: A increasing the price of game tickets because demand is inelastic. B not changing the price of game tickets because demand is unit elastic. C increasing the price of game tickets because demand is elastic. D decreasing the price of game tickets because demand is elastic.

A (increasing the price of game tickets because demand is inelastic.)

If you were selling a product with an elasticity of 1.6 and you wanted to increase your revenue, what should you do to the price? A Lower price B Increase price C Do not change price

A (lower price) (If demand is elastic, consumers are very responsive to price changes, so the quantity change will outweigh the price change. So if you want revenue to increase, you should lower price since the quantity increase will outweigh the price decrease.)

If the supply curve for aspirin is perfectly elastic, then a reduction in demand will cause the equilibrium price to: A stay the same and the equilibrium quantity to fall. B fall and the equilibrium quantity to fall. C rise and the equilibrium quantity to stay the same. D rise and the equilibrium quantity to fall.

A (stay the same and the equilibrium quantity to fall.)

If cola and iced tea are good substitutes for consumers, then it is likely that: A their cross price elasticities are greater than zero. B their price elasticities of demand are less than one. C their income elasticities are less than zero. D their price elasticities of supply are less than one .

A (their cross price elasticities are greater than zero.)

A 25 percent decrease in the price of breakfast cereal leads to a 20 percent increase in the quantity of cereal demanded. As a result: A total revenue will decrease. B total revenue will increase. C total revenue will remain constant. D the elasticity of demand will increase.

A (total revenue will decrease.)

If a production process follows diminishing marginal returns, and an individual produces 10 units in the first hour, how many units they will produce in the second hour? Select all that apply. Multiple answers:You can select more than one option A 8 units B 9 units C 10 units D 11 units

A and B (9 units 8 units) (The concept of diminishing marginal returns means that an an additional input will add smaller and smaller amount to the production process.)

Is the demand for a container of salt likely to be inelastic or elastic? Why? (Two answers) A Inelastic because salt is a necessary dietary component B Elastic because there are lots of substitutes for salt C Inelastic because for most people salt is a very small part of their budget D Elastic because people only buy salt in the long-run

A and C (Inelastic because salt is a necessary dietary component) (Inelastic because for most people salt is a very small part of their budget) (Salt is a necessity, there are few substitutes, and the amount we spend on salt is a small portion of our incomes. All three characteristics will lead us to the conclusion that salt has an inelastic demand.)

An increase in the price of the good (Indicate which of the following will cause a movement along a demand curve. Which will shift the demand curve to the left? Which will shift the demand curve to the right? Will demand increase or decrease?)

A movement along a demand curve, no change in demand

In question 1.32, what is the cost per shirt before the increase in production? Part of the information is repeated for you below. A small clothing firm currently produces 50,000 shirts and blouses per month. The costs of its factory, raw materials, and labor is $500,000 per month. If it is to increase production by 5,000, that requires an additional labor and raw material expense of $100,000. A $5 B $10 C $20 D $50 E $100

B ($10) (The cost is $500,000 divided by 50,000. That is, it is equal to $10.00.)

The making of the movie Waterworld cost a total of $180 million. It generated a total of $130 million in revenues. $70 million was spent and then the set sank. An additional $60 million was spent to rebuild the set. An additional $50 million was spent to finish the movie. Losses for the producers of Waterworld, if they finished the movie would be _____. If they did not finish the movie, losses would be _____. A $50 million; $50 million. B $50 million; $70 million. C $70 million; $50 million. D $70 million; $70 million.

B ($50 million; $70 million.) (If they made the movie, total revenues would be $130 million and total costs were $180 million for a loss of $50 million. If they did not make the movie, revenue would be zero and costs would be $70 for loss of $70 million.)

Suppose that a change in U.S. attitudes toward goods made abroad reduces the quantity demanded at each price by a half-million computers per year. What is the new equilibrium price? A $5 B $9 C $11 D $13 E $15

B ($9) (This question introduces a change in demand. This changes one of the schedules and it means that the equilibrium price and quantity also change. By subtracting .5 from all the quantity demanded values, you find equilibrium at $9.)

What is the per phone marginal cost of increasing phone production from 50 to 55 phones if there are 6 workers in the company? A 1/3 of a handbags B 3 handbags C 15 handbags D It depends on the wage of the worker

B (3 handbags) (The cost is what is given up to produce more phones. 5 more phones are made at a cost of the 15 handbags that could have been produced instead. The marginal cost (per phone) is 3 handbags.)

Billy Bob's Barber Shop knows that a 5 percent increase in the price of their haircuts results in a 15 percent decrease in the number of haircuts purchased. What is the elasticity of demand facing Billy Bob's Barber Shop? A 0.15 B 3.0 C 0.10 D 0.05

B (3.0) (15/5)

"Many Coca-Cola bottlers increased the price of Coke because the price of corn syrup (an important ingredient in Coke production) has increased." Other things constant, this most recent change in the market for Coca-Cola can best be explained as which of the following? A A decrease in demand with supply relatively unchanged B A decrease in supply with demand relatively unchanged C An increase in supply with demand relatively unchanged D An increase in demand with supply relatively unchanged

B (A decrease in supply with demand relatively unchanged) (Corn syrup is an input that, when more expensive, decreases supply.)

When parents say, "My child is very intelligent, but he just doesn't try. My child would rather play video games than study." The child is _______. A Not allocatively efficient, but technically efficient B Allocatively efficient, but not technically efficient C Economically efficient D Experiencing diminishing returns

B (Allocatively efficient, but not technically efficient) (The child may be allocating his time to his preferred activities, so he may be allocatively efficient in his mind. But, he's apparently not reaching his full production potential with the resources that he has.)

Which points represent a production level that could be economically efficient? A A and B B B and C C C and D D D and A

B (B and C) (Points B and C are preferred to point A. If more sedans and more convertibles both have value, than points B and C are better choices. The same logic works for point D. At point D, we would have more sedans and convertibles than at point A, point B, and point C. Thus it is preferred to all three. However, the economy described in our economic model does not have sufficient resources or technology to produce that combination of sedans and convertibles. It is not possible to go there.)

Which of the following goods would be the most likely to be subject to a government-imposed tax? A Cereal B Bottles of alcohol, such as whiskey and gin C Shoes

B (Bottles of alcohol, such as whiskey and gin) (The government is most likely to impose a tax on a good with a very inelastic demand. That includes goods that people can become addicted to, like cigarettes and alcohol.)

If income decreases and, at the same time, a new technology is discovered that lowers the cost of producing the good, which of the following will happen? A The equilibrium quantity will increase. The equilibrium price will increase. B Cannot tell the change in equilibrium quantity. The equilibrium price will decrease. C The equilibrium quantity will decrease. The equilibrium price will increase. D Cannot tell the change in equilibrium quantity. Cannot tell the change in equilibrium price.

B (Cannot tell the change in equilibrium quantity. The equilibrium price will decrease.) (A decrease in income will cause a decrease in demand of a normal good. The invention of a new technology will cause supply to increase. If demand decreases the equilibrium quantity will decrease, but an increase in supply leads to an increase in the equilibrium quantity. Without knowing the relative change in the supply and demand curves, one cannot tell the direction of the change in quantity in the new equilibrium. A decrease in demand will lower the equilibrium price and an increase in supply will decreases the equilibrium price. Since both changes move price in the same direction, the new equilibrium price will be lower.)

Consider the market for peaches. Suppose that the conditions for growing peaches in the southeast become unfavorable, and many of the southeastern peach farmers decide to leave the industry and look for other jobs. With this migration of farmers, what will happen to the supply of peaches from the southeast? A Increase B Decrease C Not change

B (Decrease) (In this question, the farmers are the firms producing the peaches. When the farmers move from peach farming, the number of firms decreases in the southeast. When the number of firms decreases, the supply decreases.)

Assume that tastes change so that tennis is no longer as desirable to play as it is now. What would happen to the market for tennis balls? A Demand increases, the equilibrium quantity is larger, and the price is higher. B Demand decreases, the equilibrium quantity is smaller, and the price is lower. C Demand increases, the equilibrium quantity is smaller, and the price is lower. D Demand decreases, the equilibrium quantity is larger, and the price is higher.

B (Demand decreases, the equilibrium quantity is smaller, and the price is lower.) (The change in tastes causes the demand for tennis balls to decrease. The quantity demanded is now less than quantity supplied. There is a surplus. Given the surplus, sellers will lower their prices to get rid of extra product. As prices fall, the quantity demanded will begin to increase and the quantity supplied to decrease and thus the surplus gets smaller. This downward pressure will continue until there is no longer a surplus and a new lower equilibrium price and lower equilibrium quantity are reached.)

What will happen to current purchases if people expect lower prices in the future? What will happen with expectations of higher incomes? A Demand increases; demand increases B Demand decreases; demand increases C Demand increases; demand decreases D Demand decreases; demand decreases

B (Demand decreases; demand increases) (If individuals expect lower prices, they will wait to purchase items (this leads to a decrease in demand now). If individuals expect a higher wage, they are more likely to buy more now (leading to an increase in demand).)

How will a decrease in the price of DVDs affect the demand for DVD players? Why? A Quantity demanded of DVD players increases B Demand for DVD players increases C Quantity demanded of DVD players decreases D Demand for DVD players decreases

B (Demand for DVD players increases) (DVDs and DVD players are complementary goods. If the price of one decreases, an individual is more likely to want the other.)

If the country enters a period of prosperity, resulting in consumer incomes increasing by 4% and the income elasticity of a good is 0.8, what will happen to the demand for that good as a result? A Demand will increase by 1.2% B Demand will increase by 3.2% C Demand will increase by 4.8%

B (Demand will increase by 3.2%) (Solve for change in quantity in the income elasticity equation; multiply 4% by 0.8% to get 3.2% increase in quantity.)

If (1) the cost of manufacturing computers decreases and (2) at the same time the quality improves, making computers more useful for households, which of the following is most likely to happen? A Equilibrium price will increase, equilibrium quantity will increase B Equilibrium price may increase or decrease; equilibrium quantity will increase C Equilibrium price will decrease; equilibrium quantity will decrease D Equilibrium price may increase or decrease; equilibrium quantity will decrease

B (Equilibrium price may increase or decrease; equilibrium quantity will increase)

Okra was $13.00 per bushel in 2015, and 1.5 million bushels were sold. Okra was $14.00 per bushel in 2016, and 2.0 million bushels were sold. "If in both cases the okra market was in equilibrium, this must be an example of an exception to the law of demand." A True B False

B (False) (The quote is incorrect. Increasing demand for okra from 2015 to 2016 would cause an increase in price and equilibrium quantity. The law of demand holds only if everything else remains the same. The results in the okra market must represent a shift in demand rather than a movement along a demand curve. An increase in demand will cause an increase in the equilibrium quantity and price.)

The suppliers of ____________are more likely to have a tax imposed on their production. A Jewelry B Gasoline

B (Gasoline) (The elasticity of demand for jewelry is more elastic than gasoline. The government would get more revenue from taxing a good that has an inelastic demand since the tax would lead to very small changes in consumption.)

Expectations of lower prices in the near future may cause some producers to do what? A Increase the quantity supplied of the good now B Increase the supply of the good now C Decrease the supply of the good now D Decrease the quantity supplied of the good now

B (Increase the supply of the good now) (If producers expect lower prices in the future they will increase supply now if they can.)

Suppose that a tariff is established on computers made abroad. The equilibrium price will ______________ and the equilibrium quantity will ______________. A Increase; increase B Increase; decrease C Decrease; increase D Decrease; decrease

B (Increase; decrease) (A tariff will cause a change in the quantity supplied of a foreign good. This question asks what will happen to the market for foreign computers with the tariff. A tariff will increase costs for a foreign producer for each product produced for the US. That is like an increase in the prices of inputs, and it means that the quantity supplied will decrease at every price. Since supply is going to decrease, that means that the new equilibrium point, where the quantity supplied equals the quantity demanded, will have a higher price and smaller quantity.)

An increase in the prices of inputs will cause the equilibrium price to ______________ and the equilibrium quantity to ______________. A Increase; increase B Increase; decrease C Decrease; decrease D Decrease; increase

B (Increase; decrease) (An increase in the price of inputs decreases supply. This leads to a price increase and a quantity decrease in the new equilibrium.)

Some friends and I are heading to a concert. We all have purchased $50 tickets. I just realized that I lost my ticket on the subway ride to the concert. I am confronted now with a decision of whether or not to buy a new ticket and go to the concert . Which of the following best describes that decision? A Is the concert worth paying $100 to attend? B Is the concert worth paying $50 to attend? C Is the concert worth paying $150 to attend?

B (Is the concert worth paying $50 to attend?) (The lost ticket is a sunk cost. I cannot get it back. Thus, the cost of going is buying a $50 ticket (plus the value of the time I will spend).)

An economic model makes it easier to understand complex economic problems by doing which of the following? A Programming all scenarios in a computer program to simulate the economy B Making simplifying assumptions C Using regression analysis in conjunction with large datasets D Looking for consistent patterns in economies

B (Making simplifying assumptions) (An economic model simplifies a problem by making assumptions about the real world to eliminate the complex interactions of individuals, firms, and markets, yet still represent the foundation of economic forces that allow us to understand the economy.)

If a man spends approximately 45% of his income on air travel and his sister only spends about 2% of her income on air travel (and that is the only difference), would the man's demand for air travel be less or more elastic than his sister's? A Less B More C Cannot tell

B (More) (Another determinant of elasticity is the percentage of one's income is spent on a good. If someone spends a significant amount of their salary on a good, then they will probably be more sensitive to changing prices than someone who spends a small percentage of their income on a good. In the question given, the man spends a lot more on air travel than his sister does and is probably more sensitive to changes in cost. Therefore, his demand for air travel will be more elastic than that of his sister.)

If the demand curve for a life-saving medicine is perfectly inelastic, then a reduction in supply will cause the equilibrium price to: A rise and the equilibrium quantity to fall. B rise and the equilibrium quantity to stay the same. C rise and the equilibrium quantity to rise. D stay the same and the equilibrium quantity to fall.

B (rise and the equilibrium quantity to stay the same.)

Recently, stores have been reporting increased sales of DVD players and a reduction in their prices. In accordance with this trend, one might predict that there has been a(n) ______________ in demand and a(n) ______________ in supply. A Increase; no change B No change; increase C Decrease; no change D No change; decrease

B (No change; increase) (If the equilibrium quantity increases and the price decreases, there are a variety of combination of changes that could be the cause. The possible answers listed in the question describe only one curve shifting. The only possible change to result in lower prices and higher quantities is an increase in supply. A decrease in demand would lower prices and quantities. An increase in demand would raise prices. A decrease in supply would raise prices and lower quantities.)

Which of the following graphs shows the correct change in the production possibilities frontier curve if a new technology is invented that increases the productivity of watch manufacturing? A Option A B Option B C Option C D No change

B (Option B) (An improvement in the technology to produce one good shifts the production possibilities frontier curve by a larger amount up the y-axis (watches). This shows that the same amount of input used as before yields more output of watches at every potential production mix in the production possibility frontier curve.)

Which point represents a level of production in the economy that is not possible? A Point A B Point B C Point C D Point D

B (Point B) (Point B is outside of the production possibilities frontier curve. Since the production possibilities frontier curve represents the different mixes of both goods that could be made if all resources are being utilized and the best available technology is used, point B must represent a combination of butter and shoes that the economy simply could not produce with the current day technology.)

Consider the markets for ball-point pens and the market for "rollerball" pens. Suppose that, due to an increased cost of the metal that is used in "rollerball" pens, the prices of "rollerball" pens and ball-point pens increase. There are no other changes. This is true because the two products have a unique relationship. What is the likely relationship between "rollerball" pens and ball-point pens? What are they? A Complementary goods B Substitute goods C Normal goods D Inferior goods

B (Substitute goods) (Substitute goods are goods that can replace one another and still achieve the same purpose. Complementary goods are goods that must be used together, so when the price of one changes the demand for the other is also effected. Normal and inferior goods refer to the consumers' reactions depending on changes of income.)

I am thinking about going out to visit with some friends tonight. Given what I have learned in economics, I am comparing my costs with my expected benefits. My alternatives in order of preference are to stay in my room and watch TV; stay in my room and study economics; have my friends over to my room; or go to bed early tonight. What are the costs relevant to my decision? A The benefits gained from going out to visit some friends B The benefits gained from staying in my room and watching TV C The benefits gained from watching TV, studying economics, having my friends over, and going to bed early D The benefits gained from one or two of the alternatives, but not all of them E None of the above is correct

B (The benefits gained from staying in my room and watching TV) (I am giving up the best alternative, not all of the alternatives. And staying in my room and watching TV is the most valuable alternative.)

If a country is operating on the production possibilities frontier curve, it must mean that which of the following is true? A The country is allocatively and technically efficient B The country is technically efficient. C The country is economically efficient D The country is allocatively efficient by not necessarily technically efficient

B (The country is technically efficient.) (The production possibilities frontier curve describes the maximum production capability of a country for different bundles of goods. This implies technical efficiency. Answer A and C might be correct, but we do not have information about preferences of the country's consumers.)

What does a single point on the demand curve represent? SEE DOC A The value of film to the consumer as judged by the producer B The value of consuming one more roll of film C The amount of film the consumer demands D The cost of producing film at that quantity

B (The value of consuming one more roll of film) (A single point on the demand curve represents what consumers are willing to pay for one more unit of a good. Thus, it is the value to the consumer who is willing to pay that price. The value to the consumer as judged by the producer is incorrect, as the producer is not directly reflected in the demand curve. The amount of film the consumer demands is partially correct, but each point shows how much a consumer demands, at each price. The cost of producing film at that quantity is reflected in the supply curve.)

Good economic decision-making means which of the following? A Comparing all of the benefits with all of the costs related to the production and enjoyment of a good B Thinking about marginal benefits and marginal costs of the good and services C Thinking about average benefits and average costs of the goods and services

B (Thinking about marginal benefits and marginal costs of the good and services) (Rational choices require us to compare how our benefits and our costs will change as a result of a decision. So, we should think 'on the margin'. What additional benefits will we generate? What additional costs will we have to pay?)

The making of the movie Waterworld cost a total of $180 million. It generated a total of $130 million in revenues. $70 million was spent and then the set sank. An additional $60 million was spent to rebuild the set. An additional $50 million was spent to finish the movie. Should they have rebuilt the set and finished the movie? A No, it was not rational. B Yes, it was rational. C I cannot tell.

B (Yes, it was rational) (The cost of the old set was literally sunk, but also in an economic sense so it was not relevant to the decision to film the movie. The decision to film the movie should have been based only on marginal cost and marginal benefit. The marginal cost was $110 million ($60 million to rebuild the set and $50 million to finish filming the movie) and the marginal benefit was $130 million, $20 million larger than the marginal cost.)

If the demand curve is perfectly elastic, then an increase in supply will: A decrease the price but result in no change in the quantity exchanged. B increase the quantity exchanged but result in no change in the price. C increase the price but result in no change in the quantity exchanged. D increase both the price and the quantity exchanged.

B (increase the quantity exchanged but result in no change in the price.)

Tonight I can either (1) go out to dinner and a movie, or (2) cook dinner for some friends, or (3) eat a hamburger at the baseball game. I prefer to do (1), then (2), and finally (3) if I can only do one. If these are my best choices and the dollar cost of each is the same, what would be the opportunity cost of my going out to dinner and a movie? A A hamburger at the baseball game B Cooking dinner for some friends C A hamburger at the baseball game and cooking dinner for some friends

B (Cooking dinner for some friends) (Since you prefer (1) to (2) and prefer (2) to (3), by choosing (1) you would be giving up your next best option (2).)

What is the opportunity cost of a small business investing $1 million in a new project that will pay back $1.5 million in one year? The firm's goal is to end the year with the most assets possible. Its other alternatives are: I. Leave $1 million in a bank account and earn $50,000 in interest. II. Invest $1 million in new equipment that will have a value of $1 million at the end of the year and have earned an additional $100,000 in profits during the year What is the opportunity cost of the new project? A $1,000,000 B $1,050,000 C $1,100,000 D $1,150,000

C ($1,100,000) (The value of the best alternative is $1,100,000.)

Suppose the U.S. supply and demand schedules for computers manufactured in Japan are in the table below. What is the equilibrium price? SEE DOC A $5 B $9 C $11 D $13 E $15

C ($11) (A market is in equilibrium when the quantity demanded equals the quantity supplied. $11 has to be right because it is the only selection where the quantity demanded and the quantity supplied are equal.)

A company could produce t-shirts for a $500 profit, long-sleeved shirts for a $350 profit, hoodies for a $200 profit, or socks for a $50 profit. If they can only produce one of these four options, what is the opportunity cost of producing t-shirts? A $600 B $550 C $350 D $200

C ($350) (The next best option for this company would be to produce long-sleeved shirts since they provide the second-highest level of profit, assuming there are no other non-monetary benefits to producing the other articles of clothing.)

If one worker produces 15 cones of ice cream in an hour, two workers produce 25 ice cream cones, and three workers produce 30 ice cream cones in an hour, what is the marginal return of production of the second worker? A 20 B 15 C 10 D 5

C (10) (The marginal productivity of the worker is the output contributed by the last worker hired. Since one worker has been removed from the production process, the last laborer is the second worker. The second worker increases production from 15 to 25 cones, an addition of 10 ice cream cones.)

Suppose you know that the price elasticity of demand for your product is 0.5, and you are thinking about raising your price by 8%. How much can you expect quantity to decrease? A 8% B 5% C 4% D We can't tell how much quantity will decrease.

C (4%) (4%. The equation for elasticity of demand is percentage change in quantity divided by the percentage in price. In this case, we know two of these: -0.5 = Percentage Change in Quantity / 8%. Solving for the numerator (8% x -0.5) = -4%: quantity will decrease 4%.)

A company produces reuseable water bottles. If they hire one worker that worker will produce 10 water bottles in an hour, if they hire a second worker both workers will produce 16 total water bottles in an hour, and if they hire a third worker they will all produce 18 total water bottles. What is the marginal product when hiring the second worker? A 10 B 16 C 6 D 2

C (6) (The marginal benefit is the additional output created with the additional worker. The increase of the second worker increases the total output from 10 to 16, an addition of 6 units of output.)

Ceteris paribus, an increase in an inelastic demand will cause _______ change in the equilibrium price than the same increase in an elastic demand. A A smaller B The same C A greater D One cannot tell

C (A greater) (Price will increase quite a bit before equilibrium is reached with inelastic demand. Thus the change in price will be greater in inelastic than elastic demand. With elastic demand, an increase in price causes a faster decrease in quantity.)

Why is it so difficult to consider costs that we have not physically paid as part of the cost of the decision? A Because they are not actually costs B Because they will only be costs once they are paid. C Because we have not directly paid someone.

C (Because we have not directly paid someone.) (These costs are implied. We gave a sum up instead of accepting payment. So, it is a real cost. We would have had that amount.)

Oprah Winfrey made comments about the possibility of contracting mad-cow disease from eating beef. Some observers said that those comments had negative effects on the beef market. In the same period of time, changes in rate of production may have been the real culprit. If the "over-production" affected the market, then the equilibrium price would have ______________ and the equilibrium quantity would have ______________. A Decreased; decreased B Increased; increased C Decreased; increased D Increased; decreased

C (Decreased; increased) (If the change in the market was driven by supply, then the situation changes. If overproduction became a factor, then farmers would have a larger supply than they needed and their supply curve would shift to the right. This would also cause a surplus. Prices would drop and the quantity supplied would be larger at the new equilibrium.)

Which of the following does not represent an opportunity cost of attending college? A Tuition paid B Income that one could have earned instead of going to college C Food D Books purchased at college

C (Food) (Food purchased at college will not be part of the cost. One must purchase food whether one goes to college or not.) (The increase in costs of food is part of the opportunity cost if one is spending more than one would at home.)

A decrease in the price of a complementary good will cause its complement's equilibrium price to ______________ and the equilibrium quantity to ______________. A Decrease; decrease B Increase; decrease C Increase; increase D Decrease; increase

C (Increase; increase) (This leads to an increase in demand for its complement.)

Prices should be ___________ (increased/decreased/not changed) in the winter and ___________ (increased/decreased/not changed) in the summer. A Increased; increased B Decreased; decreased C Increased; decreased D Not changed; decreased

C (Increased; decreased) (One way to solve the problem is to calculate total revenue for each possible price. But a simpler and more general way, and one that helps us understand the logic, is to determine which demand is elastic and which is inelastic. This is also the mathematical analysis that will lead us to an understanding of why revenues increase or decrease. In the winter, an increase in price from $8 to $9 is a 12.5 percent increase (((9-8)/8) x 100 = 12.5). Quantity falls by 4.5 percent (((21,000-22,000)/22,000) x 100). Thus, demand is inelastic (-4.5/12.5 = -0.36). The percentage change in price is larger than the percentage change in the quantity demanded. An increase in price will increase total revenues. The gain in revenues from the increased price is 12.5 percent. The loss in revenues from selling fewer tickets is 4.5 percent, and the net change on revenues is an increase. A decrease in price will decrease revenues. The loss in revenues from the price decrease will be 12.5 percent. The gain in revenues from selling more tickets will be 4.5 percent. Thus revenues will fall as a result of the price decrease when demand is inelastic. The conclusion is that the theater should increase its ticket prices if its goal is to maximize ticket revenues. In the summer, the same increase in prices will cause a 20 percent (((8,0000-10,000)/10,000)x100) fall in quantity demanded. Thus, demand is elastic (-20/12.5 = -1.6) because the percentage change in price is less than the percentage change in quantity demanded. Therefore, revenue will fall as the price is increased. Prices should be lowered in order to increase revenues.)

Which of the following is true of an economic model? A Must be a mathematical formula to calculate the effects of economic forces such as unemployment and interest rates B Is specifically used to forecast future economic events C Makes simplifying assumptions to provide a simpler version of a complex problem so that it may be studied and understood D Is really only used by banks to calculate the effect of macroeconomic events on loans

C (Makes simplifying assumptions to provide a simpler version of a complex problem so that it may be studied and understood) (An economic model is anything that makes simplifying assumptions in order to make complex economic ideas or problems more understandable.)

The price elasticity of demand (in absolute value) will be _________________ if demand is elastic. A Equal to one B Less than one C More than one

C (More than one) (If demand is elastic, a change in price will cause a greater change in quantity. Specifically, a given percentage change in price will cause a larger percentage change in quantity demanded. Since price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price, the price elasticity of demand will be greater than one.)

Is the income you could earn after going to college part of the cost of going to college? A A portion of it is B Yes C No

C (No) (That is one of the benefits. Not a cost.)

Your college purchased a building east of campus for $500,000. Given changes in the city's real estate market, the current market value of the building is now $2 million. The total value of the use of the building for the college is estimated to be $1.5 million. What should your college do? Explain why. A Not use the building. It would be a loss of $2 million. B Use the building. The gain would be $1.5 million. C Not use the building. Using the building would mean losing $ .5 million in doing so. D Use the building. They only paid $500,000. It's value is $1.5 million. They gain $1 million.

C (Not use the building. Using the building would mean losing $ .5 million in doing so.) (If the college uses the building it will gain benefits of $1.5 million at a cost of $2 million. Not a good decision.)

Which of the following graphs shows the change in the production possibilities frontier curve if all workers in a country become more productive (i.e. they are able to make more of any good they are asked to produce)? A Option A B Option B C Option C D No change

C (Option C) (If all workers become more productive, production of watches and chocolate will increase for every combination in the production possibilities frontier curve.)

Is room and board part of the cost of the decision to go to college? A Yes B No C Part of room and board may be part of the cost.

C (Part of room and board may be part of the cost.) (If room and board is more expensive than what your family spends on you at home, then that increase is a part of the cost. If your family continues to spend the same amount on housing and eating once you are gone (unlikely in the case of food), then the entire cost of room and board is part of the cost of going to college.)

A firm has a choice of raising or lowering its price. If the firm wishes to increase its revenues (the price times the quantity sold), what should it do? A Raise price when demand is elastic, because the quantity demanded will increase. B Lower price when demand is elastic, because the quantity demanded will decrease. C Raise price when demand is inelastic, because the revenues gained from the price increase will be larger than the revenues lost from the smaller quantity sold. D Lower price when demand is inelastic, because the revenues lost from the lower price will be smaller than the revenues gained from the increase in quantity sold.

C (Raise price when demand is inelastic, because the revenues gained from the price increase will be larger than the revenues lost from the smaller quantity sold.) (If a firm raises its price, then it will gain revenues from the higher price but lose revenues from the decrease in quantity demanded. If demand is inelastic, the percentage change in quantity will be less than the percentage change in price. The loss in revenues from the decrease in quantity will be less than the gain in revenues from the increase in price.)

In every economy, resources are limited, but wants are large and increasing. What is this problem called? A The opportunity cost of resources B The opportunity cost of wants C Scarcity D Marginal cost

C (Scarcity) (Scarcity, the condition that our wants are greater than our abilities to satisfy them, forces us to make choices among competing uses of resources.)

A pizza parlor can make 100 pizzas in an evening. They make 35 pepperoni pizzas and 35 extra cheese pizzas. 100 people order pizza, but 50 people would like a pepperoni pizza and 50 would like an extra cheese pizza. This pizza parlor is what? A Technically efficient, but not allocatively efficient nor economically efficient B Allocatively efficient, but not technically efficient nor economically efficient C Technically efficient, but not allocatively efficient, and therefore, economically efficient D Allocatively efficient, but not technically efficient, and therefore, economically efficient

C (Technically efficient, but not allocatively efficient, and therefore, economically efficient) (The pizza parlor did not use all of their resources to maximize output or did not use the best available technology, however, the proportion of toppings matched the preferences of the customers.)

What does a single point on the supply curve represent? SEE DOC A The cost of producing the given quantity of film B The amount of profit the producer hopes to receive C The cost, at the current level of production, of producing one more roll of film D The price the consumers are willing to pay for a roll of film

C (The cost, at the current level of production, of producing one more roll of film) (Each price represented on the supply curve is the minimum price that is necessary to convince businesses to produce the corresponding quantity supplied. Any market price below that price will cause businesses to reduce production. At any single point, the price is the cost of producing one more unit of a good. The cost of producing the given quantity of film is close. Except that it is the cost of producing only the marginal unit, not the entire quantity. Profit is not shown on the supply curve and the price consumers are willing to pay is represented on the demand curve.)

As a larger number of students are assigned to groups to work on a project, which of the following is true? A Each additional student drastically reduces the amount of time it will take to complete the project B The closer they will be to reaching economic efficiency C The less each additional student will contribute to the project D The closer they will be to reaching technical efficiency

C (The less each additional student will contribute to the project) (As more students are added to a group, eventually each additional student will make a smaller and smaller contribution than before. Maybe the first students in the group have a skill set that is uniquely suited for the project and each additional student has abilities in something unrelated.)

Consider the following production possibilities frontier. If the economy is currently at point A and producing missiles or automobiles are the only choices, which of the following statements is true? A Point A in an unobtainable point B The economy's resources are fully employed C The opportunity cost of producing 50 additional automobiles is zero missiles D The opportunity cost of producing 50 additional missiles is approximately 50 automobiles

C (The opportunity cost of producing 50 additional automobiles is zero missiles) (If the economy expands production from point A (where it is producing approximately 40 automobiles and 20 missiles) to a point on the production possibilities frontier producing 90 automobiles, it does not have to give up any missiles. It still can produce 20 missiles. It was not using all of its resources or it was not using its best available technology.)

If a good or service is scarce, which of the following is true? A There is a shortage at the going market price. B Buyers cannot afford to purchase the product C We must give something up if we want more of the good. D It is difficult to find the product in stores. E Production is very rare.

C (We must give something up if we want more of the good.) (A shortage only means that at the current price the quantity demanded is greater than the quantity supplied. The core of scarcity is not a shortage, but that we have to give up something else (time, alternative goods and services, etc.) if we want to enjoy any of this good or service.)

Youth smoking seems to be more _______than adult smoking—that is, the quantity of youth smoking will fall by a greater percentage than the quantity of adult smoking in response to a given percentage increase in price. A unitary elastic B inelastic C elastic D cross-price elastic

C (elastic)

A perfectly elastic supply curve is: A upward sloping to the right. B downward sloping to the left. C horizontal. D vertical.

C (horizontal.)

The longer the time period considered, the more the elasticity of supply tends to: A decrease B remain constant C increase D converge to zero

C (increase)

The price elasticity of demand measures the: A responsiveness of quantity demanded to a change in quantity supplied. B responsiveness of price to a change in quantity demanded. C responsiveness of quantity demanded to a change in price. D responsiveness of quantity demanded to a change in income

C (responsiveness of quantity demanded to a change in price.)

Tickets to a sold-out basketball game originally cost $50 each and cannot be returned. I bought one and now scalpers are willing to pay $125 for the ticket. The cost that should be considered if I am deciding whether or not to go to the game is _____. A 0 B $50 C $75 D $125 E $175

D ($125) (The $50 is sunk. The $125 is the actual amount I will give up if I choose to go to the game.)

The making of the movie Waterworld cost a total of $180 million. It generated a total of $130 million in revenues. $70 million was spent and then the set sank. An additional $60 million was spent to rebuild the set. An additional $50 million was spent to finish the movie. The sunk cost, once the movie set sank, was _______. A $10 million B $50 million C $60 million D $70 million E $180 million

D ($70 Million) (The cost of the old set was literally sunk, but also in an economic sense. Once the set sank (and presumably could not be recovered) it had no alternative use and thus was irrelevant to the decision to film the movie.)

Looking at Table 2.1, what is the marginal product of increasing the hours spent studying economics from 3 hours to 4 hours? 3 HOURS = 70 Score in economics 4 HOURS = 85 Score in economics A 70 B 85 C 20 D 15

D (15) (The marginal benefit is the INCREASE in the Economics score received by studying an additional hour.)

The following table provides the different output levels that workers could produce. For example, if three workers are making handbags and two workers are making phones, 45 handbags and 30 phones will be made. A company has 6 workers. If 3 workers are making handbags and 3 workers are making phones, what is the marginal product of phones if one worker is taken from handbag production and placed into phone production? A 10 B 5 C 12 D 8

D (8) (The marginal production is the amount of additional output created by adding one more worker to a production process.)

Increasing marginal cost is a direct result of __________. A Inflation B Increased demand C Technical inefficiency D Diminishing marginal returns

D (Diminishing marginal returns) (As more inputs are used in a production process, less additional output is produced with each additional input. Since less output is added by each additional worker, the cost of each additional unit of output has to increase.)

If I have to drop out of college, it will cost me all of the tuition I have paid and the income I could have earned during those years while I was in college. True or false. A True. These were opportunity costs of staying in college. B True. These are sunk costs. I cannot change the tuition paid and income lost. So they are not costs of dropping out. C False. I did not pay these costs. D False. I did pay these costs, but they are sunk and thus not relevant to the decision.

D (False. I did pay these costs, but they are sunk and thus not relevant to the decision.) (They are sunk costs. Therefore, they are not real costs of the decision now.)

"Falling oil prices have caused a sharp decrease in the supply of oil." Speaking precisely, this quotation is _______. A Correct; a decrease in price always causes a decrease in supply. B Incorrect; a decrease in price causes an increase in supply, not a decrease in supply. C Incorrect; a decrease in price causes an increase in the quantity supplied, not a decrease in supply. D Incorrect; a decrease in price causes a decrease in the quantity supplied, not a decrease in supply.

D (Incorrect; a decrease in price causes a decrease in the quantity supplied, not a decrease in supply.)

If the economy is producing at a point inside the production possibilities frontier, which of the following must be true? A All resources are employed B The economy is as well off as it can be given its limited resources C That point is unobtainable D More of both goods can be produced

D (More of both goods can be produced) ("A" is incorrect as all resources might be employed and the best technology is not used, but it is also possible that not all resources are not used. The economy is either not using its best technology or not using all of its resources or both. "B" is not correct, as the economy could produce more of both goods and thus be better off. "C" is incorrect, as the point can be reached. Only points beyond the production possibilities frontier are unobtainable.)

Assume that as your income increases, your consumption of burgers decreases. We can assume that your income elasticity of demand for burgers is what? A Between 0 and 1 B Greater than 1 C Equal to 1 D Negative

D (Negative) (If consumption of burgers decreases as income increases, burgers must be an inferior good. The income elasticity of an inferior good is negative.)

Suppose your parents inherit your grandparents' house. They decide to move into the house and sell your current house. They did so because the house was free. Good decision? A A good decision. They will save so much money. B Maybe a good decision if they want to spend what they could get for your current house. C Not a good decision. They are giving up the house you grew up in. D Not a good decision, based on the assumption that it is free. It is not free.

D (Not a good decision, based on the assumption that it is free. It is not free.) (The house is not free. They could sell it and have that money. The price they could get for the house is part of the cost of living there.)

Which point represents the optimal mix of producing butter and shoes? A Point B B Point C C A point between B and C D One cannot tell

D (One cannot tell) (Any point that is on the production possibilities frontier curve shows an economy that is utilizing all of its resources. However, without knowing the wants and desires of the specific economy, point B or point C could be optimal if individuals prefer more butter or more shoes.)

Health insurance makes medical care more affordable for individuals. What will happen to the equilibrium price of medical care as a result of better health care coverage and why? A Price decreases because demand increases B Price decreases because supply increases C Price increases because supply decreases D Price increases because demand increases

D (Price increases because demand increases) (Because health insurance makes medical care cheaper for the consumer at every price level, demand increases. Because of this increase in demand, the equilibrium price increases.)

Which of the following does not cause a change in demand? A Tastes and preferences B Income C Prices of related goods - substitutes and complements D Price of the good E The number of potential buyers

D (Price of the good) (Price changes the quantity demanded of a good, not demand. In order to have a change in demand, the quantity demanded at every price level must change.)

The figure below shows two production possibilities curves that do what? A Reveal firm A is allocatively efficient, but firm B is not B Reveal firm B is allocatively efficient, but firm A is not C Reveal that firm A has an increasing marginal cost of production and firm B does not D Reveal that firm B has an increasing marginal cost of production and firm A does not

D (Reveal that firm B has an increasing marginal cost of production and firm A does not) (The graph for Firm B reveals that as production of one good is increased, they have to give up larger and larger amounts of production of the other good. Firm A gives up a constant number of the other good to produce each additional good.)

How does an increase in input costs affect suppliers? A Demand increases B Demand decreases C Supply increases D Supply decreases

D (Supply decreases) (The answer is very similar to the reasoning about firm behavior in response to changes in prices. A decrease in costs (whether it is due to changes in the methods used to manufacture goods or changes in prices of inputs) will increase profits and increase incentives to produce more of the good. Thus a typical business will respond by producing more at each price. An increase in costs on the other hand would have the opposite effect on profits and on the production decision, hence resulting in a lower supply.)

Six months ago, the cost of an important input in an industry increased. Then, three months later another change occurred. Production engineers invented a new method that uses fewer raw materials for the same level of production. If these were the only two events that influenced production in the last six months, what has been the influence on the supply? A Six months ago the supply curve shifted to the left, and then three months ago the quantity supplied at each price fell. B The first event caused production to decrease and supply to drop, but the second event increased supply above what it had been originally. C The influences of both events had equal effects on the supply, only one was negative and the other positive so that they perfectly balanced out. D The event of six months ago caused added costs to production and then lowered supply. The event of three months ago allowed more to be produced at each price, so the supply increased.

D (The event of six months ago caused added costs to production and then lowered supply. The event of three months ago allowed more to be produced at each price, so the supply increased.) (When the cost of an input increases, the cost of production increases. This increase leads to a decrease in the amount businesses are willing to produce at each price; thus supply falls. So, the first event that occurred six months ago caused a decrease in supply. Technology is another important influence on supply. When enhanced technology allows each worker to produce more, the labor cost per unit produced decreases. If fewer resources are needed, costs will fall, and supply will increase. The overall effect cannot be determined without knowing the magnitude of each effect.)

A firm may produce chairs or tables. If the firm is using all of its resources to produce tables and a new technology makes it easier to produce chairs, but the firm continues to produce only tables, which of the following is true? A The firm is no longer technically efficient B The firm will experience diminishing marginal returns C A new point on the production possibilities frontier curve will be reached D The firm is still technically efficient, but the marginal cost of tables increases

D (The firm is still technically efficient, but the marginal cost of tables increases) (The new technology only affects the ability to make chairs, so the firm is still using all of its resources, however, they could be used to make more chairs than before so the marginal cost has increased.)

Over the past year, major American automotive companies have switched some of their production from smaller, more fuel efficient cars to trucks and SUVs. Pick the best response as to why they switched production. A Families have grown in size and they need larger automobiles B Gas prices have increased C Workers became more efficient in producing trucks, so the marginal cost of producing smaller cars increased D The price of trucks and SUVs increased, so marginal cost of continuing to produce smaller cars was too great.

D (The price of trucks and SUVs increased, so marginal cost of continuing to produce smaller cars was too great.) (Technological improvements specific to larger trucks and SUVs have made them easier to produce. Therefore, continuing to produce cars means the company is giving up more trucks and SUVs if they don't switch workers to another production process. Option D could make sense if prices of trucks and SUVs had increased.)

A business has spent $50 million dollars on development of a new laptop. It must spend an additional $20 million to bring the finished computer to market. What must the value of the investment be for it to make sense for the business? A Any amount over $20 million. B Any amount over $50 million. C Any amount over $70 million. D The value, if any, of the results of the $50 million spent so far. E The value, if any, of the results of the $50 million spent so far, plus the $20 million.

E (The value, if any, of the results of the $50 million spent so far, plus the $20 million.) (The remaining required expenditure of $20 million is the easiest part to see. But if I could use the results of the development to date in an alternative project, or sell those results to another company, then the value in the alternative project or the amount I could get from selling those results to someone else, should also be included. If I cannot sell the results of that development or use them in an alternative project, then they should not be included as part of the consideration of whether or not to continue.)

"The winds of the recent hurricanes in Florida are bringing significant financial gain to California orange growers. Due to the extensive damage to the Florida orange crop, many oranges were destroyed. The ones remaining were just as good as the previous oranges. California oranges are commanding their highest prices ever." If Florida and California oranges are substitute goods, which of the following statements best explains the economics of the quotation? A The demand for Florida oranges has been reduced, causing their prices to fall and therefore increasing the demand for the substitute California oranges. B The supply of Florida oranges has decreased, causing the supply of California oranges to increase and their prices to rise. C The demand for Florida oranges has been reduced by the hurricanes, causing a greater demand for the California oranges and an increase in their price. D The supply of Florida oranges has decreased, causing their price to increase and the demand for the California oranges to increase also.

D (The supply of Florida oranges has decreased, causing their price to increase and the demand for the California oranges to increase also.) (California and Florida oranges are perfect substitutes. The reduction in supply of Florida oranges causes a shortage for Florida oranges which raises their price. Since the price of a substitutes good increases, demand for California oranges increases, which raises their price.)

A 10 percent increase in the price of soda leads to a 20 percent increase in the quantity of iced tea demanded. It appears that: A elasticity of demand for soda 0.5 and is inelastic. B elasticity of demand for iced tea is 2 and is elastic. C cross-price elasticity of demand for soda is -0.5. D cross-price elasticity of demand for iced tea is -2.

D (cross-price elasticity of demand for iced tea is -2.)

Supply is said to be _______ when the quantity supplied is very responsive to changes in price. A independent B inelastic C unit elastic D elastic

D (elastic)

If the supply curve for housing is perfectly inelastic, then a reduction in demand will cause the equilibrium price to: A rise and the equilibrium quantity to fall. B rise and the equilibrium quantity to stay the same. C fall and the equilibrium quantity to fall. D fall and the equilibrium quantity to stay the same.

D (fall and the equilibrium quantity to stay the same.)

Price elasticity of demand is defined as: A the slope of the demand curve. B the slope of the demand curve divided by the price. C the percentage change in price divided by the percentage change in quantity demanded. D the percentage change in quantity demanded divided by the percentage change in price.

D (the percentage change in quantity demanded divided by the percentage change in price.)

New technology lowering the costs of production will cause the equilibrium price to ______________ and the equilibrium quantity to ______________. A Increase; increase B Increase; decrease C Decrease; decrease D Decrease; increase

D Decrease; increase (An improvement in technology increases supply.)

The opportunity cost of spending a night with friends is which of the following? A The movie I could have seen B The several hours of sleep I could have had C The better grade I could have earned with more study D All of the above E A, B, or C, but not all of them

E (A, B, or C, but not all of them) (The opportunity cost is the most desirable of these. I would not have given up all three.)

Insurance Room and board

Not opportunity costs

Tuition Student fees Transportation Books Salary Insurance Room and Board

Opportunity costs

Think of what happens to your marginal benefits of going to a movie if you were to go to the same movie more than once. One way to think of it is to ask yourself how much you would pay - not what you have to pay, but what would be willing to pay - to see a complete, exciting new movie series. Consider the graphics below. Select which graph is most likely to represent the marginal benefits of attending a movie.

The price you are willing to pay goes down with the times viewing the move because of marginal benefits and marginal costs

a decrease in the price of the good itself (Indicate which of the following will cause a movement along a supply curve. Which will shift the supply curve to the left? Which will shift the supply curve to the right? Will supply increase or decrease?)

a movement along the supply curve, no change in supply

When demand is elastic and price decreases what happens to costs?

increases

When demand is elastic and price increases what happens to costs?

decreases

When demand is elastic and price increases what happens to quantity?

decreases

When demand is elastic and price increases what happens to revenues?

decreases

When demand is inelastic and price decreases what happens to profits?

decreases

When demand is inelastic and price decreases what happens to revenues?

decreases

When demand is inelastic and price increases what happens to costs?

decreases

When demand is inelastic and price increases what happens to quantity?

decreases

price of related goods

demand and supply change

tastes and preferences

demand changes

When demand is elastic and price decreases what happens to quantity?

increases

When demand is elastic and price increases what happens to profits?

depends on which decreases more, costs or revenues

When demand is elastic and price decreases what happens to profits?

depends on which increases more, costs or revenues

Assume that the price in a market is currently below the equilibrium price. Explain exactly why that situation will change by putting the steps in the correct order. 1 B There is a shortage since quantity demanded is greater than quantity supplied 2 D Prices begin to rise 3 E The shortage becomes smaller 4 F Quantity demanded begins to decrease and quantity supplied increases 5 G Some buyers are willing to pay more for a good and sellers can raise prices while still selling all of their supply 6 A The steps repeat until there is a new equilibrium 7

in order (Normal supply and demand implies that as price falls below equilibrium the quantity demanded increases and the quantity supplied decreases. Because the quantities demanded and supplied are equal at equilibrium, there must therefore now be a shortage. A shortage means that some buyers are willing and able to pay more to get the good and that sellers can raise their prices and still sell all they are willing to supply. Prices begin to rise as a result. As prices rise, quantities demanded decrease and the quantities supplied increase. This process continues as long as there is a shortage. The shortage gets smaller and is eventually eliminated. A new equilibrium quantity is reached where the quantity demanded equals the quantity supplied. At that point the price stops rising, because there are no longer any pressures to cause increases.)

(Allergy medicine that is prescribed by a physician) Any over-the-counter allergy medicine Sudafed Cold and allergy medicine Allergy medicine that is prescribed by a physician (Rank the following in order from the least elastic demand to most elastic:)

most elastic

(Demand for food) Demand for Oreos Demand for dessert Demand for cookies Demand for food (Rank the following from the least elastic (inelastic) to most elastic. (Hint: think about the substitutes for each of these goods when ranking them).)

most elastic

price of the good sold by a firm

quantity supplied changes

An increase in income for a normal good (Indicate which of the following will cause a movement along a demand curve. Which will shift the demand curve to the left? Which will shift the demand curve to the right? Will demand increase or decrease?)

shift the demand curve to the right and an increase in demand

a tax on the land used by the producer (Indicate which of the following will cause a movement along a supply curve. Which will shift the supply curve to the left? Which will shift the supply curve to the right? Will supply increase or decrease?)

shift the supply curve to the left, a decrease in supply

expectations of rising prices of the good in the near future (Indicate which of the following will cause a movement along a supply curve. Which will shift the supply curve to the left? Which will shift the supply curve to the right? Will supply increase or decrease?)

shift the supply curve to the left; a decrease in supply

a decrease in the price of an input, such as wages for labor (Indicate which of the following will cause a movement along a supply curve. Which will shift the supply curve to the left? Which will shift the supply curve to the right? Will supply increase or decrease?)

shift the supply curve to the right, an increase in supply

a decrease in the price of another goods firms in the industry could produce (Indicate which of the following will cause a movement along a supply curve. Which will shift the supply curve to the left? Which will shift the supply curve to the right? Will supply increase or decrease?)

shift the supply to the right, an increase in supply