Principles of Microeconomics, 7e (Case/Fair)



Principles of Microeconomics,

Chapter 1: The Scope and Method of Economics

Why Study Economics?

Multiple Choice

1)

According to the text, the reason to study economics is

A)

to learn a way of thinking.

B)

to understand society and global affairs.

C)

to be an informed voter.

D)

All of the above

Answer:

D

4)

Which of the following statements is FALSE?

A)

Economics is a behavioral science.

B)

In large measure, economics is the study of how people make choices.

C)

If poverty were eliminated there would be no reason to study economics.

D)

Economic analysis can be used to explain how both individuals and societies make decisions.

Answer:

C

9)

The concept of opportunity cost

A)

is relevant only to economics.

B)

can be applied to the analysis of any decision-making process.

C)

applies to consumers but not to firms.

D)

refers only to actual payments and incomes.

Answer:

B

10)

Opportunity cost is

A)

that which we forgo, or give up, when we make a choice or a decision.

B)

a cost that cannot be avoided, regardless of what is done in the future.

C)

the additional cost of producing an additional unit of output.

D)

the additional cost of buying an additional unit of a product.

Answer:

A

13)

If you own a building and you decide to use that building to open a restaurant,

A)

there is no opportunity cost of using this building for a restaurant because you own it.

B)

there is an opportunity cost of using this building for a restaurant because it could have been used in other ways.

C)

there are no sunk costs involved in this decision.

D)

the only cost relevant to this decision is the price you paid for the building.

Answer:

B

15)

That which we forgo, or give up, when we make a choice or decision is called the __________ cost of that decision.

A)

sunk

B)

marginal

C)

fixed

D)

Opportunity cost

Answer: D

True/False

1)

The value of the best alternative foregone is the opportunity cost of making a decision.

Answer:

TRUE

2)

Scarcity is the reason that opportunity costs arise.

Answer:

TRUE

The Scope of Economics

Multiple Choice

1)

The branch of economics that examines the functioning of individual industries and the behavior of individual decision-making units is

A)

positive economics.

B)

normative economics.

C)

macroeconomics.

D)

microeconomics.

Answer:

D

2)

Studying how the management of US Steel, a large steel-producing company, decides how many tons of steel to produce and the price to charge for its steel would be considered

A)

descriptive economics.

B)

empirical economics.

C)

microeconomics.

D)

macroeconomics.

Answer:

C

3)

Studying how Bob’s firm decides to produce one more unit of output is an example of

A)

macroeconomics.

B)

microeconomics.

C)

industrial organization.

D)

descriptive economics.

Answer:

B

4)

________ focuses on the prices of individual goods and services and _______ focuses on the rate of inflation.

A)

Microeconomics; macroeconomics

B)

Macroeconomics; microeconomics

C)

Microeconomics; microeconomics

D)

Macroeconomics; macroeconomics

Answer:

A

The Method of Economics

Multiple Choice

1)

Positive economics is an approach to economics that

A)

seeks to understand behavior and the operation of systems while making judgments about their usefulness to society.

B)

analyzes outcomes of economic behavior, evaluates them as good or bad, and may prescribe preferred courses of action.

C)

describes the economy and how it works.

D)

prescribes roles for government in an economy.

Answer:

C

2)

Normative economics is an approach to economics that

A)

seeks to understand behavior and the operation of systems without making judgments.

B)

analyzes outcomes of economic behavior, evaluates them as good or bad, and may prescribe preferred courses of action.

C)

describes the economy and how it works.

D)

would never prescribe a role for government in the economy.

Answer:

B

3)

“High taxes reduce the incentive of workers to work” is best described as a _________ statement.

A)

positive

B)

Marxist ideology

C)

normative

D)

descriptive economics

Answer:

A

4)

If the price of a product falls, then the quantity demanded of that product will rise. This is best described as a ________ statement.

A)

positive

B)

Marxist ideology

C)

normative

D)

descriptive economics

Answer:

A

8)

“A poor nation like Haiti should tolerate its wealthy citizens” is best described as a _________ statement.

A)

positive

B)

normative

C)

descriptive economics

D)

nonjudgmental

Answer:

B

9)

_______ economics describes what exists and _________ economics prescribes courses of action.

A)

Descriptive; positive

B)

Positive; normative

C)

Normative; positive

D)

Normative; descriptive.

Answer:

B

10)

Descriptive economics

A)

involves mathematical statements of presumed relationships among variables.

B)

requires model building.

C)

looks at the outcomes of economic behavior and asks if they are good or bad.

D)

mainly involves the compilation of data that describe phenomena and facts.

Answer:

D

Refer to Scenario 1 below to answer the questions that follow.

SCENARIO 1: An economist wants to understand the relationship between minimum wages and the level of teenage unemployment. The economist collects data on the values of the minimum wage and the levels of teenage unemployment over time. The economist concludes that a 1% increase in the minimum wage causes a 0.2% increase in teenage unemployment. From this information he concludes that the minimum wage is harmful to teenagers and should be reduced or eliminated to increase employment among teenagers.

13)

Refer to Scenario 1. The statement that a 1% increase in the minimum wage causes a 0.2% increase in teenage unemployment is an example of ___________ economics.

A)

policy

B)

normative

C)

positive

D)

non-empirical

Answer:

C

14)

Refer to Scenario 1. The statement, "the minimum wage is harmful to teenagers and should be reduced or eliminated to increase employment among teenagers," is most likely an example of _________ economics.

A)

descriptive

B)

normative

C)

positive

D)

microeconomic

Answer:

B

15)

Refer to Scenario 1. The process of collecting data on minimum wage and teenage unemployment levels is an example of

A)

law and economics.

B)

economic history.

C)

econometrics.

D)

descriptive economics.

Answer:

D

18)

A measure that can change from time to time or from observation to observation is a

A)

theory.

B)

model.

C)

variable.

D)

parameter.

Answer:

C

24)

Since Becky plays basketball well, therefore the other members of her team must also play basketball well. This statement is an example of the fallacy of

A)

composition.

B)

post hoc, ergo propter hoc.

C)

inductive reasoning.

D)

ceteris paribus.

Answer:

A

30)

If you observe that Event A happens before Event B, and you conclude that Event A caused Event B, you may be guilty of an error called the fallacy of

A)

composition.

B)

inductive reasoning.

C)

ceteris paribus.

D)

post hoc, ergo propter hoc.

Answer:

D

29)

A student observes that every time he eats an apple before taking an exam he gets an F. He, therefore, concludes that to pass an exam, he only needs to avoid eating an apple before he takes the exam. He has committed the fallacy of

A)

composition.

B)

inductive reasoning.

C)

post hoc, ergo propter hoc.

D)

division.

Answer:

C

31)

The fallacy of composition is the belief that

A)

if Event A happens before Event B, then Event A causes Event B to occur.

B)

what is true for the whole is necessarily true of the parts.

C)

what is true for a part is necessarily true for the whole.

D)

it is impossible to draw generalizations about cause and effect.

Answer:

C

32)

Two variables are __________ if one variable changes when the other variable changes.

A)

causally related

B)

correlated

C)

unrelated

D)

independent of each other

Answer:

B

True/False

1)

Normative economics looks at outcomes of economic behavior and evaluates them as good or bad.

Answer:

TRUE

2)

Positive economics looks at outcomes of economic behavior and evaluates them as good or bad.

Answer:

FALSE

5)

Positive economics seeks to understand behavior, but not make judgments.

Answer:

TRUE

6)

Descriptive economics involves a mathematical statement of a presumed relationship between two or more variables.

Answer:

FALSE

Appendix

Multiple Choice

Refer to the information provided in Figure 1.1 below to answer the questions that follow.

[pic]

Figure 1.1

1)

Refer to Figure 1.1. There is __________ relationship between the daily temperature and the number of gallons of ice cream purchased.

A)

a negative

B)

a positive

C)

either a negative or a positive

D)

an inverse

Answer:

B

Refer to the information provided in Figure 1.2 below to answer the questions that follow.

[pic]

Figure 1.2

2)

Refer to Figure 1.2. The slope of the line between Points A and B is

A)

.3.

B)

2.3.

C)

3.3.

D)

indeterminate from this information.

Answer:

A

3)

If a straight line has negative slope, a(n) ________ in X _______ Y.

A)

increase; increases

B)

decrease; lowers

C)

increase; lowers

D)

decrease; doesn’t change

Answer:

C

Refer to the information provided in Figure 1.3 below to answer the questions that follow.

[pic]

Figure 1.3

4)

Refer to Figure 1.3. The slope of the line is

A)

positive.

B)

negative.

C)

increasing at an increasing rate.

D)

decreasing at an increasing rate.

Answer:

A

5)

Refer to Figure 1.3. The slope of the line between the origin and Point B is

A)

5.

B)

-2.

C)

0.5.

D)

2.

Answer:

D

7)

Refer to Figure 1.3. At Point A, what is the value of Y ?

A)

7.

B)

8.

C)

12.

D)

Indeterminate from this information

Answer:

B

8)

Refer to Figure 1.3. At Point A the slope of the line is 2, so at Point D the slope would be

A)

greater than 2.

B)

less than 2.

C)

equal to 2.

D)

indeterminate from this information.

Answer:

C

Refer to the information provided in Figure 1.4 below to answer the questions that follow.

[pic]

Figure 1.4

9)

Refer to Figure 1.4. Which of the curves or lines has a slope that is first positive and then negative?

A)

A

B)

B

C)

C

D)

D

Answer:

B

10)

Refer to Figure 1.4. Which of the curves or lines has a slope that is negative and then positive?

A)

A

B)

B

C)

C

D)

D

Answer:

A

11)

Refer to Figure 1.4. Which of the following curves or lines has a zero slope throughout ?

A)

A

B)

B

C)

C

D)

D

Answer:

C

12)

Refer to Figure 1.4. Which of the curves or lines has an infinite slope throughout?

A)

A

B)

B

C)

C

D)

D

Answer:

D

13)

Refer to Figure 1.4. At Point E in panel A, the slope is

A)

zero.

B)

infinite.

C)

negative.

D)

indeterminate from this information.

Answer:

A

15)

The slope of a horizontal line is

A)

negative.

B)

zero.

C)

continually changing.

D)

infinite.

Answer:

B

16)

If the slope of a straight line is 5 and if X (the variable on the horizontal axis) increases by 10, then Y (the variable on the vertical axis) will

A)

decrease by .5.

B)

decrease by 50.

C)

increase by 0.5.

D)

increase by 50.

Answer:

D

17)

If the slope of a straight line is 10 and if Y (the variable on the vertical axis) decreases by 20, then X (the variable on the horizontal axis)

A)

increases by 2.

B)

decreases by 2.

C)

increases by 200.

D)

decreases by 200.

Answer:

B

18)

The slope of a vertical line is

A)

zero.

B)

infinite.

C)

continually changing.

D)

negative.

Answer:

B

Refer to the information provided in Figure 1.5 below to answer the questions that follow.

[pic]

Figure 1.5

19)

Refer to Figure 1.5. Which of the curves has a slope that is positive and decreasing?

A)

A

B)

B

C)

C

D)

D

Answer:

B

20)

Refer to Figure 1.5. Which of the curves has a slope that is positive and increasing?

A)

A

B)

B

C)

C

D)

D

Answer:

A

21)

Refer to Figure 1.5. Which of the curves has a slope that is negative and decreasing?

A)

A

B)

B

C)

C

D)

D

Answer:

C

22)

Refer to Figure 1.5. Which of the curves has a slope that is negative and increasing?

A)

A

B)

B

C)

C

D)

D

Answer:

D

True/False

1)

Each Y value equals the corresponding X value on a 450 line.

Answer:

TRUE

2)

A graph illustrating how one variable changes over time is a Cartesian coordinate system.

Answer:

FALSE

Scarcity, Choice, and Opportunity Cost

Multiple Choice

1)

The process by which resources are transformed into useful forms is

A)

capitalization.

B)

consumption.

C)

production.

D)

allocation.

Answer:

C

4)

A(n) _______ is an input into the production process while a(n) ________ is a useable product.

A)

resource; input

B)

factor of production; resource

C)

good or service; factor of production

D)

factor of production; output

Answer:

D

5) The concept of _______ is central to the discipline of economics.

A)

need

B)

absolute advantage

C)

scarcity

D)

comparative advantage

Answer:

C

6)

The concept of trade-offs would become irrelevant if an economy could eliminate _______.

A)

profits

B)

poverty

C)

scarcity

D)

capital

Answer:

C

7)

Suppose you must decide whether to spend your last study hour of the day studying either economics or history. You are dealing with the concept of

A)

absolute advantage.

B)

comparative advantage.

C)

opportunity costs.

D)

specialization and exchange.

Answer:

C

22)

Economists draw a production possibility frontier (ppf) to illustrate the concept of

A)

the laissez-faire economy.

B)

opportunity costs.

C)

market equilibrium.

D)

the law of demand.

Answer:

B

23)

A graph showing all combinations of two goods and services a society could produce if it used all of its resources efficiently is the

A)

production possibility frontier.

B)

capital consumption frontier.

C)

Lorenz curve.

D)

circular-flow diagram.

Answer:

A

24)

If the unemployment rate decreases from 10% to 8%, an economy will move

A)

toward its production possibilities frontier to a point closer to but not on the production possibilities frontier.

B)

away from its production possibilities frontier toward a point closer to the origin.

C)

from one point to a different point on its production possibilities frontier.

D)

to a point where the economy specializes in producing only one product.

Answer:

A

25)

Periods of less than full employment correspond to points _________ the production possibilities frontier.

A)

outside

B)

inside

C)

on

D)

either inside or outside

Answer:

B

Refer to the information provided in Figure 2.1 below to answer the questions that follow.

[pic]

Figure 2.1

26)

Refer to Figure 2.1. Macroland’s ________ best explain(s) why it is currently operating at Point A.

A)

poor technology

B)

inefficiently used resources

C)

efficiently used resources

D)

few resources

Answer:

B

Refer to the information provided in Figure 2.2 below to answer the questions that follow.

[pic]

Figure 2.2

27)

Refer to Figure 2.2. Point B represents a situation of

A)

full resource employment but production inefficiency.

B)

less than full resource employment but production efficiency.

C)

full resource employment and production efficiency.

D)

less than full resource employment and production inefficiency.

Answer:

C

28)

Refer to Figure 2.2. Microland is currently operating at Point B. You correctly deduce that Microland has

A)

fully employed its resources and produced efficiently.

B)

achieved a position of inefficiency.

C)

recently experienced some type of technological breakthrough.

D)

overcome the scarcity problem.

Answer:

A

29)

The production possibility frontier is a graph that shows

A)

all the combinations of goods and services that are consumed over time if all of society's resources are used efficiently.

B)

the amount of goods and services consumed at various average price levels.

C)

the rate at which an economy's output will grow over time if all resources are used efficiently.

D)

all the combinations of goods and services that can be produced if all of society's resources are used efficiently.

Answer:

D

30)

Production inefficiency occurs when an economy is producing

A)

on its production possibility frontier.

B)

at the “right” combination of goods on its production possibility frontier.

C)

either when an economy is producing inside its production possibility frontier or when the economy is producing the wrong combination of goods on its production possibility frontier.

D)

outside its production possibility frontier.

Answer:

C

31)

An economy that is NOT producing the mix of goods that people want is

A)

efficient, as it is on the production possibility frontier.

B)

inefficient, even if the mix of goods is on the production possibility frontier.

C)

efficient, as the economy is producing goods at the lowest possible cost.

D)

inefficient, because the economy could produce the mix of goods at a lower cost if it used more efficient technology.

Answer:

B

33)

Suppose an economy efficiently produces television sets and computers, that is, it is currently operating at a point on its production possibilities frontier. If it suddenly produces computers less efficiently yet retains the same resource amounts, which of the following is most likely to happen?

A)

The economy will move to a point inside its production possibilities frontier.

B)

The economy's production possibilities frontier will shift inward.

C)

The economy will move to a point outside its production possibilities frontier.

D)

The economy's production possibilities frontier will shift outward.

Answer:

A

34)

The value of the slope of a society's production possibility frontier is called its

A)

marginal rate of substitution.

B)

inflation rate.

C)

unemployment rate.

D)

marginal rate of transformation.

Answer:

D

35)

Currently Microland produces fewer cars and trucks than it can efficiently produce. We could illustrate this situation by drawing a point where Microland would be __________ its production possibilities frontier for cars and trucks.

A)

on

B)

inside

C)

outside

D)

at the origin of

Answer:

B

37)

The marginal rate of transformation is the

A)

slope of the production possibility frontier.

B)

dollar value of the best forgone alternative.

C)

process of using resources to produce new capital.

D)

transformation of resources into a form that is useful to people.

Answer:

A

Refer to the information provided in Figure 2.3 below to answer the questions that follow.

[pic]

38)

Refer to Figure 2.3. Assume that in Microland the marginal rate of transformation of snowboards for water skis is constant and equal to -3. A graph of this society's production possibility frontier will be represented by

A)

A.

B)

B.

C)

C.

D)

D.

Answer:

C

39)

Refer to Figure 2.3. Assume that in Microland the marginal rate of transformation of snowboards for waterskis is increasing. A graph of this society's production possibility frontier will be represented by

A)

A.

B)

B.

C)

C.

D)

D.

Answer:

A

40)

The law of increasing opportunity costs is best depicted by the production possibilities frontier in panel

A)

A.

B)

B.

C)

C.

D)

D.

Answer:

A

Refer to the information provided in Figure 2.4 below to answer the questions that follow.

[pic]

Figure 2.4

42)

According to Figure 2.4, the point where only cars are produced is

A)

A.

B)

B.

C)

C.

D)

E.

Answer:

D

43)

According to Figure 2.4, the optimal point for the economy is

A)

A.

B)

B.

C)

F.

D)

indeterminate from the information given.

Answer:

D

44)

According to Figure 2.4, which point cannot be obtained with the current resources and state of technology?

A)

A

B)

B

C)

C

D)

F

Answer:

D

45)

According to Figure 2.4, the point where only trucks are produced is

A)

A.

B)

B.

C)

C.

D)

D.

Answer:

A

46)

According to Figure 2.4, a decrease in unemployment may be represented by the movement from

A)

B to A.

B)

B to D.

C)

C to D.

D)

A to C.

Answer:

C

49)

Refer to Figure 2.4. A(n) ____________ explains the economy’s move from Point B to Point D.

A)

reduction in unemployment

B)

improvement in technology

C)

increase in economic growth

D)

change in society's preferences for cars versus trucks

Answer:

D

Refer to the information provided in Figure 2.5 below to answer the questions that follow.

[pic]

Figure 2.5

50)

Refer to Figure 2.5. The economy is currently at Point A. The opportunity cost of moving from Point A to Point B is the ______ desktop computers that must be forgone to produce _______ additional laptop computers.

A)

60; 10

B)

20; 30

C)

80; 20

D)

20; 10

Answer:

D

51)

Refer to Figure 2.5. The marginal rate of transformation in moving from Point A to Point B is

A)

5.

B)

-2.

C)

-2.8.

D)

-4.

Answer:

B

52)

Refer to Figure 2.5. For this economy to move from Point B to Point C so that an additional 10 laptop computers could be produced, production of desktop computers would have to be reduced by

A)

exactly 20.

B)

fewer than 20.

C)

more than 20.

D)

exactly 40.

Answer:

C

53)

Refer to Figure 2.5. The best point for society would be

A)

Point C, as at this point there are approximately equal amounts of desktop and laptop computers being produced.

B)

either Point B or Point C, as the total amount being produced at either of these points is approximately the same.

C)

at any of the labeled points, as all of the points represent an efficient allocation of resources.

D)

indeterminate from this information, as we don't have any information about the society's desires.

Answer:

D

55)

As you move down the production possibility frontier, the absolute value of the marginal rate of transformation

A)

increases.

B)

decreases.

C)

initially increases, then decreases.

D)

initially decreases, then increases.

Answer:

A

Refer to the information provided in Figure 2.6 below to answer the questions that follow.

[pic]

Figure 2.6

58)

Refer to Figure 2.6. A __________ represents economic growth.

A)

shift from ppf2 to ppf1

B)

shift from ppf1 to ppf2

C)

movement from one to another point along ppf1

D)

movement from one to another point along ppf2

Answer:

B

59)

Refer to Figure 2.6. A __________ best represents an improvement in technology.

A)

shift from ppf2 to ppf1

B)

shift from ppf1 to ppf2

C)

movement from one to another point along ppf1

D)

movement from one to another point along ppf2

Answer:

60)

Refer to Figure 2.6. A(n) _________ will shift an economy's production possibility frontier from ppf1 to ppf2.

A)

decrease in unemployment

B)

increase in the use of existing vacant land

C)

change in consumer's tastes for the two goods

D)

increase in its capital stock

Answer:

D

61)

Refer to Figure 2.6. A(n) ________ will NOT cause the production possibility frontier to shift from ppf1 to ppf2.

A)

increase in a country’s land area

B)

improvement in technology

C)

increase in the stock of capital

D)

decrease in the unemployment rate

Answer:

D

62)

Refer to Figure 2.6. A _________ will shift the production possibility frontier from ppf2 to ppf1.

A)

change in consumer tastes for the two goods

B)

sale of stocks on the New York Stock Exchange

C)

transfer of resources from capital to consumer goods

D)

loss of workers’ lives because of a flu disease

Answer:

D

65)

In terms of the production possibility frontier, an increase in productivity attributable to new technology would best be shown by a

A)

movement along the frontier.

B)

shift of the production possibility frontier outward, away from the origin.

C)

movement from a point inside the frontier to a point on it.

D)

movement toward the origin.

Answer:

B

66)

An improvement in technology will cause the

A)

production possibility frontier to shift outward.

B)

production possibility frontier to shift inward.

C)

economy to move down the production possibility frontier.

D)

economy to move closer to its production possibility frontier.

Answer:

A

70)

The production possibility frontier does NOT help illustrate the ________ concept.

A)

scarcity.

B)

unemployment.

C)

inefficiency.

D)

market.

Answer:

D

71)

The economic problem can best be stated as:

A)

How can the economy improve technology so as to shift the production possibility frontier up and to the right?

B)

Given scarce resources, how exactly do societies go about deciding what to produce, how to produce it, and for whom to produce?

C)

Given the fact that the economy is inefficient, how much and what type of government intervention should be used to improve the efficiency of the economy?

D)

What is the best rate of economic growth for a society?

Answer:

B

True/False

1)

In economics, the term capital refers to financial capital.

Answer:

FALSE

2)

Economists call “capital” things that are themselves produced and that are in turn used to produce other goods and services.

Answer:

3)

It is possible to show economic growth as a movement along an existing production possibility frontier.

Answer:

FALSE

Economic Systems

Multiple Choice

1)

An economy in which a central authority draws up a plan that establishes what will be produced and when, sets production goals, and makes rules for distribution is a _______ economy.

A)

socialist

B)

laissez-faire

C)

public goods

D)

command

Answer:

D

2)

An economy in which individual people and firms pursue their own self-interest without any central direction or regulation is a(n) _________ economy.

A)

command

B)

laissez-faire

C)

invisible-hand

D)

private-sector

Answer:

B

4)

In a command economy, the

A)

market decides distribution.

B)

means of production are privately owned.

C)

government sets output targets.

D)

market decides what will be produced.

Answer:

C

5)

Which of the following statements is FALSE for a command economy?

A)

The state may own businesses.

B)

The government decides what is produced.

C)

The amount of a good supplied always equals the amount of the good demanded.

D)

The state decides how to distribute what is produced.

Answer:

C

6)

In a laissez-faire economy __________ what gets produced, how it is produced, and who gets it.

A)

buyer and seller behavior determines

B)

the central government authority determines

C)

firms but not consumers determine

D)

consumers but not firms determine

Answer:

A

7)

An institution through which buyers and sellers interact and engage in exchange is a

A)

central authority.

B)

laissez-faire.

C)

market.

D)

production frontier.

Answer:

C

8)

Which of the following is FALSE about a market economy?

A)

In its pure form, it is also known as a laissez-faire economy.

B)

Decisions are regulated by a central agency.

C)

The interaction between buyers and sellers answers the basic economic questions of what gets produced, how it gets produced, and who gets it.

D)

It relies on millions of individual economic decisions to determine economic outcomes.

Answer:

B

True/False

1)

In a laissez-faire economy individual people and firms pursue their own self-interest without any central direction or regulation.

Answer:

TRUE

2)

Planned economies use price as their coordinating mechanism.

Answer:

FALSE

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