Point A on a linear production possibilities curve represents a combination of 12 coffees
and 3 cappuccinos, and point B represents 3 coffees and 6 cappuccinos. Suppose
coffees are on the vertical axis and cappuccinos are on the horizontal axis.
The opportunity cost of a cup of coffee is:
A. 3 cappuccinos
B. 9 cappuccinos
C. 1/3 of a cappuccino
D. 6 cappuccinos
Suppose the value of the CPI is 1.100 in year one, 1.122 in year two, and 1.133 in year
three. Assume also that the price of computers increases by 3% between year one and
year two, and by another 3% between year two and year three. The price level is
increasing, the inflation rate is _______, and the relative price of computers is
_________.
A. decreasing; increasing
B. increasing; increasing
C. decreasing; decreasing
D. increasing; decreasing
Refer to the figure above. If the original curves are MB1 and MC1, the equilibrium
value of information is ________ and the equilibrium quantity is _______.
A. $10; 8.
B. $15; 7.
C. $15; 9.
D. $20; 8.
Refer to the figure above. For Pat, the opportunity cost of removing one bag of trash is:
A. not planting 25 bulbs.
B. not planting 5 bulbs.
C. not planting 10 bulbs.
D. not planting one-fifth of a bulb.
Assume that each day ten thousand children watch Sesame Street on public television
and that the educational benefits of watching Sesame Street generate private benefits of
$100 per child per year and a positive externality of $50 per child per year. No products
are advertised on Sesame Street but once a year the stations hold a pledge drive. During
pledge drives viewers are asked to make voluntary contributions to the public station in
order to keep the programming viable.
The broadcast of Sesame Street yields total private benefits of ____ and total social
benefits of _____.
A. $10,000; $15,000
B. $1,000,000; $1,500,000
C. $100,000; $150,000
D. $1,000,000; $500,000
You paid $35 for a ticket (which is non-refundable) to see SPAM, a local rock band, in
concert on Saturday. (Assume that you would not have been willing to pay any more
than $35 for this concert.) Your boss called and she is looking for someone to cover a
shift on Saturday at the same time as the concert. You will have to work 4 hours and she
will pay you time and a half, which is $9/hr.
What is your opportunity cost, if you go to work on Saturday?
A. $0
B. $9
C. $35
D. $36
Suppose Erie Textiles can dispose of its waste “for free” by dumping it into a nearby
river. While the firm benefits from dumping waste into the river, the waste reduces the
fish and bird reproduction. This causes damage to local fishermen and bird watchers. At
a cost, Erie Textiles can filter out the toxins, in which case local fishermen and bird
watchers will not suffer any damage. The relevant gains (in thousands of dollars) and
losses for the three parties are listed below.
Refer to the information given above. If all three parties can communicate and negotiate
with each other at no cost, will Erie Textiles use a filter?
A. No, because it makes $200 less in profit with the filter.
B. Yes, because the benefit it would receive from being able to advertise that it acts in
an environmentally responsible way exceeds the cost of using a filter.
C. No, because use of a filter would result in smaller total economic surplus.
D. Yes, because fishermen and bird watchers are willing to pay enough to Erie Textiles
to offset the cost of using a filter.
A seller’s reservation price is generally equal to:
A. the buyer’s reservation price.
B. the seller’s average cost.
C. the seller’s marginal cost.
D. the market price.
If the external benefit of an activity is added to the private benefits, then the:
A. demand curve shifts left.
B. quantity demanded rises.
C. demand curve shifts right.
D. supply curve shifts right.
Which of the following policies is likely to enhance a central bank’s credibility?
A. announce inflation targets.
B. appoint inflation doves as central bankers.
C. make the central bank obligated to finance the national deficit.
D. appoint central bankers for short terms that coincide with those in the legislative and
executive branches of government.
By convention, there are two major divisions of economics, called:
A. marginal benefit and marginal cost.
B. reservation price and opportunity cost.
C. microeconomics and macroeconomics.
D. rational economics and irrational economics.
If both supply and demand decrease simultaneously, the new equilibrium price is
___________ and the new equilibrium quantity is _________________.
A. lower; lower
B. lower; indeterminate
C. indeterminate; higher
D. indeterminate; lower
The economy of Alpha operates according to Okun’s law. In Alpha, potential GDP
equals $500 billion, actual GDP equals $520 billion, and the natural rate of
unemployment is 5 percent. What is the actual rate of unemployment in Alpha?
A. 1 percent
B. 3 percent
C. 4 percent
D. 7 percent
When an individual is judged by the characteristics of the groups he belongs to rather
than on his own characteristics, it is called
A. adverse selection.
B. statistical discrimination.
C. the lemons model.
D. illegal.
Two drawbacks in using fiscal policy as a stabilization tool are that fiscal policy affects
______ as well as aggregate demand and fiscal policy is _______.
A. consumption; too flexible
B. potential output; not flexible enough
C. consumption; offset by automatic stabilizers
D. potential output; offset by automatic stabilizers
Refer to the table above. Relative to column A, it appears that column B represents
______.
A. an increase in quantity demanded
B. an increase in demand
C. a decrease in quantity supplied
D. a change in supply
In the United States between 1980 and 2007, employment:
A. was constant, while the over-sixteen population increased.
B. decreased, while the over-sixteen population increased.
C. grew more rapidly than the over-sixteen population.
D. grew at approximately the same rate as the over-sixteen population.
When the Fed sells government securities, the banks’:
A. reserves will increase and lending will expand, causing an increase in the money
supply.
B. reserves will decrease and lending will contract, causing a decrease in the money
supply.
C. reserve requirements will increase and lending will contract, causing a decrease in
the money supply.
D. reserves/deposit ratio will increase and lending will expand, causing an increase in
the money supply.
Recessionary gaps are:
A. efficient.
B. inefficient.
C. periods when actual output exceeds potential output.
D. the result a decrease in the growth rate of potential output.
The quality adjustment bias of the CPI refers to the failure of statisticians to:
A. allow for the possibility that consumers switch from products whose prices are
rising.
B. allow for the possibility that consumers switch stores at which they shop.
C. take into account improvements in goods and services.
D. take into account price changes in goods and services.
An example of an implicit cost is:
A. interest paid on a bank loan.
B. wages paid to a family member.
C. the value of a spare bedroom turned into a home office.
D. operating costs of a company-owned car.
Globalization can increase wage inequality in the United States if international
competition is primarily in industries requiring ______ workers.
A. many
B. few
C. highly-skilled
D. low-skilled
Refer to the figure above. At a price of $15, what is the consumer surplus each day?
A. 40
B. 75
C. 105
D. 180
A regulated maximum price that is above the equilibrium price:
A. will lead to black markets.
B. will have no effect on the market.
C. will lead to excess supply in the market.
D. will lead to excess demand in the market.
An improvement in production technology causes an increase in:
A. the quantity supplied by firms and an increase in market supply.
B. supply by firms and an increase in the market quantity supplied.
C. the quantity supplied by firms and an increase in the market quantity supplied.
D. supply by firms and an increase in market supply.
If the marginal costs of 1, 2, and 3 hours of talking on the phone are $50, $75, and $105
respectively, then the total costs are of 1, 2 and 3 hours of talking on the phone are:
A. $50, $150, and $315 respectively.
B. $50, $41.67, and $115 respectively.
C. $50, $125, and $230 respectively.
D. $50, $175, and $405 respectively.
If a perfectly competitive firm produces an output level where price is less than
marginal costs, then the firm should:
A. raise its price.
B. reduce output to earn greater profits or smaller losses.
C. expand output to earn greater profits or smaller losses.
D. leave its output decision unchanged.
Suppose that there are three power-generating plants, all of which generate emissions.
The table summarizes the cost of emission reduction for each firm given five different
levels of pollution:
Suppose that the government imposes a tax of $20 per ton of pollution generated. If
Firm A produces 2 tons of smoke, its abatement costs plus taxes will total ____, and if
Firm A produces 3 tons of smoke, its abatement costs plus taxes will total ____. Firm A
will be better off emitting
A. $30; $14; 3 tons than 2 tons
B. $40; $24; 3 tons than 2 tons
C. $36; $74; 2 tons than 3 tons
D. $70; $74; 2 tons than 3 tons
Refer to the figure above. At a price of $9, the market will experience ______________
in the amount of __________ units.
A. excess demand; 5 units
B. excess supply; 6 units
C. equilibrium; 4 units
D. excess supply; 5 units
In Macroland, potential output equals $100 trillion and the natural rate of
unemployment is 4 percent. If the actual unemployment rate is 5 percent, then real GDP
must be:
A. $98 trillion.
B. $99 trillion.
C. $101 trillion.
D. $102 trillion.
The investment demand curve indicates that there is a(n):
A. positive relationship between the real interest rates and the level of investment
spending, all other things equal.
B. inverse relationship between the real interest rates and the level of investment
spending, all other things equal.
C. direct relationship between the real interest rates and the level of investment
spending, all other things equal.
D. inverse relationship between the determinants of investment and the level of
investment spending, holding interest rates constant.
When actual investment is less than planned investment:
A. firms sold less output than expected.
B. firms sold more output than expected.
C. the quantity of output sold is the amount the firm expected to sell.
D. the economy produces short-run equilibrium output.