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Moe's parents frequently tell him how it was back in their childhoods. They had a
smaller house, fewer toys, only one car and one black-and-white TV, but they were
happy. In fact, Moe's parents claim that they were happier than Moe and his friends are
today even though Moe and his friends all have much more stuff. Moe concludes that
A. his parents are irrational, because for rational people total utility increases with
consumption.
B. Moe's parents are subject to diminishing marginal utility, but Moe and his friends are
not.
C. economic models cannot be applied to two different generations.
D. the social forces that influence demand have changed since Moe's parents were
young.
Suppose that the EPA has proposed strict controls on the amount of sulfur that diesel
fuel contains. These controls were designed to fully offset the cost of pollution
generated by diesel fuel vehicles. The effect of the regulation is estimated to increase
the equilibrium price of a gallon of diesel fuel by 10 cents.
Refer to the information given above. Suppose that demand for diesel fuel is perfectly
inelastic and supply has a positive slope. The effect of the regulation will _______ than
if demand were not perfectly inelastic.
A. increase price and quantity by more
B. Increase price by less and reduce quantity by more
C. decrease price and quantity by more
D. increase price by more and reduce quantity by less
Jamie's marginal utility for consuming muffins and doughnuts in utils are as follows.
Jamie spends $4 for breakfast every morning, the price per muffin is $1.00 and the price
per doughnut is $0.50.
If Jamie consumes 3 muffins, Jamie will consume ____ doughnuts, and have ____
marginal utility per dollar from doughnuts.
A. 2; 20
B. 4; 15
C. 2; 30
D. 4; 10
Proponents of fixed exchange rates argue that the predictability of the fixed exchange
rate:
A. allows monetary policy to be used to stabilize the domestic economy.
B. increases trade and economic integration.
C. decreases trade and economic integration.
D. prevents exchange rate overvaluation.
Suppose that the salary range for recent college graduates with a bachelor's degree in
economics is $30,000 to $50,000, with 25% of jobs offering $30,000 per year, 50%
offering $40,000 per year and 25% offering $50,000 per year and that in all other
respects, the jobs are equally satisfying. Assume that in this market, a job offer remains
open for only a short time so that continuing to search requires an applicant to reject
any current job offer.
Moe has just received a job offer that pays $40,000 per year. Moe should
A. reject the offer and continue to look.
B. accept the offer if he is risk averse or risk neutral; otherwise continue searching.
C. accept the offer only if he is risk averse.
D. accept the offer regardless of his preference for risk.
If the interest rate in the U.S. falls, U.S. financial assets become ______ attractive to
buyers and the ______ U.S. dollars will fall.
A. more; demand for
B. more; supply of
C. less; demand for
D. less; supply of
Refer to the figure above. The dominant strategy for Row Resorts is __________, and
the dominant strategy for Column Cruises is ________.
A. to keep rates high during the summer; to keep rates high during the summer
B. to reduce rates during the summer; to reduce rates during the summer
C. to keep rates high during the summer; to reduce rates during the summer
D. to reduce rates during the summer; to keep rates high during the summer
Refer to the table above. The average benefit of 3 units of activity is:
A. $80
B. $60
C. $40
D. $20
Lou's college bookstore carries all of the texts required for every class, organized by
course number. Lou went over to the bookstore to see what was required, added up the
costs of those texts and found that they will cost a total of $500 this semester. Identical
books are available online for a total of $400. Lou decides to order all of the books
online.
Part of this price difference is due to
A. the information one can get at the bookstore.
B. higher quality products at the bookstore.
C. the bookstore's ignorance of internet prices.
D. the fact that internet texts are probably stolen.
The tendency for inflation to change relatively slowly from year to year in industrial
countries is called:
A. the inflation gap.
B. inflation expectations.
C. inflation inertia.
D. potential inflation.
The changing age structure of the U.S. population and more efficient labor markets are
both possible explanations for:
A. the decline in the natural rate of unemployment.
B. the increase in the cyclical rate of unemployment.
C. the 2001 recession.
D. the stagnation of real wages.
Gino's Pizza shop hires cooks in a competitive market. The raw material required to
make each pizza costs $5. Daily output at Gino's Pizza varies with the number of
workers hired, as shown in the table below:
If the pizzas sell for $8 per pie and the ingredients cost $5 per pie, what is the value
marginal product for the 4th worker?
A. $96
B. $112
C. $48
D. $128
For a given nominal exchange rate and domestic price level, a decrease in the foreign
price level ______ the real exchange rate.
A. increases
B. decreases
C. may either increase or decrease
D. offsets any change in
If a certain automotive part can be purchased in Mexico for 60 pesos or in the United
States for $6.25 and if the nominal exchange rate is 8 pesos per U.S. dollar, then the
automotive part:
A. is less expensive in Mexico.
B. is more expensive in the United States.
C. is less expensive in the United States.
D. costs the same in Mexico and the United States.
Refer to the figure above. A ______ equal to _____ would achieve the social optimum
in this market.
A. tax; QS
B. subsidy; RS
C. tax; RS
D. subsidy; QS
Your financial investments consist of U.S. government bonds maturing in twenty years
and shares in a start-up internet company. If interest rates on newly issued government
bonds increase, then the price of your bonds will ______ and the price of the shares you
own will ____.
A. increase; increase
B. decrease; decrease
C. increase; not change
D. decrease; not change
Refer to the figure above. The cost of subsidy, which must be borne by taxpayers, is:
A. $500
B. $2,000
C. $1,500
D. $7,000
Human capital is:
A. the factories and machinery used by humans in the production process.
B. the talents, training, and education of workers.
C. the financial resources available to humans for investment.
D. the factories and machinery made by workers.
Suppose a jar of orange marmalade that is ultimately sold to a customer at The Corner
Store is produced by the following production process:
If the oranges were grown and the jam produced in the year 2009, but the marmalade
was sold at The Corner Store in the year 2010, what is the contribution of these
transactions to GDP in the year 2010?
A. $0.00
B. $0.50
C. $2.00
D. $2.50
The price equals marginal cost rule for profit maximization is a specific example of
which of the following core principles?
A. Scarcity.
B. Cost-benefit.
C. Comparative advantage.
D. Efficiency.
You own a pizza shop called "Pizzas'R' Us". Currently you are paying your cooks an
hourly wage of $20. You sell a medium pizza for $10. By hiring more cooks, you can
increase your pizza production as shown in the following table.
What is the total cost per day of hiring 3 cooks if they work 8 hour shifts?
A. $60
B. $160
C. $320
D. $480
Starting from long-run equilibrium, a negative inflation shock results in a short-run
equilibrium with ___ inflation and ____ output.
A. higher; higher
B. higher; lower
C. higher; potential
D. lower; lower
Which of the following is not an example of the hurdle method of price discrimination?
A. A "Buy two, get the third free" special.
B. Mail-in rebate coupon on a printer.
C. Early-bird shopper discount for customers before 10 a.m.
D. A going-out-of-business sale.
Mexico and the members of OPEC produce crude oil. Realizing that it would be in their
best interests to form an agreement on production goals, a meeting is arranged and an
informal, verbal agreement is reached. If both Mexico and OPEC stick to the
agreement, OPEC will earn profits of $200 million and Mexico will earn profits of $100
million. If both Mexico and OPEC cheat, then OPEC will earn $175 million and
Mexico will earn $80 million. If only OPEC cheats, then OPEC earns $185 million and
Mexico $60 million. If only Mexico cheats, then Mexico earns $110 million and OPEC
$150 million. You may find it helpful to fill in the following payoff matrix in order to
answer the question below.
Refer to the information given above. Suppose Mexico picks its strategy first and
OPEC knows what they choose. OPEC told Mexico that in the event Mexico cheats on
the agreement, OPEC will cheat as well but if Mexico does not cheat, neither will
OPEC. This is an example of a ________ and the outcome is that ________.
A. commitment problem; neither will cheat
B. credible threat and promise; neither will cheat
C. prisoner's dilemma; both will cheat
D. non-credible threat or promise; both will cheat
Refer to the figure above. The total revenue of selling six units is _______, and the
marginal revenue of selling the sixth unit is ______.
A. $5; 5
B. $30; 0
C. $24; $5
D. $30; $1
Suppose that a government agency is trying to decide between two pollution reduction
policy options. Under the permit option, 100 pollution permits would be sold, each
allowing emission of one unit of pollution. Firms would be forced to shut down if they
produced any units of pollution for which they did not hold a permit. Under the
pollution tax option, firms would be taxed $250 for each unit of pollution produced.
The regulated firms all currently pollute and face varying costs of pollution reduction,
though all face increasing marginal costs of pollution reduction.
Suppose the regulators chose the permit policy. What might explain that decision?
A. Permit auctions raise more revenue than do taxes.
B. The permit policy allows regulators to achieve reduction goals without having
detailed knowledge about firms' abatement costs.
C. The permit policy will reduce pollution by more than would the tax policy.
D. Firms prefer the permit policy because it allows them to choose the least-cost
reduction technology.
Generally speaking, demand for a good will be more inelastic:
A. if few substitutes exist.
B. when the good represents a large share of the consumer's budget.
C. in the long run.
D. when many substitutes exist.
One thousand adults live in Milltown. All of them leave work at 4:30 p.m. every day
and arrive home at exactly 5:00. They all go to bed at 9 p.m. Three fundraisers, Alpha,
Beta, and Charlie, have targeted Milltown's population. Because the charities raising the
funds are identical, the first to call a willing donor will get the donation.
Refer to the information given above. The solution to the firms' problem will involve:
A. each firm differentiating itself from the others by timing.
B. each firm differentiating itself from the others by geographic location.
C. exploiting perfectly inelastic demand.
D. each firm differentiating itself from the others by quality.
The four components of planned aggregate expenditure are:
A. spending on domestic goods, domestic services, foreign goods, and foreign services.
B. spending on durable goods, inventory investment, government debt, and net exports.
C. consumption, planned investment, government transfers, and net interest.
D. consumption, planned investment, government purchases, and net exports.
Who from among the following would be classified as out of the labor force?
A. Brenda Smith, an 18 year old college student employed part-time at a fast food
restaurant.
B. Mario Faubert, a NHL hockey player at home sick with the flu.
C. Jack Little, a 21 year old new college graduate actively looking for his first job.
D. Amanda Pie, a full-time homemaker.
If the Citrus Growers Association grows $1 million worth of oranges, sells $500,000
worth of oranges to consumers, uses the rest to make orange juice that is sold to
consumers for $3 million, Citrus Grower's contribution to GDP is:
A. $500,000.
B. $1,000,000.
C. $3,500,000.
D. $4,000,000.
Assume that a firm uses 13 employee-hours and an office to produce 100 units of
output. The price of output is $5, the wage rate is $10, and rent is $200. The firm will
earn a _____ of _____.
A. profit; $370
B. loss; $200
C. profit; $170
D. loss; $170
The optimal quantity of a negative externality is zero if:
A. it kills many people.
B. it is costly to negotiate a Coasean solution.
C. people vote against it in a democratic election.
D. the marginal cost of reducing it is zero.
Adam Smith coined the term "invisible hand" to describe the process by which:
A. self-interest leads an economy to ruin.
B. self-interest leads to an allocation of goods and services that is relatively efficient.
C. private interests are sacrificed for the benefit of society.
D. the wealthy become richer and the poor become poorer.
Which of the following would increase the investment component of U.S. GDP?
A. You purchase a vacation at Disney World in Florida.
B. You purchase shares of Disney stock.
C. Disney World purchases tires for the monorail from a firm in Ohio.
D. A French man purchases a vacation at a Disney theme park in France.
