A labor contract provides for a first-year wage of $10 per hour, and specifies that the
real wage will rise by 3 percent in the second year of the contract and by another 3
percent in the third year. The CPI is 1.00 in the first year, 1.07 in the second year, and
1.15 in the third year. What dollar wage must be paid in the third year?
A. $10.61
B. $11.15
C. $12.20
D. $12.31
Economics is best defined as the study of:
A. inflation, interest rates and the stock market.
B. supply and demand.
C. how people make choices in the face of scarcity and the implications of those
choices for society as a whole.
D. the financial concerns of businesses and individuals.
If average labor productivity in two countries is the same, average living standards will
be higher in the country with:
A. the smaller population.
B. the larger population.
C. the higher share of population employed
D. the lower share of population employed.
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.
Suppose the market for shoes consists of three consumers. The table below shows the
quantity demanded at various prices for each consumer:
The data suggest that Leigh:
A. has a higher income than either Pat or Chris do.
B. does not experience diminishing marginal utility.
C. prefers shoes to other items that are for sale.
D. has a greater demand for shoes than either Pat or Chris do.
To ensure that your salary maintains its real purchasing power from year to year, your
nominal salary must be:
A. deflated.
B. indexed.
C. aggregated.
D. hyperinflated.
The value of unpaid childcare services provided by a stay-at-home dad ______ included
in GDP; the value of daycare services purchased from a licensed childcare provider
______ included in GDP.
A. is; is not
B. is; is
C. is not; is not
D. is not; is
Assume the demand for coffee increases while the supply decreases. Which of the
following outcomes is certain to occur?
A. The equilibrium price of coffee will rise.
B. The equilibrium quantity of coffee will rise.
C. The equilibrium price of coffee will fall.
D. The equilibrium quantity of coffee will fall.
The market for bagels contains two firms: BagelWorld (BW) and Bagels’R’Us (BRU).
The owners of the two firms decide to fix the price of bagels. The table below shows
how each firm’s profit (in dollars) depends on whether they abide by the agreement or
cheat on the agreement.
In the Nash equilibrium of this game:
A. both firms abide by the agreement
B. Bagel World abides and Bagels’R’Us cheats
C. both firms cheat on the agreement
D. Bagel World cheats and Bagels’R’Us abides
______ post-World War II ______ have been preceded by increases in inflation.
A. Many; expansions
B. Few; recessions
C. All; expansions
D. Many; recessions
In the basic Keynesian model, an increase in transfer payments:
A. reduces short-run equilibrium output.
B. increases short-run equilibrium output.
C. reduces potential output.
D. increases potential output.
According to the text, the allocation of scarce health care resources should be:
A. determined by length of time on a waiting list.
B. based on the willingness to pay of the recipient of the care.
C. based on the degree of suffering of the recipient of the care.
D. determined by weighing marginal costs and marginal benefits.
Bank reserves are:
A. currency and customer checking deposits.
B. currency, customer checking and savings deposits.
C. any asset used to purchase goods and services.
D. cash and similar assets held to meet depositor withdrawals or payments.
The self-control hypothesis suggests that people:
A. base their spending decisions (and consequently their saving decisions) on spending
decisions of others.
B. want to save, but lack the discipline to refrain from consuming.
C. substantially decrease their saving when the real interest rate increases.
D. control their spending in order to save more when the real interest rate increases.
If planned aggregate spending in an economy can be written as PAE = 15,000 + 0.6Y –
20,000r, and potential output equals 35,000, what real interest rate must the Federal
Reserve set to bring the economy to full employment?
A. 2 percent
B. 3 percent
C. 4 percent
D. 5 percent
Mel is thinking of going on a cruise. Mel values a cruise in nice weather at $2,000 and
values a cruise in bad weather at $50. The probability of nice weather is 60% and the
probability of bad weather is 40%. Trip insurance is sometimes available. If purchased,
it allows travelers to delay the cruise until the weather is nice. If Mel is risk-neutral,
then in the absence of trip insurance, the most she will be willing to pay for the cruise is
_______.
A. $1,200
B. $1,250
C. $1,220
D. $1,000
A measure of overall prices at a particular point in time is called:
A. a relative price.
B. the price level.
C. a real price.
D. inflation.
All of the following are reasonable arguments against adopting a zero inflation target
except that a zero inflation target:
A. makes the undesirable effects of deflation more likely.
B. prevents the central bank from achieving a negative real interest rate.
C. is not consistent with long-run price stability.
D. based on the CPI would not generate “true” price stability because of CPI
measurement problems.
Quick Buck and Pushy Sales produce and sell identical products and face zero marginal
and average cost. Below is the market demand curve for their product.
Suppose Quick Buck and Pushy Sales decide to collude and work together as a
monopolist with each firm producing half the quantity demanded by the market at the
monopoly price. If Quick Buck cheats by reducing its price to $1 while Pushy Sales
continues to comply with the collusive agreement, then Quick Buck will sell ______
units and Pushy Sales will sell ______ units.
A. 0; 3,000
B. 3,000; 1,000
C. 2,000; 1,000
D. 3,000; 0
Last year, Casey grew fresh vegetables, which she sold at her local farmers market, but
this year, Casey did not plant any vegetables and went to work at a bank instead. Which
of the following best explains Casey’s career change?
A. Casey’s opportunity costs of gardening exceeded Casey’s benefits from working at
the bank.
B. Casey’s opportunity costs of working at the bank exceeded Casey’s benefits from
gardening.
C. Casey’s opportunity costs of working at the bank exceeded Casey’s opportunity costs
of gardening.
D. Casey’s opportunity costs of gardening exceeded Casey’s opportunity costs of
working at the bank.
If the real interest rate is 3% and the inflation rate is 7%, then the nominal interest rate
equals:
A. 3%.
B. 4%.
C. 7%.
D. 10%
Consider an industry with two firms producing similar products. Each firm’s total cost
(in dollars) is given below.
Mega Corp: TC = 5,000 + 100Q.
Big Inc: TC = 4,000 + 200Q.
For both firms, average total cost:
A. declines as quantity increases.
B. increases as quantity increases.
C. is constant for all quantities.
D. declines as quantity increases for Mega Corp and increases as quantity increases for
Big Inc.
If the nominal exchange rate were to be expressed as the number of units of domestic
currency per unit of foreign currency, and that rate increases, then the domestic
currency has:
A. appreciated.
B. depreciated.
C. become overvalued.
D. become undervalued.
Firms do not change prices frequently because:
A. there are legal prohibitions against doing so.
B. it is easier to change the quantity of capital used in production.
C. it is costly to do so.
D. customers will refuse to patronize firms that change prices frequently.
Which of the following is a characteristic of economic rent?
A. It equals economic profit minus accounting profit.
B. It is driven towards zero by free entry.
C. It can be positive, zero, or negative.
D. It can never be negative.
Refer to the table below. According to the table, Pat has the absolute advantage in:
A. making pizza.
B. neither making nor delivering pizza.
C. delivering pizza.
D. making and delivering pizza.
The typical family on the Planet Econ consumes 10 pizzas, 7 pairs of jeans, and 20
gallons of milk. In 2008, pizzas cost $10 each, jeans cost $40 per pair, and milk cost $3
per gallon. In 2009, the price of pizzas went down to $8 each, while the prices of jeans
and milk remained the same. Between 2008 and 2009, a typical family’s cost of living:
A. increased by 4.5 percent.
B. decreased by 4.5 percent.
C. remained the same.
D. decreased by 20 percent.
Suppose that a vaccine is developed for a highly contagious strain of flu. The likelihood
that anyone will get this flu decreases as more people receive the vaccine. One of the
demand curves below represents the private demand for the vaccine and the other
represents the social demand for the vaccine.
The private market equilibrium quantity is ______ doses per day.
A. 50
B. 75
C. 100
D. 125
Alex, who is risk-neutral, is looking for an one-bedroom apartment to rent for the
month of August while he’s on vacation in Seattle. All of the one-bedroom apartments
in the neighborhood where he wants to stay are of equal quality, but 70 percent rent for
$700 per month, 20 percent rent for $600 per month, and 10 percent rent for $500 per
month. The first apartment Alex finds rents for $700 per month. Suppose Alex is
risk-averse. If the cost to Alex of searching for another apartment is $40, then will he
search for another apartment?
A. No, because searching for another apartment is a less-than-fair gamble.
B. Yes, because searching for another apartment is a better-than-fair gamble.
C. No, because searching for another apartment is a fair gamble.
D. Yes, because searching for another apartment is a fair gamble.
Suppose you are planning to sell your house. You value your house at $150,000. If you
do not hire a realtor, you will be able to sell your house to a buyer whose reservation
price is $180,000. If you hire a realtor, you will be able to sell your house to a buyer
whose reservation price is $200,000. Assume that the realtor’s opportunity cost of
negotiating the sale is $10,000. In this case, does using a realtor to sell your house
increase total economic surplus?
A. No, because you value the house at $150,000 no matter who buys it.
B. No, because your house only generated economic surplus when it was first built.
C. It depends on the sales price of the house, which isn’t given in the question.
D. Yes, using a realtor increases total economic surplus by $10,000.