1) Which of the following statements is not correct?
a.The percentage of the population that suffers from long-term poverty is far smaller
than the percentage of the population that suffers from short-term poverty because there
is a high level of economic mobility in the United States.
b.Permanent income is a better measure of a family’s ability to buy the necessities of
life than is transitory income.
c.The economic life cycle theory explains why gifts of goods and services reduce
poverty for the very young and the very old.
d.Because people can borrow and save to smooth out changes in income, their standard
of living in any one year depends more on lifetime income than on a particular year’s
income.
2) Lawrence is a photographer. He has $230 to spend and wants to buy either a flash for
his camera or a new tripod. Both the flash and tripod cost $230, so he can only buy one.
This illustrates the principle that
a.trade can make everyone better off.
b.people face trade-offs.
c.rational people think at the margin.
d.people respond to incentives.
3) The government can internalize externalities by taxing goods that have negative
externalities and subsidizing goods that have positive externalities.
a.True
b.False
4) The supply of aged cheddar cheese is inelastic, and the supply of bread is elastic.
Both goods are considered to be normal goods by a majority of consumers. Suppose
that a large income tax increase decreases the demand for both goods by 10%.
The change in equilibrium quantity will be
a.greater in the aged cheddar cheese market than in the bread market.
b.greater in the bread market than in the aged cheddar cheese market.
c.the same in the aged cheddar cheese and bread markets.
d.Any of the above could be correct.
5) Suppose that the supply of aged cheddar cheese is inelastic, and the supply of bread
is elastic. Both goods are considered to be normal goods by a majority of consumers.
Suppose that a large income tax increase decreases the demand for both goods by 10%.
Suppose the demand function for good X is given by: where
is the quantity demanded of good X, is the price of good X, and is the price of
good Y, which is related to good X.
The price elasticity of supply for aged cheddar cheese could be
a. -1.
b.0
c.0.5
d.1.5
6) In the long run, monopolistically competitive firms produce where demand equals
average total cost.
a.True
b.False
7) Points on the production possibilities frontier represent efficient levels of production.
a.True
b.False
8) Approximately what percentage of the world’s economies experience scarcity? a.
10%
b.40%
c.85%
d.100%
9) In the circular-flow diagram, the two types of markets in which households and firms
interact are the markets for goods and services and the markets for factors of
production.
a.True
b.False
10) The typical total-cost curve is U-shaped.
a.True
b.False